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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28285
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MEDICALOGIC, INC.
(Exact name of registrant as specified in its charter)
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OREGON 93-0890696
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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20500 NW EVERGREEN PARKWAY, HILLSBORO, OREGON 97124
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (503) 531-7000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's common stock held by
nonaffiliates as of March 1, 2000 was approximately $1,023,230,000.
The number of shares outstanding of the registrant's common stock as of
March 1, 2000 was 32,427,628.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Portions of the Company's Definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K. The Definitive Proxy Statement will be filed within
120 days of December 31, 1999, the year end date of the fiscal year covered by
this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties, including, among other things, statements
regarding our anticipated costs and expenses, revenue mix, product and service
development, and relationships with strategic partners. These forward-looking
statements include, among others, those statements using terminology such as
"may", "will", "expects", "plans", "estimates", "anticipates", "potential",
"becoming", "begin", "expand", "improve", "become", "likely", or "continue" or
the negative thereof or other comparable terminology regarding beliefs, plans,
expectations, or intentions regarding the future. Forward-looking statements
include statements in Item 1, regarding the rate of growth and acceptance of the
internet, adoption of electronic medical record technology by physicians and
patients, facilitating e-commerce transactions, new products, websites,
services, and in Item 7, regarding expected revenues from license and
subscription fees for LOGICIAN and LOGICIAN INTERNET, customer support and
consulting contracts associated with LOGICIAN, transaction fees for drug
prescriptions, payment claims processing and advertising, third party licensing
fees, additional investment in staff and infrastructure, expanding market
penetration and acceptance of our products and services. These forward-looking
statements involve risks and uncertainties, and it is important to note that
MedicaLogic's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to MedicaLogic as of the
date hereof, and MedicaLogic assumes no obligation to update any forward-looking
statement or risk factor.
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PART I
ITEM 1. BUSINESS
MedicaLogic's ("MDLI" or the "Company") business is connecting physicians
and patients through the Internet. For physicians, we offer a line of enterprise
and recently introduced Internet-based online health record products and
services for use at the point of care in the exam room, with configurations
suitable for practices of all sizes. In addition to assisting physicians, our
products are used by a wide range of health professionals at the point of care,
such as physician assistants, medical assistants and registered nurses. For
patients, we will provide, in the first half of 2000, a web site that will allow
them to access healthcare information directly from their physician-generated
medical records, enter personal medical information and communicate with their
physicians. For both physicians and patients we will provide healthcare content
and e-commerce transaction services, corresponding to information in a
selectively shared database that unites physicians and patients. This system is
currently in the pilot phase of development and will be available in the second
half of 2000. Together, these products, services and databases will comprise our
Internet Health Services Center.
Founded in 1985, MedicaLogic has been developing, marketing and supporting
electronic medical records for over a decade and has products in daily use by
physicians across the country. While most healthcare information systems have
primarily supported financial and administrative functions, we have focused
exclusively on the challenge of providing clinical solutions that are used by
physicians at the point of care to create and access the electronic medical
record. Our customers include academic medical centers such as Baylor College of
Medicine in Houston, Texas, integrated healthcare delivery systems such as
Providence Health System in Portland, Oregon, and other customers such as the
NASA space shuttle program. Our technology will use the Internet to link
healthcare consumers to physicians using either our LOGICIAN or LOGICIAN
INTERNET electronic medical record products and services. We believe we are a
leading provider of electronic medical record software in the healthcare
industry.
The Internet, with its open architecture and broadening availability at
home, in the workplace and at the point of care, makes it possible for us to
create our Internet Health Services Center and make the online health record
more useful and cost-effective for physicians who practice alone, in small
groups or within integrated healthcare delivery networks. As a result, we
believe we can accelerate the rate of adoption by physicians. By connecting
physicians and patients through our database of online health records, we
believe we can improve the physician-patient relationship and make common
communications processes, such as prescription refills or appointment requests,
more convenient. Finally, beginning in the second half of 2000 we expect to
offer healthcare consumers a combination of health news, education, goods and
services that will correspond to their health status and interests because it
will be based on the physician-created clinical information included in their
personal health record.
INTERNET HEALTH SERVICES CENTER
MedicaLogic's Internet Health Services Center integrates the following:
ELECTRONIC MEDICAL RECORDS--for physicians, Internet-hosted applications,
which became commercially available in the fourth quarter 1999, and existing
client-server applications, which will become Internet-enabled in the second
half of 2000, used at the point of care to document physician-patient
encounters and manage clinical information.
PERSONAL HEALTH PORTFOLIO--for consumers, an Internet application which will
become commercially available in the first half of 2000 and let consumers
maintain a personal health portfolio, combining portions of their
physician-created electronic medical record, with personally entered
information.
CONTEXT-SPECIFIC CONTENT AND E-COMMERCE--for both consumers and physicians,
health information content and e-commerce transaction services, which will
become commercially available in the second half of 2000, corresponding to
the patient's clinical conditions and needs based on data in the Internet
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health record. The content and e-commerce transaction services will be
provided through strategic relationships with our e-healthcare partners.
INTERNET HEALTH RECORD--a database for use by physicians, patients and our
strategic partners, which, beginning in the first half of 2000, will be
available on a commercial basis and will combine data from the electronic
medical record generated by participating physicians, the personal health
portfolio and our strategic partners. This database will allow for the
sharing of selective data among all the participants in the Internet Health
Services Center.
PRODUCTS AND MARKETS
The primary target markets for our solution consist of healthcare providers
and healthcare consumers. The healthcare provider market is divided into two
segments: physicians in private practice and physicians in integrated healthcare
delivery systems.
PHYSICIANS IN PRIVATE PRACTICE. There are approximately 450,000 physicians
in private practice, constituting approximately 75% of the practicing physician
population in the United States. Our product offering for this market is
LOGICIAN INTERNET, which we introduced commercially in the fourth quarter of
1999. LOGICIAN INTERNET provides the following benefits:
- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to verify compliance with Health Care Financing Administration
documentation guidelines for the level of service billed;
- The ability to obtain patient clinical information from any web browser by
accessing the medicalogic.com web site;
- The ability to be used at the point of care in the exam room, without
requiring a continuous Internet connection;
- The ability to store electronic records at our data center; and
- Additional planned benefits in future releases including integration of
laboratory results, electronic prescription transmission, claims
submission and eligibility checking as well as the ability of physicians
to communicate with patients using 98point6 by sharing records data and
exchanging messages on the patients' personal health portfolios. We expect
certain features to begin becoming commercially available in the second
half of 2000.
PHYSICIANS IN INTEGRATED HEALTHCARE DELIVERY SYSTEMS. Integrated healthcare
delivery systems currently employ approximately 150,000 physicians. Our
solutions for this market include LOGICIAN, a client-server based electronic
medical record software solution that has been commercially available for
several years, and LOGICIAN INTERNET, depending on the needs of the institution.
Clients will be able to migrate between LOGICIAN and LOGICIAN INTERNET in future
releases. After delivering first-generation electronic medical record products
for the PC-DOS environment from 1990 to 1995, we released LOGICIAN for the
Windows client-server environment in 1996 and have delivered three major upgrade
releases since then. Our current customers include Allina Health System, Baylor
College of Medicine, Texas Children's Hospital, Carilion Health System,
Providence Health System, Riverside Health System and more than 30 others.
LOGICIAN provides the following benefits specially designed for this market:
- Clinical decision support, including preventive care reminders, drug
interaction and allergy checking and formulary management;
- Improved ability to measure and manage patient populations using query,
reporting and intervention tools;
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- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to verify compliance with Health Care Financing Administration
documentation guidelines for the level of service billed; and
- The ability to be used at the point of care, in the exam room.
LOGICIAN interfaces have been developed and implemented with major vendor
systems encountered in the integrated healthcare delivery system environment,
including laboratory systems, practice management systems and transcription
systems. We intend to expand the interfacing capabilities of LOGICIAN to include
e-commerce transaction capabilities such as electronic prescription
transmission. We expect certain expanded capabilities will be commercially
available beginning in the second half of 2000. We will continue to deliver an
enterprise-wide electronic medical record solution to this market, evolving from
its traditional license-based pricing to monthly subscription pricing. We also
expect to improve the enterprise product's compatibility with the Internet and
the interconnectivity between LOGICIAN and LOGICIAN INTERNET. We expect these
capabilities will become commercially available in the second half of 2000.
HEALTHCARE CONSUMERS. We estimate that at least 75% of Americans are
healthcare consumers, whether they see a physician themselves on a regular or
episodic basis, or act as a coordinator of healthcare for a child, elderly
parent, or other relative. For healthcare consumers, we will offer a web site,
98point6, which is currently in a pilot program and we expect to be commercially
available in first half of 2000. 98point6 will provide the following benefits
for healthcare consumers:
- The ability to view summary data from participating physicians, including
medications, diagnoses, allergies, health directives and laboratory
results;
- The ability to enter information about medical and family history,
wellness goals and behaviors into a personal health portfolio;
- The ability to integrate these two sources of data into the Internet
health record generated by participating physicians, providing information
that can be shared selectively with other individuals and health
professionals;
- The ability to communicate with their participating personal physician,
request appointments, obtain medication refills, ask questions or clarify
their records;
- The ability to access health information content that corresponds to their
personal needs through data in the Internet health record; and
- The ability to engage in commerce, which would also correspond to specific
medical needs through data in the Internet health record.
OTHER HEALTHCARE STAKEHOLDERS. As a result of our position as a provider
and custodian of personal and professional health data on the Internet, we
believe we have the opportunity to facilitate healthcare e-commerce
transactions, such as placing prescription orders with pharmacies, and to become
a healthcare infomediary, providing aggregated and anonymous health data to
organizations such as clinical research organizations. With the consent of
individual patients and physicians, and to the extent permitted by law, these
opportunities include:
PHARMACY--delivery of new and refill prescription orders from physicians and
patients to pharmacies and pharmacy benefit managers;
LABORATORY--delivery of orders and return of results to physicians and
patients;
PAYERS--direct submission of claims to clearinghouses from physicians using
electronic data interchange and electronic bill presentment/payment to
clearinghouses by physicians on behalf of patients using their personal
health portfolio;
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CLINICAL RESEARCH ORGANIZATIONS--recruitment of patients for studies through
automated screening and notification;
HEALTHCARE ORGANIZATIONS, BOTH GOVERNMENT AND PRIVATE--aggregated and
anonymous data about the health of designated populations for epidemiologic
research, planning and management;
PHARMACEUTICAL MARKETING RESEARCH--electronically available data on the use
and outcomes of drugs; and
ADVERTISING/SPONSORSHIP--targeted marketing to consumers and physicians for
healthcare-related products or services.
We expect to begin providing these services beginning mid 2000 through 2001.
CUSTOMER SERVICE AND SUPPORT
We believe effective customer service is essential to both attracting and
retaining physician usage of our electronic healthcare applications as well as
attracting consumers and retaining them as customers of our Internet-based
services. We understand the demands of the healthcare community for
person-to-person responsiveness. We provide a wide range of customer support
services through a staff of customer service personnel, multiple call centers
and an e-mail help desk. We also offer web-based support services that are
available 24 hours a day, seven days a week and are frequently updated to
improve existing information and to support new services. Our ongoing telephone
support is accessible by a toll-free telephone number and is available from
either 5 a.m. to 6 p.m. Pacific time, Monday through Friday or, for an
additional charge 24 hours a day, seven days a week. Our operators screen all
requests for telephone support and direct the call to the appropriate customer
service personnel. Technical support personnel are responsible for consulting
with our strategic partners about technical support issues and for resolving
technical problems encountered by users, strategic partners or other parties. We
also employ technical support personnel who work closely with our direct sales
force, distribution partners and customers. We provide our customers with the
ability to purchase maintenance for our applications and services, which
includes technical support and upgrades. We also provide training programs for
our customers.
In addition, we provide enterprise planning, site evaluation, work flow
preparation, hardware and software installation, interface development and
installation and training of physicians and their staff in connection with the
implementation of our LOGICIAN application. Enterprise and site evaluation helps
us understand how best to implement our LOGICIAN application within the
enterprise and physician's office work flow. The objective of the implementation
process is to maximize the benefits of electronic medical records to the
enterprise and the physician's practice.
CUSTOMERS
We market our products and services to physicians, large integrated
healthcare delivery networks and healthcare consumers. During 1997, VHA, Inc.
accounted for approximately 23% of total revenues and Wake Forest Baptist
Medical Center accounted for approximately 13% of total revenues. In 1998,
VHA, Inc., accounted for approximately 20% of total revenues. During 1999,
Baylor College of Medicine accounted for approximately 16% of total revenues,
and Texas Childrens Hospital accounted for approximately 13% of total revenues.
SALES AND MARKETING
Our sales and marketing programs are organized around our main customer
segments: integrated healthcare delivery systems, physicians in private practice
and healthcare consumers. Our products and services are distributed by a
nationwide direct sales force, a complementary inside sales team, a select
number of strategic distribution partners and directly through the Internet. We
also partner with national
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consulting firms and systems integrators to deliver complete information
technology solutions for large system customers.
PHYSICIANS IN PRIVATE PRACTICE. We promote our products and services to
physicians in private practice with programs designed to take advantage of the
value of peer-to-peer relationships in the physician community. In contrast to
the national image-building campaign required for sales to large health systems,
we are building our individual physician sales and marketing campaign around
activities that will stimulate physician referrals of LOGICIAN INTERNET. Sales
will be offered primarily through online subscription capabilities supported by
an inside telephone sales team.
INTEGRATED HEALTHCARE DELIVERY SYSTEMS. We approach the integrated
healthcare delivery system market primarily through direct sales and
distribution partners. We believe our access to premier reference accounts plays
a large part in the success of the sales process.
HEALTHCARE CONSUMERS. We believe marketing programs for the healthcare
consumer market are likely to be more successful when they are supported by the
existing relationship between the physician or local health system and their
patients. Based on that premise, we will be launching a web site, 98point6,
which is currently being tested in a pilot program and which we expect to
release commercially in the first half of 2000. This application can be
co-branded with local integrated healthcare delivery networks. In addition,
promotion of 98point6 will include a national brand building campaign designed
to create interest by healthcare consumers through physicians. Consumers will
register for membership at no charge at the 98point6 site or through a
co-branded provider partner site.
Our sales, marketing and business development resources are located in both
our Hillsboro, Oregon and San Francisco, California facilities, while our
account representatives are deployed across the United States.
STRATEGIC RELATIONSHIPS
Because our products and services are used at the point of care, we believe
we are well positioned to offer electronic transaction services to both
physicians and their patients. To pursue these opportunities, we intend to form
relationships with strategic partners who can provide these electronic
transaction services, including electronic processing of claims, automatic
filling and refilling of prescriptions and electronic transmission of laboratory
results. In addition, we intend to enter into strategic partnerships with
vendors who will provide medical content to our customers as well as
partnerships that will allow our physician customers to have access to computer
hardware on which they may use our products and services.
To date, we have entered into strategic relationships with the following
companies:
CVS.COM. CVS.com, a subsidiary of CVS Corporation, is a leading online
pharmacy and source of health, beauty and wellness products. We have entered
into an agreement dated August 18, 1999 with CVS.com that provides access to an
online licensed pharmacy that will receive and fill orders for prescriptions
generated from physicians and patients using our Internet-based products. The
one year agreement provides that CVS will pay a transaction fee to us for each
prescription filled by its pharmacy based on an order received through our
Internet-based products. CVS.com will only pay us for completed transactions
that we facilitate between CVS.com and third parties. The agreement may be
renewed for subsequent one-year terms.
DELL. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a
leading manufacturer of personal computers and related equipment and a
shareholder of MedicaLogic. We have entered into a nonexclusive agreement dated
September 1, 1999 with Dell Marketing L.P. providing for a mutual marketing
relationship to promote each other's products and services, including hyperlinks
between each of our web sites and cooperative marketing efforts which may
include trade shows, direct mail campaigns
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and sales training. These expenses will be accounted for as marketing expenses
as incurred. The agreement designates Dell as our preferred provider of
notebooks, personal computers and other hardware, and we granted Dell a
nonexclusive right and license to reproduce and install our software programs
and related materials on Dell branded hardware products. We will promote the
Dell products with our pre-installed software programs.
DRUGSTORE.COM. Drugstore.com, inc. is a leading Internet pharmacy. We have
entered into an agreement dated November 2, 1999 to participate in
drugstore.com's six-month certification program to create and promote an
industry standard for the electronic transmission of prescriptions to online
pharmacies. The program is expected to commence in the first half of 2000.
Following certification, MedicaLogic will receive a fee for providing
drugstore.com with all relevant account information for a new customer that
elects to have drugstore.com fill an electronic prescription. Drugstore.com will
only pay us for completed transactions that we facilitate between drugstore.com
and third parties.
ENVOY. Envoy is a leader in electronic transaction processing in the
healthcare industry. We have entered into an agreement dated September 3, 1999
with Envoy that provides us with a nonexclusive and nontransferable license to
Envoy's services for the processing of healthcare transactions, including
patient eligibility and referral checks and medical claims submissions. Envoy
will also provide technical assistance in developing new functionality to
facilitate claims submission. Envoy will charge us transaction fees for use of
its services. The agreement provides that Envoy will rebate to us a portion of
the transaction fees received by Envoy for batch electronic transactions
generated through LOGICIAN INTERNET that are submitted by Envoy to its
participating payers. Envoy will only pay us for completed transactions that we
facilitate between Envoy and third parties. We expect this service to become
available to our LOGICIAN INTERNET subscribers in the second half of 2000.
HEALTHGATE. HealthGate Data Corp. is a health information content provider
offering health-related databases through its web site. We have entered into an
agreement dated July 30, 1999 with HealthGate that allows MedicaLogic's users to
access some of HealthGate's databases. We will make monthly payments, recognized
as cost of revenues, to HealthGate for access to its databases. This service is
currently available to our 98point6 pilot program subscribers.
L&H. L&H Applications USA, Inc. is a subsidiary of Lernout & Hauspie Speech
Products N.V., a leading provider of dictation software programs for use in
professional services. We have entered into an agreement dated September 28,
1999 with L&H that provides us with a nonexclusive and nontransferable license
to L&H's medical-specific speech recognition software programs for distribution
with LOGICIAN INTERNET. We will make royalty payments to L&H for each copy of
the software licensed, including a maintenance and support fee. Royalties will
be prepaid quarterly, and will be recognized as cost of revenues when the
products are delivered. This service is currently available to our LOGICIAN
INTERNET subscribers.
TIPAAA FOUNDATION. TIPAAA is a nonprofit trade association of the
Independent Physicians Associations (IPAs). Under the agreement dated
December 8, 1999, the TIPAAA Foundation, the association's educational arm, will
assist MedicaLogic in expanding the reach of Logician Internet, by both
providing a distribution channel and participating in joint educational
campaigns. The foundation plans to initiate a pilot study with independent
physicians designed to provide information on the advantages of using electronic
systems at the point of care, and the return on investment (ROI) for Logician
Internet. To fund this program, MedicaLogic has agreed to provide an educational
grant to the TIPAAA Foundation. As part of the program, TIPAAA will provide
links from its Website to other sites that educate physicians on the benefits of
automation in office-based physicians practices.
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PLANETRX.COM PlanetRx.com is an Internet healthcare destination for
content, commerce and community. Under terms of the agreement dated January 27,
2000, MedicaLogic's qualified Logician and Logician Internet clinicians will be
able to send prescriptions and reorder authorizations electronically directly
from the physician's office to PlanetRx.com's online drugstore. Patients will be
able to order their prescription refills online through MedicaLogic's 98point6
patient channel or directly through the PlanetRx.com site. PlanetRx.com will
become a preferred online drugstore vendor for MedicaLogic's Logician and
Logician Internet clinicians, enabling their patients to fill prescriptions
online at PlanetRx.com. In addition, PlanetRx.com will also appear on the
98point6 patient channel as one of the top drugstore choices for qualified
MedicaLogic patients.
COMPETITION
High growth, intense competition, and technological change characterize the
market for electronic healthcare information services and e-commerce. In
addition to direct competitors in the electronic medical records market, none of
which has a significant share of the market, we face competition from many
companies with significantly greater financial resources, well-established brand
names and large installed customer bases. We expect significant competition
from:
TRADITIONAL HEALTHCARE INFORMATION SYSTEM VENDORS. These vendors, including
Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on
providing information systems to large healthcare enterprises and physician
practice groups. They have large installed bases of customers. Although they
have not traditionally focused on providing electronic medical record solutions,
they have begun to pursue a variety of Internet strategies, some of which could
provide functions competitive with our products and services.
INTERNET HEALTHCARE COMPANIES. Internet healthcare companies are focusing
on a wide variety of areas, including:
- Automating financial, administrative and clinical transactions, such as
Healtheon Corporation and CareInsite, Inc.;
- Attracting physicians with journalistic content, such as Medscape, Inc.
and Physicians Online, Inc.; and
- Targeting the health consumer area, including drkoop.com, Inc. and
iVillage Inc. for content, as well as online pharmacies, such as
drugstore.com, Inc.
Each of these companies can be expected to compete with us within segments
of the evolving Internet healthcare market, but it is also likely that some of
them will serve in the role of our partner or vendor. Major Internet companies,
including those not currently specializing in the healthcare industry, may also
enter our markets. Many of these companies have longer operating histories,
larger customer bases, substantially greater financial, technical, sales and
marketing resources and greater name recognition than we do and we may be unable
to compete successfully against these companies.
The most significant competitive factors include clinical focus, service
reliability, breadth of product offerings, price performance ratio, network
security, ease of access and use, content bundling, customer support, brand
recognition and operating experience. We believe we will be able to compete
favorably in these areas.
TECHNOLOGY
Our Internet Health Services Center consists of a fault tolerant
configuration of web and database server computers interconnected through
redundant, high speed network components. The center is currently located at a
secure third-party data center. A new, state-of-the-art data center is being
constructed at our San Francisco office. All data centers incorporate advanced
technology to provide a high
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degree of security in the transmission of highly sensitive and confidential
patient medical record data over the Internet. This includes strict
authentication, sophisticated data encryption techniques, strong network
firewalls, stringent personnel policies, tightly controlled physical access to
the data centers and independent overall security audits of those sites. All of
our services will be linked to advanced storage systems that provide data
protection through techniques such as replication. We also will maintain on-site
backup power systems in the San Francisco data center and will install similar
facilities in our back-up data center. These safeguards are designed to provide
a reliable and secure environment for the storage and exchange of confidential
patient and customer data. Although we believe our facilities are highly
resistant to systems failure and sabotage, we are developing, and are in the
process of implementing, a disaster recovery and contingency operations plan.
Our LOGICIAN product is based on Oracle Corporation's database products. We
license these databases from Oracle under an Oracle alliance agreement. As an
alliance member, we have been given the right to sublicense the database
software to our customers.
DEVELOPMENT AND ENGINEERING
We believe our future success will depend on our ability to continue to
maintain and enhance our Internet Health Services Center, LOGICIAN applications
and related services. We have developed applications and services in house,
although future extensions to our products and services may come through
acquisitions as well. We will continue to work closely with other companies in
our development efforts.
We have several significant projects currently in development. These include
the continued enhancement of LOGICIAN and LOGICIAN INTERNET, and the development
of new services such as our physician and consumer oriented web sites and
development of interfaces with our strategic partners' and others' technology.
Rapid technological developments and evolving industry standards
characterize the emerging market for Internet-based electronic medical records
and associated transaction processing. The emerging nature of this market and
its rapid evolution will require that we continually improve the performance,
features and reliability of LOGICIAN and the Internet Health Services Center,
particularly in response to competing offerings.
We maintain a high standard for the most effective and innovative
technologies. The success of new product and service introductions is dependent
on several factors, including:
- Proper definition of new applications or services;
- Appropriate staffing of expertise on the particular assignment;
- Timely completion and introduction of new products and services; and
- Differentiation of new products and services from those of our
competitors.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. Proposals to reform the U.S. healthcare system have
been and will continue to be considered by the U.S. Congress. These programs may
contain proposals to increase or decrease government involvement in healthcare
or change the operating environment for our potential customers. Healthcare
organizations may react to these proposals and the uncertainty surrounding these
proposals by curtailing or deferring investments, including those for our
products and services. On the other hand, changes in the regulatory environment
have in the past increased and may continue to increase the needs of healthcare
organizations for cost-effective information management, which may enhance the
marketability of our applications and services. We cannot
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predict with any certainty what impact, if any, these proposals or healthcare
reforms might have on our business, financial condition and results of
operations.
The Health Insurance Portability and Accountability Act of 1996 mandates the
use of standard transactions and identifiers, prescribed security measures and
other provisions within two years after the adoption of final regulations by the
Department of Health and Human Services. It will be necessary for our products
and services to be in compliance with the proposed regulations. Congress is also
likely to consider legislation that would establish rules about individuals'
rights to access their own or someone else's medical information within
legislation known as a patient bill of rights. This legislation, if enacted,
would likely define what is to be considered protected health information and
outline steps to ensure the confidentiality of this information.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the federal Food, Drug and
Cosmetic Act. Computer applications and software are considered medical devices
and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. We do not believe that any of our current
applications or services are subject to FDA jurisdiction or regulation; however,
we plan to expand our application and service offerings into areas that may
subject us to FDA regulation. We have no experience in complying with FDA
regulations. Our compliance with FDA regulations could prove to be time
consuming, burdensome and expensive, which could have a material adverse effect
on our ability to introduce new applications or services in a timely manner.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial and rapidly evolving regulation governing both the disclosure and
the use of confidential patient medical record information. Legislation
governing the dissemination of medical record information has been proposed at
both the state and federal levels. This legislation may require holders of
medical records to implement security measures that may require substantial
expenditures by us or materially restrict the ability of healthcare providers to
submit information from patient records using our applications.
In October 1999, the Department of Health and Human Services proposed new
rules under the Health Insurance Portability and Accountability Act of 1996. The
proposed rules would require the formulation of policies and systems that give
individuals access to their health information. In addition, these rules would
require that safeguards be constructed to protect this health information
against unauthorized access. The proposed rules include new penalties for
violations of an individual's right to keep her health information private.
These proposed rules are expected to become final in early 2000.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as online content, user privacy, pricing and
characteristics and quality of applications and services. For example, although
two key provisions of the act were held unconstitutional, the Communications
Decency Act of 1996 prohibited the transmission over the Internet of some types
of information and content.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business,
financial condition and results of operations. Moreover, it may take years to
determine the extent to which existing laws governing issues such as property
ownership, libel, negligence and personal privacy are applicable to the
Internet.
11
<PAGE>
International regulations concerning the Internet, privacy and transborder
data flows are considerably more developed than regulations in the United
States. We intend to develop applications and services to be used on a worldwide
basis and, consequently, will be required to comply with international
regulations concerning the Internet and e-commerce, as well as with U.S.
regulations. We have not evaluated the effect that these regulations would have
on our business. These regulations also may have an adverse effect on our
ability to compete internationally.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
some foreign governments that could impose taxes on the sale of goods and
services and some other Internet activities. A recently passed law places a
temporary moratorium on specific types of taxation on e-commerce. We cannot
predict the effect of current attempts at taxing or regulating commerce over the
Internet. Any legislation that substantially impairs the growth of e-commerce
could have a material adverse effect on our business, financial condition and
results of operations.
INTELLECTUAL PROPERTY RIGHTS
We believe patent, trade secret and copyright protection are less
significant to our success than our ability to develop new products and
services. We rely on a combination of trademark, trade secret and copyright law,
and contractual restrictions to protect the proprietary aspects of our
technology. We presently have several federal trademark registrations, including
MedicaLogic, Practice With Knowledge, KnowledgeBank, Logician, SIMPL and
LinkLogic and numerous pending trademark applications, including AboutMyHealth,
98point6, Quickstep, ScheduLogic, Zero Degrees of Separation and The Online
Health Record Company. We have filed ten applications for U.S. patents and are
preparing two additional applications. We seek to protect our source code for
our software, documentation and other written materials under trade secret and
copyright laws. We presently have nine pending copyright applications for our
software, tools and KnowledgeBank forms, reports and templates. We license our
software under signed license agreements, which impose restrictions on the
licensee's ability to utilize the software. Finally, we seek to avoid disclosure
of our intellectual property by requiring employees and consultants with access
to our proprietary information to execute confidentiality agreements with us and
by restricting access to our source code.
The steps taken by us to protect our proprietary rights may be inadequate
and, as a result, third parties may infringe upon or misappropriate our
copyrights, trademarks, service marks and similar proprietary rights. In
addition, the global nature of the Internet makes it impossible to control the
ultimate destination of our services and effective copyright and trademark
protection may be unenforceable or limited in foreign countries.
Our competitors or others may adopt product or service names similar to
ours, which may impede our ability to build brand identity and possibly lead to
customer confusion. Moreover, because Internet domain names derive value from
the individual's ability to remember these names, our domain name may lose its
value if, for example, users begin to rely on mechanisms other than domain names
to access online resources. Our inability to protect our marks adequately could
have a material adverse effect on the acceptance of our brand and on our
business, financial condition and results of operations. In the future,
litigation may be necessary to enforce and protect our trade secrets, copyrights
and other intellectual property rights. Litigation would divert management
resources and be expensive and may not effectively protect our intellectual
property.
EMPLOYEES
As of December 31, 1999, we employed 298 persons on a full-time basis, of
whom there were 89 in technical development and support, 95 in sales and
marketing, 59 in professional services, 24 in operations and networks and 31 in
other administrative functions. None of our employees is a member of a labor
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<PAGE>
union or is covered by a collective bargaining agreement and we have never
experienced a work stoppage. We believe we have good relations with our
employees.
ITEM 2. PROPERTIES
The executive offices of the Company are located in Hillsboro, Oregon
totaling approximately 120,000 square feet of space under leases that expire in
December 2007. The Company is in the process of building out 45,000 square feet
of this leased space and intends to occupy the space in 2000. The Company also
occupies approximately 38,000 square feet of office space in San Francisco,
California under a lease that expires in May 2009. The Company currently
occupies approximately 56% of this space and plans to occupy the balance by the
end of 2000.
The Company owns substantially all of the equipment used in its facilities,
except equipment held under capitalized lease arrangements.
The Company believes that its existing properties are in good condition and
suitable for the conduct of its business. We believe our facilities are adequate
for our current operations and that additional leased space can be obtained if
needed.
ITEM 3. LEGAL PROCEEDINGS
We were named as a defendant in an action filed by AllCare Health Management
Systems, Inc. on June 14, 1999 in the United States District Court for the
Northern District of Texas. The complaint alleged that MedicaLogic and eleven
other named defendants infringed a patent relating to an integrated healthcare
system. MedicaLogic reached settlement with AllCare Health Systems Inc. and on
December 20, 1999 a Consent Order dismissing the claim was signed by the Court.
All costs associated with this action are reflected in Medicalogic's financial
statements as of December 31, 1999.
We were named as a defendant in an action filed by Epic Systems Corporation
on November 18, 1999 in the United States District Court for the Western
District of Wisconsin. The complaint alleged that MedicaLogic was infringing a
patent relating to a method of storing and invoking phrases on a computer by
entering abbreviated phrases and predetermined character strings. According to
the complaint, the plaintiff was seeking to enjoin MedicaLogic from the alleged
infringement and to recover damages in an unspecified amount. Epic Systems
Corporation agreed to dismiss, without prejudice, the action and a Dismissal
Order was entered by the court on January 26, 2000. All costs associated with
this action are reflected in Medicalogic's financial statements as of
December 31, 1999.
We are not currently subject to any other material legal proceedings.
However, we could be subject to intellectual property infringement claims as the
number of our competitors grows or the functionality of our products and
services overlaps with competing products. We could incur substantial costs and
diversion of management resources defending any infringement claims. In
addition, a party making a claim against us could secure a judgement awarding
substantial damages, as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services. Licenses for
intellectual property of third parties that might be required for our products
or services may not be available on commercially reasonable terms, or at all.
We provide data for use by physicians, consumers and other healthcare
stakeholders. This data may be obtained from our physician customers, strategic
partners, other third parties or, with patient consent, from the aggregation of
patient health records. Claims for injuries related to the use of this data may
be made in the future, and we may not be able to insure adequately against these
claims. A claim brought against us that is uninsured or under-insured could lead
to material damages against us.
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<PAGE>
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On November 1, 1999, the Company solicited proxies from the holders
(collectively the "Shareholders") of the Company's Series A Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock, Series F Convertible Preferred Stock, Series J Convertible
Preferred Stock and Common Stock (collectively, "Capital Stock") to consider a
proposal to amend the Company's articles of incorporation to (i) effect a
reverse stock split so that each of the shares of the Company's Common Stock
issued and outstanding immediately prior to the reverse stock split would be
reclassified and changed into and constitute .5 shares of the fully paid Common
Stock of the Company without further action of any kind and (ii) on a
post-reverse stock split basis, maintain the number of authorized shares of
Common Stock of the Company at 100,000,000. On November 12, 1999, Shareholders
holding a total of 38,805,678 shares of Capital Stock of the Company, out of the
total of 50,350,513 shares of Capital Stock outstanding on the record date of
November 1, 1999 were present in person or by proxy at the special meeting of
Shareholders and all shares present voted in favor of the adoption of the
proposal.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on the Nasdaq National Market under
the symbol "MDLI" since December 10, 1999. Prior to that date, there was no
public market for our common stock and, therefore, no quoted market prices for
our common stock are available for the periods prior to December 10, 1999.
According to the Company's transfer agent, the Company had approximately 271
stockholders of record as of December 31, 1999. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, the Company is
unable to estimate the total number of stockholders represented by these record
holders.
The following table sets forth the high and low sales prices reported on the
Nasdaq National Market for MDLI common stock for the periods indicated:
<TABLE>
<CAPTION>
LOW HIGH
-------- --------
<S> <C> <C>
Fiscal year and quarter ended December 31, 1999:
December 10, 1999 To December 31, 1999................... $18.25 $29.625
</TABLE>
The market price of our common stock has fluctuated since the date of our
Initial Public Offering and is likely to fluctuate in the future. Factors that
may have a significant effect on the market price of our common stock include:
- Actual or anticipated quarterly variations in our operating results;
- Change in expectations of future financial performance or changes in
estimates of securities analysts;
- Announcements of technological innovations;
- Announcements relating to strategic relationships;
- Customer relationship developments; and
- Conditions affecting the Internet or healthcare industries, in general.
The trading price of our common stock may be volatile. The stock market in
general, and the market for technology and Internet-related companies in
particular, has experienced extreme volatility that often has been unrelated to
the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If this were to happen to the Company, litigation would be expensive
and would divert management's attention.
The Company has never declared on paid any cash dividends on its common
stock. The Company currently intends to invest cash generated from operations,
if any, to support the development of its business and does not anticipate
paying cash dividends for the foreseeable future. Payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs.
The Company's registration statement (No. 333-87825) on Form S-1 for the
initial public offering was declared effective by the Securities and Exchange
Commission on December 9, 1999. In the initial public offering, which closed on
December 15, 1999, the Company registered and issued 5,900,000 shares of
15
<PAGE>
Common Stock. In addition, the Company registered and issued 885,000 shares upon
exercise of an overallotment option granted to the underwriters which closed on
December 20, 1999. The managing underwriters for the initial public offering
were Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. The initial
public offering price was $17 per share, or an aggregate of $115,345,000,
including the overallotment option. Underwriter discounts and commissions
totaled $8,074,150. The Company paid an estimated total of $2,970,850 for other
expenses in connection with the initial public offering. Proceeds to
MedicaLogic, net of underwriting discounts, commissions and other expenses, were
approximately $104,300,000. As of March 1, 2000, the entire amount of the net
proceeds from the initial public offering were invested in cash equivalents and
short-term investments.
Within the last year, MedicaLogic has issued and sold the following
unregistered securities on the dates and for the consideration indicated:
In August 1998, MedicaLogic granted an option to purchase 8,000 shares of
Common Stock at a price of $4.00 a share to Enterprise Partners IV Associates,
L.P. and granted an option to purchase 92,000 shares of Common Stock at a price
of $4.00 a share to Enterprise Partners IV, L.P. The options were exercised on
April 14, 1999. The shares of Common Stock and the options were offered and sold
and issued in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act.
In February 1999, MedicaLogic issued 750,000 shares of Common Stock to the
shareholders of PrimaCis Information Technology, Inc., at a deemed value of
$4.40 a share, as partial consideration for the acquisition of PrimaCis. The
shares of Common Stock were offered and sold by MedicaLogic in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
In May 1999, MedicaLogic issued shares of its Series J Preferred Stock to
four investors. MedicaLogic offered and sold an aggregate of 3,663,158 shares of
Series J Preferred Stock to the investors at a price of $9.50 a share, for a
total purchase price of $34,800,000. The shares of Series J Preferred Stock were
offered and sold by MedicaLogic in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
In August 1999, MedicaLogic issued an additional 1,525,264 shares of its
Series J Preferred Stock to 11 investors. MedicaLogic offered and sold the
shares of Series J Preferred Stock to the investors at a price of $9.50 a share,
for $13,499,998.75 in cash, and services from three of the investors valued at
$990,004.50. The shares of Series J Preferred Stock were offered and sold by
MedicaLogic in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act.
In September and October 1999, MedicaLogic issued 172,763 shares of Common
Stock to Baylor College of Medicine pursuant to an agreement described in the
prospectus that provides for the issuance of shares of Common Stock to Baylor
upon certain purchases of LOGICIAN licenses from the Company. The shares were
issued to Baylor as a result of purchases of LOGICIAN licenses by institutions
in Houston, Texas for approximately $1,641,244, and the deemed value of the
shares at the time of issuance was $9.50 a share. The shares of Common Stock
were offered and sold by MedicaLogic in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
16
<PAGE>
OPTIONS, RESTRICTED STOCK AND GRANTS UNDER STOCK INCENTIVE PLAN
As set forth in the chart below, between October 1998 and November 1999
MedicaLogic granted to employees, consultants and directors stock options under
MedicaLogic's Stock Incentive Plans in reliance on the exemption from
registration provided by either (i) Section 4(2) of the Securities Act, or
(ii) Rule 701 promulgated under the Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE
------------------ --------
<S> <C> <C>
October 29, 1998 to May 25, 1999............................ 371,500 $ 4.40
May 26, 1999 to September 17, 1999.......................... 901,504 $ 6.50
September 18, 1999 to November 17, 1999..................... 596,750 $ 9.50
November 18, 1999 to December 5, 1999....................... 172,000 $10.00
December 6, 1999 and thereafter............................. 352,700 $13.00
</TABLE>
In the past year, MedicaLogic from time to time offered and sold the
following shares of Common Stock as incentive compensation to senior management
of MedicaLogic, subject to repurchase or performance requirements, pursuant to
MedicaLogic's Stock Incentive Plans. Such restricted Common Stock was issued in
reliance on the exemption from registration provided by either
(i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the
Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF SALE
RESTRICTED COMMON PRICE
------------------- --------
<S> <C> <C>
October 29, 1998 to May 25, 1999........................... 300,000 $ 4.40
May 26, 1999 to September 17, 1999......................... 442,500 $ 6.50
September 18, 1999 to November 17, 1999.................... 125,000 $ 9.50
November 18, 1999 to December 6, 1999...................... 365,000 $10.00
December 6, 1999 and thereafter............................ 15,000 $13.00
</TABLE>
In the past year, MedicaLogic from time to time has granted shares of Common
Stock to employees or consultants in exchange for services rendered to
MedicaLogic, pursuant to MedicaLogic's Stock Incentive Plans, as set forth in
the table below in reliance upon the exemptions from registration provided by
either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated
under the Securities Act.
<TABLE>
<CAPTION>
DEEMED PER SHARE
NUMBER OF SHARES VALUE AT
OF COMMON DATE OF GRANT
---------------- ----------------
<S> <C> <C>
October 29, 1998 to May 25, 1999..................... 23,750 $4.40
May 26, 1999 to September 17, 1999................... 35,000 $6.50
September 18, 1999 and thereafter.................... 7,000 $9.50
</TABLE>
All of the shares underlying the stock options and restricted shares granted
pursuant to MedicaLogic's Stock Incentive Plans were registered on a Form S-8,
effective January 14, 2000.
The Company also sold to certain partners of Stoel Rives LLP, its legal
counsel, 20,000 shares of MedicaLogic Common Stock at $6.50 per share. The
Common Stock was offered and sold by MedicaLogic in reliance upon the exemption
from registration pursuant to Section 4(2) of the Securities Act.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
This summary should be read together with the consolidated financial
statements, notes to the consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this annual report on Form 10-K. Historical results of
operations are not necessarily indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Revenues.................................... $ 7,537 $ 9,664 $ 12,807 $ 16,160 $ 19,717
Net loss attributed to common
shareholders.............................. $(4,261) $(10,364) $(10,819) $ (7,232) $(27,987)
Basic and diluted net loss per common
share(1).................................. $ (0.68) $ (1.64) $ (1.64) $ (1.06) $ (3.07)
Total assets................................ $14,787 $ 26,074 $ 22,072 $ 24,308 $168,354
Long-term obligations....................... $ 1,454 $ 977 $ 278 $ 679 $ 2,233
Convertible redeemable preferred stock...... $15,795 $ 35,867 $ 42,791 $ 49,782 $ --
Total shareholders' equity (deficit)........ $(4,995) $(15,317) $(26,093) $(32,439) $149,840
</TABLE>
- ------------------------
(1) For a description of the computation of the net loss per common share see
note 1 of the notes to the consolidated financial statements.
We encourage you to read the consolidated financial statements included in
this annual report on Form 10-K.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions should be read in conjunction with the
MedicaLogic Inc. consolidated financial statements and notes thereto. This
management discussion and analysis of financial condition and result of
operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties, including, among other things, statements
regarding our anticipated costs and expenses, revenue mix, product and service
development, and relationships with strategic partners. These forward-looking
statements include, among others, those statements using terminology such as
"may", "will", "expects", "plans", "estimates", "anticipates", "potential",
"becoming", "begin", "expand", "improve", "become", "likely", or "continue" or
the negative thereof or other comparable terminology regarding beliefs, plans,
expectations, or intentions regarding the future. Forward-looking statements
include statements regarding expected revenues from license and subscription
fees for LOGICIAN and LOGICIAN INTERNET, customer support and consulting
contracts associated with LOGICIAN, transaction fees for drug prescriptions,
payment claims processing and advertising, third party licensing fees,
additional investment in staff and infrastructure, expanding market penetration,
acceptance of our products and services. These forward-looking statements
involve risks and uncertainties, and it is important to note that MedicaLogic's
actual results could differ materially from those in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed under Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk." All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to MedicaLogic as of the date hereof, and MedicaLogic assumes no
obligation to update any forward-looking statement or risk factor.
OVERVIEW
MedicaLogic was founded in 1985 and released its first DOS-based electronic
medical record product in 1989. In 1996, it released LOGICIAN, a Windows-based
electronic medical record product. During 1999, MedicaLogic released its current
version of LOGICIAN, for which an upgrade was shipped in the third quarter of
1999, and released its latest product LOGICIAN INTERNET in the fourth quarter of
1999. MedicaLogic's consumer web site, 98point6.com, is being tested in a pilot
program and is expected to be introduced in the first half of 2000.
MedicaLogic receives revenues from licensing its software products both
directly to end-users and indirectly through resellers. Revenue is recognized
from licenses when a signed agreement has been obtained, the delivery of the
product has occurred, the fee is fixed and determinable, and collectibility is
probable. MedicaLogic receives service revenues from customer support contracts
and consulting contracts. Customer support revenue, which consists of annual
subscription fees for ongoing support of the product, including upgrades, is
recognized ratably over the term of the contract, which is typically one year.
MedicaLogic derives consulting revenues primarily from the implementation
services performed on a time-and-materials basis under separate service
arrangements related to the implementation of software products. MedicaLogic
recognizes revenues from consulting services as the services are performed.
MedicaLogic recognizes software license revenues consistent with Statement
of Position 97-2, SOFTWARE REVENUE RECOGNITION, as amended by Statement of
Position 98-4 and 98-9. These statements provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
and have been applied to transactions entered into after January 1, 1998. The
application of SOP 97-2 and related amendments have not had a material impact on
MedicaLogic's results of operations.
As a result of the implementation of its LOGICIAN INTERNET product, with
revenues recognized for monthly subscriptions, along with a transition to
monthly subscription-based pricing for its LOGICIAN enterprise products,
MedicaLogic expects that its historical revenue sources, sales of software
licenses and services will gradually be replaced by these subscriptions
revenues. Because MedicaLogic's subscription
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<PAGE>
business model is in an emerging stage, revenue and income potential from
MedicaLogic's subscription products and services is unproven. For this reason,
MedicaLogic expects historical revenue sources will continue to be major
contributors to overall revenues. Despite the continued importance of historical
revenue sources, you should not use MedicaLogic's past results as a basis to
predict its future performance due to the implementation of MedicaLogic's
subscription business model.
MedicaLogic has two key metrics which will be reported on an on-going basis,
"clinicians" and "online health records." Many types of health professionals use
the LOGICIAN product, including medical personnel at the point of care, such as
physicians, registered nurses, physician assistants and medical assistants, as
well as a range of administrative support personnel such as front office and
billing staff. For reporting purposes, MedicaLogic will define "clinicians" as
health professionals involved at the point of care, excluding administrative
support. In addition, clinicians will include registered users of the LOGICIAN
INTERNET product. "Online health records" are defined as the electronic medical
record equivalent to a paper-based medical chart for an individual patient.
Costs of license revenues consist of licensing fees paid to third-party
software vendors, product media, product duplication, and manuals. Costs of
service revenues consist of implementation and support personnel and third-party
service provider costs related to customer support. Third-party licensing fees
represent charges for use of Oracle databases and industry specific content
included in the software. The majority of these licensing fees are based on the
number of licenses MedicaLogic distributes to customers. Marketing and sales
expenses consist primarily of salaries, commissions and bonuses earned by sales
and marketing personnel, travel and promotional expenses and facility and
communication costs. Research and development expenses consist primarily of
salaries and benefits paid to software developers, quality assurance personnel
and technical writers, equipment for software developers and payments to outside
contractors. General and administrative expenses consist primarily of salaries,
benefits and related costs for our finance, legal and other administrative
personnel and professional services fees.
ACQUISITIONS
Effective January 1999, MedicaLogic acquired PrimaCis Health Information
Technology, Inc. in a transaction that was accounted for as a purchase.
PrimaCis, which was founded by faculty members of the Baylor College of
Medicine, was a developer of electronic medical record software and had
developed in-depth Internet-based oncology content for its Internet site.
MedicaLogic paid PrimaCis shareholders total consideration of $6.3 million and
paid $153,000 in merger-related costs to acquire the outstanding shares of
PrimaCis capital stock. These amounts consisted of $2.1 million in cash, the
issuance of shares of MedicaLogic common stock valued at $3.3 million and the
assumption of $1.1 million in PrimaCis' liabilities. Goodwill in the amount of
$6.5 million, reflecting the excess of the purchase price for PrimaCis over the
fair value of the net tangible and other intangible assets acquired, will be
amortized on a straight-line basis over a four-year period.
At about the time of the PrimaCis acquisition, MedicaLogic entered into an
agreement with the Baylor College of Medicine. This agreement provides that for
each purchase of licenses of LOGICIAN by December 31, 2002 by Baylor College of
Medicine or any other institution or health care provider in the Houston, Texas
area, MedicaLogic will issue as payment to Baylor College of Medicine shares of
its common stock having a then-current fair market value equal to 50% of the
license fees received from that sale, up to an aggregate maximum of
$12.0 million of common stock.
RECENT DEVELOPMENTS
On February 22, 2000 MedicaLogic, Inc. and Medscape, Inc. announced an
agreement to merge and, on the same date, MedicaLogic announced an agreement to
acquire Total eMed, Inc. Medscape shareholders will receive 0.323 shares of
MedicaLogic common stock for each share of Medscape stock. Total eMed
shareholders will receive 8 million shares of MedicaLogic common stock for all
of its outstanding shares
20
<PAGE>
and options. The combined companies will be known initially as
MedicaLogic/Medscape. These transactions are expected to be accounted for as
purchases and will become effective upon approval by the shareholders of all
three companies and the satisfaction of other conditions.
RESULTS OF OPERATIONS
The following table sets fourth MedicaLogic's revenues, operating expenses,
other income and expense and net loss as a percentage of total revenues for the
years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses................................................ 59.5% 64.4% 62.2%
Service and support..................................... 40.5 35.6 37.8
----- ----- ------
Total revenues............................................ 100.0 100.0 100.0
----- ----- ------
Operating expenses:
Cost of licenses........................................ 13.3 5.8 5.9
Cost of service and support............................. 47.3 36.0 36.4
Marketing and sales..................................... 60.0 48.8 110.3
Research and development................................ 55.0 49.9 67.3
General and administrative.............................. 10.3 7.1 27.7
----- ----- ------
Total operating expenses.................................. 185.9 147.6 247.6
----- ----- ------
Operating loss.......................................... (85.9) (47.6) (147.6)
Total other income, net:.................................. 2.5 4.1 7.3
----- ----- ------
Loss before income taxes.............................. (83.4) (43.5) (140.3)
Provision for income taxes................................ -- -- --
----- ----- ------
Net loss.............................................. (83.4)% (43.5)% (140.3)%
===== ===== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
As of December 31, 1999, over 7,800 clinicians maintained more than
8.1 million electronic medical records with MedicaLogic products. These totals
represent approximately 55% and 40% increases over previous year figures of
approximately 5,000 clinicians and 5.8 million electronic medical records,
respectively.
During 1997, VHA, Inc. accounted for approximately 23% of total revenues and
Wake Forest Baptist Medical Center accounted for approximately 13% of total
revenues. In 1998, VHA, Inc., accounted for approximately 20% of total revenues.
During 1999, Baylor College of Medicine accounted for approximately 16% of total
revenues, and Texas Childrens Hospital accounted for approximately 13% of total
revenues.
Since inception, but increasingly during the past year, MedicaLogic has made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. From January 1, 1999 through
December 31, 1999, the Company hired 146 employees, or approximately 49% of the
current workforce, and invested approximately $12.5 million in capital assets. A
large portion of these assets is dedicated to the development of the Internet
Health Services Center. The planned growth will require additional staff and
infrastructure.
For the year ended December 31, 1999, MedicaLogic recorded aggregate
deferred compensation of $4.7 million for the grant of stock options and
restricted stock at prices less than the deemed fair value on
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the grant date. The deferred compensation is being amortized over the vesting
period of the securities, which is generally three years. Of the total deferred
compensation, $0.4 million was amortized during 1999. MedicaLogic expects to
amortize approximately $1.6 million, $1.6 million and $1.2 million for the years
2000, 2001 and 2002 respectively.
MedicaLogic has incurred net losses each year since it began operations. The
Company incurred net losses of approximately $10.7 million, $7.0 million and
$27.7 million for the years ended December 31, 1997, 1998 and 1999. As of
December 31, 1999, MedicaLogic had an accumulated deficit of $63.5 million.
MedicaLogic intends to increase further its spending on technology
infrastructure development, marketing and promotion, services development and
strategic relationships, all of which are related to the establishment of the
Internet Health Services Center. As a result, it expects to continue incurring
net losses and negative cash flows from operations at least through 2000.
REVENUES
Total revenues, which consisted of software licenses and service revenues,
increased from $12.8 million in 1997 to $16.2 million in 1998, and to
$19.7 million in 1999. License revenues increased from $7.6 million in 1997 to
$10.4 million in 1998, and to $12.3 million in 1999. The increase in license
revenues from 1997 to 1998 primarily resulted from an increase in the average
selling price from 1997 to 1998 due to increased sales through the direct sales
channel. The increase in license revenues from 1998 to 1999 continued the trend
of realizing higher average selling prices of LOGICIAN, partly offset by a
decrease in the total number of licenses sold. The increase in the average
selling price resulted primarily from a higher percentage of products sold
through direct channels versus products sold through reseller channels. This
trend is not expected to continue as MedicaLogic moves to a subscription
business model for LOGICIAN and LOGICIAN INTERNET, and these sources of revenue
become the primary sources of revenues. However, the timing and acceptance of
new products or the financial conditions of key customers could negatively
impact the physician adoption rate, which would have a material adverse effect
on the business, operating results and financial condition of MedicaLogic.
Service revenues increased from $5.2 million in 1997 to $5.8 million in
1998, and to $7.5 million in 1999 representing a growth rate of 11% in 1998 and
29% in 1999. The increase in service revenues is the result of new support
contracts on an increasing installed base of LOGICIAN licenses. MedicaLogic
expects total service revenue to continue to grow. However, failure of or delay
in the adoption of LOGICIAN by physicians could have a material adverse effect
on MedicaLogic's business, operating results and financial condition.
MedicaLogic cannot insure that its customers will maintain their LOGICIAN
licenses or support contracts.
OPERATING EXPENSES
COSTS OF REVENUES
Costs of licenses were $1.7 million in 1997, $0.9 million in 1998 and
$1.2 million in 1999. Costs of license revenues as a percentage of license
revenues was approximately 22% in 1997, 9% in 1998 and 9% in 1999. The decrease
in dollar amounts and the percentage of revenue amounts from 1997 to 1998 is
primarily due to more favorable license fee terms negotiated with Oracle in 1998
due to MedicaLogic's larger installed base. In 1999, costs of license revenues
as a percentage of license revenues remained level with 1998.
Costs of service and support decreased from $6.1 million in 1997 to
$5.8 million in 1998, and increased to $7.2 million in 1999. The decrease in
cost from 1997 to 1998 reflects the reorganization of MedicaLogic's consulting
practice, which included personnel changes, the relocation of personnel to
in-home offices from rented space and the reduction of use of third-party
contractors. The increase in cost of service from 1998 to 1999 is primarily due
to additional personnel costs to support the growth in installations and
revenues. MedicaLogic expects these costs to continue to increase along with the
growth
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in use of MedicaLogic's products. Costs of service revenues as a percentage of
service revenues was 117% in 1997, 101% in 1998 and 96% in 1999. The declining
percentage of costs to revenues is the result of improving staff utilization
over a larger base, as well as the cost reduction measures taken in 1998 as
noted above. MedicaLogic does not assume this trend will continue due to the
launch of new products and the uncertain mix of products sold. The cost of
providing service to customers as a percentage of associated revenues often
varies between periods because the costs of implementation and support personnel
are relatively fixed.
MARKETING AND SALES
Marketing and sales expenses increased from $7.7 million in 1997 to
$7.9 million in 1998, and to $21.7 million in 1999. The increases in marketing
and sales expenses from 1997 to 1998 resulted primarily from an increase in
commissions paid to sales staff based on increased sales, and marketing
activities which included trade shows and public relations. Marketing and sales
expenses represented 60% of total revenues in 1997, 49% in 1998 and 110% in
1999. The decrease in marketing and sales expenses as a percentage of total
revenues from 1997 to 1998 reflects the more rapid growth in revenues compared
to the growth of marketing and sales expenses due to early investment in
marketing activities to create product awareness. The increase in both the
marketing and sales dollar amount and percentage of revenues from 1998 to 1999
resulted primarily from costs related to additional direct and indirect
workforce required to promote and launch new products of approximately
$6.6 million, and an increase in trade shows, public relations and advertising
of $28.8 million in support of these product launches. MedicaLogic believes that
it will need to continue to increase its sales and marketing efforts to expand
market penetration and increase acceptance of its Internet products and
services.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $7.0 million in 1997 to
$8.1 million in 1998, and to $13.3 million in 1999. Research and development
costs represented 55% of total revenues for 1997, 50% in 1998 and 67% in 1999.
The increases in research and development expenses from 1997 to 1998 resulted
from an increase in the number of software developers and quality assurance
personnel and the use of outside contractors to support product development and
testing activities. The decrease in research and development expenses as a
percentage of total revenues primarily reflects the increase in revenues
relative to the increase in research and development staff to develop and
enhance the LOGICIAN product. The increases in research and development dollar
amount and percentage from 1998 to 1999 resulted primarily from additional
development staff and contractors required to develop new products and product
upgrades, and related equipment and facilities cost totaling approximately
$4.9 million. MedicaLogic believes that research and development costs will
continue to increase as it expands its product offering of LOGICIAN software and
other products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased from $1.3 million in 1997 to
$1.2 million in 1998, and increased to $5.5 million in 1999. General and
administrative expenses represented approximately 10% of total revenues in 1997,
7% in 1998 and 28% in 1999. The increase from 1998 to 1999 resulted from the
addition of administrative personnel and the use of contractors to support the
growth of MedicaLogic's business, $2.2 million; amortization of goodwill related
to the PrimaCis acquisition, $1.5 million; and the costs associated with the set
up of the San Francisco facility, $0.5 million. MedicaLogic believes that
general and administrative expenses will continue to increase as it expands
administrative staff and incurs expenses associated with being a public company,
including annual and other public reporting costs, director and officer
liability insurance, investor relations programs and professional services fees.
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OTHER INCOME (EXPENSE)
Other income increased from $0.3 million in 1997 to $0.7 million in 1998,
and to $1.4 million in 1999. The increase from 1997 to 1999 in other income is
mainly attributable to an increase in interest earned on cash and cash
equivalents and short term investments from issuance of preferred stock and the
initial public offering. MedicaLogic expects other income to increase
substantially in 2000 primarily due to the increase in cash and cash equivalents
and short-term investments. However, the amount of the increase will be effected
by changes in interest rates, and the rate at which MedicaLogic uses the funds
to support its growth.
PROVISION FOR INCOME TAXES
As a result of net operating losses in 1999 and prior years, MedicaLogic
made no provision or benefit for federal or state income taxes. As of
December 31, 1999, it had net operating loss carryforwards for tax reporting
purposes of approximately $59.6 million and research and experimentation credits
of approximately $2.0 million which expire through 2019. Approximately
$7.1 million of the net operating loss carryforwards are subject to an annual
utilization limitation due to ownership changes in prior years.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, MedicaLogic had cash and cash equivalents of
$110.3 million and short term investments of $28.5 million, up a combined
$127.1 million from the December 31, 1998 balances of $4.7 million and
$7.0 million respectfully.
Financing activities provided cash of $5.6 million, $7.8 million and
$154.9 million in the years ended December 31, 1997, 1998 and 1999 as follows:
in 1997, primarily from the issuance of preferred stock of $6.8 million offset
by payments of $1.3 million for obligations under capital lease agreements; in
1998, primarily from the issuance of preferred stock of $6.8 million offset by
payments of $1.3 million for obligations under capital lease agreements and
notes payable; and in 1999, primarily from MedicaLogic's initial public offering
of $104.3 million, and the issuance of preferred stock in the amount of
$47.8 million, offset by payments of $1.2 million for obligations under capital
lease agreements and notes payable.
On December 10, 1999, MedicaLogic completed its initial public offering and
issued 6,785,000 shares of its common stock. The net proceeds from the issuance
of the common stock in the initial public offering was $104.3 million. Prior to
its initial public offering, MedicaLogic financed its operations with private
placements of equity securities with investors such as Continental Casualty
Company; Dell Computer Corporation; Franklin Capital Associates III, L.P.;
Furman Selz SBIC, L.P.; Glynn Ventures III, L.P.; New Enterprise Associates VI,
Limited Partnership; Sequoia funds; Soros investments funds; and VHA, Inc. As of
December 31, 1999, net proceeds from these private placements totaled
$97.1 million.
MedicaLogic has borrowed $3.3 million under a term loan facility with
General Electric Capital Business Asset Funding Corporation to finance the
purchase of new capital equipment. No amounts were available under this facility
at December 31, 1999.
MedicaLogic's operating activities resulted in net cash outflows of
$11.6 million, $6.8 million and $12.7 million for the years ended December 31,
1997, 1998 and 1999. Cash outflows in 1997, 1998 and 1999 resulted from
MedicaLogic's investment in sales and marketing of $7.7 million, $7.9 million
and $21.7 million, research and development of $7.0 million, $8.1 million and
$13.3 million, which contributed to operating losses of $11.0 million,
$7.7 million and 29.1 million. Cash outflows in 1999 also increased for prepaid
assets of $4.0 million due to the purchase of prepaid maintenance contracts,
prepaid insurance and prepaid royalties. These costs were partially offset by a
reduction of $3.1 million in MedicaLogic's accounts receivable due to improved
collection on customer contracts, an increase in accounts payable of
$4.1 million due to the timing of invoice due dates, and an increase of
$2.2 million in deferred revenue because of an increasing base of Logician
licenses.
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Investing activities resulted in net cash outflows of $7.6 million,
$1.2 million and $36.6 million for the years ended December 31, 1997, 1998 and
1999. Cash outflows in 1997 resulted from net investments of $7.1 million in
short term instruments. Cash outflows in 1998 resulted from $1.3 million related
to the purchase of fixed assets. Cash outflows in 1999 resulted from net
investments of $21.8 million in short-term instruments, $12.5 million related to
the purchase of fixed assets and $2.1 million for the acquisition of PrimaCis.
MedicaLogic currently anticipates that it will continue to experience
significant growth in its operating expenses as it enters new markets for its
products and services, increases marketing activities, increases research and
development spending, develops new distribution channels, expands its
infrastructure, and improves its operational and financial systems. These
operating expenses will consume a material amount of MedicaLogic's cash
resources. MedicaLogic believes the net proceeds from its financing activities
during 1999, together with its existing cash and cash equivalents, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Depending upon the market
opportunity, MedicaLogic may seek additional funds to support potential merger
and acquisition activities or for other purposes through public or private
equity financing or from other sources. MedicaLogic may not be able to obtain
adequate or favorable financing at that time. Any financing MedicaLogic obtains
may dilute the ownership interest of its shareholders prior to the financing.
YEAR 2000 COMPLIANCE
In 1998 the Company began working to address the possible effects of the
potential inability of computer programs to adequately process date information
after December 31, 1999 (Year 2000). The Company conducted a review of its
products, information technology and facilities computer systems to identify all
software that could be affected by the Year 2000 issue and developed and
executed plans to address it. These actions were completed in the fourth quarter
of 1999. With the passing of January 1, 2000, the Company reports that no
significant Year 2000 problems arose. Identifiable expenditures through the
fourth quarter of 1999 total approximately $0.7 million. These costs were
expensed as incurred. No further significant expenditures related to the Year
2000 issue are expected.
To date the Company has not experienced any year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. In June 1999,
the FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
Statement No. 137 defers the effective date of Statement No. 133 for one year.
Statement No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Because we currently hold no derivative financial
instruments and do not currently engage in hedging activities, adoption of SFAS
No. 133 is expected to have no material impact on our financial condition or
results of operations.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
IF WE DO NOT ACHIEVE BROAD ACCEPTANCE OF OUR PRODUCTS AND SERVICES BY
PHYSICIANS, PATIENTS AND OTHER HEALTHCARE STAKEHOLDERS, OUR BUSINESS WILL BE
HARMED.
Our business model depends on our ability both to sell our LOGICIAN and
LOGICIAN INTERNET systems to physicians and other healthcare providers and to
generate usage by a large number of physicians. Failure to achieve broad
acceptance of our products and services by physicians and other healthcare
stakeholders would severely limit our ability to implement our Internet-based
business model. Achieving market
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acceptance for our products and services will require substantial marketing
efforts and the expenditure of significant financial and other resources to
create awareness and demand by physicians and healthcare consumers. Use of our
products and services requires physicians to integrate our products and services
into their office work flow and to adopt different behavior patterns and new
methods of conducting business and exchanging information. Physicians may not
choose to use our products and services.
OUR INTERNET-BASED BUSINESS MODEL MAY NOT BE SUCCESSFULLY IMPLEMENTED, AND IT IS
DIFFICULT TO EVALUATE BECAUSE IT IS NEW AND UNPROVEN.
We have only recently implemented our Internet-based business model, and we
do not have an operating history with this model upon which you can evaluate our
prospects. In attempting to implement our Internet-based business model, we are
significantly changing our business operations, sales and implementation
practices, customer service and support operations and management focus. We are
also facing new risks and challenges, including a lack of meaningful historical
financial data upon which to plan future budgets, the need to develop strategic
relationships and other risks described below. For each of the last three fiscal
years, all of our revenue was generated from the sale of licenses on and
services related to our enterprise software and no revenue was derived from our
LOGICIAN INTERNET system or other Internet-based products and services. Our
operating history is not indicative of our future performance under our
Internet-based business model, and you should not rely upon our past performance
to predict our future performance. We may not be able to implement our business
model successfully.
WE HAVE A HISTORY OF NET OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE
FUTURE.
Failure to achieve or maintain profitability could materially and adversely
affect the market price of our common stock. We have experienced net losses of
approximately $10.8 million in 1997, $7.2 million in 1998 and $28.0 million in
1999. At December 31, 1999, we had a retained deficit of $63.5 million. We are
investing heavily to develop our Internet-based products and services and expand
our sales and marketing capabilities related to our Internet-based business. To
date, we have not achieved any revenue from our Internet-based products or
services. We expect to continue to experience net losses, and we are not certain
when we will become profitable, if at all. Even if we do achieve profitability,
we may not sustain or increase profitability on a quarterly or annual basis.
WE MAY MAKE ACQUISITIONS IN THE FUTURE AND WE MAY NOT SUCCESSFULLY ASSIMILATE
THE ACQUIRED OPERATIONS OR PRODUCTS.
We intend to make acquisitions in the future, although there can be no
assurance that suitable companies, products or technologies will be available
for acquisition. Acquisitions entail numerous risks, including assimilation of
the operations and products, retention of key employees, diversion of our
management's attention, and uncertainties in our ability to maintain key
business relationships the acquired entities have established. In addition, if
we undertake future acquisitions, we may issue dilutive securities, assume or
incur additional debt obligations, incur large one-time expenses, and acquire
intangible assets that would result in significant future expense. Also,
recently the Financial Accounting Standards Board ("FASB") voted to eliminate
pooling of interests accounting for acquisitions and voted to eliminate the
immediate write-off of acquired in-process research and development. The effect
of these changes would be to increase the portion of the purchase price for any
future acquisitions that must be charged to the Company's cost of revenues and
operating expenses in the periods following any such acquisitions. Any of these
events could have a material adverse effect upon our business, operating results
and financial condition.
26
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WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OUR
REVENUES COULD DECLINE SUBSTANTIALLY.
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of customers. If any significant customer
spends less money on licenses for LOGICIAN or related services, or terminates
its relationship with us, our revenues could decline substantially. In 1998, we
derived 21% of our revenue from VHA, Inc., a distribution partner, and in 1999,
we derived approximately 29% of our revenue from Baylor College of Medicine and
Texas Children's Hospital. We expect to continue to derive a significant portion
of our future revenues from sales of our LOGICIAN enterprise product to a
limited number of large integrated healthcare delivery networks. Failure to make
these sales during any quarter could cause our revenues and results of
operations to fall short of expectations, which could adversely affect the price
of our common stock.
OUR FAILURE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES COULD ADVERSELY
AFFECT THE IMPLEMENTATION OF OUR INTERNET-BASED BUSINESS MODEL.
Any failure by us to introduce planned products or to introduce these
products on schedule could make it difficult for us to implement our
Internet-based business model. For example, we expect to release commercially
our consumer web site 98point6, which is currently being tested in a pilot
program, in the first half of 2000. We may not be able to introduce this and
other products and services under development on schedule, or at all. For
example, LOGICIAN INTERNET was introduced one month after its planned release
date. Moreover, even if we were able to release a product or service when
expected, initial releases of software often contain errors or defects. Past
releases of LOGICIAN have contained errors and defects that required us to
provide corrections and other upgrades.
OUR FAILURE TO SUCCESSFULLY ENHANCE CURRENT PRODUCTS AND SERVICES COULD
ADVERSELY AFFECT THE IMPLEMENTATION OF OUR INTERNET-BASED BUSINESS MODEL.
Failure to enhance our product and service offerings to add functionality in
areas like interfacing with the products of our strategic partners could make it
more difficult for us to implement our Internet-based business model. For
example, we are working on enhancements that will allow our LOGICIAN and
LOGICIAN INTERNET products to communicate with each other to facilitate
connections between physicians in integrated healthcare delivery networks, who
primarily use LOGICIAN, and physicians who use LOGICIAN INTERNET. Developing,
integrating, enhancing and customizing our products and services will be
expensive and time consuming.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WE MAY BE UNABLE TO
SUSTAIN OR GROW OUR BUSINESS.
If we lose any of our existing strategic relationships or fail to establish
additional strategic relationships, or if our strategic relationships fail to
benefit us as expected, we may not be able to sustain or grow our business. We
will depend upon our strategic relationships to extend the reach of our products
and services to a larger number of participants in the healthcare industry,
develop and deploy new products and generate additional revenue. We have limited
experience in establishing and maintaining strategic relationships with
healthcare and Internet industry participants. Entering into strategic
relationships is complicated by the following factors:
- Current or future strategic partners may decide to compete with us in some
or all of our markets;
- Key participants in the healthcare industry may refuse to establish
strategic relationships with us if we have entered into relationships with
their competitors; and
- Potential strategic partners may be reluctant to work with us until our
products and services have obtained widespread market acceptance.
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<PAGE>
POTENTIAL INTEGRATED HEALTHCARE DELIVERY NETWORK CUSTOMERS COULD TAKE A LONG
TIME TO EVALUATE THE PURCHASE OF OUR PRODUCTS AND SERVICES, WHICH COULD RESULT
IN SLOW SALES GROWTH AND ADVERSELY AFFECT THE PRICE OF OUR STOCK.
One element of our strategy is to market our services directly to large
healthcare organizations. The sale of our products and services are often
subject to delays due to these organizations' internal budgets and procedures
for approving large capital expenditures and deploying new technologies within
their networks. As a result, sales of our products and services to new
integrated healthcare delivery network customers may grow slowly and unevenly
due to those organizations' purchasing cycles. If the time and resources
required to sell our products and services to new integrated healthcare delivery
network customers materially exceed our expectations, it may adversely affect
our share price.
The average period from our first contact with an integrated healthcare
delivery network customer and its purchase of our products and services is
18 months. We do not control many of the factors that will influence the timing
of our customers' buying decisions.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS AND
SERVICES.
Our industry is intensely competitive and subject to fragmentation, high
growth and rapid technological change. We may face significant competition from
traditional healthcare information system vendors and Internet healthcare
companies as they expand their product offerings. Many of these companies have
significantly greater financial resources, well-established brand names and
large installed customer bases. We may be unable to compete successfully against
these organizations.
IF WE FAIL TO ACHIEVE A SIGNIFICANT MARKET SHARE, WE MAY BE UNABLE TO COMPETE
SUCCESSFULLY.
We believe that, to be successful, we must gain significant market share
with our products and services before our competitors introduce alternative
products and services with features similar to ours. Failure to achieve a
significant market share may materially reduce our ability to compete
successfully, if at all, with other market participants and may lead to reduced
sales of our products and services.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON OUR BUSINESS OPERATIONS.
We will need to continue to expand our operations rapidly if we successfully
achieve market acceptance for our products and services. Difficulties in
managing any future growth could have a significant negative impact on our
business operations, increase our costs and make it more difficult for us to
achieve profitability. We may not be able to project the rate or timing of
increases in the use of our products and services accurately or to expand and
upgrade our systems and infrastructure to accommodate these increases. Our
future results of operations will depend on the ability of our officers and key
employees to manage changing business conditions and to implement and improve
our technical, administrative, financial control and reporting systems in
response to our anticipated rapid growth.
OUR FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL COULD SIGNIFICANTLY HINDER THE
EXECUTION OF OUR BUSINESS STRATEGY.
Our success depends in large part on the continued service of our management
and other key personnel and our ability to continue to attract, motivate and
retain highly qualified employees. In particular, the services of Mark K.
Leavitt, our chief executive officer, David C. Moffenbeier, our president and
Harvey J. Anderson, our chief operating officer, general manager of Internet
operations are integral to the execution of our business strategy. If one or
more of our key employees leaves MedicaLogic and we are unable to find a
replacement with the combination of skills and attributes necessary to execute
our strategy, we may be unable to execute our strategy successfully. We do not
maintain key person life insurance on any of our employees.
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IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION MAY BE ADVERSELY AFFECTED.
Our ability to compete depends upon our proprietary systems and technology,
including LOGICIAN INTERNET and LOGICIAN. The steps we currently take to protect
our intellectual property rights may prove to be inadequate, time consuming and
expensive.
Misappropriation of our intellectual property may make us less competitive
and require us to engage in expensive litigation to enforce or protect our
intellectual property rights or to defend against claims of invalidity.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our products and
services overlaps with competing products. We could incur substantial costs and
diversion of management resources defending any infringement claims. In
addition, a party making a claim against us could secure a judgement awarding
substantial damages, as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services. Licenses for
intellectual property of third parties that might be required for our products
or services may not be available on commercially reasonable terms, or at all.
IF WE ARE HELD LIABLE FOR USE OF DATA WE PROVIDE, WE COULD BE REQUIRED TO PAY
MATERIAL DAMAGES TO INJURED THIRD PARTIES.
We provide data for use by physicians, consumers and other healthcare
stakeholders. This data may be obtained from our physician customers, strategic
partners, other third parties or, with patient consent, from the aggregation of
patient health records. Claims for injuries related to the use of this data may
be made in the future, and we may not be able to insure adequately against these
claims. A claim brought against us that is uninsured or under-insured could lead
to material damages against us.
FAILURE TO CONTINUE TO EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE TO
ACCOMMODATE INCREASED USE BY OUR CUSTOMERS COULD MAKE IT DIFFICULT TO
SUCCESSFULLY IMPLEMENT OUR INTERNET-BASED BUSINESS MODEL.
To successfully implement our Internet-based business model, we must
continue to expand and adapt our network infrastructure to accommodate
additional users, increased transaction volumes and changing customer
requirements. Our infrastructure may not accommodate increased use while
maintaining acceptable overall performance. To date, we have processed a limited
number and variety of Internet-based transactions. In addition, our Internet
products and services have only been used by a limited number of physicians and
healthcare consumers. An unexpectedly large increase in the volume or pace of
traffic on our web site, the number of physicians using LOGICIAN INTERNET or our
other Internet-based products and services, or orders placed by customers may
require us to expand and further upgrade our technology. This expansion and
adaptation would be expensive and will divert our attention from other
activities.
OUR INABILITY TO PREVENT SECURITY BREACHES COULD DETER PEOPLE FROM USING OUR
PRODUCTS AND SERVICES AND COULD EXPOSE US TO CLAIMS FOR DAMAGES.
Any well-publicized compromise of Internet security could deter people from
using our products and services to conduct transactions that involve
transmitting confidential healthcare information over the Internet.
A security breach could occur if a third party were able to penetrate our
network security and misappropriate our patient and other information. If this
happened, we could also be subject to liability and litigation. The difficulty
of securely transmitting confidential information over the Internet has been a
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<PAGE>
significant barrier to conducting e-commerce and engaging in sensitive
communications. We may have to devote significant financial and other resources
to protect against security breaches or to alleviate problems caused by
breaches.
WE MAY NOT BE ABLE TO IMPLEMENT OUR NEW MANAGEMENT INFORMATION SYSTEMS IN A
TIMELY MANNER AND THE NEW SYSTEMS MAY NOT BE ADEQUATE TO SUPPORT OUR
OPERATIONS.
The growth in the complexity of our business has placed and will continue to
place a significant strain on our operational, financial and management
information systems. In June, 1999, we purchased a new management information
system from Oracle Corporation and the required hardware to support it. This
system is crucial to our accounting, operations, purchasing and project billing
capabilities. We must integrate this system with our Internet products and
services and with our existing customer relationship management system. We may
not be able to implement this new system in an efficient and timely manner and
the new system may not be adequate to support our operations.
RISKS RELATED TO THE HEALTHCARE INDUSTRY AND THE INTERNET
FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY
COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS.
We are subject to federal and state legislation and regulation affecting the
healthcare industry. Existing and new laws and regulations applicable to the
healthcare industry could have a material adverse effect on our ability to
operate our business. The federal and state governments extensively regulate the
confidentiality and release of patient records. Additional legislation governing
the distribution of medical records and health information has been proposed at
both the federal and state level. It may be expensive to implement security or
other measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering patient records or health information
electronically.
Other legislation currently being considered at the federal level could also
negatively affect our business. For example, the Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions and
identifiers, prescribed security measures and other provisions within two years
after the adoption of final regulations by the Department of Health and Human
Services. Because we intend to market some of our services as meeting these
regulatory requirements, our success will also depend on other healthcare
participants complying with these regulations.
A federal law commonly known as the Medicare/Medicaid antikickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others to acquire, arrange for or recommend the acquisition of
healthcare products or services. Another federal law, commonly known as the
Stark law, prohibits physicians from referring Medicare and Medicaid patients
for designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. The application and interpretation of these laws are complex
and difficult to predict and could constrain our financial and marketing
relationships or our ability to obtain pharmaceutical company sponsorship for
our products.
STATE RESTRICTIONS ON THE PRACTICE OF MEDICINE MAY NEGATIVELY AFFECT OUR
ACTIVITIES.
Any finding in a state that we are not in compliance with its laws could
require us to restructure our services, which could adversely affect our
revenues or share price. The laws in some states prohibit some business
entities, such as MedicaLogic, from practicing medicine. This is commonly
referred to as the prohibition against the "corporate practice of medicine."
These laws generally prohibit us from employing physicians to practice medicine
or from directly furnishing medical care to patients. Each state requires
licensure for the practice of medicine within that state, and some states
consider the receipt of an electronic transmission of selected healthcare
information in that state to be the practice of medicine. Some states have
similar prohibitions on corporate practice and licensure requirements for other
regulated
30
<PAGE>
health care professions (for example, nurse practitioners or pharmacists). These
laws restrict our activities and the extent to which we can provide medical
advice to consumers, physicians and others. If challenged, our activities may
not be found to be in compliance with these laws. We are also expanding
internationally, and may face similar restrictions on our activities outside the
United States.
THE INTERNET IS SUBJECT TO MANY LEGAL UNCERTAINTIES AND POTENTIAL GOVERNMENT
REGULATIONS THAT MAY DECREASE DEMAND FOR OUR SERVICES, INCREASE OUR COST OF
DOING BUSINESS OR OTHERWISE HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
RESULTS OR PROSPECTS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our financial results and prospects.
Laws and regulations may be adopted in the future that address
Internet-related issues, including online content, user privacy, pricing and
quality of products and services. For example, although it was held
unconstitutional, in part, the Communications Decency Act of 1996 prohibited the
transmission over the Internet of various types of information and content. In
addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure in many areas, local exchange carriers have
petitioned the FCC to regulate Internet service providers in a manner similar to
long distance telephone carriers and to impose access fees on the Internet
service providers.
The United States or foreign nations may adopt legislation aimed at
protecting Internet users' privacy. This legislation could increase our cost of
doing business and negatively affect our financial results. For example, the
Federal Trade Commission will start enforcing requirements under the Children's
Online Privacy Protection Act in April 2000. The act applies to the online
collection of personal information from children under 13, and imposes
significant compliance burdens and potential penalties on operators of web sites
that collect covered information. Moreover, it may take years to determine the
extent to which existing laws governing issues like property ownership, libel,
negligence and personal privacy are applicable to the Internet. Currently, U.S.
privacy law consists of disparate state and federal statutes regulating specific
industries that collect personal data. Most of them predate and therefore do not
specifically address online activities. However, European nations are now
implementing a European Union Data Privacy Directive regulating the transmission
and storage of personal information and data. In addition, a number of
comprehensive legislative and regulatory privacy proposals are now under
consideration by federal, state and local governments in the United States. In
some cases, such as the European Directive, these comprehensive privacy
proposals include special rules that provide added protections for sensitive
information, including information about health and medical conditions.
STATE AND FEDERAL LAWS THAT PROTECT INDIVIDUAL HEALTH INFORMATION MAY LIMIT OUR
PLANS TO COLLECT, USE AND DISCLOSE THAT INFORMATION.
If we fail to comply with current or future laws or regulations governing
the collection, dissemination, use and confidentiality of patient health
information, this failure could have a material adverse effect on our business,
operating results and financial condition.
Consumers sometimes enter private health information about themselves or
their family members when using our services. Physicians or other health care
professionals who use our products will directly enter health information about
their patients, including information that constitutes a medical record under
applicable law, that we will store on our computer systems. Also, our systems
record use patterns when consumers access our databases that may reveal
health-related information or other private information about the user. Numerous
federal and state laws and regulations, the common law, and contractual
31
<PAGE>
obligations govern collection, dissemination, use and confidentiality of
patient-identifiable health information, including:
- state privacy and confidentiality laws;
- our contracts with customers and partners;
- state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
- Medicaid laws;
- the Health Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Health Care Financing Administration; and
- Health Care Financing Administration standards for Internet transmission
of health data.
The U.S. Congress has been considering proposed legislation that would
establish a new federal standard for protection and use of health information.
In addition, the laws of other countries also govern the use of and disclosure
of health information. Any failure by us or our personnel or partners to comply
with any of these legal and other requirements could result in material
liability. Although we have systems in place for safeguarding patient health
information from unauthorized disclosure, these systems may not preclude
successful claims against us for violation of applicable law or other
requirements. Other third-party sites or links that consumers access through our
web sites also may not maintain systems to safeguard this health information, or
may circumvent systems we put in place to protect the information from
disclosure. In some cases, we may place our content on computers that are under
the physical control of others, which may increase the risk of an inappropriate
disclosure of health information. For example, MedicaLogic currently contracts
out the hosting of our web sites to third parties. In addition, future laws or
changes in current laws may necessitate costly adaptations to our systems.
In this year, the Department of Health and Human Service expects to finalize
proposed regulations at the federal level authorized under the Health Insurance
Portability and Accountability Act of 1996. These proposed regulations will
establish a new federal standard for privacy of health information. We believe
that these regulations, which will not be effective until two years from
finalization, will directly regulate some aspects of our business. Achieving
compliance with these regulations could cost us significant amounts or delay or
prevent implementation of our business model, and any noncompliance by us could
result in civil and criminal penalties. In addition, development of related
federal and state regulations and policies on confidentiality of health
information could negatively affect our business.
We intend to develop medical information systems and market research
services that we will use to collect, analyze and report aggregate medical care,
medical research, outcomes and financial data pertaining to items such as
prescribing patterns and usage habits. Some states have enacted legislation
regulating the aggregation of health information and the manipulation, use and
ownership of that aggregated data, even when this data does not reveal the
patient's identity. Because this area of the law is rapidly changing, our
collection, analysis and reporting of aggregate healthcare data maintained in
our database may not at all times and in all respects comply with laws or
regulations governing the ownership, collection and use of this data. Future
laws or changes in current laws governing the ownership, collection and use of
aggregate healthcare data may necessitate costly adaptations to our systems or
limit our ability to use this data.
FDA AND FTC REGULATIONS ON ADVERTISING AND PROMOTIONAL ACTIVITIES MAY BE
BURDENSOME AND NEGATIVELY AFFECT OUR ABILITY TO PROVIDE SOME APPLICATIONS OR
SERVICES, WHICH COULD LEAD TO HIGHER THAN ANTICIPATED COSTS OR LOWER THAN
ANTICIPATED REVENUES.
Complying with Food and Drug Administration and Federal Trade Commission
regulations may be time consuming, burdensome and expensive and could negatively
affect our ability to continue providing
32
<PAGE>
some applications or services, or to introduce new applications or services in a
timely manner. This may result in higher than anticipated costs or lower than
anticipated revenues. In addition, because part of our business involves
direct-to-consumer advertising of prescription drugs, any increase in FDA or FTC
regulation of these advertisements or the enforcement of these regulations or
policies could make it more difficult for us to provide existing or future
applications or services to our audience or obtain the necessary corporate
sponsorship to do so.
Any current or future regulatory requirements that the FDA or the FTC impose
on us or our advertisers and sponsors could harm us by:
- making it harder to persuade pharmaceutical, biotechnology and medical
device companies to advertise or promote their products on our web sites,
or to sponsor programs that we offer to healthcare professionals and the
public;
- restricting our ability to continue to provide some of our services or
content, or to introduce new services or content in a timely manner;
- damaging our relationships with pharmaceutical, biotechnology and medical
device companies, particularly if programs we recommend or endorse result
in FDA or FTC enforcement action directed against us or these companies;
or
- making it more expensive and time-consuming to comply with new
requirements.
As a consequence of these harms, we might lose advertising or sponsorship
revenue, spend significant amounts of our limited resources on regulatory
experts in the area of FDA or FTC compliance, or receive adverse publicity that
negatively affects share value. In addition to existing FDA and FTC regulation
of advertising and promotion by pharmaceutical, biotechnology and medical device
companies, our business faces a potential risk of increased FDA and FTC
regulation of these activities in an online context.
CHANGES IN EXISTING FDA REGULATORY REQUIREMENTS OR POLICIES, OR OUR FAILURE TO
COMPLY WITH CURRENT OR FUTURE REQUIREMENTS OR ADOPTION OF NEW REQUIREMENTS
COULD INCREASE OUR COST OF DOING BUSINESS AND CAUSE OUR REVENUES TO DECLINE.
We face potential FDA regulation of software that we develop for use on our
web sites. Some computer applications and software are considered medical
devices and are subject to regulation by the FDA. If FDA regulations were
applicable to any of our products and services, complying with those regulations
would be time consuming, burdensome and expensive and could delay or prevent
introduction of new products or services.
While the FDA's policies regarding the regulation of software are evolving,
based on the FDA's informal policy statements regarding the scope of its
regulation of stand-alone software, MedicaLogic does not believe that its
current products or services are subject to FDA regulation as medical devices
because they do not meet the statutory definition of a device. However, the FDA
may take the view that some of our current or future applications or services do
in fact meet the definition of a medical device and, therefore, are subject to
regulation, or the FDA may change its policies or regulations with respect to
regulation of software or Internet technologies. Also, we may expand our product
and service offerings into areas that subject us to FDA regulation. If the FDA
finds that our software is subject to regulation as a medical device, the
applicable regulatory controls could include both premarket and postmarket
requirements and the FDA might require us:
- to obtain premarket clearance or approval of the medical device software
from the FDA, which might include the conduct of supporting clinical
trials or other studies;
- to register ourselves as a medical device manufacturer and to list our
devices with the FDA;
- to create our software in compliance with the FDA design and manufacturing
standards;
33
<PAGE>
- to permit the FDA to inspect our facilities and records; and
- to make periodic reports to the FDA.
MedicaLogic does not have any experience in preparing the required
documentation for FDA clearance or approval of a medical device, including the
conduct of supporting clinical trials or other studies, or complying with other
FDA regulations that would apply both before and after clearance or approval.
GOVERNMENT REGULATION OF THE INTERNET COULD SEVERELY RESTRICT OUR ABILITY TO
OPERATE OUR BUSINESS.
Our business is subject to evolving government regulation of the Internet.
Existing as well as new laws and regulations could severely restrict our ability
to operate our business. Laws and regulations may be adopted to govern the
Internet or other online services covering issues such as:
- User privacy;
- Pricing;
- Content; and
- Copyrights.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for our
applications and services may be affected by additional regulation of the
Internet. For example, until recently Health Care Financing Administration
guidelines prohibited transmission of Medicare eligibility information over the
Internet.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES AND RESULTS OF OPERATIONS.
If we were forced to reduce our prices because of consolidation in the
healthcare industry, our revenues and results of operations could suffer. Many
healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry
participants will become more intense. These industry participants may try to
use their market power to negotiate price reductions for our products and
services.
OUR ACTIVITIES MAY EXPOSE US TO MALPRACTICE AND OTHER LIABILITY INHERENT IN
HEALTHCARE DELIVERY.
We may be exposed to malpractice or other liability against which we may not
be adequately insured, resulting in a decline in our financial results. We will
provide data for use by physicians, consumers and other healthcare stakeholders.
This data may be obtained from our physician customers, strategic partners,
other third parties or, with patient consent, from the aggregation of patient
health records. Claims for injuries relating to the use of this data may be made
in the future. Also, patients who file lawsuits against doctors often name as
defendants all persons or companies with any relationship to the doctors. As a
result, patients may file lawsuits against us based on treatment provided by
physicians who use our products and services. In addition, a court or government
agency may take the position that our delivery of health information directly,
including through licensed physicians, or delivery of information by a third-
party site that a consumer accesses through our web sites, exposes us to
malpractice or other personal injury liability for wrongful delivery of
healthcare services or erroneous health information. The amount of insurance we
maintain with insurance carriers may not be sufficient to cover all of the
losses we might incur from these claims and legal actions. In addition,
insurance for some risks is difficult, impossible or too costly to obtain and,
as a result, we may not be able to purchase insurance for some types of risks.
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<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
- The size and timing of customer orders;
- General economic conditions which can affect our customers' capital
investment levels and the length of our sales cycle;
- The lengthy sales cycle of our product;
- Technological changes in computer systems and environments;
- Structure and timing of acquisitions of businesses, products and
technologies;
- Whether we are able to develop, introduce and market new products on a
timely basis;
- Changes in our or our competitors' product offerings and pricing policies,
and customer order deferrals in anticipation of future new products and
product enhancements from MedicaLogic or competitors;
- Whether we are able to develop, introduce and market new products on a
timely basis;
- The mix of our products and services sold;
- Whether we are able to meet our customers' service requirements;
- Costs associated with acquisitions;
- The terms and timing of financing activities;
- Loss of key personnel;
- Interpretation of recently introduced accounting pronouncements on
software revenue recognition;
OUR STOCK PRICE MAY BE VOLATILE AND COULD DECLINE SIGNIFICANTLY
The market price of our common stock could fluctuate significantly in
response to various factors, including:
- Announcements of technological innovations or new services or products by
us or our competitors;
- Timeliness of our introductions of new products; and
- Shortfalls in our revenues and earnings from levels expected by securities
analysts or decreases in revenue or earnings projections by securities
analysts.
In addition, the stock markets, especially the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies, and Internet-related
companies in particular. These fluctuations have often been unrelated or
disproportionate to operating performance. These broad market factors may
materially affect the trading price of our common stock. In addition, these
fluctuations could lead to costly class action litigation which could result in
substantial costs and the diversion of management's attention and resources.
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<PAGE>
SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE EXPIRATION OF THE LOCK UP
AGREEMENTS ASSOCIATED WITH THE INITIAL PUBLIC OFFERING COULD RESULT IN A LOWER
MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of our common stock in the public market after
expiration of the lock up agreements associated with the initial public
offering, or the perception that these sales will occur, could adversely affect
the market price of our common stock. At expiration of the lock up agreements,
25,175,293 shares will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
22,823,071 After 180 days from the effective date of the initial
public offering, in some cases subject to volume
limitations.
2,352,222 At various times after 180 days from the effective date of
the initial public offering, in some cases subject to
volume limitations.
</TABLE>
In addition, a substantial number of outstanding shares of common stock and
shares issuable upon exercise of outstanding options will become available for
resale in the public market at prescribed times.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to outstanding debt instruments. The
risk associated with fluctuating interest expense is limited, however, to the
exposure related to those debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of its
invested principal funds by limiting default risk, market risk and investment
risk. We plan to mitigate default risk by investing in low-risk securities. At
December 31, 1999, we had an investment portfolio of money market funds,
commercial securities and U.S. Government securities, including those classified
as short-term investments, of $138.9 million. We had notes payable outstanding
of $3.4 million at December 31, 1999. If market interest rates were to increase
immediately and uniformly by 10% from levels as of December 31, 1999, the
decline of the fair market value of the fixed income portfolio and loans
outstanding would not be material.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MedicaLogic, Inc.:
We have audited the accompanying consolidated balance sheets of
MedicaLogic, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of MedicaLogic's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MedicaLogic, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Portland, Oregon
February 4, 2000
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<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,718 $110,320
Short-term investments.................................... 7,030 28,536
Accounts receivable, net.................................. 10,084 6,473
Prepaid expenses and other current assets................. 545 4,515
------- --------
Total current assets.................................... 22,377 149,844
Property and equipment, net................................. 1,804 13,087
Other assets, net........................................... 127 5,423
------- --------
Total assets............................................ $24,308 $168,354
======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 557 $ 5,638
Accrued and other liabilities............................. 2,286 2,639
Deferred revenue.......................................... 2,701 3,269
Long term liabilities, current portion.................... 742 2,432
------- --------
Total current liabilities............................... 6,286 13,978
Long term liabilities, net of current portion............... 679 2,233
Deferred revenue, long-term................................. -- 1,627
Other long term liabilities................................. -- 676
------- --------
Total liabilities....................................... 6,965 18,514
------- --------
Convertible redeemable preferred stock; 50,000,000 shares
authorized; aggregate liquidation preference $0 at
December 31, 1999; issued and outstanding 21,524,545, and
0, at December 31, 1998 and 1999, respectively............ 49,782 --
------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 7,127,556 and 32,364,391 shares
at December 31, 1998 and 1999, respectively............. 5,139 229,724
Common stock notes receivable............................. (2,039) (11,788)
Deferred stock compensation............................... -- (4,570)
Accumulated deficit....................................... (35,539) (63,526)
------- --------
Total shareholders' equity (deficit).................... (32,439) 149,840
------- --------
Total liabilities, redeemable preferred stock and
shareholders' equity (deficit).......................... $24,308 $168,354
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Licenses................................................. $ 7,617 $ 10,410 $ 12,261
Service and support...................................... 5,190 5,750 7,456
---------- --------- ---------
Total revenues......................................... 12,807 16,160 19,717
Operating expenses:
Cost of licenses......................................... 1,702 939 1,163
Cost of service and support.............................. 6,054 5,815 7,171
Marketing and sales...................................... 7,681 7,882 21,740
Research and development................................. 7,047 8,071 13,260
General and administrative............................... 1,315 1,151 5,467
---------- --------- ---------
Total operating expenses............................... 23,799 23,858 48,801
---------- --------- ---------
Operating loss......................................... (10,992) (7,698) (29,084)
Other income (expense):
Interest expense......................................... (240) (187) (292)
Interest income.......................................... 617 707 1,876
Other, net............................................... (55) 143 (153)
---------- --------- ---------
Total other income..................................... 322 663 1,431
---------- --------- ---------
Loss before income taxes............................... (10,670) (7,035) (27,653)
Provision for income taxes................................. -- -- --
---------- --------- ---------
Net loss............................................... (10,670) (7,035) (27,653)
Accretion of preferred stock redemption preference......... (149) (197) (334)
---------- --------- ---------
Net loss attributed to common shareholders............. $ (10,819) $ (7,232) $ (27,987)
========== ========= =========
Net loss per share:
basic and diluted........................................ $ (1.64) $ (1.06) $ (3.07)
========== ========= =========
Weighted average shares:
basic and diluted........................................ 6,579,980 6,807,091 9,107,613
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON TOTAL
COMMON STOCK STOCK SHAREHOLDERS'
--------------------- NOTES DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
---------- -------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............. 6,613,862 $ 3,108 $ (937) $ -- $(17,488) $(15,317)
Issuance of common stock in exchange for
services............................... 14,350 51 -- -- -- 51
Options exercised........................ 26,068 43 -- -- -- 43
Interest accrued on common stock notes
receivable............................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference............................. -- -- -- -- (149) (149)
Net loss............................. -- -- -- -- (10,670) (10,670)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1997............. 6,654,280 3,202 (988) -- (28,307) (26,093)
Issuance of common stock for
acquisition............................ 13,750 55 -- -- -- 55
Issuance of common stock for cash........ 175,000 700 -- -- -- 700
Issuance of restricted common stock in
exchange for promissory notes.......... 250,000 1,000 (1,000) -- -- --
Non-cash stock compensation.............. -- 110 -- -- -- 110
Options exercised........................ 34,526 72 -- -- -- 72
Interest accrued on common stock notes
receivable............................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference............................. -- -- -- -- (197) (197)
Net loss............................. -- -- -- -- (7,035) (7,035)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1998............. 7,127,556 5,139 (2,039) -- (35,539) (32,439)
Issuance of common stock for
acquisition............................ 750,000 3,300 -- -- -- 3,300
Conversion of redeemable preferred stock
to common stock........................ 15,950,747 97,874 -- -- -- 97,874
Issuance of restricted common stock in
exchange for promissory notes.......... 1,247,500 9,229 (9,229) -- -- --
Issuance of common stock in exchange for
services............................... 65,750 1,314 (195) (194) -- 925
Issuance of common stock for
commission............................. 172,763 1,987 -- -- -- 1,987
Warrants exercised....................... 22,500 13 -- -- -- 13
Options exercised........................ 242,575 869 -- -- -- 869
Stock compensation expense............... -- 986 -- -- -- 986
Interest accrued on common stock notes
receivable............................. -- -- (325) -- -- (325)
Deferred compensation related to stock
options................................ -- 4,746 -- (4,746) -- --
Amortization of deferred compensation
related to stock options............... -- -- -- 370 -- 370
Issuance of common stock, net of offering
costs.................................. 6,785,000 104,267 -- -- -- 104,267
Accretion of preferred stock redemption
preference............................. -- -- -- -- (334) (334)
Net loss............................. -- -- -- -- (27,653) (27,653)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1999............. 32,364,391 $229,724 $(11,788) $(4,570) $(63,526) $149,840
========== ======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,670) $(7,035) $(27,653)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 1,464 1,537 4,077
Stock compensation and other non cash expenses.......... 51 110 4,961
Provisions for doubtful accounts........................ 829 756 505
Loss (gain) on disposition of assets.................... 14 (2) (76)
Other non-cash income................................... (51) (51) (325)
Changes in assets and liabilities:
Accounts receivable................................... (3,630) (3,177) 3,106
Prepaid expenses and other current assets............. (133) (239) (4,024)
Other assets.......................................... (35) -- 202
Accounts payable...................................... (906) (110) 4,123
Accrued and other liabilities......................... 1,314 99 259
Deferred revenue...................................... 113 1,305 2,195
-------- ------- --------
Net cash used by operating activities............... (11,640) (6,807) (12,650)
-------- ------- --------
Cash flows from investing activities:
Purchases of fixed assets................................. (525) (1,280) (12,525)
Purchase of business...................................... -- (12) (2,117)
Proceeds from sale of fixed assets........................ -- 6 18
Purchases of short-term investments....................... (15,261) (28,248) (52,994)
Proceeds from maturities of short-term investments........ 8,145 28,334 31,211
Issuance of long-term notes receivable.................... -- -- (200)
-------- ------- --------
Net cash used by investing activities............... (7,641) (1,200) (36,607)
-------- ------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............. 6,775 6,794 47,758
Net proceeds from issuance of common stock................ 43 772 105,229
Proceeds from issuance of notes payable................... -- 1,264 3,069
Principal payments under capital lease.................... (1,264) (879) (394)
Principal payments under note obligations................. -- (150) (803)
-------- ------- --------
Net cash provided by financing activities........... 5,554 7,801 154,859
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (13,727) (206) 105,602
Cash and cash equivalents at beginning of period............ 18,651 4,924 4,718
-------- ------- --------
Cash and cash equivalents at end of period.................. $ 4,924 $ 4,718 $110,320
======== ======= ========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable................................................ $ -- $ 1,000 $ 9,424
Issuance of common stock for purchase of a business....... -- 55 3,300
Assets acquired or exchanged under capital leases......... 593 62 1,371
Accretion of preferred stock redemption preference........ 149 197 334
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) COMPANY
MedicaLogic, Inc. develops, markets and supports electronic medical record
software used by physicians at the point of care, throughout the U.S.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MedicaLogic and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. Operations of business acquired and accounted for
as purchases are consolidated as of the date of acquisition.
(C) USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets, liabilities
and contingencies at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
(D) CASH AND CASH EQUIVALENTS
For purposes of these statements, MedicaLogic considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
(E) SHORT-TERM INVESTMENTS
Short-term investments include various corporate debt instruments and have
been classified as available-for-sale securities according to the requirements
of Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES at December 31, 1998 and 1999.
Short-term investments are carried at amortized cost, which approximates market.
At December 31, 1999, contractual maturities of short-term investments ranged
from one hundred eleven to two hundred ninety-six days.
(F) CONCENTRATION OF CREDIT RISK
The Company invests its cash, cash equivalents and short-term investments
with financial institutions with high credit standing and, by policy, limits the
amounts invested with any one institution, type of security and issuer.
The Company sells its products to customers, ranging from individual
doctors, small to large medical groups, and medical institutions. The Company
performs ongoing credit evaluations of its customers financial condition and
limits the amount of credit extended as deemed appropriate, but generally
requires no collateral. The Company maintains reserves for estimated credit
losses and, to date, such losses have been within management's expectations.
42
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$1,360 and $529 at December 31, 1998 and 1999. The following table presents a
roll forward of the allowance for doubtful accounts for the indicated periods:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Balance--beginning of period........................ $ 165 $ 852 $ 1,360
Provision........................................... 829 756 505
Charge offs......................................... (142) (248) (284)
Recoveries.......................................... -- -- (1,052)
----- ------ -------
Balance--end of period.............................. $ 852 $1,360 $ 529
===== ====== =======
</TABLE>
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the leased assets
at the inception of the lease. The cost of repairs and maintenance is expensed
as incurred.
Depreciation on furniture, equipment and leasehold improvements is
calculated on a straight-line basis over the estimated useful lives of the
assets, five years for furniture and two to three years for equipment. Property
and equipment held under capital leases are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset.
Amortization of leasehold improvements is recognized over the shorter of the
life of the improvement or the remaining life of the lease using the
straight-line method.
As required by SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of the assets
may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted net cash flows of the operation to which
the assets relate, to the carrying amount including associated intangible assets
of the operation. If the operation is determined to be unable to recover the
carrying amount of its assets, then intangible assets are written down first,
followed by the other long-lived assets of the operation, to fair value. Fair
value is determined based on discounted cash flows or appraised values,
depending upon the nature of the assets.
(I) GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in various acquisitions.
Goodwill costs are being amortized on a straight-line
43
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
basis, over periods ranging from two to four years. Amortization expense for the
years ended December 31, 1997, 1998 and 1999 was $-0-, $34 and $1,527.
Accumulated amortization at December 31, 1997, 1998 and 1999 was $-0-, $34 and
$1,561. Recoverability of goodwill is periodically reviewed for impairment.
(J) SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for according to the
requirements of Statement of Financial Accounting Standards No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED.
Under the standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological feasibility
and the general availability of the software has been short; therefore, software
development costs qualifying for capitalization have been immaterial. As such,
MedicaLogic has not capitalized any software development costs and charged all
costs to research and development expense.
(K) REVENUE RECOGNITION
MedicaLogic has adopted SOP 97-2, as amended by SOP 98-4 and 98-9 beginning
January 1, 1998. MedicaLogic's revenue policy before December 31, 1997 complied
with the preceding authoritative guidance provided by SOP No. 91-1, SOFTWARE
REVENUE RECOGNITION.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence ("VSOE") of the relative fair values of each element
in the arrangement. MedicaLogic has established sufficient VSOE to ascribe a
value to consulting services and post-contract customer support based on the
price charged when these elements are sold separately. Accordingly, license
revenue is recorded under the residual method. Under the residual method,
revenue is recognized as follows:
(1) The total fair value of undelivered elements, as indicated by VSOE, is
deferred and subsequently recognized according to the requirements of SOP
97-2.
(2) The difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the
delivered elements.
MedicaLogic recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, the fee
is fixed and determinable and collectibility of the license fee is probable.
Term based licenses from Logician Enterprise and Logician Internet products will
be recognized on a subscription basis. Subscription revenue which is billed in
advance will be recognized over the period earned normally in one month.
Support revenue consists of fees for maintenance and customer support
services. Fees for maintenance and customer support service, conveying the right
to obtain upgrades, when and if available, are generally paid in advance and
revenue is recognized ratably over the term of the agreement.
Services revenue generally consists of consulting, training and integration
fees. These services are typically billed separately from the license fees and
are recognized as the related services are performed.
44
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) INCOME TAXES
MedicaLogic accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that include the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
(M) STOCK-BASED EMPLOYEE COMPENSATION
MedicaLogic has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for employee
stock options and similar equity instruments. As is permitted under SFAS
No. 123, MedicaLogic has elected to continue to account for its stock-based
compensation plans in accordance with APB Opinion No. 25 under which no
compensation for stock options is recognized for stock awards granted at or
above fair market value and provides the pro forma disclosures as prescribed by
SFAS No. 123.
(N) ADVERTISING
MedicaLogic expenses costs of advertising when the costs are incurred.
Advertising expense was approximately $836, $896 and $1,473 for the years ended
December 31, 1997, 1998 and 1999.
(O) NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE. SFAS No. 128 which provides that basic net income (loss) per share
and diluted net income (loss) per share are to be computed using the weighted
average number of common shares outstanding. Weighted average number of common
shares outstanding does not include the shares of restricted stock subject to
repurchase summarized below. Diluted net income per share includes the effect of
potentially dilutive common shares. The following potential common shares have
been excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Shares issuable under stock options and
warrants................................. 915,284 1,129,724 2,069,303
Shares of restricted stock subject to
repurchase............................... 54,561 75,945 1,211,328
</TABLE>
45
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(P) COMPREHENSIVE LOSS
MedicaLogic has no material components of other comprehensive loss so the
comprehensive loss is the same as net loss for all periods presented.
(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable approximate fair value due to the
short-term nature of these instruments. The carrying amounts of capital leases
and notes payable approximate fair value as the stated interest rates reflect
current market rates. Fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument when
available. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(R) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Internal use software development costs are accounted for according to the
requirements of SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalization criteria, are capitalized and
amortized on a straight-line basis over five years, the estimated useful life of
the asset.
(S) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of MedicaLogic's revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive environment in which MedicaLogic operates, these product
generating, development and marketing processes are uncertain and complex,
requiring accurate prediction of market trends and demand as well as successful
management of various development risks inherent in these products. In light of
these dependencies, it is possible that failure to successfully manage a
significant product introduction could have a severe impact on MedicaLogic's
growth and results of operations.
(2) ACQUISITIONS
On January 5, 1998, MedicaLogic paid $12 in cash and issued 13,750 shares of
common stock valued at $4.00 per share to acquire intangible assets of Health
Outcome Technologies, Inc. This acquisition was accounted for as a purchase and
results of operations for the acquired company are included only from the date
of acquisition forward. In connection with this acquisition, MedicaLogic
recorded goodwill of $67, which is being amortized over two years, the estimated
economic life of the goodwill.
In January 1999, MedicaLogic acquired PrimaCis Health Information
Technology, Inc., a Delaware corporation. This acquisition was accounted for as
a purchase and the results of operations for the acquired Company are included
only from the date of acquisition forward. The total purchase price, including
acquisition costs, was $6,453 and consisted of $2,100 in cash, the assumption of
$1,053 in liabilities and the issuance of 750,000 shares of common stock at an
estimated fair value of $4.40 per share.
46
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) ACQUISITIONS (CONTINUED)
The purchase accounting allocations resulted in goodwill of approximately
$6,500 which is amortized on a straight-line basis over a four year period.
The pro forma results shown below assume the PrimaCis acquisition occurred
as of the beginning of 1998.
<TABLE>
<S> <C>
Revenues.................................................... $ 16,408
Net loss.................................................... (11,278)
Basic and diluted net loss per share........................ (1.49)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred had the acquisition been in effect for the 1998 period. The pro
forma statement of operations data for the year ended December 31, 1999 have not
been presented as the results of operations presented for MedicaLogic during
this period include PrimaCis' operating results. In addition, they are not
intended to be a projection of the future results that may be achieved from the
combined operations.
In connection with the acquisition of PrimaCis, MedicaLogic entered into a
separate agreement with a customer of PrimaCis under which MedicaLogic received
a purchase order for 1,500 licenses. MedicaLogic delivered 500 licenses to this
customer on March 31, 1999 and delivered 1,000 licenses to this customer on
June 17, 1999 under a standard license agreement. An element of this agreement
represents a discount on future sales. Therefore, $1,890 of the license revenue
representing this element has been deferred. Revenue from this element will be
recognized as sales are completed in accordance with the terms of the separate
agreement discussed below or, if earlier, on the expiration of the agreement. In
addition, MedicaLogic is performing training and implementation services on a
time and materials basis to the customer.
As part of a separate agreement, if the customer or any third party in the
Houston, Texas area purchases additional licenses from MedicaLogic, MedicaLogic
is obligated to issue shares of common stock to this customer having a then fair
market value of 50% of the price of the subsequent licenses, up to $12 million
of stock. This agreement expires on December 31, 2002. MedicaLogic has issued
172,763 shares of common stock in connection with sales to third parties in the
Houston, Texas area and recorded commission expense of $1,987 during the year
ended December 31, 1999.
47
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) BALANCE SHEET COMPONENTS
(A) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Furniture and equipment................................... $ 4,565 $16,576
Leasehold improvements.................................... 1,267 1,519
------- -------
5,832 18,095
Less accumulated depreciation and amortization............ (4,028) (5,008)
------- -------
$ 1,804 $13,087
======= =======
</TABLE>
(B) ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Royalties.................................................. $ 843 $1,735
Payroll and related liabilities............................ 627 488
Litigation accruals........................................ 488 100
Other...................................................... 328 316
------ ------
$2,286 $2,639
====== ======
</TABLE>
(4) LONG TERM LIABILITIES
(A) LEASES
MedicaLogic leases office furniture and equipment under long-term capital
leases, which expire over the next two years. At December 31, 1998 and 1999, the
net book value of leased furniture and equipment included in property and
equipment was $307 and $1,368.
MedicaLogic also leases its office facilities under non-cancelable operating
lease agreements.
48
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG TERM LIABILITIES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases and the
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
2000.................................................. $ 730 $ 2,925
2001.................................................. 838 3,109
2002.................................................. -- 3,117
2003.................................................. -- 3,242
2004.................................................. -- 3,325
Years after 2004...................................... -- 13,915
------ -------
Total minimum lease payments........................ 1,568 $29,633
=======
Less amount representing interest....................... (282)
------
Present value of net minimum capital lease
payments.......................................... 1,286
Less current portion of capital leases.................. (562)
------
Non-current portion of capital leases............... $ 724
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
approximately $611, $1,073 and $1,591.
On May 12, 1999 MedicaLogic entered into a ten year operating lease
agreement for office space. The lease requires a letter of credit in lieu of a
cash security deposit in the amount of $1,750. Also in connection with this
lease, MedicaLogic granted options to the lessor to purchase up to 25,000 shares
of common stock, at a price of $6.50 per share. The lessor is required to
exercise the option within three years of MedicaLogic's initial public offering.
The fair value of the options to be issued to the lessor was determined by
applying the Black-Scholes methodology using the commitment date of the lease
for performance of the lessor as the measurement date. The per share weighted
average fair market value was $4.79 on the date of grant, with the following
weighted average assumptions: Risk-free interest rate of 5.75%, expected
dividend yield -0-%, a three year term, an expected volatility of 100%. The fair
value of $120 will be amortized over the lease period.
49
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG TERM LIABILITIES (CONTINUED)
(B) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Note payable, monthly principal and interest payments of
$1; interest at 11% per year; final payment due
December 31, 2008; unsecured........................... $ 70 $ 66
Note payable, monthly principal and interest payments of
$3; interest at 11% per year; final payment due
November 30, 1999; unsecured........................... 37 --
Notes payable, under term facility, monthly principal and
interest payments of $47; interest at two-year treasury
constant maturities plus 5% per year, 10.4% as of
December 31, 1998 and 9.53% at December 31, 1999;
maturing between September 2000 and September 2001;
secured by equipment purchased......................... 1,007 525
Notes payable under term facility, monthly principal and
interest payments of $25; interest at a two-year
treasury constant maturities plus 5% per year; 9.45% at
December 31, 1999; maturing between March 2001 and
September 2001; secured by equipment purchased......... -- 758
Note payable under term facility, quarterly principal and
interest payments of $38; interest at 7.96% per year;
final payment due April 2001; secured by equipment
purchased.............................................. -- 307
Notes payable under term facility, monthly principal and
interest payments of $25; interest at a two-year
treasury constant maturities plus 5% per year; 9.45% at
December 31, 1999; maturing between October 2001 and
October 2002; secured by equipment purchased........... -- 1,723
------ ------
1,114 3,379
Less current portion of notes payable.................... 527 1,870
------ ------
$ 587 $1,509
====== ======
</TABLE>
MedicaLogic has a $3,300 term loan facility to finance the purchase of new
capital equipment. At December 31, 1999 no amounts were available under this
facility.
50
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG TERM LIABILITIES (CONTINUED)
Future maturities are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $1,870
2001...................................................... 1,326
2002...................................................... 136
2003...................................................... 8
2004...................................................... 8
Years after 2004.......................................... 31
------
Total................................................... $3,379
======
</TABLE>
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK
MedicaLogic has authorized several series of convertible redeemable
preferred stock. The title, carrying amount, and number of shares issued and
outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Series A, $1.00 liquidation preference; issued and
outstanding 5,750,001 and 0 at December 31, 1998 and
1999.................................................... $ 5,745 $ --
Series A-1, $10.00 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
Series C, $2.25 liquidation preference; issued and
outstanding 7,012,637 and 0 shares at December 31, 1998
and 1999................................................ 15,767 --
Series C-1, $22.50 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
Series E, $3.15 liquidation preference; 4,761,907 and 0
shares issued and outstanding at December 31, 1998 and
1999.................................................... 14,694 --
Series E-1, $31.50 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
Series F, $3.40 liquidation preference; 4,000,000 and 0
shares issued and outstanding at December 31, 1998 and
1999.................................................... 13,576 --
Series F-1, $34.00 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
Series I, $3.80 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999........... -- --
Series I-1, $38.00 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
Series J, $4.75 liquidation preference; 0 shares issued
and outstanding at December 31, 1998 and 1999........... -- --
Series J-1, $47.50 liquidation preference; no shares
issued and outstanding at December 31, 1998 and 1999.... -- --
------- ----
Total convertible redeemable preferred Stock.......... $49,782 $ --
======= ====
</TABLE>
51
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
All outstanding preferred stock was converted into common stock upon the
effectiveness of the registration statement on December 9, 1999. The terms for
each series of preferred stock were similar and are summarized below:
DIVIDENDS
Preferred shareholders are entitled to receive dividends when and if
declared by the board of directors at an annual rate of $.10 and $1 per share
for series A and A-1, $.225 and $2.25 per share for series C and C-1, $.315,
$3.15 for series E and E-1, $.340 and $3.40 for series F and F-1, and $.380 and
$3.80 for series I and I-1, and $0.475 and $4.75 for series J and J-1. The right
to receive dividends on preferred stock is not cumulative and no right to
receive dividends accrues to holders of the preferred stock in the event the
board of directors does not declare dividends. No dividends may be declared or
paid on common stock until all declared dividends on preferred stock have been
paid. As of December 31, 1999 no dividends had been declared or paid.
LIQUIDATION PREFERENCES
Upon dissolution, liquidation or winding up of the affairs of MedicaLogic,
either voluntarily or involuntarily, the preferred shareholders receive
preference in liquidation over the common shareholders of MedicaLogic. The
liquidation value for each outstanding share is $1 and $10 for series A and A-1,
$2.25 and $22.50 for series C and C-1. $3.15 and $31.50 for series E and E-1,
$3.40 and $34.00 for series F and F-1. $3.80 and $38.00 for series I and I-1,
and $4.75 and $47.50 for series J and J-1, adjusted for any stock dividends. The
holders of series E and E-1, series F and F-1, series I and I-1 and series J and
J-1, on a parity basis among these series, are entitled to receive their
liquidation value before and in preference to any distribution to the holders of
series A and A-1 and series C and C-1 preferred stock. The holders of series C
and C-1 preferred stock are entitled to receive their liquidation value before
and in preference to any distribution to the holders of series A and A-1.
REDEMPTION
The preferred stock is subject to mandatory redemption features following
the affirmative vote of a majority of the outstanding shares of the preferred
stock, effective no earlier than December 31, 2001. Upon the majority vote of
the outstanding shares, MedicaLogic is required to redeem all of the then
outstanding preferred stock or an amount determined by MedicaLogic for which
funds are available for redemption. The per share redemption price for each
series of preferred stock is equal to its per share liquidation value.
In the event of a redemption of only a portion of the total outstanding
preferred stock, MedicaLogic is required to redeem series E and E-1, series F
and F-1, series I and I-1 and series J and J-1 before and in preference to the
holders of series A and A-1 and series C and C-1 preferred stock. In addition,
the holders of series C and C-1 will have preference over the holders of
series A and A-1 preferred stock.
52
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
VOTING
The holder of each share of each series of preferred stock is entitled to
the number of votes the holder would be entitled to if the shares of preferred
stock were converted to common stock.
CONVERSION
Two shares of preferred stock is voluntarily convertible into one share of
common stock at any time after the date of issuance at a rate that equals the
original issue price divided by the conversion price at the time in effect,
subject to adjustments specified in the purchase agreements. Automatic
conversion to common stock at the then effective conversion rate will occur for
series A, A-1, C, C-1, E and E-1, following the effectiveness of a registration
statement under the Securities Act of 1933 in which the aggregate price to the
public equals or exceeds $7,500,000 and in which the public offering price of
common stock equals or exceeds $10 per share. The public offering price of
MedicaLogic's common stock that will trigger automatic conversion of the
series F and F-1, the series I and I-1 and series J and J-1 preferred stock is
$10.80, $11.58 and $10.80 per share.
(6) SHAREHOLDERS' EQUITY
(A) SHAREHOLDERS' AGREEMENT
MedicaLogic and its shareholders had an agreement that includes restrictions
on the purchase and sale of MedicaLogic's stock. Except as expressly provided,
no shareholder was allowed to transfer ownership of stock without the prior
written consent of the other shareholders that are party to the agreement. These
restrictions lapsed upon the effectiveness of a registration of common stock
under the Securities Act of 1933 and the consummation of the sale of common
stock under that registration statement on December 9, 1999.
The shareholders agreement also contained a right of first refusal which
gives MedicaLogic the right, but not the obligation, to buy back shares under
specified conditions. The acquisition price is equal to the fair value of the
shares to be purchased.
(B) STOCK INCENTIVE PLAN
On February 9, 1993, MedicaLogic adopted a stock incentive plan which
allowed for the issuance of 2,247,192 shares of common stock. Under the 1996
stock incentive plan, adopted December 31, 1996, together with the 1993 stock
incentive plan, 500,000 shares of common stock were reserved for issuance. The
1996 plan was amended in 1998 to reserve an additional 350,000 shares of common
stock for issuance. On April 30, 1999, MedicaLogic's 1996 plan was amended to
reserve a additional 1,900,000 shares of common stock, bringing the total under
the plans to 4,997,192. In September 1999 MedicaLogic adopted the 1999 stock
incentive plan, which authorizes the issuance of 2,000,000 shares, bringing the
total to 6,997,192. Under the terms of the plans, the board of directors is
authorized to grant incentive stock options, non-statutory stock options and to
sell restricted stock to employees or others providing services or benefits to
MedicaLogic. The plans also allow granting of stock bonuses, stock appreciation
rights, and other forms of stock based incentives. The 1999 plan provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 for the granting to
53
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
employees and consultants of nonstatutory stock options and for the issuance of
stock bonuses, restricted stock and stock appreciation rights. Unless terminated
earlier, the 1999 plan will terminate automatically in September 2009.
The stock incentive plans are administered by the board of directors. The
board has the power to determine the terms of the options or rights granted,
including the exercise price, the number of shares subject to each option or
right, the character of the grant, the exercisability of the grant and the form
of consideration payable upon exercise of options. The board of directors may
delegate administration of the stock incentive plans to a committee.
In March 1998, MedicaLogic extended the term of all outstanding options from
five years to ten years, which constituted a new measurement date. The fair
value of the stock as determined by the board of directors on the date the
change was effective was $4.00 per share. 121,025 of these options had exercise
prices ranging from $1.60 to $2.00 per share and were fully vested. For these
outstanding options, MedicaLogic recorded a compensation charge of $110 in
connection with this change in option terms. The compensation expense was
calculated by taking the difference between the original grant price and the
fair value on the new measurement date.
The exercise price of incentive stock options must not be less than the fair
market value of the common stock at the date of the grant or, in the case of
incentive stock options issued to holders of more than 10% of the outstanding
common stock, 110% of the fair market value. The maximum term of incentive stock
options is 10 years, or five years in the case of 10% shareholders. The
aggregate fair market value, on the date of the grant, of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Options granted under the stock incentive plans are generally
nontransferable and, unless otherwise determined by the board of directors, must
be exercised during the period of the option holder's employment or service with
MedicaLogic or within 90 days of termination of employment or service.
The stock incentive plans provide that if we merge with or into another
corporation, or we sell substantially all of our assets, each outstanding option
will be assumed by the successor corporation.
The per share weighted average fair market value, as determined by applying
the Black-Scholes option pricing model to stock options granted under the plans
during 1997, 1998 and 1999 was $2.90, $3.44 and $5.02 on the date of grant, with
the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate............................. 6.5% 6.0% 5.875%
Expected dividend yield............................. 0% 0% 0%
Years of expected life.............................. 4 7 7
Expected volatility................................. 100% 100% 100%
</TABLE>
54
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
MedicaLogic continues to apply APB Opinion No. 25 in accounting for the
plans and compensation cost is generally not recognized for its stock options in
the financial statements. The effect on MedicaLogic's net loss, had MedicaLogic
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss........................................ $(10,819) $(7,232) $(27,987)
Proforma net loss............................... $(11,921) $(8.342) $(30,895)
Net loss per share.............................. $ (1.64) $ (1.06) $ (3.07)
Proforma net loss per share..................... $ (1.78) $ (1.21) $ (3.39)
</TABLE>
Transactions involving the plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding, December 31, 1996............. 504,070 $3.08
Granted............................................ 536,475 4.00
Exercised.......................................... (26,068) 1.64
Forfeited.......................................... (40,462) 3.90
--------- -----
Options outstanding, December 31, 1997............. 974,015 3.68
Granted............................................ 480,493 4.10
Exercised.......................................... (34,526) 2.10
Forfeited.......................................... (206,576) 3.98
--------- -----
Options outstanding, December 31, 1998............. 1,213,406 3.80
Granted............................................ 2,363,950 8.18
Exercised.......................................... (242,575) 3.61
Forfeited.......................................... (80,905) 4.51
--------- -----
Options outstanding, December 31, 1999............. 3,253,876 $6.98
========= =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER OF AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
- -------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
1.60-2.00 63,225 $3.20 $ 1.82 63,225 $ 1.82
4.00-4.40 1,177,003 7.85 4.12 780,296 4.05
6.50-6.50 894,198 9.14 6.50 166,325 6.50
9.50-10.00 768,750 9.79 9.61 9,055 9.66
13.00-13.00 350,700 9.03 13.00 25,000 13.00
--------- ----- ------ --------- ------
1.60-13.00 3,253,876 $8.70 $ 6.98 1,043,901 $ 4.57
</TABLE>
55
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, 396,550 shares were available for grant.
MedicaLogic has recorded deferred stock compensation expense of $4,746 at
December 31, 1999. This deferred stock compensation expense is based on the
difference between the deemed fair market value of common stock and the exercise
price of the option or stock on the grant date. Deferred compensation is being
amortized over the vesting period of the options, which is generally three
years. MedicaLogic recognized expense of $370 in the twelve-month period ended
December 31, 1999 related to these grants.
(C) STOCK WARRANTS
In 1994, MedicaLogic entered into a stock purchase warrant agreement with
Indius, Inc. Under the agreement, MedicaLogic issued Indius warrants to purchase
up to 22,500 shares of common stock at $.62 per share, conditioned on Indius
meeting specified software development and licensing requirements. These
warrants were exercised in March 1999.
(D) RESTRICTED STOCK PURCHASE AGREEMENTS
As of December 31, 1999, MedicaLogic had sold 2,175,750 shares of common
stock at prices ranging from $4.00 to $13.00 to senior management of
MedicaLogic. These shares were sold under agreements which allow MedicaLogic, at
its option, to repurchase these shares at the original sale price. Under the
repurchase agreements associated with 1,958,250 of these shares, the shares
subject to repurchase are reduced in equal increments over 36 months from the
original vesting dates which range from February 28, 1996 to December 6, 2002.
At December 31, 1998 and 1999 there were 141,530 and 1,211,328 shares
outstanding that were eligible for repurchase. MedicaLogic has accepted
promissory notes totaling $11,194 of principal amount at December 31, 1999 from
its officers in consideration for the restricted stock discussed above. These
notes accrue interest at 6% per year and are payable in full 10 years from the
date of the loan. Of these shares of common stock 217,500 have been released
from MedicaLogic's repurchase rights as key business performance criteria have
been met. In connection with these stock issuances, MedicaLogic recorded
compensation expense of $986 for the period ended December 31, 1999.
(E) SHARES ISSUED FOR SERVICES
During 1997, MedicaLogic issued 14,350 shares of common stock valued at $57,
in exchange for contracted engineering services by an independent third-party.
During 1999, MedicaLogic issued 65,750 shares of common stock valued at
$1,314 for public relations consulting, recruitment services, and contracted
engineering services by independent third-parties. 104,212 shares of preferred
stock were issued to the three principals of an investment group as a commission
in conjunction with the series J preferred stock issuance. The preferred shares
were valued at $990. The Company issued 20,000 shares of common shares at a
price of $6.50 for legal services. The fair value of the shares was offset
against the proceeds of the Initial Public Offering. A warrant was issued for
10,000 shares of common stock at a price of $6.50 for legal services. The fair
value of the warrant issued was determined by applying the Black-Scholes
methodology using the commitment date for performance as the measurement date.
The per share weighted average fair market value was $13.60 on the date of
grant, with the
56
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
following weighted average assumptions: Risk-free interest rate of 5.75%,
expected dividend yield of 0%, a two-year term and an expected volatility of
100%. The fair value of $136 was netted against the proceeds of the Initial
Public Offering.
The above common shares or options were valued using the fair value as
determined by the board of directors. Preferred shares were valued using sales
to unrelated third parties. All shares or warrants to issue shares were fully
vested on the date of issuance and were awarded for past services. The
measurement date for determining the fair value of the equity instrument was the
date of the completion of the performance.
(F) EMPLOYEE STOCK PURCHASE PLAN
The board of directors has adopted and the shareholders have approved an
employee stock purchase plan, or ESPP, for the benefit of MedicaLogic's
employees. A total of 1,000,000 shares are reserved for issuance under the ESPP.
Except as described below, all full-time employees of MedicaLogic and
designated subsidiaries of MedicaLogic are eligible to participate in the ESPP.
Any employee who would, after a purchase of shares in an offering under the
plan, own or be considered to own five percent or more of the voting power or
value of all classes of stock of MedicaLogic, or any parent or subsidiary of
MedicaLogic, is ineligible to participate in an offering.
Except for the first offering period, offering periods are one year long and
are divided into two six-month purchase periods. The first offering period will
begin on the effective date of the initial public offering, will run for
approximately two years, and will be divided into four purchase periods. On the
first day of each offering period, known as the offering date, each eligible
employee is automatically granted an option to purchase shares of MedicaLogic's
common stock. That option will be automatically exercised on the last day of
each purchase period during the offering. The last day of a purchase period is
known as a purchase date. No employee may purchase more than 10,000 shares or
accrue the right to purchase shares at a rate that exceeds $25,000 of fair
market value, as determined on the offering date, for each calendar year that
the option is outstanding. Each eligible employee may elect to participate in
the ESPP by filing a subscription and payroll deduction authorization. Shares
may be purchased under the ESPP only through payroll deductions of not more than
15 percent of an employee's total compensation. On each purchase date, the
amounts withheld will be applied to purchase shares for the employee from
MedicaLogic. The purchase price will be the lesser of 85 percent of the fair
market value of MedicaLogic's common stock:
- on the offering date; or
- on the purchase date.
The ESPP is administered by the board of directors. The board of directors
may adopt rules and regulations for the operation of the ESPP, adopt forms for
use in connection with the ESPP, decide any question of interpretation of the
ESPP or rights arising under the ESPP and generally supervise the administration
of the ESPP. MedicaLogic pays all expenses of the ESPP other than commissions on
sales of shares for employees' accounts by the custodian.
57
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
An independent custodian maintains the records under the ESPP. Shares
purchased by employees under the ESPP are delivered to and held by the custodian
on behalf of the employees. By appropriate instructions from an employee, all or
part of the shares may be sold or transferred into the employee's own name and
delivered to the employee.
The board of directors may amend the ESPP, except that increases in the
number of reserved shares, other than adjustments authorized by the ESPP, or
decreases in the purchase price of shares offered under the ESPP require
shareholder approval. The board of directors may terminate the ESPP at any time.
(8) INCOME TAXES
MedicaLogic incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1997, 1998 and 1999. As such, there
was no current or deferred tax provision for these periods.
The actual income tax expense differs from the expected tax expense, which
is computed by applying the U.S. federal corporate income tax rate of 34% to net
loss before income taxes, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed expected income tax benefit................ (34.0)% (34.0)% (34.0)%
Increase (reduction) in income tax expense (benefit)
resulting from:
State income tax benefit.......................... (4.3) (4.3) (4.1)
Increase in valuation allowance................... 43.8 44.7 37.8
Research and development credits.................. (3.1) (8.3) (2.2)
Other............................................. (2.4) 1.9 2.5
----- ----- -----
Income tax expense.............................. --% --% --%
===== ===== =====
</TABLE>
58
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Furniture and equipment due to differences in
depreciation....................................... $ 229 $ --
Net operating loss and research and experimentation
credit carryforwards............................... 14,169 24,588
Allowance for doubtful accounts...................... 234 203
Other accruals....................................... 215 487
-------- --------
Gross deferred tax assets.......................... 14,847 25,278
Less valuation allowance............................. (14,559) (25,084)
-------- --------
Net deferred tax assets............................ 288 194
-------- --------
Deferred tax liabilities:
Change in method of accounting....................... (280) (54)
Other................................................ (8) (140)
-------- --------
Net deferred tax liabilities....................... (288) (194)
-------- --------
Net deferred tax assets and liabilities............ $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1999 was
approximately $25,084. The net change in the total valuation allowance for the
years ending December 31, 1997, 1998 and 1999 was an increase of approximately
$4,668, $3,153 and $10,525.
At December 31, 1999, MedicaLogic has available federal and state net
operating loss carryforwards for tax purposes of approximately $59,598 and
research and experimentation credits of approximately $1,973 which expire
through 2019. approximately $7,100 of the net operating losses are subject to
annual utilization limitation due to ownership changes in prior years.
(9) COMMITMENTS AND CONTINGENCIES
In September 1999, MedicaLogic entered into a license agreement with L&H
Applications USA, Inc. L&H has granted to MedicaLogic a non-exclusive,
non-transferable license to incorporate L&H's product into MedicaLogic's
Logician family of products. MedicaLogic made a non-refundable pre-payment of
royalty fees of $1,100 in December 1999. MedicaLogic is required to make
additional minimum payments of $230 and $795 for the years ended December 31,
2000 and 2001.
MedicaLogic has agreed to issue common stock to a customer at fair market
value up to $12,000, contingent upon sales of additional licenses to the
customer and to third parties in the customer's geographic area. This
consideration is for allowing MedicaLogic to use this customer as a reference
site. MedicaLogic has issued 172,763 shares of common stock with an estimated
fair value of $11.50 per share
59
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
to this customer as of December 31, 1999. MedicaLogic has recorded the expense
associated with this grant as a component of marketing and sales expense. The
stock agreement expires December 31, 2002.
MedicaLogic is involved in various claims and legal actions in the normal
course of business. The most significant of these are described below.
MedicaLogic was the defendant in a suit at December 31, 1998 arising out of
an alleged breach of contract with a channel partner. MedicaLogic accrued $250
at December 31, 1997 and 1998. This suit was settled in April 1999, and the
terms of the settlement are confidential. MedicaLogic was also the defendant at
December 31, 1998 in a suit filed by a customer. This suit was a counter-claim
to a breach of contract MedicaLogic had filed. The suit sought a refund of
amounts paid to MedicaLogic for the product. MedicaLogic accrued $125 at
December 31, 1998. This suit was settled in July 1999 for $120 including legal
fees.
At December 31, 1999 MedicaLogic was a defendant in an action relating to a
patent infringement claim. The plaintiff was seeking unspecified damages. On
January 26, 2000 the plaintiff agreed to dismiss, without prejudice. The action
and a dismissal order was entered by the court. The costs associated with
litigation and settlement of the litigation have been recorded as a component of
general and administrative expense.
In the opinion of management, the ultimate disposition of outstanding claims
and legal actions will not have a material effect on MedicaLogic's consolidated
financial position, results of operations or liquidity.
(10) SEGMENT INFORMATION
MedicaLogic derives its revenue from a single operating segment, electronic
medical records, and the service and support related to these products.
GEOGRAPHIC INFORMATION
MedicaLogic operates solely within the United States and to date has derived
all of its revenue from within the United States.
MAJOR CUSTOMERS
In 1997, MedicaLogic derived greater than 10% of its revenue from
VHA, Inc., one of our distribution partners, $2,700, and from Wake Forest
Baptist Medical Center, $1,600.
In 1998, MedicaLogic derived greater than 10% of its revenue from
VHA, Inc., $3,400. MedicaLogic had accounts receivable from this customer
representing approximately 20% of trade accounts receivable at December 31,
1998.
In 1999, MedicaLogic derived 10% or greater of its revenue from Baylor
College of Medicine, $3,087 and Texas Childrens Hospital, $2,470. MedicaLogic
had accounts receivable from these customer representing approximately 28% of
trade accounts receivable at December 31, 1999.
60
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) 401(K) PLAN
MedicaLogic sponsors a 401(k) deferred savings plan for all employees.
Employees become eligible to participate in the plan upon employment. Employees
may contribute up to 15% of their pay to the plan, subject to the limitation of
$10 by the Internal Revenue Code. All employee contributions vest immediately.
MedicaLogic has not made any matching contributions but does pay administrative
costs for the plan. These costs were not significant for any period presented.
(12) RELATED PARTY TRANSACTIONS
MedicaLogic has accepted promissory notes aggregating $11,800 of principal
and interest amount at December 31, 1999 from its officers in consideration for
restricted stock issued. These notes accrue interest at 6% per year and are
payable in full 10 years from the date of the loan. MedicaLogic also has loaned
an officer approximately $104 to help pay for relocation expenses, under an
unsecured promissory note, which bears interest at 6% per year. The note is
payable in full on the earlier to occur of the sale of his residence located in
Portland, Oregon, the termination of his employment, or July 1, 2001. The note
is prepayable in full without penalty.
In September 1999, MedicaLogic entered into an agreement with an officer in
consideration of relocating to San Francisco, California. MedicaLogic agreed to
reimburse this officer $8 for improvements to his Portland, Oregon residence and
any shortfall between the sales price on his Portland, Oregon residence and the
original purchase price of $520 paid by this officer and any transaction costs
not covered by the sales price of this residence, unless the sales price is
greater than the purchase price. MedicaLogic also agreed to forgive the interest
accrued on the unsecured promissory note referred to above, which will be repaid
from the proceeds of the sale of the Portland, Oregon residence and to pay the
mortgage payment on the officer's residence in Portland, Oregon until it is
sold. In December 1999 the residence sold, and $36 of relocation expense was
recognized and $104 was recorded as payment against the note.
In August 1998, MedicaLogic entered into stock purchase agreements with two
entities that are affiliated with two directors of MedicaLogic. These agreements
were for the issuance of 175,000 shares of common stock at a price of $4.00 per
share. Options for 100,000 shares of common stock were also granted to these
entities with a fair value using the Black-Scholes of $113. These stock options
were exercised by these entities for an additional 100,000 shares of common
stock in April 1999.
In May 1999, MedicaLogic sold an aggregate of 1,052,632 shares of series J
preferred stock to two entities that are affiliated with a director of
MedicaLogic.
A member of MedicaLogic's board of directors is a partner in a law firm
retained by MedicaLogic to provide legal counsel.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents unaudited quarterly results of MedicaLogic's
operations for 1998 and 1999. This unaudited information has been prepared on
the same basis as the audited consolidated financial statements. This table
includes all adjustments, consisting only of normal recurring adjustments, that
are considered necessary for a fair presentation of our financial position and
results of operations for
61
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
the quarters presented. You should not draw any conclusions about our future
results from the results of operations for any quarter presented.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 2,811 $ 3,848 $ 4,100 $5,401 $ 2,997 $ 4,088
Operating expenses......... $ 5,485 $ 5,847 $ 5,993 $6,533 $ 6,634 $ 8,631
Net loss................... $(2,638) $(1,860) $(1,749) $ (788) $(3,426) $(4,337)
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
<S> <C> <C>
Revenues................... $ 6,017 $ 6,615
Operating expenses......... $13,344 $ 20,192
Net loss................... $(6,802) $(13,088)
</TABLE>
(14) SUBSEQUENT EVENTS (UNAUDITED)
On February 22, 2000 MedicaLogic Inc. and Medscape, Inc. announced an
agreement to merge and MedicaLogic Inc. announced an agreement to acquire Total
eMed, Inc. Medscape shareholders will receive 0.323 shares of MedicaLogic common
stock for each share of Medscape stock and options outstanding and Total eMed
shareholders will receive 8 million shares of MedicaLogic common stock for all
of its outstanding shares and options. The new Company, will be known initially
as MedicaLogic/ Medscape. The transaction will become effective upon approval by
the shareholders of the companies and the satisfaction of other conditions.
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None
63
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ---------------------------------------------
<S> <C> <C>
Mark K. Leavitt................. 49 Chairman of the Board and Chief Executive
Officer
David C. Moffenbeier............ 48 President, Secretary and Director
Frank J. Spina.................. 45 Senior Vice President and Chief Financial
Officer
Harvey J. Anderson.............. 36 Chief Operating Officer, General Manager of
Internet Operations
Thomas M. Watson................ 50 Senior Vice President, Worldwide Sales and
Professional Services
Bruce M. Fried.................. 49 Director
Ronald H. Kase.................. 41 Director
Neal Moszkowski................. 34 Director
Mark A. Stevens................. 39 Director
Ronald R. Taylor................ 52 Director
</TABLE>
MARK K. LEAVITT founded MedicaLogic in 1985 and has served as its chairman
of the board and chief executive officer since its inception. From
December 1997 to June 1998, Dr. Leavitt served as a director of Physician
Partners, Inc., a physician practice management company. From 1992 to 1996,
Dr. Leavitt served as a faculty member for St. Vincent Internal Medicine
Practice and concurrently served as medical director and regional information
systems director for Sisters of Providence Health System from 1992 to 1994.
Dr. Leavitt operated a private practice of internal medicine from 1982 to 1992.
Dr. Leavitt received a B.S. from the University of Arizona and an M.S. and a
Ph.D. in electronic engineering from Stanford University. Dr. Leavitt received
an M.D. from the University of Miami and served as a resident in internal
medicine at Oregon Health Sciences University from 1979 to 1982.
DAVID C. MOFFENBEIER served as chief operating officer until February 2000
when he became president. Mr. Moffenbeier has been a director since 1994. From
1993 to 1994, Mr. Moffenbeier served as chairman of the board of directors of
Summit Design Inc., a supplier of software tools for integrated circuits.
Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of
hardware and software for electronic design automation, where he served as a
director from 1981 to 1993 and as its chief financial officer from 1981 to 1984,
its vice president of international sales from 1985 to 1988 and its vice
president of worldwide sales from 1989 to 1993. He currently serves on the board
of directors of Providence Good Health Plan, a health care management
organization, and North Pacific Group, Inc., a wholesale distributor of
commodities. Mr. Moffenbeier received a B.A. from Wesleyan University and an
M.B.A. from Harvard University. Mr. Moffenbeier is a certified public
accountant.
FRANK J. SPINA was hired by MedicaLogic to serve as its senior vice
president and chief financial officer starting in November 1999. From 1997 to
1999, Mr. Spina served as the chief financial officer for 3D Systems
Corporation, a provider of solid imaging systems. From 1994 to 1997, Mr. Spina
served as vice president and corporate controller of Qualcomm, Inc., a developer
and manufacturer of wireless communication equipment. From 1985 to 1994,
Mr. Spina served in a variety of positions with Motorola, Inc.,
64
<PAGE>
including division controller and group operations controller. Mr. Spina
received his B.A. from Baldwin Wallace College and is a certified public
accountant.
HARVEY J. ANDERSON has served as chief operating officer, senior vice
president, general manager of Internet operations since March 1999. From 1996 to
1999, Mr. Anderson participated in numerous acquisitions and technology
transactions at Netscape Communications Corp., a provider of software, services
and web site resources for the Internet, where he served in various roles
including assistant general counsel. From 1993 to 1996, Mr. Anderson practiced
intellectual property law with McCutchen Doyle Brown & Enersen, LLP and Limbach
and Limbach, LLP, law firms in San Francisco, California. Before 1993, he served
as a network design engineer for Pacific Telesis, a telecommunications company.
Mr. Anderson received a B.S. from Marquette University and a J.D. from the
University of San Francisco School of Law.
THOMAS M. WATSON has served as senior vice president, worldwide sales and
professional services since March 1999. From 1997 to 1999, Mr. Watson served as
vice president, sales. From 1989 to 1997, Mr. Watson served as vice president of
sales at PHAMIS Inc., a leading provider of healthcare information systems
solutions. Mr. Watson received a B.A. from Drexel University.
BRUCE M. FRIED has been a director since 1998. Mr. Fried is a partner and
chair of the health law group at Shaw Pittman, an international law firm based
in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care
Financing Administration's director of the Center for Health Plans and
Providers, where he was responsible for policy development and execution and
operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice
president of federal affairs at FHP International Corporation, then one of the
nation's largest managed care organizations. Mr. Fried received a B.A. and a
J.D. from the University of Florida.
RONALD H. KASE has been a director since July 1994. Mr. Kase joined New
Enterprise Associates, a venture capital investment firm in 1990 and has been a
general partner since May 1995. Mr. Kase serves on the boards of directors of
Data Critical Corporation, a wireless healthcare data products company, and
several privately-held information technology and healthcare companies.
Mr. Kase received a B.S. from Purdue University and received an M.B.A. from the
University of Chicago.
NEAL MOSZKOWSKI has been a director since May 1999. Since 1998,
Mr. Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a
private equity investment affiliate of Soros Fund Management, L.L.C. Before
Soros, Mr. Moszkowski was an executive director in the principal investment area
of Goldman, Sachs International and a vice president of Goldman, Sachs & Co.,
which he joined in 1993. Mr. Moszkowski serves on the board of directors of
Integra Life Sciences Holdings Corporation, a developer and marketer of medical
products, implants and biomaterials, Bluefly, Inc., an off-price apparel
Internet retailer, and several private companies. Mr. Moszkowski earned his B.A.
from Amherst College and an M.B.A. from Stanford University.
MARK A. STEVENS has been a director since 1994. Mr. Stevens joined Sequoia
Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on
the boards of directors of MP3.com, Inc., an online music Internet company,
NVidia Corp., a supplier of graphics processors and software and Terayon
Communication Systems, Inc., a cable modem system supplier, and several
privately held Internet and semiconductor companies. Mr. Stevens received a
B.S.E.E., a B.A. and an M.S. in computer engineering from the University of
Southern California and an M.B.A. from Harvard University.
RONALD R. TAYLOR has been a director since 1995. Since 1998, Mr. Taylor has
been a general partner of Enterprise Partners, a venture capital firm. In 1987,
Mr. Taylor founded Pyxis Corporation, a medical information systems company, and
served as its chairman and chief executive officer until it merged with Cardinal
Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson
Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality
Corporation, a leading owner of full service
65
<PAGE>
hotels in the Northwest. He received a B.A. from the University of Saskatchewan
and an M.A. from the University of California at Irvine.
Executive officers serve at the discretion of the board of directors and
hold office until their successors have been elected and qualified. There are no
family relationships among any of the directors, officers or key employees of
MedicaLogic. Directors are elected at the annual shareholders meeting and hold
office until their successors are elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires MedicaLogic's
directors and executive officers, and persons who own more than 10% of a
registered class of MedicaLogic's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of MedicaLogic's common stock and other equity securities.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish MedicaLogic with copies all Section 16(a) reports filed.
Based solely upon review of the copies of such reports furnished to
MedicaLogic and written representations that no other reports were required,
MedicaLogic believes that there was compliance for the fiscal year ended
December 31, 1999 with all Section 16(a) filing requirements applicable to
MedicaLogic's officers, directors and greater than 10% beneficial owners, except
that (1) Mr. Charles Burwell filed a late report with respect to an acquisition
of 1,150 shares acquired in MedicaLogic's initial public offering,
(2) Mr. Bruce Fried filed a late report with respect to an acquisition of 1,150
shares acquired in MedicaLogic's initial public offering, (3) Mr. Mark Stevens
filed a late report with respect to an acquisition of 3,000 shares acquired in
MedicaLogic's initial public offering, and (4) Mr. Ron Taylor filed a late
report with respect to an acquisition of 1,150 shares acquired in MedicaLogic's
initial public offering.
ITEM 11. EXECUTIVE COMPENSATION
Information required in this section regarding executive compensation, are
herein incorporated by reference to the Company's definitive proxy statement to
be filed within 120 days of the Company's year end with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required in this section regarding security ownership of certain
beneficial owners and management, are herein incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days of the
Company's year end with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required in this section regarding certain relationships and
related transactions, are herein incorporated by reference to the Company's
definitive proxy statement to be filed within 120 days of the Company's year end
with the Securities and Exchange Commission.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
MEDICALOGIC, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MedicaLogic, Inc.--Consolidated Financial Statements:
Report of KPMG LLP........................................ 37
Consolidated Balance Sheets............................... 38
Consolidated Statements of Operations..................... 39
Consolidated Statements of Shareholders' Equity
(Deficit)............................................... 40
Consolidated Statements of Cash Flows..................... 41
Notes to Consolidated Financial Statements................ 42
</TABLE>
(A) EXHIBITS
<TABLE>
<S> <C>
2.1(2) Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Medscape, Inc. and
Moneypenny Merger Corp.
2.2(2) Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Total eMed, Inc. and AQ
Merger Corp.
3.1(3) 1999 Restated Articles of Incorporation
3.2(1) Restated Bylaws
4.1(1) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
10.1(1) 1999 Amended and Restated Investor Rights Agreement
10.2(1) 1993 Stock Incentive Plan
10.3(1) 1996 Stock Incentive Plan, as amended
10.4(1) 1999 Stock Incentive Plan
10.5(1) Form of Incentive Stock Option Agreement
10.6(1) Form of Restricted Stock Purchase Agreement (Performance)
10.7(1) Form of Restricted Stock Purchase Agreement
10.8(1) Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1(1) Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(1) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
10.9(1) Agreement to Issue Shares of Common Stock between
MedicaLogic and Baylor College of Medicine dated as of
February 16, 1999
10.10(1) Software Deposit Agreement with Fidex Americas Corporation
dated April 15, 1996
</TABLE>
67
<PAGE>
<TABLE>
<S> <C>
10.11(1)+ Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
21.1(1) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Powers of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ Confidential treatment
(1) Previously filed and incorporated herein by reference to the Company's
registration statement on Form S-1 (333-87285).
(2) Previously filed and incorporated herein by reference to the Company's
Current Report on Form 8-K, dated February 21, 2000 and filed with the
Securities and Exchange Commission on March 9, 2000.
(3) Previously filed and incorporated herein by reference to the Company's
registration statement on Form S-8 (333-94751).
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(C) REPORTS ON FORM 8-K.
None.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of
1934, the Registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Hillsboro, State of Oregon, on March 8, 2000.
<TABLE>
<S> <C> <C>
MEDICALOGIC, INC.
By: /s/ MARK K. LEAVITT, M.D.
-----------------------------------------
Mark K. Leavitt, M.D.
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark K.
Leavitt, M.D., Frank J. Spina, and David C. Moffenbeier, as attorneys-in-fact,
with the power of substitution, for him or her in any and all capacities, to
sign any amendment to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully as to all intents and
purposes that he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of
1934, this report on Form 10-K has been signed below on March 8, 2000 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MARK K. LEAVITT, M.D. Chairman of the Board and Chief Executive
------------------------------------------- Officer
Mark K. Leavitt, M.D. Principal Executive Officer
/s/ FRANK J. SPINA Senior Vice President and Chief Financial
------------------------------------------- Officer
Frank J. Spina Principal Financial and Accounting Officer
------------------------------------------- Director
Bruce M. Fried
/s/ RONALD H. KASE
------------------------------------------- Director
Ronald H. Kase
/s/ DAVID C. MOFFENBEIER
------------------------------------------- Director
David C. Moffenbeier
------------------------------------------- Director
Neal Moszkowski
------------------------------------------- Director
Mark A. Stevens
/s/ RONALD R. TAYLOR
------------------------------------------- Director
Ronald R. Taylor
</TABLE>
69
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
2.1(2) Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Medscape, Inc. and
Moneypenny Merger Corp.
2.2(2) Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Total eMed, Inc. and AQ
Merger Corp.
3.1(3) 1999 Restated Articles of Incorporation
3.2(1) Restated Bylaws
4.1(1) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
10.1(1) 1999 Amended and Restated Investor Rights Agreement
10.2(1) 1993 Stock Incentive Plan
10.3(1) 1996 Stock Incentive Plan, as amended
10.4(1) 1999 Stock Incentive Plan
10.5(1) Form of Incentive Stock Option Agreement
10.6(1) Form of Restricted Stock Purchase Agreement (Performance)
10.7(1) Form of Restricted Stock Purchase Agreement
10.8(1) Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1(1) Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(1) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
10.9(1) Agreement to Issue Shares of Common Stock between
MedicaLogic and Baylor College of Medicine dated as of
February 16, 1999
10.10(1) Software Deposit Agreement with Fidex Americas Corporation
dated April 15, 1996
10.11(1)+ Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
21.1(1) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Powers of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
+ Confidential treatment
(1) Previously filed and incorporated herein by reference to the Company's
registration statement on Form S-1 (333-87285).
(2) Previously filed and incorporated herein by reference to the Company's
Current Report on Form 8-K, dated February 21, 2000 and filed with the
Securities and Exchange Commission on March 9, 2000.
(3) Previously filed and incorporated herein by reference to the Company's
registration statement on Form S-8 (333-94751).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MedicaLogic, Inc.:
We consent to incorporation by reference in the Registration Statements
(Nos. 333-94751 and 333-94761) on Form S-8 of MedicaLogic, Inc. of our report
dated February 4, 2000, with respect to the consolidated balance sheets of
MedicaLogic, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999 annual report
on Form 10-K of MedicaLogic, Inc.
/s/ KPMG LLP
Portland, Oregon
March 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 110,320
<SECURITIES> 28,536
<RECEIVABLES> 7,002
<ALLOWANCES> (529)
<INVENTORY> 0
<CURRENT-ASSETS> 149,844
<PP&E> 18,095
<DEPRECIATION> (5,008)
<TOTAL-ASSETS> 168,354
<CURRENT-LIABILITIES> 13,978
<BONDS> 0
0
0
<COMMON> 229,724
<OTHER-SE> (79,884)
<TOTAL-LIABILITY-AND-EQUITY> 168,354
<SALES> 19,717
<TOTAL-REVENUES> 19,717
<CGS> 8,334
<TOTAL-COSTS> 8,334
<OTHER-EXPENSES> 40,467
<LOSS-PROVISION> 505
<INTEREST-EXPENSE> 292
<INCOME-PRETAX> (27,653)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,987)
<EPS-BASIC> (3.07)
<EPS-DILUTED> (3.07)
</TABLE>
