<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28285
------------------------
MEDICALOGIC, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OREGON 93-0890696
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
20500 NW EVERGREEN PARKWAY,
HILLSBORO, OREGON 97124
(Address of principal executive offices)
(503) 531-7000
(Registrant's telephone number, including area code
------------------------
Check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
As of May 12, 2000 there were 39,931,475 shares of the Registrant's Common
Stock outstanding.
1
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MEDICALOGIC, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2000
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS: Number
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999........................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999..................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999..................................................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................. 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
ITEM 2. Changes in Securities and Use of Proceeds........................ 18
ITEM 6. Exhibits and Reports on Form 8-K................................. 18
Signatures.................................................................. 19
Index to Exhibits........................................................... 20
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 69,485 $110,320
Short-term investments.................................... 48,264 28,536
Accounts receivable, net.................................. 5,905 6,473
Prepaid expenses and other current assets................. 4,381 4,515
-------- --------
Total current assets.................................... 128,035 149,844
Property and equipment, net................................. 18,101 13,087
Other assets, net........................................... 8,364 5,423
-------- --------
Total assets............................................ $154,500 $168,354
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,009 $ 5,638
Accrued and other liabilities............................. 6,017 2,639
Deferred revenue.......................................... 2,756 3,269
Long term liabilities, current portion.................... 2,361 2,432
-------- --------
Total current liabilities............................... 14,143 13,978
Long term liabilities, net of current portion............... 1,693 2,233
Deferred revenue, long-term................................. 1,627 1,627
Other long term liabilities................................. 1,247 676
-------- --------
Total liabilities....................................... 18,710 18,514
-------- --------
Shareholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
32,467,509 and 32,364,391 shares issued and outstanding
at March 31, 2000 and December 31, 1999 respectively;... 230,578 229,724
Common stock notes receivable............................. (12,387) (11,788)
Deferred stock compensation............................... (4,149) (4,570)
Accumulated deficit....................................... (78,252) (63,526)
-------- --------
Total shareholders' equity.............................. 135,790 149,840
-------- --------
Total liabilities and shareholders' equity.............. $154,500 $168,354
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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MEDICALOGIC, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Revenues:
Licenses, service and support............................. $ 5,356 $ 2,997
Subscription and eCommerce................................ 252 --
---------- ---------
Total revenues.......................................... 5,608 2,997
Operating expenses:
Cost of operations........................................ 4,472 1,470
Sales and marketing....................................... 8,659 2,102
Research and development.................................. 3,759 2,113
General and administrative................................ 3,305 379
Depreciation and amortization............................. 1,954 570
---------- ---------
Total operating expenses................................ 22,149 6,634
---------- ---------
Operating loss.......................................... (16,541) (3,637)
Other income, net........................................... 1,815 211
---------- ---------
Net loss................................................ (14,726) (3,426)
Accretion of preferred stock redemption preference.......... -- (49)
---------- ---------
Net loss attributed to common shareholders.............. $ (14,726) $ (3,475)
========== =========
Net loss per share:
basic and diluted......................................... $ (0.45) $ (0.48)
========== =========
Weighted average shares:
basic and diluted......................................... 32,423,637 7,286,729
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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MEDICALOGIC, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(14,726) $(3,426)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 1,954 570
Stock compensation and other non cash expenses.......... 846 184
Changes in assets and liabilities:
Accounts receivable..................................... 568 2,880
Prepaid expenses and other assets....................... 133 (109)
Accounts payable........................................ (2,629) 270
Accrued liabilities..................................... 3,378 997
Deferred revenue........................................ (512) 422
-------- -------
Net cash provided by (used in) operating activities... (10,988) 1,788
-------- -------
Cash flows from investing activities:
Purchases of fixed assets................................. (6,589) (397)
Payments related to the purchase of businesses............ (3,345) (2,117)
Purchases of short-term investments....................... (39,729) (13,071)
Proceeds from maturities of short-term investments........ 20,000 11,767
-------- -------
Net cash used in investing activities................. (29,663) (3,818)
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 427 112
Proceeds from issuance of notes payable................... -- 126
Principal payments under capital lease.................... (132) (78)
Principal payments under note obligations................. (479) (135)
-------- -------
Net cash provided by (used in) financing activities... (184) 25
-------- -------
Net decrease in cash and cash equivalents............. (40,835) (2,005)
Cash and cash equivalents at beginning of period............ 110,320 4,718
-------- -------
Cash and cash equivalents at end of period.................. $ 69,485 $ 2,713
======== =======
Summary of non-cash investing and financing activities:
Issuance of common stock for purchase of a business......... -- 3,300
Accretion of preferred stock redemption preference.......... -- 49
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of MedicaLogic, Inc. ("MedicaLogic") and its wholly
owned subsidiaries, have been prepared by MedicaLogic's management and
reflect all adjustments that, in the opinion of management, are necessary for
a fair presentation of the interim periods presented. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for any subsequent quarter or for
the entire year ending December 31, 2000. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
under the Securities and Exchange Commission's rules and regulations. A
condensed consolidated statement of comprehensive loss has not been presented
because the components of comprehensive loss are not material.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with MedicaLogic's audited
consolidated financial statements and notes for the year ended December 31,
1999 which were included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission and our Registration Statement on Form S-4
filed on March 13, 2000 with the Securities and Exchange Commission.
(a) COMPANY
MedicaLogic's business is connecting physicians and patients through the
Internet. The Company develops, markets and supports software that provides
both the physician and patient with internet access to electronic medical
records created by the physician at the point of care and facilitates
communication between physicians, patients, and other medical care providers,
throughout the U.S.
(b) RECLASSIFICATIONS
Certain reclassifications, none of which affected net loss, have been made to
the financial statements to conform with financial statement presentation.
(2) PROPOSED MERGER AND ACQUISITION
On February 22, 2000 MedicaLogic Inc. and Medscape, Inc. ("Medscape")
announced an agreement to merge and MedicaLogic, Inc. announced an agreement
to acquire Total eMed, Inc. ("Total eMed"). Under the terms of the merger
agreement, Medscape shareholders will receive 0.323 shares of MedicaLogic
common stock for each share of Medscape stock and options outstanding at the
effective date of the merger. Under the terms of the purchase agreement,
Total eMed shareholders will receive 8 million shares of MedicaLogic common
stock for all of its stock and options outstanding at the effective date of
the merger. The new company, will be known initially as MedicaLogic/Medscape.
The transactions are preliminarily valued at approximately $723 million for
Medscape, Inc. and approximately $341 million for Total eMed for a combined
total of approximately $1,064 million. The acquisitions, which will be
accounted for using the purchase method of accounting, are anticipated to be
completed in the second quarter of 2000. Both transactions are subject to
customary closing conditions, including approval by the respective
shareholders of each company, and are subject to regulatory review.
6
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MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(3) BALANCE SHEET COMPONENTS
(a) PROPERTY AND EQUIPMENT
Property and equipment, including equipment acquired under capital leases,
consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Furniture and equipment..................................... $23,019 $16,576
Leasehold improvements...................................... 1,519 1,519
------- -------
24,538 18,095
Less accumulated depreciation and amortization.............. (6,437) (5,008)
------- -------
$18,101 $13,087
======= =======
</TABLE>
(4) INCOME STATEMENT COMPONENTS
(a) DEFERRED STOCK COMPENSATION
MedicaLogic recorded deferred stock compensation expense of $443 as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Cost of operations.......................................... $ 96 $ --
Sales and marketing......................................... 214 --
Research and development.................................... 64 --
General and administrative.................................. 69 --
---- ---------
Total deferred stock compensation........................... $443 $ --
==== =========
</TABLE>
Deferred stock compensation represents the difference between the purchase or
exercise price of certain restricted stock and stock option grants and the
deemed fair value of MedicaLogic's common stock at the time of grant. The
deferred stock compensation balance at March 31, 2000 was approximately $4.1
million. The deferred stock compensation balance is being amortized over the
three year vesting period of certain restricted stock and stock option
grants. Amortization expense is estimated to total approximately $1.6 million
in 2000, approximately $1.6 million in 2001 and approximately $0.9 million in
2002.
(5) SUBSEQUENT EVENTS
In the second quarter of 2000 MedicaLogic, Inc. entered into an agreement to
acquire certain assets and technology for $7 million in cash. This
transaction will be accounted for as a purchase.
On April 4, 2000, MedQuist Transcriptions, LTD. filed a suit in the Delaware
Court of Chancery, MEDQUIST TRANSCRIPTIONS, LTD. V. JOHN H. DAYANI, TOTAL
EMED, INC. AND MEDICALOGIC, INC. against Dr. John H. Dayani, Total eMed, Inc.
and MedicaLogic, Inc. MedQuist alleging that Total eMed misappropriated its
trade secrets through Dr. Dayani, the founder of Total eMed and a former
director and employee of MedQuist. This suit was related to other litigation
between MedQuist and Dr. Dayani.
7
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MedQuist sought to enjoin Total eMed and MedicaLogic from taking any action
to consummate the MedicaLogic/Total eMed merger, and sought to enjoin
MedicaLogic and Total eMed from aiding and abetting Dr. Dayani's alleged
breach of his fiduciary duties and the further dissemination or
misappropriation of MedQuist's trade secrets. On April 18, 2000, the court
denied Medquist's motion for expedited consideration of its request for a
preliminary injunction, and on May 2, 2000 this suit was voluntarily
dismissed without prejudice.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this 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. Moreover, from time to time the Company and its management may issue
and make forward-looking statements. These forward-looking statements
include, among others, those statements using terminology such as "may",
"will", "expects", "plans", "estimates", "anticipates", "potential",
"believes", "intends" or the negative thereof or other comparable terminology
regarding beliefs, plans, expectations, or intentions regarding the future.
Forward-looking statements include statements regarding the rate of growth
and acceptance of MedicaLogic's Internet-based products and services, new
products, websites and services, expected revenues from license and
subscription fees for LOGICIAN and LOGICIAN INTERNET and the relative mix
between license fee and subscription revenue, the level of research and
development, sales and marketing, administrative and other operating costs,
additional investment in staff and infrastructure and additional capital
needs. MedicaLogic wishes to caution the reader that these forward-looking
statements involve risks and uncertainties and the factors below, as well as
the factors detailed below under "Factors That May Affect Future Results of
Operations", the factors detailed in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission under "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors That
May Affect Future Results of Operations" and the factors described under
"Risk Factors" in our Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, may cause MedicaLogic's results to differ
materially from those stated in the forward-looking statements. These factors
include: (i) our business will be harmed if we do not achieve broad
acceptance of our products and services by physicians, patients and other
healthcare stakeholders; (ii) our Internet-based business model is new and
unproven and may not be successfully implemented; (iii) our business will be
harmed if the Medscape's and Total eMed's operations and products are not
successfully integrated with MedicaLogic's operations and products after the
completion of those mergers; (iv) our failure to successfully introduce new
products and services or to enhance our current products and services will
adversely affect our business; (v) our failure to establish and maintain
strategic relationships will adversely affect our business; and (vi) we are
experiencing rapid growth and our failure to manage our growth effectively
will harm our business and operations.
The following discussions also should be read in conjunction with the
MedicaLogic, Inc. consolidated financial statements and notes thereto for the
year ended December 31, 1999 included in our Annual Report on Form 10-K as
filed with the Securities and Exchange Commission and on our Registration
Statement on Form S-4 filed by the Company on March 13, 2000 as filed with
the Securities and Exchange Commission.
OVERVIEW
MedicaLogic's ("MDLI", "we," "our" 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. MedicaLogic's consumer web site, 98point6.com, was
introduced in the first quarter of 2000 and will provide, for patients, a web
site allowing 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 MDLI will
provide healthcare content and eCommerce transaction services corresponding
to information in a selectively shared database that unites physicians and
patients. These additional features are being added to this system to fully
enable our Internet Health Center and are currently in the pilot phase of
development and are expected to be available in the second half of 2000.
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, MDLI has 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 technology will use the Internet to link healthcare consumers to
physicians using either our LOGICIAN or LOGICIAN INTERNET electronic medical
9
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record products and services. MedicaLogic is a leading provider of electronic
medical record software in the healthcare industry.
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 support revenues from customer support
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, typically one year. MedicaLogic
derives service revenues primarily from implementation services performed on
a time-and-materials basis under separate service arrangements related to the
implementation of software products. MedicaLogic recognizes service revenues
as the services are performed.
As a result of the implementation of its LOGICIAN INTERNET product, with
revenues recognized for monthly subscriptions, along with a transition to
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 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.
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.
On February 21, 2000, MedicaLogic, AQ Merger Corp., a wholly owned subsidiary
of MedicaLogic, and Total eMed, Inc., entered into an Agreement of
Reorganization and Merger. Pursuant to the terms of the Total eMed Merger
Agreement, AQ would merge with and into Total eMed, subject to certain
conditions being satisfied or waived. In connection with the Total eMed
merger, MedicaLogic will issue approximately 7,450,000 shares of its common
stock to Total eMed's former stockholders, and assume options to purchase
approximately 550,000 shares of MedicaLogic's common stock. Pursuant to the
Total eMed Merger Agreement, each share of Total eMed Common Stock would be
converted into the right to receive .8070437 shares of MedicaLogic Common
Stock. Also in connection with this merger, the outstanding options to
purchase shares of Total eMed stock will be assumed by MedicaLogic and
adjusted in accordance with the foregoing conversion ratio. Conditions to the
consummation of the Total eMed Merger include the receipt of regulatory
approvals and approval by the shareholders of MedicaLogic and Total eMed.
On February 21, 2000, MedicaLogic, Moneypenny Merger Corp., a wholly owned
subsidiary of MedicaLogic, and Medscape, Inc. entered into an Agreement of
Reorganization and Merger. Pursuant to the terms of the Medscape Merger
Agreement, Moneypenny would merge with and into Medscape, subject to certain
conditions being satisfied or waived. In connection with the Medscape merger,
MedicaLogic will issue approximately 14,432,000 shares of its common stock to
Medscape's former stockholders, and assume options to purchase approximately
4,599,000 shares of MedicaLogic's common stock. Pursuant to the Medscape
Merger Agreement, each outstanding share of Medscape Common Stock would be
converted into the right to receive .323 of a share of MedicaLogic Common
Stock. Also in connection with this merger, the outstanding options to
purchase shares of Medscape stock will be assumed by MedicaLogic and adjusted
in accordance with the foregoing conversion ratio. Conditions to the
consummation of the Medscape Merger include the receipt of regulatory
approvals and approval by the shareholders of MedicaLogic and Medscape.
A meeting of MedicaLogic shareholders to consider proposals to approve the
Total eMed and Medscape mergers is currently scheduled for May 10, 2000.
Meetings of the shareholders of Total eMed and Medscape to consider proposals
to approve these transactions are currently scheduled for May 10 and May 15,
2000, respectively. The transactions, which will be accounted for using the
purchase method of accounting, are anticipated to be completed in the second
quarter of 2000. After these transactions, we will be known as
MedicaLogic/Medscape.
10
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More information regarding these proposed transactions is included in
MedicaLogic's Registration Statement on Form S-4 as filed with the Securities
and Exchange Commission.
RECENT DEVELOPMENTS
In the second quarter of 2000 MedicaLogic, Inc. entered into an agreement to
acquire certain assets and technology for $7 million in cash. This
transaction will be accounted for as a purchase.
RESULTS OF OPERATIONS
The following table sets forth MedicaLogic's revenues, operating expenses,
other income and expense and net loss as a percentage of total revenues for
the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Licenses, service and support............................. 95.5% 100.0%
Subscription and eCommerce................................ 4.5 --
------ ------
Total revenues.............................................. 100.0 100.0
------ ------
Operating expenses:
Cost of operations........................................ 79.7 49.0
Sales and marketing....................................... 154.4 70.1
Research and development.................................. 67.0 70.5
General and administrative................................ 58.9 12.6
Depreciation and amortization expense..................... 34.8 19.0
------ ------
Total operating expenses.................................... 394.8 221.2
------ ------
Operating loss............................................ (294.8) (121.2)
Total other income, net..................................... 32.4 7.0
------ ------
Net loss............................................... (262.4)% (114.2)%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
As of March 31, 2000 nearly 12,000 clinicians were using products and
services of MDLI with over 4,000 Internet users. This represents a 94%
increase from the 6,200 clinicians from March 31, 1999. Patient records at
March 31, 2000 increased to 9.2 million over the March 31, 1999 figure of 6.2
million.
MedicaLogic has incurred net losses each period since it began operations.
The Company incurred a net loss of approximately $14.7 million and
approximately $3.5 million for the three months ended March 31, 2000 and
1999, respectively. As of March 31, 2000, MedicaLogic had an accumulated
deficit of approximately $78.3 million. MedicaLogic intends to further
increase its spending on marketing and promotion, research and development
and strategic relationships. As a result, MedicaLogic expects to continue
incurring net losses and negative cash flows from operations through 2000.
REVENUES
Total revenues increased to over $5.6 million from approximately $3.0
million for the three months ended March 31, 2000 and 1999, respectively.
Licenses, service and support revenues increased to approximately $5.4
million from approximately $3.0 million for the three months ended March 31,
2000 and 1999, respectively. The increase in license revenues from 1999
primarily resulted from an increase in the number of licenses sold. This
trend is not expected to continue as MedicaLogic moves to a subscription
business model for LOGICIAN and LOGICIAN INTERNET, and subscription revenue
becomes the primary sources of revenues. In addition, the timing and
acceptance of new products or the financial conditions of key customers could
negatively impact the physician adoption
11
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rate, which would have a material adverse effect on the business, operating
results and financial condition of MedicaLogic.
Subscription and eCommerce revenues increased to approximately $0.3 million.
This is the first quarter the Company offered subscription pricing. The
subscription and eCommerce revenues in this quarter consisted of primarily
from the Enterprise product line. MedicaLogic expects total subscription and
eCommerce revenues to continue to grow. However, failure of or delay in the
adoption of LOGICIAN INTERNET, or renewal of support contracts could have a
material adverse effect on MedicaLogic's business, operating results and
financial condition.
OPERATING EXPENSES
Cost of operations
Cost of operations includes the cost of licenses, service and support and the
data center. The data center which supports LOGICIAN INTERNET and eCommerce
revenues was previously in the development stage and as such the cost
associated with the development of the data center was included in research
and development expenses through December 31, 1999.
Cost of operations increased to approximately $4.5 million from approximately
$1.5 million for the three months ended March 31, 2000 and 1999,
respectively. Cost of operations as a percentage of revenues was
approximately 80% and approximately 49% for the three months ended March 31,
2000 and 1999, respectively. The cost of operations associated with the data
center was approximately $1.4 million representing approximately 25% of total
revenue for the three months ended March 31, 2000. There were no costs for
the data center in the period ended March 31, 1999. This cost will continue
to increase as we continue to build infrastructure to support LOGICIAN
INTERNET and our eCommerce business model. For the three months ended March
31, 2000 and 1999, cost of licenses, service and support revenues as a
percentage of license service and support revenues remained the same.
MedicaLogic does not assume this trend will continue due to the launch of new
products and the uncertain mix of products sold.
SALES AND MARKETING
Sales and marketing increased to approximately $8.7 million from
approximately $2.1 million for the three months ended March 31, 2000 and
1999, respectively. Sales and marketing represented approximately 154% of
total revenues and approximately 70% for the three months ended March 31,
2000. The increase in dollar amount and percentage of revenues for the three
months ended March 31, 2000 and 1999, respectively, resulted primarily from
costs related to additional direct and indirect workforce required to promote
and launch new products of approximately $3.2 million, and an increase in
trade shows, public relations and advertising of approximately $2.4 million
to support 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 increased to approximately $3.8 million from
approximately $2.1 million for the three months ended March 31, 2000 and
1999, respectively. Research and development costs represented approximately
67% and approximately 71% of total revenues for the three months ended March
31, 2000 and 1999, respectively. The increases in research and development
costs for the three months ended March 31, 2000 resulted primarily from the
addition of development staff and contractors to develop new products and
product upgrades, totaling approximately $1.5 million. MedicaLogic believes
that research and development costs will continue to increase as it expands
its product offerings.
GENERAL AND ADMINISTRATIVE
General and administrative increased to approximately $3.3 million from
approximately $0.4 million for the three months ended March 31, 2000 and
1999, respectively. General and administrative costs represented
approximately 59% and 13% of total revenues for the three months ended March
31, 2000 and 1999, respectively. The increase resulted from the addition of
administrative personnel, contractors and professional of approximately $2.5
million to support the growth of MedicaLogic's business. In the period ended
March 31, 1999 certain legal estimates were determined not to be required and
therefore reversed. Without this change in estimate the general and
administrative expense would have been about $0.7 million or approximately
24% of revenue. MedicaLogic believes that general and
12
<PAGE>
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, professional
services fees and costs to complete mergers and acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to approximately $2.0 million from
approximately $0.6 million for the three months ended March 31, 2000 and
1999, respectively. Depreciation and amortization represented approximately
35% and approximately 19% of total revenues for the three months ended March
31, 2000 and 1999, respectively. The increase resulted from the purchase of
approximately $16.9 million of additional capital equipment to support the
infrastructure for our LOGICIAN, LOGICIAN INTERNET and eCommerce services
during the twelve months ended March 31, 2000. This trend is expected to
continue as MedicaLogic continues to build its infrastructure. Because the
timing of depreciation and amortization may not match the adoption rate of
our products and services, it is expected that depreciation and amortization
may increase as a percentage of revenue.
OTHER INCOME, NET
Other income, net increased to approximately $1.8 million from approximately
$0.2 million for the three months ended March 31, 2000 and 1999,
respectively. The increase in other income is mainly attributable to an
increase in interest earned on cash and cash equivalents and short term
investments resulting from the issuance of stock in the Company's initial
public offering. MedicaLogic expects other income to decrease in future
quarters as the Company uses the proceeds from the initial public offering to
finance its operations, support its growth and complete acquisitions.
PROVISION FOR INCOME TAXES
As a result of net operating losses for the three months ended March 31, 2000
and prior periods, MedicaLogic made no provision or benefit for federal or
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, MedicaLogic had cash and cash equivalents of
approximately $69.5 million and short term investments of approximately $48.2
million, down a total of approximately $21.1 million from the December 31,
1999 balances of approximately $110.3 million and approximately $28.5 million
respectively.
In December, 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.
MedicaLogic's operating activities resulted in net cash outflows of
approximately $11.0 million and a net cash inflow of approximately $1.8
million for the three months ended March 31, 2000 and 1999, respectively. The
increase in cash outflows resulted primarily from an increase in sales and
marketing of $6.6 million and an increase in research and development of $1.7
million for the three months ended March 31, 2000. Cash outflows for the
three months ended March 31, 2000 also increased approximately $0.5 million
due to a reduction of deferred revenue. Cash inflows for the three months
ended March 31, 1999 also increased approximately $2.9 million due to a
reduction in accounts receivable, resulting from an improved collection
effort, an increase of approximately $0.4 million in deferred revenue and an
increase in accrued liabilities of approximately $1.0 million.
Investing activities resulted in net cash outflows of approximately $29.7
million and approximately $3.8 million for the three months ended March 31,
2000 and 1999, respectively. Cash outflows for the three months ended March
31, 2000 resulted from net investments of approximately $19.7 million in
short term investments, purchase of fixed assets of approximately $6.6
million and cash consumed of approximately $3.3 million for services related
to the merger with Medscape and the acquisition of Total eMed. MedicaLogic
believes significant additional cash will be required to complete these and
other transactions. Cash outflows for the three months ended March 31, 1999
resulted from net investments of approximately $1.3 million in short-term
investments, approximately $0.4 million related to the purchase of fixed
assets and approximately $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 activities, develops
13
<PAGE>
new distribution channels, develops its infrastructure, and improves its
operational and financial systems. These operating expenses will consume a
material amount of MedicaLogic's cash resources. MedicaLogic believes that
its existing cash and cash equivalents and short term investments, 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.
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.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25, (FIN 44). FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee
status that occur on or after July 1, 2000, except for the provisions related
to repricings and the definition of an employee, which apply to awards issued
after December 15, 1998. The provisions related to modifications to fixed
stock options awards to add a reload feature are effective for awards
modified after January 12, 2000. We do not expect that this statement will
have a significant impact on our financial condition or results of operations.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
WHEN THE MEDSCAPE MERGER, AND TOTAL EMED ACQUISITION OCCUR WE MAY NOT
SUCCESSFULLY ASSIMILATE THE ACQUIRED OPERATIONS OR PRODUCT.
We may not be successful in the assimilation of Medscape or Total eMed. We
may not be successful in the assimilation of their operations, retaining key
employees, and uncertainties in our ability to maintain key business
relationships. Any of these events could have a material adverse effect upon
our business, operating results and financial condition.
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;
The mix of our products and services sold;
14
<PAGE>
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;
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, 30,959,174 shares will be eligible for sale in the public market
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
28,606,952 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.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of MedicaLogic's investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. In general, money market
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. Some of the securities that we have
invested in may be subject to market risk. This means that a change in the
prevailing interest rates may cause the principal amount of the investment to
fluctuate. 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 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
our 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 March 31, 2000, we had an investment portfolio of money market
funds, commercial securities and U.S. Government securities, including those
classified as cash and cash equivalents and short-term investments, of
approximately $117.7 million. We had notes payable outstanding of
approximately $4.1 million at March 31, 2000. If market interest rates were
to increase immediately and uniformly by 10% from levels as of March 31,
2000, the decline of the fair market value of the fixed income portfolio and
loans outstanding would not be material.
EXCHANGE RATE SENSITIVITY
Currently all of MedicaLogic's sales and most of our expenses are denominated
in U.S. dollars and as a result we have experienced no significant foreign
exchange gains or losses to date. While we are conducting some transactions
in foreign currencies during 2000, we do not anticipate that foreign exchange
gains or losses will be significant. We have not engaged in foreign currency
hedging activities to date.
16
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 2000, MedQuist Transcriptions, LTD. filed a suit in the Delaware
Court of Chancery, MEDQUIST TRANSCRIPTIONS, LTD. V. JOHN H. DAYANI, TOTAL
EMED, INC. AND MEDICALOGIC, INC. against Dr. John H. Dayani, Total eMed, Inc.
and MedicaLogic, Inc. MedQuist alleging that Total eMed misappropriated its
trade secrets through Dr. Dayani, the founder of Total eMed and a former
director and employee of MedQuist. This suit is related to other litigation
between MedQuist and Dr. Dayani.
MedQuist sought to enjoin Total eMed and MedicaLogic from taking any action
to consummate the MedicaLogic/Total eMed merger, and sought to enjoin
MedicaLogic and Total eMed from aiding and abetting Dr. Dayani's alleged
breach of his fiduciary duties and the further dissemination or
misappropriation of MedQuist's trade secrets. On April 18, 2000, the court
denied Medquist's motion for expedited consideration of its request for a
preliminary injunction, and on May 2, 2000 this suit was voluntarily
dismissed without prejudice.
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 were 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.
17
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
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 31, 2000, the entire
amount of the net proceeds from the initial public offering were invested in
cash equivalents and short-term investments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Index to Exhibit on page 20 are filed
as part of this report.
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2000:
The Company filed a report on Form 8-K on February 21, 2000 regarding the
proposed merger with Medscape, Inc. and the proposed acquisition of Total
eMed.
18
<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-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Hillsboro, State of Oregon, on May 10, 2000.
MEDICALOGIC, INC.
By: /s/ FRANK J. SPINA
-----------------------------------------
Frank J. Spina
Senior Vice President and Chief
Financial Officer
PRINCIPAL FINANCIAL OFFICER AND ACCOUNTING
OFFICER
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1 Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Total eMed, Inc. and AQ
Merger Corp. Incorporated by reference to Exhibit 2.2 to
MedicaLogic's Registration Statement on Form S-4
(Registration No. 333-32390)*
2.2 Agreement of Reorganization and Merger dated as of February
21, 2000 among MedicaLogic, Inc., Medscape, Inc. and
Moneypenny Merger Corp. Incorporated by reference to Exhibit
2.1 to MedicaLogic's Registration Statement on Form S-4
(Registration No. 333-32390)*
27.1 Financial data schedule (EDGAR only)
</TABLE>
* Certain exhibits to, and schedules delivered in connection with, the Total
eMed Merger Agreement and Medscape Merger Agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K. MedicaLogic agrees to
supplementally furnish to the Commission a copy of any such exhibit or
schedule upon request.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MEDICALOGIC'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 69,485
<SECURITIES> 48,264
<RECEIVABLES> 5,905
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 128,035
<PP&E> 24,538
<DEPRECIATION> (6,437)
<TOTAL-ASSETS> 154,500
<CURRENT-LIABILITIES> 14,143
<BONDS> 0
0
0
<COMMON> 230,578
<OTHER-SE> (94,788)
<TOTAL-LIABILITY-AND-EQUITY> 154,500
<SALES> 5,608
<TOTAL-REVENUES> 5,608
<CGS> 4,472
<TOTAL-COSTS> 4,472
<OTHER-EXPENSES> 17,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152
<INCOME-PRETAX> (14,726)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,726)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,726)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
