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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-32085
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
36-3444974
Delaware (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
2401 Commerce Drive, Libertyville, Illinois 60048
(Address of principal executive offices and zip code)
(847) 680-3515
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $0.01 par value per share
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 voting and non-voting common stock held by
non-affiliates of the registrant as of March 23, 2001 was approximately
$107,294,565. The number of outstanding shares of the registrant's Common Stock
as of that date was 37,988,218.
Documents Incorporated by Reference: Portions of the Proxy Statement for the
2001 annual stockholders meeting are incorporated by reference into Part III.
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ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.
TABLE OF CONTENTS TO
2000 ANNUAL REPORT ON FORM 10-K
Item Page
---- ----
PART I
1. Business........................................................... 1
2. Properties......................................................... 7
3. Legal Proceedings.................................................. 7
4. Submission of Matters to a Vote of Security Holders................ 8
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 9
6. Selected Financial Data............................................ 10
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 11
7A. Quantitative and Qualitative Disclosures About Market Risk......... 33
8. Financial Statements and Supplementary Data........................ 34
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 65
PART III
10. Directors and Executive Officers of the Registrant................. 66
11. Executive Compensation............................................. 66
12. Security Ownership of Certain Beneficial Owners and Management..... 66
13. Certain Relationships and Related Transactions..................... 66
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 67
Signatures......................................................... 71
Effective January 8, 2001, Allscripts, Inc. acquired Channelhealth
Incorporated, and each became a wholly owned subsidiary of a new holding
company, Allscripts Healthcare Solutions, Inc., which was originally
incorporated in Delaware as Allscripts Holding, Inc. on July 11, 2000. As a
result of the merger transaction, each outstanding share of Allscripts, Inc.
common stock was converted into one share of Allscripts Healthcare Solutions,
Inc. common stock. Allscripts, Inc. no longer files reports with the Securities
and Exchange Commission, and its common stock is no longer listed on the Nasdaq
National Market; however, Allscripts Healthcare Solutions, Inc. does file
reports with the Securities and Exchange Commission, and its common stock is
listed on the Nasdaq National Market under the symbol "MDRX". In this report,
"we", "us", "our" and "Allscripts", when referring to events prior to January
8, 2001, refer to our wholly owned subsidiary and predecessor, Allscripts,
Inc., and, when referring to subsequent time periods, refer to Allscripts
Healthcare Solutions, Inc. and its wholly owned subsidiaries, Allscripts, Inc.
and Channelhealth Incorporated, unless the context indicates otherwise.
TouchScript(R) and TeleMed(R) are registered trademarks of Allscripts, Inc.,
Channelhealth(R) is a registered trademark of Channelhealth Incorporated, and
PATIENT ED(R) is a registered trademark of Medifor, Inc. Trademarks of
Allscripts Healthcare Solutions, Inc. or one of its wholly owned subsidiaries
used in this report include: Allscripts(TM), Clinical Works Modules(TM), e-
Detailing(TM), FirstFill(TM), HealthFrame(TM), Integration Professional(TM),
Physician Channel(TM), Physician Homebase(TM), Physicians Interactive(TM),
Pocket Library(TM), TouchWorks(TM), TouchWorks Enterprise(TM) and TouchWorks
Professional(TM). All other trademarks, brand marks, trade names and registered
marks used in this report are trademarks, brand marks, trade names or
registered marks of their respective owners. Allscripts Healthcare Solutions,
Inc. and its wholly owned subsidiaries own a number of additional trademarks,
including registered trademarks, that are not referenced in this report.
PART I
Item 1. Business
General
We provide decision support solutions for physicians that are designed to
improve the quality and cost effectiveness of healthcare. Our technology-based
approach focuses on the point of care, where prescriptions and many other
healthcare transactions originate, and creates an electronic dialogue between
physicians and other participants in the healthcare delivery process, including
patients, pharmacies, managed care organizations and pharmaceutical
manufacturers. We believe physicians find our solutions attractive because
incorporating these solutions into their office work flow can increase
efficiency and profitability, reduce errors and improve the quality of patient
care.
Our products are designed to provide real time information to enable better
clinical decisions, streamline the care process to improve physician
productivity, enhance the physician-patient relationship, and provide a
measurable return on investment. We currently offer products in four
categories: point-of-care decision support solutions, physician education,
information products and prepackaged medications. Our TouchWorks software
enables physicians to automate the most common clinical activities, including
prescribing, dictation, charge capture, lab orders and results, patient
education, and clinical notes. Our Physicians Interactive e-Detailing product
enables healthcare professionals to learn about new healthcare products through
the Internet and other multimedia technology. We also sell our prepackaged
medications to physicians so they can offer their patients the convenience of
receiving prescription medications in the physician's office.
Recent Developments
Since January 2000, we have made three acquisitions and signed three
strategic agreements that have advanced our business.
. IMS Health Incorporated, a leading provider of information solutions to
the pharmaceutical and healthcare industries, and Allscripts signed a
strategic alliance agreement on February 16, 2000. In December of 2000,
we terminated the initial agreement and entered into a new agreement
focused primarily on development and marketing of new Internet-based
information solutions for the pharmaceutical industry.
. Express Scripts, the nation's third largest pharmacy benefit manager,
signed a strategic agreement with Allscripts on April 26, 2000. The
agreement enables physicians who use Allscripts' TouchScript electronic
prescribing software product to have real-time access to current
formulary and clinical information at the point-of-care and provides
funding for system installation.
. Masterchart, a software developer of digital dictation, document
management and integration technology products, was acquired on May 9,
2000.
. Medifor, a leading provider of clinical software designed to help
physicians more effectively communicate with patients, both at the point
of care and via the Internet, was acquired on May 17, 2000.
. Child Health Corporation of America (CHCA) and Allscripts signed an
exclusive marketing agreement on October 26, 2000 designed to provide
access to and advance sales of TouchScript to CHCA's customer base of 38
leading children's medical centers nationwide.
. On January 8, 2001, Allscripts acquired Channelhealth, a business unit of
IDX Systems. In addition to the acquisition, Allscripts and IDX entered
into a 10-year strategic alliance whereby Allscripts became the exclusive
provider of Internet and point-of-care clinical applications sold by IDX
to physician practices, providing Allscripts access to IDX's current
118,000 physician practice management customers.
1
The Allscripts Solution
Through our own internal development efforts and acquisitions, we have
developed a variety of point-of-care solutions that enable physicians to
provide higher quality healthcare and deliver it more cost effectively. Our
TouchWorks software seamlessly integrates technology into the entire care
process. The TouchWorks modules are accessed using wireless handheld or desktop
workstation devices to automate prescribing, dictation, charge capture,
documentation, orders and results, patient education and structured notes. The
modules can be combined with a comprehensive tasking tool that helps physicians
organize their practice flow.
The prescribing component of this physician-centered solution redesigns the
pharmaceutical management process to benefit each participant. By providing
access to real time information such as potential drug interactions and prior
adverse reactions during the prescribing process, physicians reduce the amount
of time spent clarifying and changing prescriptions. In addition, our system
enables physicians to better manage financial risk and to increase practice
revenue by providing the first fill of their most commonly prescribed
medications to their patients at the point of care and can also reduce
medication errors. Patients benefit from the convenience, immediacy and
confidentiality of receiving prescription medications in the physician's
office. Patients also gain access to valuable information that enables them to
play a more active role in managing their healthcare. Managed care
organizations benefit from higher physician compliance with their pharmacy
guidelines, resulting in lower overall costs. Pharmacies benefit from improved
communication with physicians, which enhances efficiency and reduces the
likelihood of errors. We also believe that the new products and services that
we intend to offer in the future will benefit additional participants in the
healthcare delivery process.
We currently have products that enable physicians to learn more about the
latest medications and new indications whenever it is convenient for them,
seven days a week, 24 hours a day. Physicians can also acquire and access via
our wireless handheld device clinical reference books that contain important
medication data. Using our products, our clients can now also set up personal,
secure webpages for their patients, through which they can communicate
additional information on medical condition and engage in an electronic dialog.
We intend to continue to enhance our current offerings by integrating new
products and services that address other aspects of the physician's daily work
flow.
We believe that the best way to improve the care management process is by
focusing and automating the most labor intensive, time consuming aspects of
care delivery--writing prescriptions, dictating notes and capturing charges.
Having these modules available on a handheld, wireless device that offers real
time connectivity, combined with our FirstFill option, enables us to provide an
attractive set of benefits to our customers:
. Ease of Use. TouchWorks is easy to use, enabling a physician to complete
a prescription, dictate a note or document a charge very rapidly.
. Accessibility. Physicians can instantly access TouchWorks from a variety
of locations, including the exam room, hospital or home. They can also
perform such important tasks as dictation and charge capture in an
offline mode and immediately transfer those files once they reconnect to
the network.
. Information. TouchWorks provides valuable, objective information prior
to, during and after the care process, enabling physicians to provide
higher quality care and deliver it more cost effectively.
. Financial Opportunity. TouchWorks streamlines a very complicated and
cumbersome paper based process that reduces overall costs and provides
physicians with a significant financial opportunity.
Competitive Advantage
We believe that we have several advantages over our current and potential
competitors:
. Breadth of product offering. Our suite of decision support solutions,
featuring a handheld wireless product that includes electronic
prescibing, digital dictation, charge capture, and a collection of
clinical
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reference material, encompasses virtually all of the administrative
functions that a physician performs at the point of care.
. Installed Base. Over 15,000 physicians purchase one or more of our
products or solutions, including physicians associated with some of the
country's most prestigious healthcare institutions.
. Return on investment. Based on documented increase in productivity,
quality of care improvement, and greater practice revenue opportunities,
we believe we can provide our customers immediate and measurable value.
. Strategic alliance with IDX Systems. Allscripts is the exclusive provider
of point-of-care clinical applications to IDX's installed base of large
physician practices nationwide, representing over 118,000 physician
prospects for the TouchWorks solution. We also have a 10-year agreement
with IDX that includes integration into IDX practice management systems
and joint product development.
. Managed Care Experience. Approximately 100 managed care payers and
pharmacy benefit managers, including many of the country's largest,
currently reimburse our physician customers for prescription medications
dispensed in their offices.
. Regulatory Experience. We have a thorough understanding of, and operating
experience in, the dynamic and complex federal and state healthcare
regulatory environment.
. Management. Our management team has substantial experience in managing
rapidly growing public companies that use technology to change business
processes.
Current and Future Products and Services
Touchworks Professional is our point-of-care clinical productivity solution
for smaller to mid-size physician practices. TouchWorks Professional provides
electronic prescribing that reduces medication errors and routes transactions
to local retail and mail order pharmacies, dictation that walks the physician
through a template to properly chart a patient's visit, and charge capture
that provides guidance to assist the physician in properly capturing the
charges for the visit. The TouchWorks Professional solution is delivered on a
wireless handheld personal digital assistant, or PDA, that will help
physicians save time and improve the financial performance of their practice.
TouchWorks Enterprise is our point-of-care clinical productivity solution
for larger physician groups. An evolution of the ChannelHealth Clinical Works
Modules, TouchWorks Enterprise modules address a critical set of clinical
functions within the physician office--from task management and triage
routing, dictation, transcription and documentation management, to
prescription management and dispensing, ambulatory orders and results review.
3
Products/Modules Description Features
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TouchWorks Professional
TouchScript Electronic prescribing Drug utilization review
Formulary checking
Generic substitution
SCRIPT standard prescription
routing
Dictate Digital dictation Templates for documentation
assistance
Charge Automated encounter form Easy to use template design
Pocket Library Electronic clinical reference Framework to add content easily
TouchWorks Enterprise
Physician Homebase Internet portal providing real Links to clinically relevant
time access to practice content and continuing medical
management and clinical functions education
Workflow Office automation and work-flow Task lists for the physicians and
integration tools their support teams
Charge Automated encounter form Easy to use template design
Document Electronic dictation and document On-line tracking, viewing and
management printing capabilities
Prescribe Medication management and Drug utilization review and plan-
prescription communication for specific formulary checking
ambulatory patients
Results Display of clinical results and Online result retrieval
text documents
Orders Ordering of diagnostic tests, Online ordering
supplies and other items for
ambulatory patients
Notes* Structured clinical note creation Note creation and management
and editing
Allscripts FirstFill Medication fullfillment at the Inventory management
point of care Online adjudication
e-Detailing Internet-based drug education for Interactive education sessions
physicians
PATIENT ED Personalized patient care plans Private patient web page creation
Over 900 preloaded templates
HealthFrame Client/server and Internet-based Electronic document management
inpatient document management and Electronic document routing
clinical data repository Electronic signature
Integration Professional Interface engine Template driven
- --------
*Not yet available.
4
Competition
Our industry is intensely competitive, rapidly evolving and subject to rapid
technological change. A number of the companies that offer products or services
that compete with one or more of our products or services have greater
financial, technical, product development, marketing and other resources than
we have. These organizations may be better known and may have more customers
than we have. We may be unable to compete successfully against these
organizations. We believe that we must gain significant market share with our
products and services before our competitors introduce alternative products and
services with features similar to ours.
We believe that there are no competitors in providing decision support
solutions to physicians that offer a comprehensive solution with ease of use,
accessibility, information content and financial opportunity for physicians
comparable to ours. However, several organizations offer components that
overlap with certain components of our solutions and may become increasingly
competitive with us in the future.
We face competition from several types of organizations, including the
following:
. electronic prescribing product providers;
. physician practice management systems suppliers;
. electronic medical records providers;
. healthcare electronic data interchange providers;
. point-of-care dispensing providers; and
. Internet information providers.
While many of these types of organizations are potential competitors, we
believe that there are opportunities to establish strategic relationships,
alliances or distribution agreements with some of them, and we intend to pursue
these opportunities selectively. In addition, we expect that major software
information systems companies and others specializing in the healthcare
industry may offer products or services that are competitive with components of
our solutions.
Governmental Regulation
As a participant in the healthcare industry, our operations and
relationships are regulated by a number of federal, state and local
governmental entities.
The use of our TouchScript software by physicians to perform electronic
prescribing, electronic routing of prescriptions to pharmacies and dispensing
is governed by state and federal law. States have differing prescription format
requirements, which we have programmed into TouchScript. Many existing laws and
regulations, when enacted, did not anticipate methods of e-commerce now being
developed. Federal law and the laws of several states neither specifically
permit nor specifically prohibit electronic transmission of prescription
orders. Given the rapid growth of e-commerce in healthcare, and particularly
the growth of the Internet, we expect many states, as well as the federal
government, to directly address these areas with regulation in the near future.
Physician dispensing of medications for profit is allowed in all states
except Utah and is prohibited, subject to extremely limited exceptions, in
Massachusetts, Montana and Texas. In addition, New York and New Jersey allow
physician dispensing of medications for profit, but limit the number of days'
supply of all medications, subject to limited exceptions, that a physician can
dispense; several other states limit the number of days' supply of controlled
substances that a physician may dispense. Many of the states allowing physician
dispensing for profit have regulations relating to licensure, storage,
labeling, record keeping and the degree of supervision required by the
physician over support personnel who assist in the non-judgmental tasks
associated with physician dispensing, like retrieving medication bottles and
affixing labels. We regularly monitor these
5
laws and regulations, in consultation with the governing agencies, to assist
our customers in understanding them so that they can materially comply.
Congress enacted significant prohibitions against physician self-referrals
in the Omnibus Budget Reconciliation Act of 1993. This law, commonly referred
to as "Stark II," applies to physician dispensing of outpatient prescription
drugs that are reimbursable by Medicare or Medicaid. Stark II, however,
includes an exception for the provision of in-office ancillary services,
including a physician's dispensing of outpatient prescription drugs, provided
that the physician meets the requirements of the exception. We believe that the
physicians who use our TouchScript system or dispense drugs distributed by us
are doing so in material compliance with Stark II, either pursuant to the in-
office ancillary services exception or another applicable exception.
As a repackager and distributor of drugs, we are subject to regulation by
and licensure with the FDA, the DEA and various state agencies that regulate
wholesalers or distributors. Among the regulations applicable to our
repackaging operation are the FDA's "good manufacturing practices." We are
subject to periodic inspections by regulatory authorities of our facilities,
policies and procedures for compliance with applicable legal requirements.
Because the FDA's good manufacturing practices were designed to govern the
manufacture, rather than the repackaging, of drugs, we face legal uncertainty
concerning the application of some aspects of these regulations and of the
standards that the FDA will enforce.
As a distributor of prescription drugs to physicians, we and our customers
are also subject to the federal anti-kickback statute, which applies to
Medicare, Medicaid and other state and federal programs. The statute prohibits
the solicitation, offer, payment or receipt of remuneration in return for
referrals or the purchase of goods, including drugs, covered by the programs.
The anti-kickback law provides a number of exceptions or "safe harbors" for
particular types of transactions. We believe that our arrangements with our
customers are in material compliance with the anti-kickback statute and
relevant safe harbors. Many states have similar fraud and abuse laws, and we
believe that we are in material compliance with those laws.
As part of our services provided to physicians, our system will
electronically transmit claims for prescription medications dispensed by a
physician to many patients' payers for immediate approval and reimbursement.
Federal law provides that it is both a civil and a criminal violation for any
person to submit a claim to any payer, including, for example, Medicare,
Medicaid and all private health plans and managed care plans, seeking payment
for any services or products that overbills or bills for items that have not
been provided to the patient. We believe that we have in place policies and
procedures to assure that all claims that are transmitted by our system are
accurate and complete, provided that the information given to us by our
customers is also accurate and complete.
Existing federal and state laws and regulations regulate the disclosure of
confidential medical information, including information regarding conditions
like AIDS, substance abuse and mental illness. In addition, the U.S. Department
of Health and Human Services recently published rules regarding the disclosure
of confidential medical information. The effective date of those regulations is
uncertain. As part of the operation of our business, our customers do provide
to us patient-identifiable medical information related to the prescription
drugs that they prescribe and other aspects of patient treatment. We believe
that we have policies and procedures to assure that any confidential medical
information we receive is handled in a manner that complies with all federal
and state confidentiality requirements.
History
Allscripts was initially organized to repackage and sell pharmaceuticals to
physicians for dispensing to their patients. When the current management team
arrived at Allscripts in late 1997, it recognized the need for a new set of
medication management solutions. The communication capabilities offered by the
Internet, paired with our existing relationships with managed care
organizations and with physicians, enabled us to create a new set of tools for
the physician with a first-to-market advantage. Management immediately
refocused Allscripts
6
on information technology products rather than solely dispensing repackaged
pharmaceuticals. In recent years, we have invested heavily in Internet and
client/server software development to capture and leverage the value of
electronic information to all parties in the healthcare equation: patients,
physicians, managed care organizations, pharmacies and pharmaceutical
manufacturers.
Employees
As of February 28, 2001, we employed 491 persons on a full-time basis,
including 195 in customer service and support, 98 in general and
administrative, 82 in sales and marketing, 55 in production and warehousing and
61 in product development. None of our employees is a member of a labor union
or is covered by a collective bargaining agreement. We believe we have
excellent relations with our employees.
Item 2. Properties
Our executive offices and state-of-the-art repackaging facilities are
located in Libertyville, Illinois, in approximately 80,000 square feet of space
under a lease that expires in June 2004. We lease space for a separate, smaller
repackaging facility in Grayslake, Illinois, under a lease that expires in June
2002. We also maintain two other offices for sales, marketing, operations and
development efforts in Port Townsend, Washington, with approximately 4,600
square feet combined under separate leases expiring in March 2001, with respect
to which we are currently in discussions with the landlord to renew, and July
2002, respectively, and in Burlington, Vermont, with approximately 15,000
square feet under a lease that expires in January 2006. We believe that our
facilities are adequate for our current operations.
Item 3. Legal Proceedings
Allscripts is a defendant in over 2,000 multi-defendant lawsuits brought by
over 3,000 claimants involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. The majority of these suits were filed in state
courts in Texas beginning in August 1999. The plaintiffs in these cases claim
injury as a result of ingesting a combination of these weight-loss drugs. In
each of these suits, Allscripts is one of many defendants, including
manufacturers and other distributors of these drugs. Allscripts does not
believe it has any significant liability incident to the distribution or
repackaging of these drugs, and it has tendered defense of these lawsuits to
its insurance carrier for handling. In addition, while Allscripts has not yet
conducted a review of all of the Texas suits, physician dispensing is generally
prohibited in Texas and Allscripts has never distributed these drugs in Texas.
Allscripts believes that it is unlikely that it is responsible for the
distribution of the drugs at issue in many of these cases. The lawsuits are in
various stages of litigation, and it is too early to determine what, if any,
liability Allscripts will have with respect to the claims made in these
lawsuits. If Allscripts' insurance coverage in the amount of $16,000,000 per
occurrence and $17,000,000 per year in the aggregate is inadequate to satisfy
any resulting liability, Allscripts will have to defend these lawsuits and be
responsible for the damages, if any, that Allscripts suffers as a result of
these lawsuits. Allscripts does not believe that the outcome of these lawsuits
will have a material adverse effect on its financial condition, results of
operations or cash flows.
Between October 2000 and December 2000, four complaints were filed in the
United States District Court for the Northern District of Illinois against
Allscripts and its President and Chief Financial Officer, David B. Mullen. The
complaints purported to be brought on behalf of a class of individuals who
purchased the common stock of Allscripts during the period of July 27, 2000
through and including October 26, 2000 (the "Class Period"), and alleged
violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934
based on the restatement of our financial results for the second quarter of
2000. The four complaints were deemed related, and the cases were reassigned
and consolidated for all purposes before Judge Charles Kocoras, before whom the
first filed case was pending. The consolidated action is entitled In re
Allscripts, Inc. Securities
7
Litigation, No. 00C6796 (N.D. Ill.) and includes all consolidated cases:
Bredeson v. Allscripts, Inc. and David B. Mullen, Civ. No. 00C-6796 (N.D. Ill.,
filed on October 31, 2000), Karmazin v. Allscripts, Inc. and David B. Mullen,
Civ. No. 00C-6864 (N.D. Ill., filed on November 2, 2000), Mohr v. Allscripts,
Inc. and David B. Mullen, Civ. No. 00C-6992 (N.D. Ill., filed on November 6,
2000), Nadav v. Allscripts, Inc. and David B. Mullen, Civ. No. 00C-8126 (N.D.
Ill., filed on December 26, 2000).
In January 2001, Lead Plaintiff and Lead Counsel were appointed in the
consolidated case. On March 12, 2001, plaintiffs filed a Consolidated and
Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint
continues to name Allscripts and David B. Mullen as defendants and alleges
violations of Section 10(b) and 20(a) of the Securities Exchange Act. Three
additional defendants are named in the Amended Complaint: Glen E. Tullman, our
Chairman of the Board and Chief Executive Officer, J. Peter Geerlofs, our Chief
Medical Officer, and Philip J. Langley, formerly our Senior Vice President of
Business Development/Field Services. The Amended Complaint purports to expand
the Class Period in the consolidated case to include all individuals who
purchased the common stock of Allscripts during the period from March 6, 2000
through and including February 27, 2001. The Amended Complaint is based on the
previous allegations about the restatement of our financial results for the
second quarter of 2000 and new allegations relating to, inter alia, the
prospects for our TouchScript product.
We intend to move to dismiss the Amended Complaint, and Judge Kocoras has
set June 2001 as the prospective ruling date. At this time, management is
unable to determine the likely outcome of this matter or to reasonably estimate
the amount of any potential loss with respect to this matter.
In addition, we are involved in litigation incidental to our business from
time to time. We are not currently involved in any litigation in which we
believe an adverse outcome would have a material adverse effect on our
business, financial condition, results of operations or prospects.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Public Market for Common Stock
Our common stock has been quoted on the Nasdaq National Market under the
symbol "MDRX" since January 9, 2001. From July 23, 1999 until that time, the
stock of Allscripts, Inc. traded on the Nasdaq National Market under the same
symbol. Prior to July 23, 1999, there was no public market for the common
stock. The following table sets forth, for the periods indicated, the high and
low closing prices per share of the common stock of Allscripts Healthcare
Solutions, Inc. and Allscripts, Inc. for the applicable periods as reported on
the Nasdaq National Market.
High Low
------ ------
Year Ended December 31, 1999
Third Quarter (since July 23, 1999)......................... $19.75 $12.38
Fourth Quarter.............................................. 49.50 10.88
Year Ended December 31, 2000
First Quarter............................................... 86.00 44.63
Second Quarter.............................................. 50.00 21.88
Third Quarter............................................... 29.31 13.13
Fourth Quarter.............................................. 18.13 6.00
Year Ended December 31, 2001
First Quarter (through March 23, 2001)...................... 11.66 4.63
On March 23, 2001, we had 517 holders of record of common stock. We have
never declared or paid cash dividends on our common stock. We currently intend
to retain all available funds and any future earnings for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
Recent Unregistered Issuances of Common Stock
In the three months ended December 31, 2000, we issued 9,253 unregistered
shares of common stock upon exercise of warrants for an aggregate exercise
price of $11,520. Exemption from registration is claimed pursuant to Sections
3(a)(9) and 4(2) of the Securities Act.
9
Item 6. Selected Financial Data
You should read the selected consolidated financial data shown below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes
included elsewhere in this report. The consolidated statement of operations
data for the year ended December 31, 2000 and the consolidated balance sheet
data at December 31, 2000 are derived from the consolidated financial
statements audited by KPMG LLP that are included elsewhere in this report. The
consolidated statements of operations data for the years ended December 31,
1998 and 1999 and the consolidated balance sheet data at December 31, 1999 are
derived from the consolidated financial statements audited by
PricewaterhouseCoopers LLP that are included elsewhere in this report. The
consolidated statements of operations data for the years ended December 31,
1996 and 1997 and the balance sheet data at December 31, 1996, 1997 and 1998
are derived from audited financial statements that are not included in this
report. The historical results are not necessarily indicative of results to be
expected for any future period. The statements of operations data below reflect
the pharmacy benefit management business that we sold in March 1999 as a
discontinued operation.
Year Ended December 31,
----------------------------------------------
1996 1997 1998 1999 2000
------- -------- ------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenue....................... $33,462 $ 30,593 $23,682 $ 27,586 $ 54,983
Cost of revenue............... 23,390 21,117 17,320 21,909 42,518
------- -------- ------- -------- --------
Gross profit.................. 10,072 9,476 6,362 5,677 12,465
Operating expenses:
Selling, general and
administrative expenses..... 11,599 13,869 12,658 20,656 42,733
Amortization of intangibles.. 529 409 372 1,351 24,062
Write-off of acquired in-
process research and
development................. -- -- -- -- 13,729
Other operating expenses..... 1,034 2,568 430 319 450
------- -------- ------- -------- --------
Loss from operations.......... (3,090) (7,370) (7,098) (16,649) (68,509)
Interest income (expense),
net.......................... (1,301) (1,621) (596) 1,216 7,706
Other expense................. (39) -- -- -- (1,000)
------- -------- ------- -------- --------
Loss from continuing
operations................... (4,430) (8,991) (7,694) (15,433) (61,803)
Income (loss) from
discontinued operations...... 1,489 (1,808) 970 642 83
Gain from sale of discontinued
operations................... -- -- -- 3,547 4,353
------- -------- ------- -------- --------
Loss before extraordinary
items........................ (2,941) (10,799) (6,724) (11,244) (57,367)
Extraordinary loss from early
extinguishment of debt....... -- -- (790) -- --
------- -------- ------- -------- --------
Net loss...................... (2,941) (10,799) (7,514) (11,244) (57,367)
Accretion on mandatory
redeemable preferred stock
and accrued dividends on
preferred stock.............. (923) (923) (2,415) (2,198) --
------- -------- ------- -------- --------
Net loss attributable to
common stockholders.......... $(3,864) $(11,722) $(9,929) $(13,442) $(57,367)
======= ======== ======= ======== ========
Basic and diluted net loss
from continuing operations
per share, including
accretion on mandatory
redeemable preferred stock
and accrued dividends on
preferred stock.............. $ (1.87) $ (3.35) $ (1.66) $ (1.20) $ (2.22)
======= ======== ======= ======== ========
Weighted average shares used
in computing basic and
diluted per share
calculation.................. 2,854 2,956 6,076 14,718 27,900
======= ======== ======= ======== ========
Balance Sheet Data (at period
end):
Cash, cash equivalents and
marketable securities........ $ 665 $ 205 $ 718 $ 55,610 $119,837
Working capital............... 5,443 (3,023) 271 58,856 105,114
Intangible assets, net........ 11,043 4,578 3,702 3,575 149,690
Total assets.................. 26,713 19,387 18,920 74,014 305,420
Long-term debt................ 15,093 11,276 59 59 --
Redeemable preferred stock.... 9,796 10,719 32,547 -- --
Total stockholders' equity
(deficit).................... (6,700) (18,356) (26,792) 67,364 290,975
Other Operating Data:
Traditional revenue (1)....... $33,462 $ 30,593 $22,338 $ 17,892 $ 20,184
E-commerce revenue (2)........ -- -- 1,344 9,694 34,799
------- -------- ------- -------- --------
Revenue....................... $33,462 $ 30,593 $23,682 $ 27,586 $ 54,983
======= ======== ======= ======== ========
10
- --------
(1) Traditional revenue includes all non-e-commerce revenue and is derived from
the sale through non-Internet channels of prescription medications and
other medical products to physicians who do not use our software.
(2) E-commerce revenue is derived primarily from the sale of prescription
medications over the Internet to physicians who use our software or who
order products from us primarily over the Internet. E-commerce revenue also
includes revenue from software license fees, computer hardware sales and
leases, and related services.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis together with
"Selected Financial Data" and our consolidated financial statements and related
notes included elsewhere in this report. This discussion contains certain
forward-looking statements that involve risks, uncertainties and assumptions.
You should read the cautionary statements made in this report as applying to
related forward-looking statements wherever they appear in this report. Our
actual results may be materially different from the results we discuss in the
forward-looking statements due to certain factors, including those discussed in
"Risk Factors" and other sections of this report.
Overview
We provide point-of-care medication management and physician decision
support solutions that focus on addressing the needs of physicians, managed
care payers and plans.
From our inception in 1986 through 1996, we focused almost exclusively on
the sale of prepackaged medications to physicians, in particular those with a
high percentage of fee-for-service patients. The advent of managed prescription
benefit programs required providers to obtain reimbursement for medications
dispensed from managed care organizations rather than directly from their
patients. This new reimbursement methodology made it more difficult for our
physician customers to dispense medications to their patient base.
In 1997, under the direction of our new executive management team, we
focused our efforts on the information aspects of medication management,
including the development of technology tools necessary for electronic
prescribing, routing of prescription information and submission of medication
claims for managed care reimbursement. In January 1998, we introduced the first
version of TouchScript that fully incorporated these features. At the same
time, we redirected our sales and marketing efforts away from our traditional
fee-for-service customer base to physicians who have a large percentage of
managed care patients. We recognized that there is a larger market opportunity
among physicians whose patients are covered by managed care plans because the
portion of prescriptions covered by managed care plans is increasing relative
to the portion of fee-for-service prescriptions. Further, we believe that our
technology can give us a competitive advantage where more patients'
prescriptions are covered by managed care plans because our products streamline
the process by which physicians, managed care organizations and patients
interact. In addition, we believe that the managed care market provides us with
the opportunity to realize higher margins on our software products.
We currently derive our revenue from the sale of prepackaged medications,
software licenses, computer hardware, electronic information and education
products and related services. In the years ended December 31, 1998, 1999 and
2000, sales of prepackaged medications represented 97.8%, 92.3% and 71.1%,
respectively, of total revenue.
11
Our shift in focus to physicians who desire technology-based services to
operate successfully in a managed care environment and away from physicians
with a high percentage of fee-for-service patients is reflected in the
composition of our revenue, as depicted in the following table:
Quarter Ended
--------------------------------------------------------------
1999 2000
----------------------------- --------------------------------
June Sept. Dec. Sept.
March 31 30 30 31 March 31 June 30 30 Dec. 31
-------- ------ ------ ------ -------- ------- ------- -------
(Unaudited)
(In thousands)
Traditional revenue..... $5,235 $4,537 $4,035 $4,085 $4,443 $ 4,993 $ 5,134 $ 5,614
E-commerce revenue...... 793 1,855 2,940 4,106 5,204 7,123 9,704 12,768
------ ------ ------ ------ ------ ------- ------- -------
Total revenue....... $6,028 $6,392 $6,975 $8,191 $9,647 $12,116 $14,838 $18,382
====== ====== ====== ====== ====== ======= ======= =======
Traditional revenue includes all non-e-commerce revenue and is derived from
the sale, through non-Internet channels, of prescription medications and other
medical products to physicians who do not use our software. We expect
traditional revenue to represent a decreasing percentage of total revenue in
the future. E-commerce revenue is derived from the sale of prescription
medications over the Internet to physicians who use our software or who order
products from us primarily over the Internet. E-commerce revenue also includes
technology related revenue for software subscriptions, licenses and related
professional services, computer hardware sales and leases, transaction fees, e-
detailing and related services. For the year ended December 31, 2000, sales of
prepackaged medications represented 60.3% of e-commerce revenue. For the year
ended December 31, 2000, 22.7% of e-commerce revenue represented medication
sales over the Internet without the use of TouchScript ordering. While we
expect a portion of future e-commerce revenue to continue to represent a
shifting of traditional revenue, we anticipate that most of the future growth
in e-commerce revenue will be generated by physician practice groups that are
not currently our customers. Factors that we expect will attract future
customers include an interest in physician dispensing, a desire to minimize
financial risk imposed by managed care payers with respect to medications that
they prescribe and concern about the potential liability associated with
medication errors.
We believe that managed care prescription programs will continue to cover an
increasing percentage of patients in the foreseeable future. This trend will
have the effect of reducing the dispensing opportunities of our traditional
dispensing customers because of their inability to submit claims electronically
for reimbursement by managed care payers. This reduction in dispensing
opportunities will reduce the revenue that we have historically recognized from
these customers. Additionally, managed care programs impose reduced
reimbursement rates for the medications dispensed to their plan participants,
thus providing us with a dollar margin per prescription dispensed that is lower
than we have historically experienced. Because TouchScript enables physicians
to submit claims electronically for reimbursement by managed care payers, a
large portion of the medications dispensed by our TouchScript customers is
dispensed to managed care patients. Accordingly, we expect that the fastest
growing portion of our business will provide margins with respect to the sale
of prepackaged medications that are lower than we have historically
experienced. In addition, we expect that seasonal variances in demand for our
products and services will continue. Historically, all other factors aside, our
sales of prepackaged medications have been highest in the fall and winter
months.
To maintain our position in a rapidly changing and increasingly competitive
marketplace, we expect to continue to increase the number of our sales, sales
support, product development and customer service personnel significantly, and,
accordingly, we expect our operating expenses to continue to increase. In
addition, we expect to amortize unearned compensation expense totaling
approximately $1,097,000 through December 31, 2003.
In addition to medication management, we believe that there are other
aspects of the physician's daily work flow that can be effectively addressed
through technology-focused solutions. We have enhanced and intend to continue
to enhance our current offerings by integrating new products and services that
address these needs. In furtherance of this strategy, in May 2000, we acquired
MasterChart, Inc., a software developer providing dictation, integration and
patient record technology, and Medifor, Inc., a provider of Internet-
12
delivered patient education. In connection with these acquisitions, we recorded
goodwill and other intangible assets of approximately $160,500,000, $4,600,000
of which will be amortized over two years, and the balance of which will be
amortized over five years. In 2000, we completed another acquisition that
resulted in additional goodwill of approximately $10,800,000, which is being
amortized over two years.
In addition, on January 8, 2001, we acquired Channelhealth Incorporated in
exchange for approximately 8,600,000 shares of our common stock with a fair
value of approximately $218,400,000 and approximately 493,000 common stock
options with a fair value of approximately $7,600,000 in replacement of
outstanding Channelhealth common stock options. This acquisition will be
accounted for as a purchase and we expect to record goodwill and other
intangible assets equal to a substantial portion of the purchase price. Under
current accounting rules, these intangible assets will be amortized over their
estimated economic life, which ranges from five to 10 years. Additional stock-
based consideration will be granted to the sellers of Channelhealth if certain
revenue targets are achieved during 2002. Those revenue targets, if achieved,
will result in the recording of additional purchase price at the time that the
targets are met. We also anticipate that there will be additional cash required
to fund the ongoing operations of Channelhealth.
We do not believe that inflation has had a material effect on our results of
operations.
In the years ended December 31, 1998, 1999 and 2000, we recorded total
unearned stock compensation of approximately $407,000, $1,850,000 and $0,
respectively, in connection with stock options granted during the period. These
amounts represent the difference between the exercise price of stock option
grants and the deemed fair market value of our common stock at the time of the
grants. These amounts are being amortized over the vesting periods of the
applicable options, resulting in approximately $176,000, $449,000 and $535,000
in selling, general and administrative expenses for the years ended December
31, 1998, 1999 and 2000, respectively. Amortization of unearned compensation
expense for each of the next three fiscal years is expected to be as follows:
Amount
Year Ended (In thousands)
---------- --------------
December 31, 2001.......................................... $496
December 31, 2002.......................................... 485
December 31, 2003.......................................... 116
In March 1999, in order to focus all of management's attention and resources
on its physician medication management business and due to the significant
resources necessary to remain competitive and sustain profitability in the
pharmacy benefit management business, we sold substantially all of the assets,
excluding cash and accounts receivable, of our pharmacy benefit management
business. The total consideration was approximately $7,500,000 in cash at
closing and a contingent payment based upon achieving certain milestones for
the one-year period following the closing. During the year ended December 31,
2000, we received a contingent payment of $4,353,000, net of related expenses.
This business had net sales of $52,866,000 and $14,292,000 in 1998 and 1999,
respectively, while recording an operating profit of $970,000, $642,000 and
$83,000 in 1998, 1999 and 2000, respectively. The profit in 2000 was due to the
recovery of certain receivables previously fully reserved. Our financial
statements and the discussion in Management's Discussion and Analysis of
Financial Condition and Results of Operations reflect the pharmacy benefit
management business as a discontinued operation. In the years ended December
31, 1999 and 2000, we recognized gains on the sale of this business of
$3,547,000 and $4,353,000, respectively, based upon the consideration received.
In 1999, we completed acquisitions through the issuance of 204,771 shares of
our common stock with a value of approximately $2,572,000 and a promissory note
in the principal amount of $650,000, bearing interest at 6% per year and
payable upon the consummation of our initial public offering. We repaid the
promissory note, including accrued interest of $3,000, in August 1999.
On May 9, 2000, we acquired MasterChart, Inc., a software developer
providing dictation, integration and patient record technology, in exchange for
1,617,873 shares of our common stock with a value of
13
approximately $127,400,000 and cash of $5,000,000. Approximately $5,000,000 of
the purchase price was allocated to the value of acquired in-process research
and development that had no alternative future use and was charged against
operations during the three months ended June 30, 2000. In addition,
approximately $4,600,000 of the purchase price was allocated to acquired
software and is being amortized on a straight-line basis over two years, the
software's estimated useful life. Trademarks and goodwill, totaling
approximately $125,600,000, are being amortized on a straight-line basis over
five years.
On May 17, 2000, we acquired Medifor, Inc., a provider of Internet-delivered
patient education. In exchange for all of the outstanding common and preferred
A and B stock of Medifor, Allscripts issued 935,858 shares of its common stock
with a fair value of approximately $34,400,000. In addition, Allscripts issued
142,786 common stock options in replacement of Medifor common stock options
with a fair value of approximately $4,200,000. The fair value of the
replacement common stock options was estimated using the Black-Scholes model.
Approximately $8,700,000 of the purchase price was allocated to the value of
acquired in-process research and development that had no alternative future use
and was charged against operations during the three months ended June 30, 2000.
Trademarks and goodwill totaling $30,300,000 are being amortized on a straight-
line basis over five years.
In 2000, we completed another acquisition through the issuance of 87,484
shares of our common stock and a cash payment of $8,000,000. The acquisition
resulted in goodwill of approximately $10,800,000, which is being amortized on
a straight-line basis over two years.
On January 8, 2001, we completed the acquisition of Channelhealth
Incorporated in exchange for 8,592,996 shares of common stock with a fair value
of approximately $218,400,000, the issuance of approximately 493,000 common
stock options as replacement of outstanding Channelhealth common stock options
with a fair value of approximately $7,600,000 and transaction costs totaling
approximately $4,750,000. We will pay additional stock-based consideration if
certain revenue targets are achieved during 2002.
Results of Operations
The following table shows, for the periods indicated, our results of
operations expressed as a percentage of our revenue:
Year Ended
December 31,
----------------------
1998 1999 2000
----- ----- ------
Revenue............................................... 100.0% 100.0% 100.0%
Cost of revenue....................................... 73.1 79.4 77.3
----- ----- ------
Gross profit.......................................... 26.9 20.6 22.7
Operating expenses:
Selling, general and administrative expenses........ 53.5 74.9 77.7
Amortization of intangibles......................... 1.6 4.9 43.8
Write-off of acquired in-process research and
development........................................ -- -- 25.0
Other operating expenses............................ 1.8 1.2 0.8
----- ----- ------
Loss from operations.................................. (30.0) (60.4) (124.6)
Interest income (expense), net........................ (2.5) 4.4 14.0
Other expense, net.................................... -- -- (1.8)
----- ----- ------
Loss from continuing operations....................... (32.5) (56.0) (112.4)
Income from discontinued operations................... 4.1 2.3 0.2
Gain from sale of discontinued operations............. -- 12.9 7.9
----- ----- ------
Loss before extraordinary items....................... (28.4) (40.8) (104.3)
Extraordinary loss from early extinguishment of debt.. (3.3) -- --
----- ----- ------
Net loss.............................................. (31.7)% (40.8)% (104.3)%
===== ===== ======
14
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenue increased by 99% or $27,397,000 from $27,586,000 in 1999 to
$54,983,000 in 2000. E-commerce revenue increased by 259% or $25,105,000 from
$9,694,000 in 1999 to $34,799,000 in 2000. Traditional revenue increased by 13%
or $2,292,000 from $17,892,000 in 1999 to $20,184,000 in 2000.
The increase in e-commerce revenue reflects increased installations and
utilization of TouchScript, a conversion of traditional revenue as a result of
traditional customers adopting TouchScript and ordering products over the
Internet, revenue generated from our e-Detailing product, revenue generated by
our Medifor and MasterChart acquisitions, an increase in the percentage of
brand drugs sold, which have a higher average selling price than their generic
counterparts, general price inflation of brand and generic medications and
revenue generated from information services. The increase in traditional
revenue reflects general price inflation of brand and generic medications, and
increased sales of pre-packaged medications to new customers obtained through
internal business generation and acquisition and traditional revenue generated
by a 1999 acquisition, offset partially by a conversion of traditional revenue
to e-commerce, as outlined above.
Cost of revenue increased by 94% or $20,609,000 from $21,909,000 in 1999 to
$42,518,000 in 2000 due to increased revenue, higher depreciation expense due
to an increase in the number of customers deploying Touchscript, increased
amortization of acquired software, general price inflation of both brand and
generic products, and increased operating costs at sites where we manage the
dispensary on behalf of the physician. For the twelve months ended December 31,
2000, cost of revenue as a percentage of total revenue decreased from 79.4% in
the prior year period to 77.3% principally due to higher relative margin
contributions from our e-Detailing products, information services and software
license fees, partially offset by increased depreciation, increased operating
costs at sites where we manage the dispensary on behalf of the physician and a
greater percentage of revenue coming from lower margin brand medications.
Selling, general and administrative expenses for the twelve months ended
December 31, 2000 increased by 107% or $22,077,000 from $20,656,000 in 1999 to
$42,733,000 in 2000 due primarily to additional spending for sales and sales
support personnel and related expenses needed to sell, implement and support
TouchScript installations and our e-Detailing product, expenses related to
MasterChart and Medifor operations that were acquired during May 2000 and
TeleMed operations that were acquired during May 1999, additional spending for
TouchScript and Internet product development personnel and related support
expenses, and an increase in non-cash charges related to stock options issued
to non-employees. As a result, selling, general and administrative expenses as
a percentage of total revenue increased to 77.7% for the twelve months ended
December 31, 2000 from 74.9% of total revenue in the prior year period.
Amortization of intangibles for the twelve months ended December 31, 2000
increased by $22,711,000 from $1,351,000 in 1999 to $24,062,000 in 2000. The
increase in amortization relates to the amortization of goodwill and other
intangibles recorded in connection with acquisitions made during 2000, as well
as the amortization of goodwill and other intangibles recorded in connection
with acquisitions made during 1999. For the twelve months ended December 31,
2000, we recorded an expense for the immediate write-off of acquired in-process
research and development related to the Medifor and MasterChart acquisitions in
the amount of $13,729,000.
Other operating expenses for the twelve months ended December 31, 2000
increased $131,000 from $319,000 to $450,000. The expense in 2000 represents a
special charge, consisting primarily of professional fees, related to our
revision of interim period financial results.
Net interest income for the twelve months ended December 31, 2000 was
$7,706,000 as compared to net interest income of $1,216,000 for the prior year
period. The change relates to interest earned on the investment of net proceeds
from our initial public offering in July 1999 and our public offering in March
2000, as well as the repayment of borrowings under our revolving credit
facility with our commercial bank in July 1999.
15
Other expenses for the twelve months ended December 31, 2000 of $1,000,000
reflect a non-cash writedown of an investment in an early stage Internet
software company focused on the college healthcare market.
We have recorded no provision or benefit for income taxes during 2000
because we currently anticipate that the annual effective income tax rate will
be minimal or zero and we have fully reserved our net deferred tax assets.
The operating results of our pharmacy benefit management business, which we
sold in March 1999, have been segregated from continuing operations and
reported as a separate line item on the Consolidated Statements of Operations
under the caption "Income from discontinued operations." Additionally, the gain
we recognized from the sale of this business has been reported as a separate
line item under the caption "Gain from sale of discontinued operations." The
gain for the twelve months ended December 31, 2000 represents final payment of
contingent consideration related to the sale. See "Discontinued Operations"
section for a discussion of these operations.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenue increased by 17% or $3,904,000 from $23,682,000 in 1998 to
$27,586,000 in 1999. E-commerce revenue increased by 621% or $8,350,000 from
$1,344,000 in 1998 to $9,694,000 in 1999. Traditional revenue decreased by 20%
or $4,446,000 from $22,338,000 in 1998 to $17,892,000 in 1999.
The increase in e-commerce revenue reflects a shifting of traditional
revenue as a result of traditional customers ordering products over the
Internet, as well as additional installations and increased use of TouchScript.
The decrease in traditional revenue reflects a shifting of traditional revenue
to e-commerce as outlined above and the attrition of traditional customers, as
well as reduced levels of prepackaged medication dispensing by our traditional
customers due to the increased penetration of managed care prescription
programs. This decrease was partially offset by general price inflation of
brand medications, an increase in the dispensing percentage of brand drugs,
which have a considerably higher average selling price than their generic
counterparts, and revenue generated by a 1999 acquisition.
Cost of revenue increased by 27% or $4,589,000 from $17,320,000 in 1998 to
$21,909,000 in 1999 due to a greater percentage of revenue coming from sales of
higher cost brand products, increased revenue, increased operating costs at
sites where we manage the dispensary on behalf of the physician and increased
costs of technical support. Cost of revenue as a percentage of total revenue
increased from 73.1% in 1998 to 79.4% in 1999 principally due to a greater
percentage of revenue coming from lower margin brand products and increased
operating costs at sites where we manage the dispensary on behalf of the
physician. This percentage increase was partially offset by higher relative
percentage margin contributions from software and TeleMed revenues.
Selling, general and administrative expenses increased by 63% or $7,998,000
from $12,658,000 in 1998 to $20,656,000 in 1999 due primarily to additional
spending for sales and sales support personnel as well as related expenses
needed to sell, implement and support TouchScript installations, additional
spending for TouchScript and Internet product development personnel and related
support expenses, expenses related to TeleMed operations, increased recruiting
expenses, increased legal costs and additional stock compensation expense. In
1999, we recorded unearned stock compensation of approximately $1,850,000,
representing the difference between the exercise price of stock option grants
and the deemed fair market value of our common stock at the time of the grants.
This amount will be amortized to expense over the vesting periods of the
applicable grants and is expected to be fully amortized by 2003. We also
incurred non-cash compensation expense of $293,000 in 1999 related to stock
options issued to consultants of Allscripts. As a result, selling, general and
administrative expenses as a percentage of total revenue increased from 53.4%
in 1998 to 74.9% in 1999.
Amortization of intangibles increased by 263% or $979,000 from $372,000 in
1998 to $1,351,000 in 1999. The increase in amortization relates to the
amortization of the goodwill recorded in the TeleMed acquisition, which was
completed in May 1999, and the Shopping@Home acquisition, which was completed
in June 1999.
16
Other operating expenses decreased by 26% or $111,000 from $430,000 in 1998
to $319,000 in 1999. Other operating expenses in 1999 of $319,000 reflect a
non-cash charge related to the issuance of common stock upon the closing of our
initial public offering in accordance with a contingent payment obligation
related to an acquisition we made in 1995. The 1998 expense consisted entirely
of severance costs related to the refocusing of our sales efforts.
Net interest income for 1999 was $1,216,000 as compared to net interest
expense of $596,000 for 1998. This increase relates to interest earned on the
investment of net proceeds from our initial public offering in July 1999, the
exchange of subordinated convertible debentures for redeemable preferred stock
in April 1998, the repayment of the term loan we had with our commercial bank
in April 1998 and the repayment of borrowings on our revolving credit facility
with our commercial bank in July 1999.
We have recorded no provision or benefit for income taxes for the twelve
months ended December 31, 1999 because we anticipate that the annual effective
income tax rate will be minimal or zero, and we have fully reserved all of our
deferred tax assets.
The operating results of our pharmacy benefit management business, which we
sold in March 1999, have been segregated from continuing operations and
reported as a separate line item on the Consolidated Statements of Operations
under the caption "Income from discontinued operations." Additionally, the gain
we recognized from the sale of this business has been reported as a separate
line item under the caption "Gain from sale of discontinued operations." See
"Discontinued Operations" section for a discussion of these operations.
17
Selected Quarterly Operating Results
Our quarterly results of operations have generally been seasonal, with a
greater proportion of our revenue typically occurring in the first and fourth
quarters. This seasonality is primarily attributable to the fact that more
prescriptions are written in the winter months.
The following table shows our quarterly unaudited consolidated financial
information for the eight quarters ended December 31, 2000 and each item as a
percentage of total revenue. We have prepared this information on the same
basis as the annual information presented in other sections of this report. In
management's opinion, this information reflects all adjustments, all of which
are of a normal recurring nature, that are necessary for a fair presentation of
the results for these periods. You should not rely on the operating results for
any quarter to predict the results for any subsequent period or for the entire
fiscal year. You should be aware of possible variances in our future quarterly
results. See "Risk Factors--Risks Related to Our Stock--Our quarterly operating
results may vary."
Quarter Ended
---------------------------------------------------------------------------------
(unaudited)
1999 2000
------------------------------------- -----------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- -------- -------- --------
(In thousands)
Statements of Operations
Data:
Revenue................. $6,028 $ 6,392 $ 6,975 $ 8,191 $ 9,647 $ 12,116 $ 14,838 $ 18,382
Cost of revenue......... 4,565 5,143 5,686 6,515 7,597 9,492 11,654 13,775
------ ------- ------- ------- ------- -------- -------- --------
Gross profit............ 1,463 1,249 1,289 1,676 2,050 2,624 3,184 4,607
Operating expenses:
Selling, general and
administrative
expenses.............. 3,550 4,554 5,698 6,854 8,945 10,748 11,624 11,416
Amortization of
intangibles........... 93 175 477 606 574 5,443 9,020 9,025
Write-off of acquired
in-process research
and development....... -- -- -- -- -- 13,729 -- --
Other operating
expenses.............. -- -- 319 -- -- -- -- 450
------ ------- ------- ------- ------- -------- -------- --------
Loss from operations.... (2,180) (3,480) (5,205) (5,784) (7,469) (27,296) (17,460) (16,284)
Interest income
(expense), net......... (109) (91) 603 813 1,183 2,272 2,247 2,004
Other expense, net...... -- -- -- -- -- -- -- (1,000)
------ ------- ------- ------- ------- -------- -------- --------
Loss from continuing
operations............. (2,289) (3,571) (4,602) (4,971) (6,286) (25,024) (15,213) (15,280)
Income from discontinued
operations............. 26 -- 616 -- 83 -- -- --
Gain from sale of
discontinued
operations............. 3,547 -- -- -- 4,160 193 -- --
------ ------- ------- ------- ------- -------- -------- --------
Net income (loss)....... $1,284 $(3,571) $(3,986) $(4,971) $(2,043) $(24,831) $(15,213) $(15,280)
====== ======= ======= ======= ======= ======== ======== ========
Quarter Ended
---------------------------------------------------------------------------------
(unaudited)
1999 2000
------------------------------------- -----------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- -------- -------- --------
As a Percentage of
Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 75.7 80.5 81.5 79.5 78.7 78.3 78.6 74.9
------ ------- ------- ------- ------- -------- -------- --------
Gross profit............ 24.3 19.5 18.5 20.5 21.3 21.7 21.4 25.1
Operating expenses:
Selling, general and
administrative
expenses.............. 58.9 71.3 81.6 83.7 92.7 88.8 78.3 62.1
Amortization of
intangibles........... 1.5 2.7 6.8 7.4 6.0 44.9 60.8 49.1
Write-off of acquired
in-process research
and development....... -- -- -- -- -- 113.3 -- --
Other operating
expenses.............. -- -- 4.6 -- -- -- -- 2.5
------ ------- ------- ------- ------- -------- -------- --------
Loss from operations.... (36.1) (54.5) (74.5) (70.6) (77.4) (225.3) (117.7) (88.6)
Interest income
(expense), net......... (1.8) (1.4) 8.6 9.9 12.3 18.8 15.2 10.9
Other expense, net...... -- -- -- -- -- -- -- (5.4)
------ ------- ------- ------- ------- -------- -------- --------
Loss from continuing
operations............. (37.9) (55.9) (65.9) (60.7) (65.1) (206.5) (102.5) (83.1)
Income from discontinued
operations............. 0.4 -- 8.8 -- 0.8 -- -- --
Gain from sale of
discontinued
operations............. 58.8 -- -- -- 43.1 1.5 -- --
------ ------- ------- ------- ------- -------- -------- --------
Net income (loss)....... 21.3% (55.9)% (57.1)% (60.7)% (21.2)% (205.0)% (102.5)% (83.1)%
====== ======= ======= ======= ======= ======== ======== ========
18
Discontinued Operations
The operating results of the pharmacy benefit management segment have been
segregated from continuing operations and reported as a separate line item on
the Consolidated Statements of Operations under the caption "Income from
discontinued operations." Additionally, we have reclassified our prior
financial statements to present the operating results of the pharmacy benefit
management business as a discontinued operation.
Operating results from discontinued operations were as follows:
1998 1999 2000
------- ------- ----
(In thousands)
Revenue............................................. $52,866 $14,292 $--
Cost of revenue..................................... 49,313 13,378 --
------- ------- ----
Gross profit.................................... 3,553 914 --
Selling, general and administrative expenses........ 2,583 272 (83)
------- ------- ----
Operating income.................................... 970 642 83
------- ------- ----
Income from discontinued operations................. $ 970 $ 642 $ 83
======= ======= ====
Revenue from discontinued operations decreased by 73.0% or $38,574,000 from
$52,866,000 in 1998 to $14,292,000 in 1999 due to the sale of the pharmacy
benefit management business in March 1999.
Cost of revenue decreased by 72.9% or $35,935,000 from $49,313,000 in 1998
to $13,378,000 in 1999 due to the sale of the pharmacy benefit management
business in 1999 as noted above. Cost of revenue as a percentage of revenue
increased from 93.3% in 1998 to 93.6% in 1999.
Selling, general and administrative expenses decreased by $2,311,000 or
89.5% from $2,583,000 in 1998 to $272,000 in 1999, primarily due to the sale of
the pharmacy benefit management business in March 1999, as noted above.
Selling, general and administrative expenses in 2000 included the recovery of
certain receivables that were previously fully reserved.
Liquidity and Capital Resources
At December 31, 2000, our principal sources of liquidity consisted of
$76,513,000 of cash and cash equivalents and $43,324,000 of marketable
securities. Historically, our principal sources of funds were bank borrowings,
the sale of subordinated debt, redeemable preferred stock and equity
securities, and operating cash flow generated by our pharmacy benefit
management business, which we sold in March 1999. We issued securities for net
cash proceeds totaling $8,930,000 in 1998, $102,709,000 in 1999 and $99,766,000
in 2000. We have used these capital resources to fund operating losses, working
capital, capital expenditures, acquisitions and retirement of debt. At December
31, 2000, we had an accumulated deficit of $119,375,000.
Net cash used in operating activities increased by $12,286,000 from
$12,693,000 for 1999 to $24,979,000 for 2000, of which $4,277,000 relates to an
increase in operating losses and $8,009,000 reflects an increase in cash used
for net working capital. Depreciation and amortization increased by $26,115,000
to $28,632,000 for the twelve months ended December 31, 2000, compared to
$2,517,000 for the twelve months ended December 31, 1999, primarily due to
amortization expenses related to recent acquisitions. Accounts receivable
increased by $8,449,000 in the twelve months ended December 31, 2000, versus a
decrease of $4,828,000 in the same period last year, primarily due to increased
sales volume in 2000 and the sale of the pharmacy benefit management business
in March 1999. Interest receivable increased $951,000 in the twelve months
ended December 31, 2000, due to higher investments in cash equivalents and
marketable securities. Inventories increased by $1,525,000 in the twelve months
ended December 31, 2000, versus an increase of $1,353,000 for the same period
last year due to increased levels of activity. Prepaid expenses and other
assets increased by $604,000 in 1999 to $2,782,000 in 2000 primarily due to the
capitalization of expenses related to the
19
Channelhealth acquisition, which was closed on January 8, 2001, and increased
prepaid commissions and insurance. Accounts payable increased by $2,366,000 in
the twelve months ended December 31, 2000, versus a decrease of $3,999,000 in
the same period the previous year, primarily due to increased levels of
activity and the sale of the pharmacy benefit management business in March
1999. Accrued expenses and deferred revenue increased by $1,780,000 in the
twelve months ended December 31, 2000, compared to a decrease of $10,000 in the
comparable 1999 period, primarily due to an increase in deferred revenue from
e-detailing, information, dictation and document management products, as well
as an increase in other accrued expenses due to increased sales volume in 2000.
Accrued compensation increased $540,000 in the twelve months ended December 31,
2000, versus an increase of $261,000 in the same period in the prior year,
primarily due to an increase in commissions and incentive payments offset by a
reduction in amounts owed to employees for unused vacation. During 2000,
Allscripts also incurred non-cash charges of $751,000 related to stock options
issued to non-employees, $13,729,000 related to the write-off of in-process
research and development costs and $1,000,000 related to the write-down of an
investment.
Net cash used in investing activities increased to $47,037,000 in the twelve
months ended December 31, 2000 from $11,959,000 in the same period in the prior
year, primarily as a result of net cash used to invest in marketable securities
of $27,816,000 compared to $15,049,000 for the same period in 1999. In
addition, net cash used for acquisitions was $13,223,000 for the twelve months
ended December 31, 2000, compared to $46,000 of net cash provided by
acquisitions for the same period in 1999. Capital expenditures increased to
$9,351,000 for the twelve months ended December 31, 2000, compared to
$4,428,000 for the same period in 1999. The increased level of expenditures in
2000 relates to facilities expansion and improvements, increased purchases of
TouchScript computer systems and an increase in capital outlays to accommodate
new employees. Currently, we have no material commitments for capital
expenditures, although we anticipate ongoing capital expenditures in the
ordinary course of business.
On July 28, 1999, Allscripts completed the initial public offering of its
common stock. Allscripts issued 7,000,000 shares of common stock at an initial
public offering price of $16.00 per share and all outstanding shares of
convertible preferred stock automatically converted into 2,977,483 shares of
common stock. The initial public offering resulted in gross proceeds of
$112,000,000; $7,840,000 of which was applied to the underwriting discount and
approximately $1,451,000 of which was applied to related offering expenses. In
addition, Allscripts used approximately $34,745,000 of the proceeds to redeem
all outstanding shares of its Series H, I and J Redeemable Preferred Stock,
plus accrued dividends thereon, $3,900,000 to repay advances under its
revolving line of credit with its commercial bank and approximately $653,000 to
repay a promissory note, including accrued interest, issued as consideration
for a 1999 acquisition.
On March 10, 2000, we completed a public offering of 1,452,000 shares of our
common stock at an initial price to the public of $73.00 per share, resulting
in gross proceeds of $105,996,000, $5,561,000 of which was applied to the
underwriting discount and approximately $669,000 of which was applied to
related offering expenses. The remaining net proceeds of approximately
$99,766,000 were invested in short-term, interest-bearing, investment grade
securities pending their use for general corporate purposes and working
capital.
Net cash provided by financing activities increased to $107,968,000 for the
twelve months ended December 31, 2000, compared to $64,495,000 for the twelve
months ended December 31, 1999, primarily due to a $34,745,000 payment in
connection with the mandatory redemption of preferred stock, which occurred in
1999, and the receipt of $9,983,000, net of related expenses, related to a
private placement of common stock in March 2000.
At December 31, 2000, we had operating loss carryforwards available for
federal income tax reporting purposes of approximately $56,587,000 and expect
to generate taxable losses in 2001. The operating loss carryforwards expire
from 2002 to 2020. Our ability to use these operating loss carryforwards to
offset future taxable income depends on a variety of factors, including
possible limitations on usage under Internal Revenue Code Section 382. Section
382 imposes an annual limitation on the future utilization of operating loss
carryforwards due to changes in ownership resulting from the issuance of common
shares, stock options, warrants and preferred shares.
20
We believe that our existing cash, cash equivalents, and marketable
securities will be sufficient to meet the anticipated cash needs of our current
business for the next twelve months. However, any projections of future cash
needs and cash flows are subject to substantial uncertainty. We will, from time
to time, consider the acquisition of, or investment in, complementary
businesses, products, services and technologies, which might affect our
liquidity requirements or cause us to issue additional equity or debt
securities. There can be no assurance that financing will be available in the
amounts or on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 133, as amended,
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective in the first quarter of 2001. We currently do not
invest in derivative investments nor do we engage in hedging activities. We do
not expect our adoption of FAS No. 133 to have a material effect on our
financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The adoption of SAB 101 during the fourth quarter of 2000
did not have a material effect on our financial position or results of
operations.
Risk Factors
You should carefully consider the risks and uncertainties described below
and other information in this report. These are not the only risks and
uncertainties that we face. Additional risks and uncertainties that we do not
currently know about or that we currently believe are immaterial may also harm
our business operations. If any of these risks or uncertainties occurs, it
could have a material adverse effect on our business.
Risks Related to Allscripts Healthcare Solutions, Inc.
If physicians do not accept our products and services, our growth will be
impaired.
Our business model depends on our ability to sell the TouchScript system and
Physician Channel applications and services to physicians and other healthcare
providers and to generate usage by a large number of physicians. We have not
achieved this goal with previous or currently available versions of the
TouchScript system or the Physician Channel applications and services.
Physician acceptance of our products and services will require physicians to
adopt different behavior patterns and new methods of conducting business and
exchanging information. We cannot assure you that physicians will integrate our
products and services into their office work flow or that participants in the
pharmaceutical healthcare market will accept our products and services as a
replacement for traditional methods of conducting healthcare transactions.
Achieving market acceptance for our products and services will require
substantial marketing efforts and the expenditure of significant financial and
other resources to create awareness and demand by participants in the
pharmaceutical healthcare industry. If we fail to achieve broad acceptance of
our products and services by physicians and other healthcare participants or to
position our services as a preferred method for pharmaceutical healthcare
delivery and information management, our prospects for growth will be
diminished.
We are currently experiencing losses and we may not become profitable in the
future.
We are currently experiencing losses and cannot assure you that we will
become profitable in the foreseeable future, if ever. For the year ended
December 31, 2000, Allscripts, Inc. had a net loss of $57,367,000.
Historically, Channelhealth has also incurred significant net losses, and since
Channelhealth has
21
only recently implemented its business strategy, we expect Channelhealth to
continue to incur losses at least through 2001. Additionally, Channelhealth has
spent significant amounts on research and development and sales and marketing
efforts, and we expect these costs to continue. We cannot be certain that we
will achieve profitability, and even if we do achieve profitability, we may be
unable to sustain or increase our profitability in the future.
Because our business model is new and unproven, our operating history is not
indicative of our future performance, and our business is difficult to
evaluate.
Because we have not yet successfully implemented our business model, we do
not have an operating history upon which you can evaluate our prospects, and
you should not rely upon our past performance to predict our future
performance. Since its inception as an independent company in September 1999,
Channelhealth's operating activities have consisted largely of developing the
software applications necessary to provide its services, and Channelhealth has
only recently begun to sell its software and services to provider
organizations. In addition, Channelhealth's long-term success will depend
largely on the success of its strategic relationships and the strategic
alliance between us and IDX. Channelhealth is still in the early stages of its
current strategic relationships and we are unable to predict whether the goals
of those relationships will be achieved. Channelhealth's limited operating
history and limited experience with its strategic business partners make it
difficult to evaluate its business and its prospects. Our operating history is
not necessarily indicative of our future performance under our new business
model. In attempting to implement our business model, we are significantly
changing our business operations, sales and implementation practices, customer
service and support operations and management focus. We are also facing new
risks and challenges, including a lack of meaningful historical financial data
upon which to plan future budgets, the need to develop strategic relationships
and other risks described below.
We may face difficulties in integrating the operations and products of
Channelhealth and Allscripts, Inc.
Channelhealth and Allscripts, Inc. operated separately until January 8,
2001. Our management team does not have experience with the combined business.
Integration of product lines will involve consolidation of products with
duplicative functionality, coordination of research and development activities
and convergence of the technologies supporting the various products. We may not
be able to integrate the products, product development, information systems and
operations of Channelhealth and Allscripts, Inc. without a loss of key
officers, employees, customers or suppliers, a loss of revenues or an increase
in net loss, an increase in operating or other costs or other difficulties. In
addition, we may not be able to realize the operating efficiencies, the
material expansion of our customer base to IDX customers or the other benefits
expected from the merger and related transactions such as our strategic
alliance with IDX. Any unexpected costs or delays incurred in connection with
this integration could have an adverse effect on our business, results of
operations or financial condition.
The business separation of Channelhealth from IDX may impair assets.
The separation of Channelhealth from the rest of IDX's businesses, assets
and liabilities pursuant to the asset purchase agreement between IDX and
Channelhealth required the transfer of assets, including intellectual property
rights, between Channelhealth and IDX. Some of these transfers may have
triggered Channelhealth liabilities that are not yet known by Channelhealth.
Generally, IDX will be responsible for these liabilities but IDX would not be
required to indemnify Channelhealth for any losses that are consequential, in
the nature of lost profits, diminution in value, damage to reputation or the
like, special or punitive damages.
If we are unable to maintain existing relationships and create new
relationships with managed care payers, our prospects for growth will suffer.
We rely on managed care organizations to reimburse our physician customers
for prescription medications dispensed in their offices. While many of the
leading managed care payers and pharmacy benefit managers
22
currently reimburse our physicians for in-office dispensing, none of these
payers is under a long-term obligation to do so. If we are unable to increase
the number of managed care payers that reimburse for in-office dispensing, or
if some or all of the payers who currently reimburse physicians decline to do
so in the future, utilization of our products and, therefore, our growth will
be impaired.
Our growth and revenues could suffer if we are unable to enter into and
maintain relationships with IDX customers.
We seek to increase Channelhealth's subscriber base through targeting
provider organizations that use IDX practice management systems or other IDX
services, and affiliates of these organizations. Channelhealth's services use
the Web FrameWork technology, which it licenses from IDX, and which enables its
software applications and services to be tightly integrated with IDX practice
management systems and provide real-time synchronization of data. If
Channelhealth's relationship with IDX terminates, its services might not be as
attractive to IDX customers and Channelhealth may not have access to this
potential customer base, IDX might enter into arrangements that would allow
Channelhealth's competitors to utilize IDX technology and IDX could compete
against Channelhealth. If any of these situations were to occur, our expected
revenues may be lower, our business may be harmed and our stock price may fall.
Our business will be harmed if we cannot maintain the strategic alliance
agreement and the cross license agreement with IDX.
Upon completion of the mergers, we entered into a 10-year strategic alliance
agreement with IDX pursuant to which we and IDX agreed to coordinate product
development and align our respective marketing processes. Under this agreement
IDX granted us the exclusive right to market, sell, license and distribute
ambulatory point-of-care and clinical application products to IDX customers.
This agreement does not, however, limit IDX's continued development and
distribution of its own "LastWord" or radiology products and services. Our
business strategy includes targeting current and prospective IDX customers and
their affiliates. If we fail to successfully implement that business strategy,
we may not be able to achieve projected results or support the price paid for
Channelhealth. If the strategic alliance agreement is terminated, we would lose
access to an important customer base. After the expiration or termination of
the strategic alliance agreement, we may not be able to align with another
company to market and distribute our products on as favorable a basis as that
represented by the IDX strategic alliance. This would harm our growth and
revenue. In addition, prior to the termination of this agreement, we cannot
allow certain specified IDX direct competitors to market, distribute or sell
our or Channelhealth's services, even if that agreement would benefit our
business.
Also upon completion of the mergers, Channelhealth entered into an amended
and restated cross license and software maintenance agreement with IDX pursuant
to which Channelhealth granted IDX a license to use, market and sublicense its
products combined with IDX products, and IDX granted Channelhealth a license to
use, market and sublicense IDX software for use with Channelhealth products. If
this agreement is terminated, Channelhealth will not have access to IDX
software, which would harm our ability to integrate our services with IDX
systems and provide real-time data synchronization. This would make
Channelhealth's systems less desirable to IDX customers and would harm its
business.
If we are unable to successfully introduce new products, our business prospects
will be impaired.
The successful implementation of our business model depends on our ability
to introduce new products and to introduce these new products on schedule. We
cannot assure you that we will be able to introduce new products or our
products currently under development on schedule, or at all. In addition, early
releases of software often contain errors or defects. We cannot assure you
that, despite our extensive testing, errors will not be found in our new
product releases and services before or after commercial release, which would
result in product redevelopment costs and loss of, or delay in, market
acceptance. A failure by us to introduce planned products or other new products
or to introduce these products on schedule could have a material adverse effect
on our business prospects.
23
Our business will not be successful unless we establish and maintain strategic
relationships.
To be successful, we must establish and maintain strategic relationships
with leaders in a number of healthcare and Internet industry segments. This is
critical to our success because we believe that these relationships will enable
us to:
. extend the reach of our products and services to a larger number of
physicians and to other participants in the healthcare industry;
. develop and deploy new products;
. further enhance the Allscripts and Channelhealth brands; and
. generate additional revenue.
Entering into strategic relationships is complicated because some of our
current and future strategic partners may decide to compete with us in some or
all of our markets. In addition, we may not be able to establish relationships
with key participants in the healthcare industry if we have relationships with
their competitors. Moreover, many potential strategic partners have resisted,
and may continue to resist, working with us until our products and services
have achieved widespread market acceptance.
Once we have established strategic relationships, we will depend on our
partners' ability to generate increased acceptance and use of our products and
services. To date, we have established only a limited number of strategic
relationships, and many of these relationships, are in the early stages of
development and may not achieve the objectives that we seek. On June 8, 2000,
Channelhealth and IDX entered into agreements with Healtheon/WebMD Corp.
pursuant to which Healtheon/WebMD agreed to provide electronic transaction and
content services to Channelhealth and IDX. Pursuant to the agreement,
Healtheon/WebMD's content is to be integrated into Channelhealth's Physician
Channel and Patient Channel Internet services. Healtheon/WebMD further
committed to a multi-million dollar campaign promoting IDX and Channelhealth
products and services that incorporate Healtheon/WebMD content and
transactions. Healtheon/WebMD has recently informed IDX that it believes
Channelhealth and IDX will be unable to perform their obligations to
Healtheon/WebMD now that a strategic alliance between IDX and us has been
consummated. Healtheon/WebMD also stated that it would seek to terminate the
Channelhealth agreement and would propose a "restructured" relationship with
IDX. We believe that Channelhealth's and IDX's performance will not be impaired
by the strategic alliance with us and that Healtheon/WebMD does not have a
basis for unilaterally terminating the Channelhealth agreement or restructuring
the IDX agreement. In addition, pursuant to the strategic alliance agreement
between IDX and us, we and IDX each agree not to take any action that would
cause a default under or termination of the agreement between Channelhealth and
Healtheon/WebMD.
We have limited experience in establishing and maintaining strategic
relationships with healthcare and Internet industry participants. If we lose
any of these strategic relationships or fail to establish additional
relationships, or if our strategic relationships fail to benefit us as
expected, we may not be able to execute our business plan, and our business
will suffer. In the event the Healtheon/WebMD agreement is terminated, our
expected revenues for 2001 may be significantly lower than currently
anticipated, our business may be harmed and our stock price may fall.
If potential customers take a long time to evaluate the purchase of our
products and services, we could incur additional selling expenses and require
additional working capital.
The length of the sales cycle for our current TouchScript product and
Physician Channel services depend on a number of factors, including the nature
and size of the potential customer and the extent of the commitment being made
by the potential customer, and is difficult to predict. Our marketing efforts
with respect to large healthcare organizations generally involve a lengthy
sales cycle due to these organizations' complex decision-making processes. If
potential customers take longer than we expect to decide whether to purchase
our solutions, our selling expenses could increase, and we may need to raise
additional capital sooner than we would otherwise need to.
24
If we cannot keep pace with advances in technology, our business could be
harmed.
If we cannot adapt to changing technologies, our products and services may
become obsolete, and our business could suffer. Because the Internet and
healthcare information markets are characterized by rapid technological change,
we may be unable to anticipate changes in our current and potential customers'
requirements that could make our existing technology obsolete. Our success will
depend, in part, on our ability to continue to enhance our existing products
and services, develop new technology that addresses the increasingly
sophisticated and varied needs of our prospective customers, license leading
technologies and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development
of our proprietary technology entails significant technical and business risks.
We may not be successful in using new technologies effectively or adapting our
proprietary technology to evolving customer requirements or emerging industry
standards.
Our future success depends upon our ability to grow, and if we are unable to
manage our growth effectively, we may incur unexpected expenses and be unable
to meet our customers' requirements.
We will need to expand our operations if we successfully achieve market
acceptance for our products and services. We cannot be certain that our
systems, procedures, controls and existing space will be adequate to support
expansion of our operations. Our future operating results will depend on the
ability of our officers and key employees to manage changing business
conditions and to implement and improve our technical, administrative,
financial control and reporting systems. An unexpectedly large increase in the
volume or pace of traffic on our web site or the number of orders placed by
customers may require us to expand and further upgrade our technology. We may
not be able to project the rate or timing of increases in the use of our web
site accurately or to expand and upgrade our systems and infrastructure to
accommodate these increases. Difficulties in managing any future growth could
have a significant negative impact on our business because we may incur
unexpected expenses and be unable to meet our customers' requirements.
If we lose the services of our key personnel, we may be unable to replace them,
and our business could be negatively affected.
Our success depends in large part on the continued service of our management
and other key personnel and our ability to continue to attract, motivate and
retain highly qualified employees. In particular, the services of Glen E.
Tullman, our Chairman and Chief Executive Officer, and David B. Mullen, our
President and Chief Financial Officer, are integral to the execution of our
business strategy. If one or more of our key employees leaves our employment we
will have to find a replacement with the combination of skills and attributes
necessary to execute our strategy. Because competition for skilled employees is
intense, and the process of finding qualified individuals can be lengthy and
expensive, we believe that the loss of the services of key personnel could
negatively affect our business, financial condition and results of operations.
If we are unable to implement our acquisition strategy successfully, our
ability to expand our product and service offerings and our customer base may
be limited.
We regularly evaluate acquisition opportunities. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
services, products and personnel of the acquired company, the diversion of
management's attention from other business concerns, entry into markets in
which we have little or no direct prior experience, the potential loss of key
employees of the acquired company and our inability to maintain the goodwill of
the acquired businesses. In order to expand our product and service offerings
and grow our business by reaching new customers, we may continue to acquire
businesses that we believe are complementary. The successful implementation of
this strategy depends on our ability to identify suitable acquisition
candidates, acquire companies on acceptable terms, integrate their operations
and technology successfully with our own and maintain the goodwill of the
acquired business. We are unable to predict whether or when any prospective
acquisition candidate will become available or the likelihood that any
acquisition will be completed. Moreover, in pursuing acquisition opportunities,
we may compete for acquisition
25
targets with other companies with similar growth strategies. Some of these
competitors may be larger and have greater financial and other resources than
we have. Competition for these acquisition targets could also result in
increased prices of acquisition targets.
Future acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the assumption of known and
unknown liabilities, the write off of software development costs and the
amortization of expenses related to goodwill and other intangible assets, all
of which could have a material adverse effect on our business, financial
condition, operating results and prospects. We have taken, and in the future
may take, charges against earnings in connection with acquisitions. The costs
and expenses incurred may exceed the estimates upon which we based these
charges.
Our business depends on our intellectual property rights, and if we are unable
to protect them, our competitive position will suffer.
Our business plan is predicated on our proprietary systems and technology,
including TouchScript and the Physician Channel applications and services. We
protect our proprietary rights through a combination of trademark, trade secret
and copyright law, confidentiality agreements and technical measures. We
generally enter into non-disclosure agreements with our employees and
consultants and limit access to our trade secrets and technology. We cannot
assure you that the steps we have taken will prevent misappropriation of
technology. Misappropriation of our intellectual property would have a material
adverse effect on our competitive position. In addition, we may have to engage
in litigation in the future to enforce or protect our intellectual property
rights or to defend against claims of invalidity, and we may incur substantial
costs as a result.
If we are deemed to infringe on the proprietary rights of third parties, we
could incur unanticipated expense and be prevented from providing our products
and services.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our applications
overlaps with competitive products. While we do not believe that we have
infringed or are infringing on any valid proprietary rights of third parties,
an infringement claim has been asserted against us, and we cannot assure you
that additional infringement claims will not be asserted against us or that
those claims will be unsuccessful. We could incur substantial costs and
diversion of management resources defending any infringement claims.
Furthermore, a party making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services. In addition, we
cannot assure you that licenses for any intellectual property of third parties
that might be required for our products or services will be available on
commercially reasonable terms, or at all.
Factors beyond our control could cause interruptions in our operations, which
would adversely affect our reputation in the marketplace and our results of
operations.
To succeed, we must be able to operate our systems without interruption.
Certain of our communications and information services are provided through our
service providers. Our operations are vulnerable to interruption by damage from
a variety of sources, many of which are not within our control, including:
. power loss and telecommunications failures;
. software and hardware errors, failures or crashes;
. computer viruses and similar disruptive problems; and
. fire, flood and other natural disasters.
We have no comprehensive plans for these contingencies. Any significant
interruptions in our services would damage our reputation in the marketplace
and have a negative impact on our results of operations.
26
We may be liable for use of data we provide.
We provide data for use by healthcare providers in treating patients. Third-
party contractors provide us with most of this data. Although no claims have
been brought against us alleging injuries related to the use of our data,
claims may be made in the future. While we maintain product liability insurance
coverage in an amount that we believe is sufficient for our business, we cannot
assure you that this coverage will prove to be adequate or will continue to be
available on acceptable terms, if at all. A claim brought against us that is
uninsured or under-insured could materially harm our financial condition.
If our security is breached, we could be subject to liability, and people could
be deterred from using our services.
The difficulty of securely transmitting confidential information over the
Internet has been a significant barrier to conducting e-commerce and engaging
in sensitive communications over the Internet. Our strategy relies on the use
of the Internet to transmit confidential information. We believe that any well-
publicized compromise of Internet security may deter people from using the
Internet for these purposes, and from using our system to conduct transactions
that involve transmitting confidential healthcare information.
It is also possible that third parties could penetrate our network security
or otherwise misappropriate patient information and other data. If this
happens, our operations could be interrupted, and we could be subject to
liability. We may have to devote significant financial and other resources to
protect against security breaches or to alleviate problems caused by breaches.
We could face financial loss, litigation and other liabilities to the extent
that our activities or the activities of third-party contractors involve the
storage and transmission of confidential information like patient records or
credit information. In addition, we could incur additional expenses when and if
the new rules recently published by the U.S. Department of Health and Human
Services regarding the use of personal information become effective.
If we are unable to obtain additional financing for our future needs, our
growth prospects and our ability to respond to competitive pressures will be
impaired.
We cannot be certain that additional financing will be available on
favorable terms, or at all. If adequate financing is not available or is not
available on acceptable terms, our ability to fund our expansion, take
advantage of potential acquisition opportunities, develop or enhance services
or products, or respond to competitive pressures would be significantly
limited.
If our content and service providers fail to perform adequately, our reputation
in the marketplace and results of operations could be adversely affected.
We depend on independent content and service providers for many of the
benefits we provide through our TouchScript system and our Physician Channel
applications and services, including the maintenance of managed care pharmacy
guidelines, drug interaction reviews and the routing of transaction data to
third-party payers. Any problems with our providers that result in
interruptions of our services or a failure of our services to function as
desired could damage our reputation in the marketplace and have a material
adverse effect on our results of operations. We may have no means of replacing
content or services on a timely basis or at all if they are inadequate or in
the event of a service interruption or failure.
We also expect to rely on independent content providers for the majority of
the clinical, educational and other healthcare information that we plan to
provide on our web site. In addition, we will depend on our content providers
to deliver high quality content from reliable sources and to continually
upgrade their content in response to demand and evolving healthcare industry
trends. Any failure by these parties to develop and maintain high quality,
attractive content could impair the value of the Allscripts and Channelhealth
brands and our results of operations.
27
If third-party payers force us to reduce our prices, our results of operations
could suffer.
We expect to derive a significant portion of our revenue from the sale,
including over the Internet, of prepackaged medications to physicians. We may
be subject to pricing pressures with respect to our future sales of prepackaged
medications arising from various sources, including practices of managed care
organizations and any governmental action requiring or allowing pharmaceutical
reimbursement under Medicare. If our pricing of prepackaged medications
experiences significant downward pressure, our business will be less
profitable.
If we incur costs exceeding our insurance coverage in lawsuits pending against
us or that are brought against us in the future, it could materially adversely
affect our financial condition.
Allscripts is a defendant in numerous multi-defendant lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and phentermine. In
addition, Allscripts and certain members of management are defendants in
shareholder class action litigation. While we do not believe we or our
management have any significant liability in these lawsuits, in the event we or
members of our management were found liable in these lawsuits or in any other
lawsuits filed against us in the future, and if our insurance coverage were
inadequate to satisfy these liabilities, it could have a material adverse
effect on our financial condition. See "Legal Proceedings".
If our principal supplier fails or is unable to perform its contract with us,
we may be unable to meet our commitments to our customers.
We currently purchase a majority of the medications that we repackage from
McKesson HBOC, Inc. We have an agreement with this supplier that expires in
September 2001. If we do not meet certain minimum purchasing requirements,
McKesson may increase the prices that we pay under this agreement, in which
case we would have the option to terminate the agreement. Although we believe
that there are a number of other sources of supply of medications, if McKesson
fails or is unable to perform under our agreement, particularly at certain
critical times during the year, we may be unable to meet our commitments to our
customers, and our relationships with our customers could suffer.
Because of anti-takeover provisions under Delaware law and in our certificate
of incorporation and by-laws, takeovers may be more difficult, possibly
preventing you from obtaining optimal share price.
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of us. For example, our certificate of incorporation and by-laws provide for a
classified Board of Directors and allow us to issue preferred stock with rights
senior to those of the common stock without any further vote or action by the
stockholders. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which could have the
effect of delaying or preventing a change in control of us.
Risks Related to Our Industry
If the healthcare environment becomes more restrictive, or we do not comply
with healthcare regulations, our existing and future operations may be
curtailed, and we could be subject to liability.
As a participant in the healthcare industry, our operations and
relationships are regulated by a number of federal, state and local
governmental entities. Because our business relationships with physicians are
unique, and the healthcare electronic commerce industry as a whole is
relatively young, the application of many state and federal regulations to our
business operations is uncertain. It is possible that a review of our business
practices or those of our customers by courts or regulatory authorities could
result in a determination that could adversely affect us. In addition, the
healthcare regulatory environment may change in a way that restricts our
existing operations or our growth.
28
. Electronic Prescribing. The use of our TouchScript software by physicians
to perform electronic prescribing, electronic routing of prescriptions to
pharmacies and dispensing is governed by state and federal law. The
application of these laws to our business is uncertain because many
existing laws and regulations, when enacted, did not anticipate methods
of e-commerce now being developed. The laws of many jurisdictions neither
specifically permit nor specifically prohibit electronic transmission of
prescription orders. Future regulation of these areas may adversely
affect us.
. Licensure. As a repackager and distributor of drugs, we are subject to
regulation by and licensure with the United States Food and Drug
Administration, the United States Drug Enforcement Administration and
various state agencies that regulate wholesalers or distributors. Among
the regulations applicable to our repackaging operation are the FDA's
"good manufacturing practice" regulations. Because the FDA's good
manufacturing practice regulations were designed to govern the
manufacture, rather than the repackaging, of drugs, we face legal
uncertainty concerning the application of some aspects of these
regulations and of the standards that the FDA will enforce. Both the FDA
and the DEA have the right, at any time, to inspect our facilities and
operations to determine if we are operating in compliance with the
requirements for licensure and all applicable laws and regulations. Along
with many other drug repackagers, we have received an FDA warning letter
alleging violations of FDA regulations, including the good manufacturing
practice regulations. We have implemented procedures intended to address
many of the concerns raised by the FDA in that letter and believe that
our compliance with FDA regulations meets or exceeds the standard in the
drug repackaging industry. We also believe that we possess all licenses
required to operate our business. If, however, we do not maintain all
necessary licenses, or the FDA decides to substantially modify the manner
in which it has historically enforced its good manufacturing practice
regulations against drug repackagers or the FDA or DEA finds any
violations during one of their periodic inspections, we could be subject
to liability, and our operations could be shut down.
. Physician Dispensing. Physician dispensing of medications for profit is
allowed in all states except Utah and is prohibited, subject to extremely
limited exceptions, in Massachusetts, Montana and Texas. In addition, New
Jersey and New York allow physician dispensing of medications for profit,
but limit the number of days' supply of all medications, subject to
limited exceptions, that a physician may dispense; several other states
limit the number of days' supply of controlled substances that a
physician may dispense. Other states may enact legislation or regulations
prohibiting or restricting physician dispensing.
The American Medical Association, through certain of its constituent
bodies, has historically taken inconsistent positions on physician
dispensing, alternately discouraging and supporting it. While the AMA's
Council on Ethical and Judicial Affairs in 1986 discouraged physicians
from regularly dispensing prescription pharmaceuticals, in 1987 the AMA's
House of Delegates adopted the following resolution: "Resolved, that the
American Medical Association support the physician's right to dispense
drugs and devices when it is in the best interest of the patient and
consistent with the AMA's ethical guidelines." This position was
reaffirmed by the AMA House of Delegates in January 1997. The AMA's
ethical guidelines provide in relevant part that "physicians may dispense
drugs within their office practices provided there is no resulting
exploitation of patients." While two recent Reports of the Council on
Ethical and Judicial Affairs oppose the in-office sale of health-related
products by physicians, these reports specifically exclude the sale of
prescription items from their scope, although they do refer to the
Council's 1986 Report.
. Stark II. Congress enacted significant prohibitions against physician
self-referrals in the Omnibus Budget Reconciliation Act of 1993. This
law, commonly referred to as "Stark II," applies to physician dispensing
of outpatient prescription drugs that are reimbursable by Medicare or
Medicaid. We believe that the physicians who use our TouchScript system
or dispense drugs distributed by us are doing so in material compliance
with Stark II, either pursuant to an in-office ancillary services
exception or another applicable exception. While our physician customers
currently do not, to any significant degree, dispense drugs that are
reimbursable by Medicare or Medicaid, if they were to and if it were
determined
29
that the physicians who use our system or dispense pharmaceuticals
purchased from us were not in compliance with Stark II, it could have a
material adverse effect on our business, results of operations and
prospects.
. Drug Distribution. As a distributor of prescription drugs to physicians,
we and our customers are also subject to the federal anti-kickback
statute, which applies to Medicare, Medicaid and other state and federal
programs. The statute prohibits the solicitation, offer, payment or
receipt of remuneration in return for referrals or the purchase of goods,
including drugs, covered by the programs. The anti-kickback law provides
a number of exceptions or "safe harbors" for particular types of
transactions. We believe that our arrangements with our customers are in
material compliance with the anti-kickback statute and relevant safe
harbors. Many states have similar fraud and abuse laws, and we believe
that we are in material compliance with those laws. If, however, it were
determined that we were not in compliance with those laws, we could be
subject to liability, and our operations could be curtailed.
. Claims Transmission. As part of our services provided to physicians, our
system will electronically transmit claims for prescription medications
dispensed by a physician to many patients' managed care organizations and
payers for immediate approval and reimbursement. Federal law provides
that it is both a civil and a criminal violation for any person to submit
a claim to any payer, including, for example, Medicare, Medicaid and all
private health plans or managed care plans seeking payment for any
services or products that have not been provided to the patient or
overbilling for services or products provided. We have in place policies
and procedures that we believe assure that all claims that are
transmitted by our system are accurate and complete, provided that the
information given to us by our customer is also accurate and complete.
If, however, we do not follow those procedures and policies, or they are
not sufficient to prevent inaccurate claims from being submitted, we
could be subject to liability.
. Patient Information. Existing federal and state laws and regulations
regulate the disclosure of confidential medical information, including
information regarding conditions like AIDS, substance abuse and mental
illness. In addition, the U.S. Department of Health and Human Services
recently published rules regarding the disclosure of confidential medical
information. There is uncertainty as to when those rules will be
effective and how they will be interpreted. Further, the rules and their
interpretation are subject to change from time to time. In the event that
the rules are interpreted in a way that requires material change to the
way in which Allscripts does business, it could have a material adverse
effect on our business, results of operations and prospects. As part of
the operation of our business, our customers do provide to us patient-
identifiable medical information related to the prescription drugs that
they prescribe and other aspects of patient treatment. We have policies
and procedures that we believe assure compliance with all federal and
state confidentiality requirements for handling of confidential medical
information we receive. If, however, we do not follow those procedures
and policies, or they are not sufficient to prevent the unauthorized
disclosure of confidential medical information, we could be subject to
liability, fines and lawsuits, or our operations could be shut down.
The Bush Administration has announced that it intends to propose broad
Medicare reform legislation that would make available to Medicare recipients a
subsidized prescription drug benefit. While no federal price controls are
included in the current version of the proposed legislation, any legislation
that reduces physician incentives to dispense medications in their offices
could adversely affect physician acceptance of our products. We cannot predict
whether or when future health care reform initiatives at the federal or state
level or other initiatives affecting our business will be proposed, enacted or
implemented or what impact those initiatives may have on our business,
financial condition or results of operations.
If the new and rapidly evolving Internet and electronic healthcare information
markets fail to develop as quickly as expected, our business prospects will be
impaired.
The Internet and electronic healthcare information markets are in the early
stages of development and are rapidly evolving. A number of market entrants
have introduced or developed products and services that are
30
competitive with one or more components of the solutions we offer. In addition,
several companies have recently introduced or announced their intention to
introduce electronic prescribing products. We expect that additional companies
will continue to enter these markets. In new and rapidly evolving industries,
there is significant uncertainty and risk as to the demand for, and market
acceptance of, recently introduced products and services. Because the markets
for our products and services are new and evolving, we are not able to predict
the size and growth rate of the markets with any certainty. We cannot assure
you that markets for our products and services will develop or that, if they
do, they will be strong and continue to grow at a sufficient pace. If markets
fail to develop, develop more slowly than expected or become saturated with
competitors, our business prospects will be impaired.
Consolidation in the healthcare industry could adversely affect our business.
Many healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As provider networks and
managed care organizations consolidate, competition to provide products and
services like ours will become more intense, and the importance of establishing
relationships with key industry participants will become greater. These
industry participants may try to use their market power to negotiate price
reductions for our products and services. If we were forced to reduce our
prices, our business would become less profitable unless we were able to
achieve corresponding reductions in our expenses.
If the Internet infrastructure does not continue to improve, our ability to use
the Internet on a large scale could be compromised.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it. The Internet may not prove to be
a viable commercial medium because of inadequate development of the necessary
infrastructure, lack of timely development of complementary products like high
speed modems, delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or increased
government regulation. Because our business plan relies heavily on the
viability of the Internet, our business will suffer if growth of the Internet
does not meet our expectations.
Risks Related to Our Stock
The public market for our common stock has been and may continue to be
volatile.
The market price of our common stock is highly volatile and could fluctuate
significantly in response to various factors, including:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new services or products by
us or our competitors;
. changes in financial estimates by securities analysts;
. conditions and trends in the electronic healthcare information, Internet,
e-commerce and pharmaceutical markets; and
. general market conditions and other factors.
In addition, the stock markets, especially the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies, and Internet-related
companies in particular. These fluctuations have often been unrelated or
disproportionate to operating performance. These broad market factors may
materially affect the trading price of our common stock. General economic,
political and market conditions like recessions and interest rate fluctuations
may also have an adverse effect on the market price of our common stock.
31
Volatility in the market price for our common stock may result in the filing
of securities class action litigation. On October 26, 2000, Allscripts, Inc.
announced that its previously reported revenues for the second quarter of 2000
were being revised from $12,616,000 to $12,116,000. Between October 2000 and
December 2000, four complaints were filed in the United States District Court
for the Northern District of Illinois against Allscripts and its President and
Chief Financial Officer, David B. Mullen. The complaints purported to be
brought on behalf of a class of individuals who purchased the common stock of
Allscripts during the period of July 27, 2000 through and including October 26,
2000 (the "Class Period"), and alleged violations of Section 10(b) and 20(a) of
the Securities Exchange Act of 1934 based on the restatement of our financial
results for the second quarter of 2000. The four complaints were deemed
related, and the cases were reassigned and consolidated for all purposes before
Judge Charles Kocoras, before whom the first filed case was pending. The
consolidated action is entitled In re Allscripts, Inc. Securities Litigation,
No. 00C6796 (N.D. Ill.) and includes all consolidated cases: Bredeson v.
Allscripts, Inc. and David B. Mullen, Civ. No. 00C-6796 (N.D. Ill., filed on
October 31, 2000), Karmazin v. Allscripts, Inc. and David B. Mullen, Civ. No.
00C-6864 (N.D. Ill., filed on November 2, 2000), Mohr v. Allscripts, Inc. and
David B. Mullen, Civ. No. 00C-6992 (N.D. Ill., filed on November 6, 2000),
Nadav v. Allscripts, Inc. and David B. Mullen, Civ. No. 00C-8126 (N.D. Ill.,
filed on December 26, 2000).
In January 2001, Lead Plaintiff and Lead Counsel were appointed in the
consolidated case. On March 12, 2001, plaintiffs filed a Consolidated and
Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint
continues to name Allscripts and David B. Mullen as defendants and alleges
violations of Section 10(b) and 20(a) of the Securities Exchange Act. Three
additional defendants are named in the Amended Complaint: Glen E. Tullman, our
Chairman of the Board and Chief Executive Officer, J. Peter Geerlofs, our Chief
Medical Officer, and Philip J. Langley, formerly our Senior Vice President of
Business Development/Field Services. The Amended Complaint purports to expand
the Class Period in the consolidated case to include all individuals who
purchased the common stock of Allscripts during the period from March 6, 2000
through and including February 27, 2001. The Amended Complaint is based on the
previous allegations about the restatement of our financial results for the
second quarter of 2000, and new allegations relating to, inter alia, the
prospects for our TouchScript product.
We intend to move to dismiss the Amended Complaint, and Judge Kocoras has
set June 2001 as the prospective ruling date. At this time, management is
unable to determine the likely outcome of this matter or to reasonably estimate
the amount of any potential loss with respect to this matter.
Our quarterly operating results may vary.
The quarterly operating results of our subsidiaries have varied in the past,
and we expect that our quarterly operating results will continue to vary in
future periods depending on a number of factors, including seasonal variances
in demand for our products and services, the sales, installation and
implementation cycles for our TouchScript system and Physician Channel
applications and services and other factors described in this "Risk Factors"
section of this report. For example, all other factors aside, sales of our
prepackaged medications have historically been highest in the fall and winter
months. We expect to increase activities and spending in substantially all of
our operational areas. We base our expense levels in part upon our expectations
concerning future revenue, and these expense levels are relatively fixed in the
short term. If we have lower revenue, we may not be able to reduce our spending
in the short term in response. Any shortfall in revenue would have a direct
impact on our results of operations. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors, and our stock
price could suffer.
We may have substantial sales of our common stock that could cause our stock
price to fall.
Allscripts, Inc.'s common stock began trading on the Nasdaq National Market
on July 23, 1999; however, until recently there have been a limited number of
shares trading in the public market. A substantial number of our shares have
become eligible for public sale, and sales of a substantial number of shares of
our common stock could cause our stock price to fall.
32
Because our executive officers and directors have substantial control of our
voting stock, takeovers not supported by them will be more difficult, possibly
preventing you from obtaining optimal share price.
The control of a significant amount of our stock by insiders could adversely
affect the market price of our common stock. Our executive officers and
directors beneficially own or control 18,362,158 shares or 47.5% of the
outstanding common stock. If our executive officers and directors choose to act
or vote together, they will have the power to influence significantly all
matters requiring the approval of our stockholders, including the election of
directors and the approval of significant corporate transactions. Without the
consent of these stockholders, we could be prevented from entering into
transactions that could be beneficial to us.
Safe Harbor for Forward-Looking Statements
This report and statements we make or our representatives make contain
forward-looking statements that involve risks and uncertainties, including
those discussed above and elsewhere in this report. We develop forward-looking
statements by combining currently available information with our beliefs and
assumptions. These statements often contain words like believe, expect,
anticipate, intend, contemplate, seek, plan, estimate or similar expressions.
Forward-looking statements do not guarantee future performance. Recognize these
statements for what they are and do not rely upon them as facts.
Forward-looking statements involve risks, uncertainties and assumptions,
including, but not limited to, those discussed above and elsewhere in this
report. We make these statements under the protection afforded them by Section
21E of the Securities Exchange Act of 1934, as amended. Because we cannot
predict all of the risks and uncertainties that may affect us, or control the
ones we do predict, these risks and uncertainties can cause our results to
differ materially from the results we express in our forward-looking
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2000, we did not own any derivative financial instruments
but we were exposed to market risks, primarily changes in U.S. interest rates.
As of December 31, 2000, we had cash, cash equivalents and marketable
securities in financial instruments of $119,837,000. Maturities range from less
than one month to approximately 12 years, with the majority being less than one
year. Declines in interest rates over time will reduce our interest income from
our investments. Based upon our balance of cash, cash equivalents and
marketable securities, a decrease in interest rates of 1.0% would cause a
corresponding decrease in our annual interest income by approximately
$1,198,000.
33
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Allscripts Healthcare Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Allscripts
Healthcare Solutions, Inc. and subsidiaries (the Company) as of December 31,
2000, and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive income (loss), and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allscripts
Healthcare Solutions, Inc. and subsidiaries as of December 31, 2000 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
Chicago, Illinois
February 23, 2001, except for note 14,
as to which the date is March 12, 2001
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Allscripts
Healthcare Solutions, Inc.
In our opinion, the consolidated balance sheet as of December 31, 1999 and
the related consolidated statements of operations, of cash flows and of
stockholders' equity (deficit) and comprehensive income (loss) for each of the
two years in the period ended December 31, 1999 listed in the index appearing
under Item 14(a)(1) on page 67 present fairly, in all material respects, the
financial position, results of operations and cash flows of Allscripts
Healthcare Solutions, Inc. (formerly Allscripts, Inc.) and its subsidiaries at
December 31, 1999 and for each of the two years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Allscripts Healthcare Solutions, Inc. and
subsidiaries for any period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 17, 2000
35
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-------------------
1999 2000
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 40,561 $ 76,513
Marketable securities................................... 15,049 20,663
Accounts receivable, net of allowances of $3,743 in 1999
and $4,384 in 2000..................................... 5,126 13,850
Interest receivable..................................... 340 1,291
Inventories............................................. 3,585 5,290
Prepaid and other current assets........................ 786 1,724
-------- ---------
Total current assets.................................. 65,447 119,331
Long-term marketable securities........................... -- 22,661
Fixed assets, net......................................... 4,940 11,792
Intangible assets, net.................................... 3,575 149,690
Other assets.............................................. 52 1,946
-------- ---------
Total assets.......................................... $ 74,014 $ 305,420
======== =========
LIABILITIES
Current liabilities:
Accounts payable........................................ $ 4,352 $ 7,269
Accrued expenses........................................ 337 2,546
Accrued compensation.................................... 1,327 2,525
Deferred revenue........................................ 575 1,877
-------- ---------
Total current liabilities............................. 6,591 14,217
Long-term debt............................................ 59 --
Other non-current liabilities............................. -- 228
-------- ---------
Total liabilities..................................... 6,650 14,445
-------- ---------
STOCKHOLDERS' EQUITY
Preferred stock:
Undesignated, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1999 and December 31, 2000................ -- --
Common stock:
$0.01 par value, 75,000,000 shares authorized,
24,221,537 shares issued, 24,187,072 shares outstanding
at December 31, 1999; 150,000,000 shares authorized,
29,138,619 shares issued, 29,104,154 shares outstanding
at December 31, 2000................................... 242 291
278,646 shares issued and held pursuant to business
combinations at December 31, 2000...................... -- 3
Additional paid-in capital................................ 130,830 411,081
Unearned compensation..................................... (1,632) (1,097)
Treasury stock at cost: 34,465 common shares at December
31, 1999 and December 31, 2000........................... (68) (68)
Accumulated deficit....................................... (62,008) (119,375)
Accumulated other comprehensive income.................... -- 140
-------- ---------
Total stockholders' equity............................ 67,364 290,975
-------- ---------
Total liabilities and stockholders' equity............ $ 74,014 $ 305,420
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
36
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
Revenue........................................... $23,682 $ 27,586 $ 54,983
Cost of revenue................................... 17,320 21,909 42,518
------- -------- --------
Gross profit.................................. 6,362 5,677 12,465
Selling, general and administrative expenses...... 12,658 20,656 42,733
Amortization of intangibles....................... 372 1,351 24,062
Write-off of acquired in-process research and
development...................................... -- -- 13,729
Other operating expenses.......................... 430 319 450
------- -------- --------
Loss from operations.......................... (7,098) (16,649) (68,509)
Interest income (expense), net.................... (596) 1,216 7,706
Other expense..................................... -- -- (1,000)
------- -------- --------
Loss from continuing operations................... (7,694) (15,433) (61,803)
Income from discontinued operations............... 970 642 83
Gain from sale of discontinued operations......... -- 3,547 4,353
------- -------- --------
Loss before extraordinary item.................... (6,724) (11,244) (57,367)
Extraordinary loss from early extinguishment of
debt............................................. (790) -- --
------- -------- --------
Net loss.......................................... (7,514) (11,244) (57,367)
Accretion of mandatory redemption value of
preferred shares and accrued dividends on
preferred shares................................. (2,415) (2,198) --
------- -------- --------
Net loss attributable to common stockholders...... $(9,929) $(13,442) $(57,367)
======= ======== ========
Per share data--basic and diluted:
Loss from continuing operations (including
accretion and accrued dividends on preferred
shares)........................................ $ (1.66) $ (1.20) $ (2.22)
Income from discontinued operations............. 0.16 0.04 0.00
Gain from sale of discontinued operations....... -- 0.25 0.16
Extraordinary loss.............................. (0.13) -- --
------- -------- --------
Net loss attributable to common stockholders.... $ (1.63) $ (0.91) $ (2.06)
======= ======== ========
Weighted average shares of common stock
outstanding used in computing basic and diluted
net loss per share............................... 6,076 14,718 27,900
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share amounts)
Accumu-
Treasury lated
Preferred Stock Common Stock Additional Unearned Stock Other
------------------ ---------------- Paid-In Compen- ------------- Accumu- Comprehensive
Shares Amount Shares Amount Capital sation Shares Amount lated Deficit Income Total
---------- ------ --------- ------ ---------- -------- ------ ------ ------------- ------------- --------
Balance at
December 31,
1997............. 8,718,768 $8,719 3,425,052 $35 $16,208 $ -- 34,465 $(68) $(43,250) $-- $(18,356)
Issuance of
4,597,070 common
shares in Series
I Unit Offering. 4,597,070 46 963 1,009
Issuance of
336,532 common
shares under
option
agreements...... 336,532 3 54 57
Issuance of
1,326,652
warrants in
connection with
exchange of
subordinated
convertible
debentures for
Series J
redeemable
preferred stock. 239 239
Unearned
compensation
expense......... 407 (407) --
Compensation
expense......... 176 176
Cumulative
dividends in
arrears on
Series H
redeemable
preferred stock. (704) (704)
Cumulative
dividends in
arrears on
Series I
redeemable
preferred stock. (521) (521)
Cumulative
dividends in
arrears on
Series J
redeemable
preferred stock. (702) (702)
Accretion of
mandatory
redemption value
of preferred
stock........... (323) (323)
Issuance costs
of Series I Unit
Offering........ (153) (153)
Net loss for the
year ended
December 31,
1998............ (7,514) (7,514)
---------- ------ --------- --- ------- ------ ------ ---- -------- --- --------
Balance at
December 31,
1998............. 8,718,768 8,719 8,358,654 84 15,468 (231) 34,465 (68) (50,764) -- (26,792)
Issuance of
204,771 shares
of common stock
in connection
with
acquisition..... 204,771 2 2,570 2,572
Issuance of
961,541 shares
of common stock
under option
agreements...... 961,541 9 797 806
Expense related
to warrants
granted to non-
employee........ 30 30
Issuance of
7,000,000 shares
of common stock
in initial
public offering,
net of offering
expenses........ 7,000,000 70 102,639 102,709
Payment of
fractional
shares in
connection with
reverse stock
split........... (6) (6)
Issuance of
4,699,130 shares
of common stock
under warrant
agreements...... 4,699,130 47 367 414
Issuance of
19,958 shares of
common stock
under a
contingent
payment
obligation...... 19,958 0 319 319
Conversion of
convertible
preferred stock
to common stock
at initial
public offering. (8,718,768) (8,719) 2,977,483 30 8,689 --
Other capital
contribution.... 12 12
Unearned
compensation
expense......... 1,850 (1,850) --
Compensation
expense......... 449 449
Expense related
to options
granted to non-
employees....... 293 293
Cumulative
dividends in
arrears on
Series H
redeemable
preferred stock. (407) (407)
Cumulative
dividends in
arrears on
Series I
redeemable
preferred stock. (425) (425)
Cumulative
dividends in
arrears on
Series J
redeemable
preferred stock. (572) (572)
Accretion of
mandatory
redemption value
of preferred
stock........... (794) (794)
Net loss for the
year ended
December 31,
1999............ (11,244) (11,244)
---------- ------ --------- --- ------- ------ ------ ---- -------- --- --------
Comprehensive
Income (Loss)
Total
-------------
Balance at
December 31,
1997............. $ --
Issuance of
4,597,070 common
shares in Series
I Unit Offering.
Issuance of
336,532 common
shares under
option
agreements......
Issuance of
1,326,652
warrants in
connection with
exchange of
subordinated
convertible
debentures for
Series J
redeemable
preferred stock.
Unearned
compensation
expense.........
Compensation
expense.........
Cumulative
dividends in
arrears on
Series H
redeemable
preferred stock.
Cumulative
dividends in
arrears on
Series I
redeemable
preferred stock.
Cumulative
dividends in
arrears on
Series J
redeemable
preferred stock.
Accretion of
mandatory
redemption value
of preferred
stock...........
Issuance costs
of Series I Unit
Offering........
Net loss for the
year ended
December 31,
1998............ (7,514)
-------------
Balance at
December 31,
1998............. (7,514)
=============
Issuance of
204,771 shares
of common stock
in connection
with
acquisition.....
Issuance of
961,541 shares
of common stock
under option
agreements......
Expense related
to warrants
granted to non-
employee........
Issuance of
7,000,000 shares
of common stock
in initial
public offering,
net of offering
expenses........
Payment of
fractional
shares in
connection with
reverse stock
split...........
Issuance of
4,699,130 shares
of common stock
under warrant
agreements......
Issuance of
19,958 shares of
common stock
under a
contingent
payment
obligation......
Conversion of
convertible
preferred stock
to common stock
at initial
public offering.
Other capital
contribution....
Unearned
compensation
expense.........
Compensation
expense.........
Expense related
to options
granted to non-
employees.......
Cumulative
dividends in
arrears on
Series H
redeemable
preferred stock.
Cumulative
dividends in
arrears on
Series I
redeemable
preferred stock.
Cumulative
dividends in
arrears on
Series J
redeemable
preferred stock.
Accretion of
mandatory
redemption value
of preferred
stock...........
Net loss for the
year ended
December 31,
1999............ (11,244)
-------------
38
Accumu-
Preferred Treasury lated
Stock Common Stock Additional Unearned Stock Accumu- Other
------------- ----------------- Paid-In Compen- ------------- lated Comprehensive
Shares Amount Shares Amount Capital sation Shares Amount Deficit Income Total
------ ------ ---------- ------ ---------- -------- ------ ------ --------- ------------- --------
Balance at
December 31,
1999............. -- -- 24,221,537 242 130,830 (1,632) 34,465 (68) (62,008) -- 67,364
Issuance of
214,794 shares
of common stock
to IMS.......... 214,794 2 9,981 9,983
Issuance of
2,641,215 shares
of common stock
in connection
with
acquisitions and
option
conversions..... 2,641,215 26 169,044 169,070
Issuance of
1,452,000 shares
of common stock
in public
offering, net of
offering
expenses........ 1,452,000 15 99,751 99,766
Issuance of
844,083 shares
of common stock
under option
agreements...... 844,083 8 714 722
Issuance of
43,636 shares of
common stock
under warrant
agreements...... 43,636 1 19 20
Compensation
expense......... 535 535
Compensation
expense--non-
employee........ 751 751
Other, net...... (9) (9)
Comprehensive
income (loss):
Net loss for the
year ended
December 31,
2000............ (57,367) (57,367)
Other
comprehensive
income-
unrealized gain
on marketable
securities, net
of tax of $93... 140 140
--- ---- ---------- ---- -------- ------- ------ ---- --------- ---- --------
Balance at
December 31,
2000............. -- $-- 29,417,265 $294 $411,081 $(1,097) 34,465 $(68) $(119,375) $140 $290,975
=== ==== ========== ==== ======== ======= ====== ==== ========= ==== ========
Comprehensive
Income (Loss)
Total
-------------
Balance at
December 31,
1999............. (11,244)
=============
Issuance of
214,794 shares
of common stock
to IMS..........
Issuance of
2,641,215 shares
of common stock
in connection
with
acquisitions and
option
conversions.....
Issuance of
1,452,000 shares
of common stock
in public
offering, net of
offering
expenses........
Issuance of
844,083 shares
of common stock
under option
agreements......
Issuance of
43,636 shares of
common stock
under warrant
agreements......
Compensation
expense.........
Compensation
expense--non-
employee........
Other, net......
Comprehensive
income (loss):
Net loss for the
year ended
December 31,
2000............ (57,367)
Other
comprehensive
income-
unrealized gain
on marketable
securities, net
of tax of $93... 140
-------------
Balance at
December 31,
2000............. $(57,227)
=============
The accompanying notes are an integral part of these consolidated financial
statements.
39
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
Cash flows from operating activities:
Net loss........................................ $(7,514) $(11,244) $(57,367)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,531 2,517 28,632
Gain on sale of discontinued operations....... -- (3,547) (4,353)
Expense from issuance of equity instruments to
non-employees................................ -- 323 751
Write off of in process research and
development.................................. -- -- 13,729
Extraordinary loss............................ 791 -- --
Write-down of investment...................... -- -- 1,000
Non-cash compensation expense................. 176 449 535
Exchange of debentures in satisfaction of
accrued interest............................. 439 -- --
Other non-cash charges........................ -- 319 --
Provision for doubtful accounts............... 1,241 (633) 980
Changes in assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in accounts receivable.. (1,186) 4,828 (8,449)
(Increase) in interest receivable........... -- -- (951)
(Increase) in inventories................... (348) (1,353) (1,525)
(Increase) decrease in prepaids and other
current assets............................. 154 (604) (2,782)
(Decrease) increase in accounts payable..... 1,131 (3,999) 2,366
(Decrease) increase in accrued compensation. (464) 261 540
(Decrease) increase in accrued expenses and
deferred revenue........................... (116) (10) 1,780
Increase in other non-current liabilities... -- -- 135
------- -------- --------
Net cash used in operating activities..... (4,165) (12,693) (24,979)
------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (884) (4,428) (9,351)
Purchase of marketable securities............... -- (15,049) (61,112)
Maturities of marketable securities............. -- -- 33,296
Proceeds from sale of discontinued operations... -- 7,472 4,353
Cash provided by (used for) acquisitions, net of
acquired cash.................................. -- 46 (13,223)
Purchase of investment.......................... -- -- (1,000)
------- -------- --------
Net cash used in investing activities..... (884) (11,959) (47,037)
------- -------- --------
Cash flows from financing activities:
Proceeds from public offering, net.............. -- 102,709 99,766
Borrowings under line of credit................. 4,000 1,400 --
Payments under line of credit................... (2,500) (5,400) (2,464)
Proceeds from Series I Unit Offering............ 8,930 -- --
Payments for preferred stock redemptions........ -- (34,745) --
Payment of notes payable........................ -- (650) (59)
Proceeds from exercise of common stock warrants. -- 414 20
Repayment of term loan.......................... (4,693) -- --
Proceeds from issuance of common stock to IMS... -- -- 9,983
Proceeds from exercise of common stock options.. 57 806 722
Share and debt issue costs...................... (232) (45) --
Other capital contribution...................... -- 12 --
Payment of fractional shares.................... -- (6) --
------- -------- --------
Net cash provided by financing activities. 5,562 64,495 107,968
------- -------- --------
Net increase in cash and cash equivalents......... 513 39,843 35,952
Cash and cash equivalents, beginning of year...... 205 718 40,561
------- -------- --------
Cash and cash equivalents, end of year............ $ 718 $ 40,561 $ 76,513
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Allscripts Healthcare Solutions, Inc. (formerly Allscripts, Inc.) and its
wholly owned subsidiaries, Allscripts Pharmacy Centers, Inc., Prescription
Management Company, Inc., Physician Dispensing Systems, Inc., TeleMed Corp.,
Compumed, Inc., Masterchart, Inc., Medifor, Inc., Allscripts, Inc. and
Channelhealth Incorporated, which was acquired January 8, 2001, (altogether
referred to as "Allscripts"), provide physicians with decision support systems
designed to improve the quality and cost effectiveness of healthcare.
Allscripts grants uncollateralized credit to its customers. Allscripts operates
in one industry segment. As its product offerings evolve, the manner in which
its activities are internally reported and its decisions are made could change.
Allscripts will continually evaluate its determination of operating segments.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Allscripts
Healthcare Solutions, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents balances at December 31, 1999 and December 31,
2000 consist of cash and highly liquid corporate debt securities with
maturities at the time of purchase of less than 90 days. Allscripts' cash, cash
equivalents, short term marketable securities and long-term marketable
securities are invested in overnight repurchase agreements, money market funds
and corporate debt securities. The carrying value of our cash equivalents,
short-term marketable securities and long-term marketable securities is as
follows:
December 31,
----------------
1999 2000
------- --------
(in thousands)
Cash equivalents:
Overnight repurchase agreements........................ $ 290 $ --
Money market funds..................................... 16,578 15
Corporate debt securities.............................. 22,066 68,620
------- --------
38,934 68,635
Short-term marketable securities:
Corporate debt securities.............................. 15,049 20,663
Long-term marketable securities:
Corporate debt securities (contractual lives ranging
from 1-12 years)...................................... -- 22,661
------- --------
Total cash equivalents and marketable securities..... $53,983 $111,959
======= ========
Gross unrealized gains were $24,000 and $209,000 under current and long-term
marketable securities, respectively, as of December 31, 2000. Gross unrealized
gains and losses were immaterial at December 31, 1999. Gross realized gains and
losses were immaterial for the years ended December 31, 1999 and 2000.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates the designation at each
balance sheet date. Marketable debt and equity securities are classified as
available-for-sale and are carried at their fair value, with the unrealized
gains and losses reported net-of-tax in a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be other-
than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on specific identification.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
41
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories, which consist primarily of finished goods, are carried at the
lower of cost or market with cost being determined using the specific
identification method.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are computed
on the straight-line method over the estimated useful lives of the related
assets. Upon asset retirement or other disposition, cost and the related
accumulated depreciation are removed from the accounts, and gain or loss is
included in the consolidated statements of operations. Amounts expended for
repairs and maintenance are charged to operations as incurred.
Website Costs
Allscripts' website costs consist of the costs to develop features that
enable users to perform functions on-line, hosting costs and costs to develop
content and graphics. Allscripts has adopted the provisions of the American
Institute of Certified Public Accountants' Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." At December 31, 1999 and 2000, approximately $0 and $286,000,
respectively, was capitalized for the development of Allscripts' website and
was included in property and equipment. These costs are being amortized over
the expected life of the website, which is two years. Costs associated with
content changes and maintenance incurred subsequent to the launch of the
website have been expensed as incurred.
Intangible Assets
Intangible assets, which are stated at cost, consist of software rights,
customer lists, trademarks and goodwill. Allscripts' policy is to amortize
intangible assets using the straight-line method over the remaining estimated
economic life of those assets, including the period being reported on.
Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Allscripts accounts for long-lived assets in accordance with the provisions
of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Software Development Costs
Allscripts capitalizes purchased software that is ready for service and
software development costs incurred from the time technological feasibility of
the software is established until the software is ready for use. Research and
development costs and other computer software maintenance costs related to
software development are expensed as incurred. Upon the establishment of
technological feasibility for previous versions of TouchScript, related
software development costs were capitalized. However, these costs were written
off because the recoverability was uncertain since market acceptance of
TouchScript had not been achieved. Development costs incurred subsequent to the
establishment of technological feasibility but prior to general release of the
current version of TouchScript were not significant. Software development costs
of $771,000, $1,417,000 and $3,774,000 have been expensed in 1998, 1999 and
2000, respectively. The costs of purchased software are amortized using the
straight-line method over three years.
42
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Issuance Costs
Costs attributable to the issuance of significant debt are deferred and
amortized on a straight-line basis over the term of the related debt.
Income Taxes
Deferred tax assets or liabilities are established for temporary differences
between financial and tax reporting bases and for tax carryforward items and
are subsequently adjusted to reflect changes in tax rates expected to be in
effect when the temporary differences reverse. A valuation allowance is
established for any deferred tax asset for which realization is not likely.
Stock Based Compensation
Allscripts follows Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (FAS 123). As allowed by FAS 123,
Allscripts has elected to continue to account for its stock based compensation
programs according to the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, compensation
expense has been recognized to the extent of employee or director services
rendered based on the intrinsic value of compensatory options or shares granted
under the plans. Allscripts has adopted the disclosure provisions required by
FAS 123.
Revenue Recognition
Allscripts' revenue is primarily derived from the sale of medications for
dispensing at the point of care. Allscripts offers the right of return on
pharmaceutical products under various policies and estimates and maintains
reserves for product returns. Revenue from the sale of medications is
recognized upon shipment of the pharmaceutical products when no obligations
remain and collection of the receivable, net of provisions for estimated
returns, is probable.
Revenue is also generated from sales of software licenses and related
consulting services as well as from subscriptions for software and hardware.
Allscripts recognizes revenue in accordance with the provisions of Statement of
Position ("SOP") No. 97-2, "Software Revenue Recognition", as amended by SOP
98-9. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of those elements. The fair value of an element must be
based on objective evidence specific to the vendor. If the vendor does not have
evidence of fair value for all the elements in a multi-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or until
all elements are delivered, unless evidence of fair value is available for all
undelivered elements, then revenue related to the delivered elements can be
recognized using the residual value method prescribed by SOP 98-9. Revenue from
software licensing arrangements is principally recognized upon delivery.
Revenue from consulting services is recognized in the period in which services
are performed. Allscripts defers the recognition of all revenue until
collectibility is probable, persuasive evidence of an arrangement exists,
prices of the products and services being sold are supported by vendor specific
objective evidence, and payments are fixed and determinable. Revenue from
subscription agreements for software and related hardware is recognized ratably
over the term of the subscription period beginning after the software and
hardware have been delivered and installed and customer training has been
completed. However, no revenue is recognized for subscription agreements where
payment of the related fee is refundable or subject to performance of future
obligations. Revenue from the sale of hardware is recognized upon shipment of
the product.
In December 1999, the U.S. Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The adoption of SAB 101 during the quarter ended December
31, 2000 did not have a material effect on Allscripts' financial position or
results of operations.
43
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Manufacturer Rebates
Rebates from suppliers are recorded as a reduction of cost of revenue and
are recognized on an estimated basis upon shipment of the product to customers.
The difference between the amount estimated and the amount actually received is
reflected prospectively as a change of estimate. These revisions have not been
material.
Advertising Costs
Allscripts recognizes substantially all advertising costs as incurred.
Advertising expense was $0, $118,000 and $1,006,000 in 1998, 1999 and 2000,
respectively.
Comprehensive Income
During 1998, Allscripts adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Allscripts
has reported unrealized gains/(losses) on certain investments as other
comprehensive income.
Net Loss Per Share
Allscripts accounts for net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128
requires the presentation of "basic" loss per share and "diluted" loss per
share. Basic loss per share is computed by dividing the net loss attributable
to common stockholders by the weighted average shares of outstanding common
stock. For purposes of calculating diluted earnings per share, the denominator
includes both the weighted average shares of common stock outstanding and
dilutive potential common stock.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted average number of shares of common stock
outstanding during the period. Allscripts has excluded the impact of all
outstanding warrants and options to purchase shares of common stock, all
outstanding convertible preferred shares and debentures on an if-converted
basis and contingent share payment obligations from the calculation of diluted
loss per share because all such securities are antidilutive for all periods
presented.
On July 28, 1999, Allscripts consummated an initial public offering of its
common stock. Upon the closing of the offering, all of the outstanding shares
of Allscripts' convertible preferred stock were automatically converted into
2,977,483 shares of common stock. Additionally, 19,958 shares of common stock
were issued upon the closing of the offering, pursuant to a contingent share
payment obligation.
Shares of common stock issuable from securities that could potentially
dilute basic earnings per share in the future that were not included in the
computation of earnings per share because their effect was anti-dilutive were
as follows at December 31:
Year Ended
December 31,
------------------
1998 1999 2000
------ ----- -----
(In thousands)
Stock options.......................................... 2,697 2,587 3,728
Warrants............................................... 4,892 64 19
Convertible notes...................................... 14 14 --
Convertible preferred stock............................ 8,719 -- --
------ ----- -----
Total................................................ 16,322 2,665 3,747
====== ===== =====
44
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additionally, the net loss applicable to common stockholders for the years
ended December 31, 1998, 1999 and 2000 would have been decreased by adding back
interest expense related to the convertible notes of approximately $282,000,
$5,000 and $0, respectively.
Fair Value of Financial Instruments
Cash and cash equivalents and marketable securities are reported at their
fair values in the balance sheets with the corresponding mark-to-market
adjustments recorded as other comprehensive income in stockholders' equity. The
carrying amounts reported in the balance sheets for accounts receivable and
accounts payable approximate their fair values due to the short-term nature of
these financial instruments. The fair value of the long-term debt is estimated
based on current interest rates available to Allscripts for debt instruments
with similar terms, degrees of risk and remaining maturities. The carrying
value of the long-term debt approximates its fair value.
Concentration of Credit Risk
Financial instruments that potentially subject Allscripts to a concentration
of credit risk consist of cash and cash equivalents, marketable securities and
trade receivables. Allscripts maintains its cash balances with one major
commercial bank and its cash equivalents and marketable securities in interest-
bearing, investment-grade securities.
Allscripts sells its products and services to healthcare providers. Credit
risk with respect to trade receivables is generally diversified due to the
large number of customers and their dispersion across the United States. To
reduce credit risk, Allscripts performs ongoing credit evaluations of its
customers and their payment histories. In general, Allscripts does not require
collateral from its customers, but it does enter into advance deposit, security
or guarantee agreements if appropriate.
The provision for doubtful accounts aggregated $1,241,000 and $980,000 in
1998 and 2000, respectively. Allscripts recorded a net credit to income
aggregating $633,000 in 1999 due to the collection of receivables, which had
been reserved as being uncollectable in previous periods.
Use of Estimates
Accounting principles generally accepted in the United States of America
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at year end and the reported amounts of revenue and expenses during
the year. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made in the prior period financial
statements to conform to the current period.
3. Statements of Operations Information
Other operating expenses consist of the following for the years ended
December 31:
1998 1999 2000
---- ---- ----
(In thousands)
Management reorganization and shutdown costs.............. $430 $-- $--
Settlement of contingent payment obligation............... -- 319 --
Expenses related to revision of interim financial
statements............................................... -- -- 450
---- ---- ----
$430 $319 $450
==== ==== ====
45
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The management reorganization and shutdown costs relate to severance costs
associated with reductions in force and other severance arrangements. In 1998,
ten administrative and nine sales employees were affected by the
reorganization. As of December 31, 1999, all payments provided for had been
made.
A summary of management reorganization and shutdown costs and related
payments is as follows:
1998 1999 2000
---- ---- ----
(In thousands)
Beginning balance........................................ $181 $273 $--
Expense.................................................. 430 -- --
Payments................................................. (338) (273) --
---- ---- ----
Ending balance......................................... $273 $-- $--
==== ==== ====
The settlement of contingent payment obligation in 1999 reflects a non-cash
charge related to the issuance of 19,958 shares of common stock upon the
closing of the initial public offering in settlement of a contingent obligation
related to an acquisition Allscripts made in 1995.
As a result of restating Allscripts' financial results for the quarter ended
June 30, 2000, a number of charges including professional fees, were incurred.
Other non-operating expense for the twelve months ended December 31, 2000 of
$1,000,000 reflects a non-cash writedown of an investment in an early stage
Internet software company focused on the college healthcare market.
4. Acquisitions
In 1999, Allscripts completed acquisitions through the issuance of 204,771
shares of its common stock valued at approximately $2,572,000 and a promissory
note in the principal amount of $650,000, bearing interest at 6% per year and
payable upon the consummation of an initial public offering. The business
combinations were accounted for using the purchase method of accounting, and
the results of operations have been included in the consolidated financial
statements subsequent to the dates of acquisition. The acquisitions resulted in
goodwill of approximately $3,830,000, which represents the excess of the
purchase price over the fair value of the acquired net assets and which is
being amortized on a straight-line basis over two years. The promissory note,
including accrued interest of $3,000, was repaid in August 1999.
On May 9, 2000, Allscripts acquired MasterChart, Inc., a software developer
providing dictation, integration and patient record technology. In exchange for
all of the outstanding common stock of MasterChart, Allscripts issued 1,617,873
shares of its common stock with a value of approximately $127,400,000 and paid
cash of approximately $5,000,000. The business combination was accounted for
using the purchase method of accounting and MasterChart's results of operations
have been included in the consolidated financial statements subsequent to the
date of acquisition. Approximately $5,000,000 of the purchase price was
allocated to the value of acquired in-process research and development that had
no alternative future use and was charged against operations during the three
months ended June 30, 2000. In addition, approximately $4,600,000 of the
purchase price was allocated to acquired software and is being amortized on a
straight-line basis over two years, the software's estimated useful life.
Trademarks and goodwill, totaling approximately $125,600,000, are being
amortized on a straight-line basis over five years. Goodwill represents the
excess of the purchase price over the fair market value of the net assets
acquired.
On May 17, 2000, Allscripts acquired Medifor, Inc., a provider of
computerized patient and physician education products. In exchange for all of
the outstanding common and preferred A and B stock of Medifor, Allscripts
issued 935,858 shares of its common stock with a fair value of approximately
$34,400,000. In addition, Allscripts issued 142,786 common stock options in
replacement of Medifor common stock options with a fair value of approximately
$4,200,000. The fair value of the replacement common stock options was
46
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated using the Black-Scholes model. The business combination was accounted
for using the purchase method of accounting and Medifor's results of operations
have been included in the consolidated financial statements subsequent to the
date of acquisition. Approximately $8,700,000 of the purchase price was
allocated to the value of acquired in-process research and development that had
no alternative future use and was charged against operations during 2000.
Trademarks and goodwill totaling $30,300,000 are being amortized on a straight-
line basis over five years. Goodwill represents the excess of the purchase
price over the fair value of the net assets acquired.
The income approach was the primary technique utilized in valuing the
purchased in-process research and development. The income approach focuses on
the income producing capability of the acquired assets and best represents the
present value of the future economic benefits expected to be derived from these
assets. The approach included, but was not limited to, an analysis of (i) the
expected cash flows attributable to the in-process research and development
projects; (ii) the risks associated with achieving such cash flows; (iii) the
completion costs for the projects, and (iv) the stage of the completion of each
project.
Pursuant to the terms of the MasterChart and Medifor purchase agreements,
certain shares of Allscripts' common stock were not delivered at the
acquisition dates. It is anticipated that all undelivered shares will be
delivered by March 31, 2001.
In 2000, Allscripts completed another acquisition through the issuance of
87,484 shares of its common stock with a value of approximately $3,000,000 and
a payment of $8,000,000 in cash. The business combination was accounted for
using the purchase method of accounting, and the results of operations have
been included in the consolidated financial statements subsequent to the date
of acquisition. The acquisition resulted in goodwill of approximately
$10,800,000, which represents the excess of the purchase price over the fair
value of the acquired net assets and which is being amortized on a straight-
line basis over two years. The operating results of this acquisition were not
material.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 2000 assume the MasterChart, Inc. and
Medifor, Inc. acquisitions occurred as of January 1 of each year after giving
effect to purchase accounting adjustments. These pro forma financial statements
have been prepared for comparative purposes only and do not purport to be
indicative of what Allscripts' operating results would have been had the
acquisitions actually taken place at the beginning of each of the periods
presented, nor are they necessarily indicative of future consolidated operating
results. The pro forma information below excludes the impact of non-recurring
charges related to an immediate expensing of acquired in-process research and
development, as well as the impact of charges from stock-based compensation
recognized by MasterChart in connection with the acquisition.
The pro forma weighted average shares used in computing unaudited pro forma
basic and diluted loss per share include 1,617,873 and 935,858 shares issued as
consideration for the MasterChart and Medifor acquisitions, respectively, as if
they had been issued as of January 1 of each period presented.
47
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended
December 31,
------------------
1999 2000
-------- --------
(unaudited)
(In thousands,
except per share
data)
Revenue.............................................. $ 31,792 $ 56,703
Loss from continuing operations...................... (51,570) (75,475)
Income from discontinued operations.................. 642 83
Gain from sale of discontinued operations............ 3,547 4,353
Net loss............................................. (47,381) (71,039)
Net loss attributable to common stockholders......... (49,579) (71,039)
Per share data--basic and diluted:
Loss from continuing operations (including
accretion and accrued dividends on preferred
shares)........................................... $ (3.11) $ (2.61)
Income from discontinued operations................ 0.04 0.00
Gain from sale of discontinued operations.......... 0.20 0.15
-------- --------
Net loss attributable to common stockholders..... $ (2.87) $ (2.46)
======== ========
Weighted average shares of common stock outstanding
used in computing unaudited pro forma basic and
diluted net loss per share.......................... 17,272 28,851
======== ========
5. Fixed Assets
Fixed assets as of December 31 consist of the following:
Estimated
Useful Life 1999 2000
----------- ------- -------
(In thousands)
Office furniture and equipment............... 2-7 years $ 4,466 $ 7,093
Service assets............................... 2 years 3,844 10,619
Production and warehouse equipment........... 7 years 1,088 1,159
Leasehold improvements....................... 4 years 952 1,477
Website development costs.................... 2 years -- 286
Construction in progress..................... -- 57 --
------- -------
10,407 20,634
Less accumulated depreciation and
amortization................................ 5,467 8,842
------- -------
Fixed assets, net............................ $ 4,940 $11,792
======= =======
Depreciation and amortization expense was approximately $563,000, $980,000
and $3,411,000 in 1998, 1999 and 2000, respectively.
Service assets include equipment placed with customers for their use in
running Allscripts' software. At December 31, 1999 and 2000, service assets
included $1,296,000 and $2,970,000, respectively, of assets at physician sites
in various stages of installation for which depreciation had not begun. Amounts
deemed necessary to reserve for writedowns to fair value on returned equipment
are included in accumulated depreciation and amortization.
48
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Intangible Assets
Intangible assets as of December 31 consist of the following:
Estimated
Useful Life 1999 2000
----------- ------- --------
(In thousands)
Acquired software........................... 2-3 years $ 81 $ 4,678
Trademarks.................................. 5 years -- 26,104
Customer lists.............................. 4-5 years 3,563 3,563
Goodwill.................................... 2-8 years 12,044 152,656
------- --------
15,688 187,001
Less accumulated amortization............... 12,113 37,311
------- --------
Intangibles, net............................ $ 3,575 $149,690
======= ========
Goodwill increased by $140,600,000 in 2000 due to the acquisitions described
in Note 4.
7. Notes Payable
Through April 16, 1998, Allscripts maintained a credit arrangement with a
commercial bank consisting of two components, a revolving credit facility and a
term loan. The revolving credit facility permitted borrowings up to
$10,000,000, limited by certain eligible working capital requirements.
Borrowings under the revolving credit facility were collateralized by accounts
receivable, inventories, equipment and other assets.
On April 16, 1998, Allscripts signed a revolving credit agreement with a
commercial bank. As amended, the revolving credit facility permitted borrowings
up to $10,000,000, limited by certain eligible working capital requirements.
Interest is at prime plus 0.5%. Borrowings under the revolving credit facility
are collateralized by accounts receivable, inventory, equipment and other
assets. The revolving credit facility expired on April 16, 2000.
Under the revolving credit agreement, Allscripts was required to maintain
certain financial ratios, including minimum net working capital, minimum EBITDA
and minimum capital funds. The agreement also prohibited the payment of
dividends. No outstanding borrowings existed under the line at December 31,
1999, and no amounts were available for borrowing at that date due to certain
covenant violations.
8. Long-Term Obligations
On April 30, 1996, Allscripts completed a $10,000,000 financing in the form
of 8.0% convertible subordinated debentures due April 30, 2001. Interest on the
debentures was payable semiannually. The debentures could be converted into
2,683,152 common shares of Allscripts at a conversion price equal to $4.2024.
The debentures were convertible at the option of the holder. Under the terms of
the debenture agreements, Allscripts' ability to pay dividends was restricted
under certain circumstances.
In conjunction with the issuance of the Series I Preferred and common stock,
the majority of the outstanding subordinated convertible debentures were
exchanged for 1,803,838 shares of Series J Preferred. In connection with this
exchange, Allscripts also issued to the Series J Preferred stockholders
1,326,652 detachable warrants to purchase shares of common stock of Allscripts
for $0.06 per share. The warrants had an expiration date of five years from the
date of closing of the sale of Series I Preferred (see Note 11). The balance of
the outstanding convertible subordinated debentures was paid-off in January
2000.
An extraordinary loss of $790,000 was recorded in the consolidated statement
of operations for the year ended December 31, 1998, consisting of the writeoff
of deferred financing costs related to Allscripts'
49
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
convertible subordinated debentures in connection with their exchange for
shares of Series J Preferred and warrants.
Long-term obligations as of December 31 consist of the following:
1999 2000
------- -------
(In thousands,
except per
share amounts)
Convertible subordinated debentures issued April 30, 1996;
due April 30, 2001; interest at 8.0% payable semiannually
on April 30 and October 31, potentially increasing 0.5%
on each such interest record date to a maximum of 1.5%;
convertible into 13,985 common shares at December 31,
1999 at $4.2024.......................................... $ 59 $ --
====== =======
9. Income Taxes
The U.S. Federal statutory tax rate differs from Allscripts' effective tax
rate for the years ended December 31 are as follows:
1998 1999 2000
----- ----- -----
U.S. Federal statutory tax
rate..................... (34.0)% (34.0)% (34.0)%
Items affecting Federal
income tax rate:
Amortization of
nondeductible goodwill. 1.3 3.4 11.9
Acquired in-process
research and
development............ -- -- 8.1
Other, net.............. 1.2 (0.9) 1.2
Valuation allowance..... 31.5 31.5 12.8
----- ----- -----
Effective income tax rate. -- % -- % -- %
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities for the years ended
December 31 are as follows (in thousands):
1999 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards.................... $ 17,222 $ 22,041
Allowance for doubtful accounts..................... 1,553 1,707
Acquisition costs................................... 362 340
Accrued expenses.................................... 329 97
Deferred compensation............................... -- 407
Goodwill amortization............................... -- 186
Inventory........................................... -- 62
Property, plant, and equipment...................... 110 296
Other............................................... 62 34
-------- --------
Total deferred tax assets......................... 19,638 25,170
Less: valuation allowance............................. (19,638) (15,003)
-------- --------
Net deferred tax assets............................... $ -- $ 10,167
-------- --------
Deferred tax liabilities:
Acquired intangibles................................ $ -- $ 10,073
Website development costs........................... -- 94
-------- --------
Total deferred tax liabilities.................... -- 10,167
-------- --------
Net deferred tax assets (liabilities)................. $ -- $ --
======== ========
50
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance as of January 1, 1999 was $15,284,000. The net
change in the total valuation allowance for the years ended December 31, 1999
and 2000 is an increase of $4,354,000 and a decrease of $4,635,000,
respectively. The decrease in the valuation allowance in 2000 is also affected
by a decrease attributable to acquired net deferred tax liabilities of
$11,973,000.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
At December 31, 2000, Allscripts has operating loss carry forwards available
for Federal income tax reporting purposes of approximately $56,587,000. The
operating loss carryforwards expire between 2002 and 2020. Allscripts' ability
to utilize these operating loss carryforwards to offset future taxable income
is dependent on a variety of factors, including possible limitations on usage
pursuant to Internal Revenue Code Section (IRC) 382. IRC 382 imposes an annual
limitation on the future utilization of operating loss carryforwards due to
changes in ownership resulting from the issuance of common stock, stock
options, warrants and convertible preferred stock.
10. Redeemable Preferred Shares
The Series H Preferred shares were voting, nonparticipating and had a
liquidation preference upon dissolution of Allscripts of $6.462 per share plus
an amount equal to all unpaid dividends accrued thereon. The Series H Preferred
shares were senior to Series A, Series B, Series C, Series D, Series F and
Series G Preferred shares with respect to the liquidation preference.
The shares were entitled to cumulative, quarterly dividends of 8.0% accruing
from the date of issuance and payable beginning September 15, 1998 and then
payable quarterly thereafter. Mandatory redemption of shares (at $6.462 per
share) in the proportion of 10%, 10%, 10%, and 70% of the total number of
shares originally issued was initially scheduled to begin on September 15, 1998
and occur annually thereafter through 2001, respectively.
In connection with the 8% convertible subordinated debenture offering
described in Note 8, the terms of the Series H Preferred were amended. Pursuant
to such amendment, on September 15, 1998, Allscripts was required to begin
paying dividends quarterly. Allscripts was required to redeem shares of Series
H Preferred with a redemption value of $6.16 million and all accrued dividends
thereon on September 15, 2001.
In conjunction with the issuance of $8,930,000 of Series I Preferred on
April 16, 1998, the terms of the Series H Preferred were amended to extend the
maturity date five years from the closing of the sale of the Series I
Preferred. Allscripts was required to redeem shares of Series H Preferred equal
to $8,800,000 plus all accrued dividends ($3,007,000 at December 31, 1998 or
$2.21 per share) five years from the closing of the sale of Series I Preferred.
In consideration of the change in terms therein, Allscripts issued 916,651
warrants to purchase shares of common stock of Allscripts for $0.06 per share
to the holders of Series H Preferred. The warrants will expire five years from
the date of the closing of the sale of Series I Preferred. The Series H
Preferred shares were redeemed at $8,800,000 plus accrued unpaid dividends,
upon completion of the initial public offering of Allscripts common stock on
July 28, 1999.
On April 16, 1998, Allscripts effected the private placement of Series I
Preferred and common stock of Allscripts for $8,930,000. The common stock
component, 4,597,070 shares, represented 24.4% of Allscripts' common stock at
April 16, 1998, assuming exercise of all options and warrants and the
conversion of all convertible preferred stock into common stock. Based upon an
independent appraisal, $1,009,000 was allocated to the value of the common
stock issued in the Series I Unit Offering. The difference, $733,000, between
the
51
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amount initially recorded for the redeemable preferred stock and its redemption
value was accreted over the life of the Series I Preferred shares such that the
Series I Preferred shares were reflected at redemption value at the date of
redemption on July 28, 1999. The Series I Preferred shares were voting and had
a liquidation preference upon dissolution of Allscripts of $6.462 per share
plus an amount equal to all unpaid dividends accrued thereon. The Series I
Preferred shares were in parity with the Series J Preferred shares and senior
to Series A, Series B, Series C, Series D, Series F, Series G and Series H
Preferred shares with respect to liquidation preference.
A cumulative dividend on the Series I Preferred accrued at a rate of 8.5%
per annum. The Series I Preferred shares were redeemed at $8,654,000 plus
accrued unpaid dividends on July 28, 1999.
In conjunction with the issuance of the Series I Preferred and common stock,
substantially all of the outstanding subordinated convertible debentures were
exchanged for 1,803,838 shares of Series J Preferred. The Series J Preferred
shares were voting and had a liquidation preference upon dissolution of
Allscripts of $6.462 per share plus an amount equal to all unpaid dividends
accrued thereon.
A cumulative dividend on the Series J Preferred accrued at a rate of 8.5%
per annum. The Series J Preferred shares were redeemed at $11,656,000 plus
accrued unpaid dividends on July 28, 1999.
11. Stockholders' Equity
Preferred Shares
The Series A, Series B, Series C, Series D, Series F and Series G Preferred
shares were voting, nonparticipating, convertible, and had a liquidation
preference upon dissolution of Allscripts equal to $1.00, $3.75, $3.20, $4.50,
$1.25 and $4.50 per share, respectively. The Series G Preferred shares were
senior to the Series A, Series B, Series C, Series D and Series F Preferred
shares in respect to the liquidation preference. The Series C, Series D and
Series F Preferred shares were senior to the Series A and Series B Preferred
shares in respect to the liquidation preference. These preferred shareholders
had the option to convert their shares into common shares at prescribed rates.
Automatic conversion of all convertible preferred shares into 2,977,483 shares
of common stock occurred upon the closing of the initial public offering of
Allscripts common stock on July 28, 1999.
Common Stock
During 1999, Allscripts' Board of Directors authorized and its shareholders
approved a one-for-six reverse common stock split. Consequently, all common
share and per share information in the accompanying financial statements has
been adjusted to reflect the reverse stock split.
On July 28, 1999, Allscripts completed the initial public offering of its
common stock. Allscripts issued 7,000,000 shares of common stock at an initial
public offering price of $16.00 per share and all outstanding shares of
convertible preferred stock automatically converted into 2,977,483 shares of
common stock. The initial public offering resulted in gross proceeds of
$112,000,000, $7,840,000 was applied to the underwriting discount and
approximately $1,451,000 was applied to related offering expenses. In addition,
Allscripts used approximately $34,745,000 of the proceeds to redeem all
outstanding shares of its Series H, I and J Redeemable Preferred Stock, plus
accrued dividends thereon, $3,900,000 to repay advances under its revolving
line of credit with its commercial bank and approximately $653,000 to repay a
promissory note, including accrued interest, issued as consideration for a 1999
acquisition.
52
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During February 2000, Allscripts sold IMS Health Incorporated 214,794 shares
of Allscripts common stock for a purchase price of $9,983,000, net of related
expenses of $17,000.
On March 10, 2000, Allscripts completed a public offering of 1,452,000
shares of its common stock, at an offering price of $73.00 per share. The
public offering resulted in gross proceeds of $105,996,000, $5,561,000 of which
was applied to the underwriting discount and approximately $669,000 of which
was applied to related offering expenses. The remaining net proceeds of
approximately $99,766,000 were invested in interest-bearing, investment grade
securities.
Warrants
In conjunction with the 1996 convertible subordinated debenture offering,
the term loan guaranteed by a stockholder was amended to extend the maturity
date to April 30, 1998. In exchange for extending its guaranty of such term
debt, Allscripts issued warrants to purchase an aggregate of 279,175 common
shares with a strike price of $4.2024. The warrants expire April 30, 2001.
Because the exercise price of the warrants exceeded the per share value implied
by the convertible subordinated debenture offering, no value was ascribed to
the warrants. At December 31, 2000, 10,713 warrants were outstanding, all of
which were fully vested and exercisable.
As a condition to the Series I Unit Offering, Allscripts amended the
maturity date of the Series H Preferred stock and exchanged the subordinated
convertible debentures for shares of Series J Preferred stock. In exchange for
these concessions, Allscripts issued detachable warrants to the holders of
Series H Preferred stock and holders of Series J Preferred stock to receive in
the aggregate 916,651 and 1,326,652 shares of common stock, respectively. Based
upon an independent appraisal, $165,000 was allocated to the warrants issued to
the Series H Preferred stockholders, and the net loss attributable to the
common stockholders in 1998 was increased by this amount. Based upon an
independent appraisal, $239,000 was assigned to the value of the warrants
issued to the Series J Preferred stockholders. The warrants carry a strike
price of $0.06 and expire in April 2003. At December 31, 2000, 1,876 warrants
issued to Series H Preferred stockholders and 2,528 warrants issued to Series J
Preferred stockholders were outstanding, all of which were fully vested and
exercisable.
During 1999, Allscripts issued a fully vested warrant to purchase 3,333
shares of common stock at $3.00 per share to a non-employee for services
rendered. Allscripts assigned a value of $9.00 to the warrant and accordingly
recorded expense in the amount of $30,000 in 1999. These warrants expire ten
years after issuance. In addition, during 1999, Allscripts issued a
performance-based warrant to another non-employee to purchase 8,333 shares of
common stock at $3.00 per share. This warrant expired during 2000.
All of the above warrants may be exercised with payment of cash or the
surrender of additional warrants, such warrants to be valued by the excess of
fair market value of a common share on the day of exercise over the warrant
purchase price. For the year ended December 31, 1999 and 2000, 4,165,057 and
25,954, respectively, shares of common stock were issued through the cashless
exercise of warrants. Warrants to purchase 140,834 shares of common stock in
1999 and 45 shares of common stock in 2000 were surrendered to exercise these
warrants, such warrants being valued at the excess of fair market value of a
common share on the day of exercise over the warrant exercise price. The net
value surrendered, determined by the difference between the market price on the
date of exercise and the exercise price, was approximately $1,399,000 and
$2,000 in 1999 and 2000, respectively. The value of the net shares issued has
been included in par value of common stock and additional paid-in capital in
the accompanying consolidated balance sheet.
53
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, Allscripts has reserved 18,450 shares of common stock
for issuance upon the exercise of warrants.
12. Stock Option Plans
At December 31, 2000, options to purchase 7,393,489 shares of common stock
were authorized under Allscripts' Amended and Restated 1993 Stock Incentive
Plan. The exercise price for shares under this plan is determined by
Allscripts' Board of Directors at the date of grant. All options must be
exercised within ten years of the date of grant. The plan provides for exercise
of options by payment of cash or surrender of common stock. Options vest on
various schedules, primarily on a straight-line basis over three and four year
periods from the date of grant, and in certain circumstances upon a change in
control. In January 2001, the Board of Directors approved the Allscripts'
Healthcare Solutions, Inc. 2001 Nonstatutory Stock Option Plan. The plan
provides for the issuance of up to 2,000,000 options to purchase common stock.
The plan will be administered by the Compensation Committee of the Board of
Directors. The plan covers employees of Allscripts or its affiliates
(excluding, however, any employee who is also serving as an officer or director
of Allscripts or an affiliate) designated by the Board or the Compensation
Committee as being eligible under the plan and non-employee consultants or
contractors. The exercise price, term and vesting period of option issued under
this plan are determined by the Compensation Committee at the time of grant.
In May 1998, in conjunction with the closing of the Series I Unit Offering
the Board of Directors approved the cancellation and reissuance of options to
purchase 1,481,916 shares of Allscripts' common stock. The options covered by
the grant all have an exercise price of $0.06 per share.
Total stock-based compensation expense included in selling, general and
administration expenses related to options issued to employees for the years
ended 1998, 1999 and 2000 was $176,000, $449,000 and $535,000, respectively.
At December 31, 2000, Allscripts has reserved 3,728,327 shares of common
stock for issuance upon exercise of outstanding options and 1,678,906 shares of
common stock are available for future issuance under the Amended and Restated
1993 Stock Incentive Plan.
Had Allscripts elected to apply the provisions of FAS 123 regarding
recognition of compensation expense to the extent of the calculated fair value
of stock options granted, reported net loss and net loss attributable to common
stockholders per share would have been increased as follows:
1998 1999 2000
------- -------- --------
(In thousands, except
per share data)
Net loss, as reported....................... $(7,514) $(11,244) $(57,367)
Pro forma net loss.......................... $(7,649) $(11,375) $(66,390)
Net loss per share attributable to common
stockholders--basic and diluted, as
reported................................... $ (1.63) $ (0.91) $ (2.06)
Pro forma net loss per share attributable to
common stockholders--basic and diluted..... $ (1.66) $ (0.92) $ (2.38)
Under FAS 123, compensation expense representing fair value of the option
grant is recognized over the vesting period.
54
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of the FAS 123 pro forma net loss and net loss per share
calculation, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option pricing model. The weighted average
assumptions used in determining fair value as disclosed for FAS 123 are shown
in the following table:
1998 1999 2000
---- ---- ----
Risk-free interest rate................................. 5.15% 5.82% 6.20%
Option life (years)..................................... 4 4 4
Dividend rate........................................... -- % -- % -- %
No expected volatility factor has been used in determining the fair value of
options granted prior to Allscripts' initial public offering, while a
volatility factor of 87% has been used in valuing options granted subsequent to
the initial public offering and prior to December 31, 1999 and 140% for option
grants issued in 2000.
Option activity for the years ended December 31, 1998, 1999 and 2000 is as
follows:
Options Weighted Average Options
Outstanding Exercise Price Exercisable
----------- ---------------- -----------
Balance at December 31,
1997..................... 2,730,357 $ 2.04 1,100,948
Options granted......... 1,985,165 0.06
Options exercised....... (336,532) 0.18
Options forfeited....... (198,291) 1.62
Options canceled........ (1,483,576) 1.34
----------
Balance at December 31,
1998..................... 2,697,123 0.68 1,434,122
Options granted......... 1,025,440 9.56
Options exercised....... (961,541) 0.84
Options forfeited....... (173,544) 1.19
----------
Balance at December 31,
1999..................... 2,587,478 4.10 984,426
Options granted......... 2,190,558 24.83
Options exercised....... (844,083) 0.86
Options forfeited....... (205,626) 13.36
----------
Balance at December 31,
2000..................... 3,728,327 $16.51 979,661
==========
55
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1998, 1999 and 2000 the weighted average
fair value of options granted was $0.19, $7.97 and $22.96, respectively.
Information regarding options outstanding at December 31, 2000 is as follows:
Weighted Average
Number of Remaining Number of
Exercise Options Contractual Life Options
Prices Outstanding (in years) Exercisable
-------- ----------- ---------------- -----------
$ 0.06 553,279 7.53 403,546
1.15 46,049 9.38 46,049
1.50 134,559 4.42 134,559
2.16 4,800 5.66 4,800
2.34 35,984 6.05 33,346
3.00 233,042 8.25 85,241
6.12 8,622 9.38 8,622
6.88 290,000 9.96 --
11.25 344,600 8.80 89,506
12.69 163,875 8.61 49,325
12.76 13,717 9.38 13,717
13.27 26,852 9.38 26,852
13.31 90,000 9.74 --
13.78 34,953 9.38 29,651
13.93 5,858 9.38 5,858
14.69 40,000 8.75 10,000
14.88 1,672 9.79 1,672
15.31 2,303 9.38 2,303
15.38 53,000 8.69 9,500
15.51 538 9.38 --
16.00 37,499 8.56 9,377
16.59 1,782 9.38 1,782
16.64 1,393 9.38 1,393
21.25 942,850 9.56 62
21.88 66,000 9.31 --
44.63 595,100 9.09 12,500
--------- -------
3,728,327 979,661
========= =======
In August 1999, Allscripts granted options to purchase an aggregate of
30,000 shares of common stock to non-employees in exchange for future services.
These options have an exercise price of $12.69 per share and became fully
vested as of February 3, 2000. Selling, general and administrative expenses for
the years ended December 31, 1999 and 2000 include $293,000 and $741,000,
respectively, in expense relating to these options. In October 2000, Allscripts
granted options to purchase 1,672 shares of common stock to a consultant in
exchange for services rendered. Selling, general and administrative expenses
for the year ended December 31, 2000 include $10,000 in expense relating to
these options.
13. Lease Commitments
Allscripts conducts its operations from leased premises and with equipment
acquired under several operating leases. Total rent expense from continuing
operations was approximately $599,000, $579,000 and $935,638 in 1998, 1999 and
2000, respectively.
56
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum rental payments for the next five years are as follows (in
thousands):
Year Ending
December 31,
------------
2001.............................. $ 868
2002.............................. 837
2003.............................. 807
2004.............................. 411
2005.............................. --
------
Total future minimum lease
payments......................... $2,923
======
14. Contingencies
The pharmaceutical repackaging industry is subject to stringent federal and
state regulations. Allscripts' repackaging operations are regulated by the Food
and Drug Administration as if Allscripts were a manufacturer. Allscripts is
also subject to regulation by the Drug Enforcement Administration in connection
with the packaging and distribution of controlled substances.
Allscripts is a defendant in over 2,000 multi-defendant lawsuits brought by
over 3,000 claimants involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine. The majority of these suits were filed in state
courts in Texas beginning in August 1999. The plaintiffs in these cases claim
injury as a result of ingesting a combination of these weight-loss drugs. In
each of these suits, Allscripts is one of many defendants, including
manufacturers and other distributors of these drugs. Allscripts does not
believe it has any significant liability incident to the distribution or
repackaging of these drugs, and it has tendered defense of these lawsuits to
its insurance carrier for handling. In addition, while Allscripts has not yet
conducted a review of all of the Texas suits, since physician dispensing is
generally prohibited in Texas and Allscripts has never distributed these drugs
in Texas, Allscripts believes that it is unlikely that it is responsible for
the distribution of the drugs at issue in many of these cases. The lawsuits are
in various stages of litigation, and it is too early to determine what, if any,
liability Allscripts will have with respect to the claims made in these
lawsuits. If Allscripts' insurance coverage in the amount of $16,000,000 per
occurrence and $17,000,000 per year in the aggregate is inadequate to satisfy
any resulting liability, Allscripts will have to defend these lawsuits and be
responsible for the damages, if any, that Allscripts suffers as a result of
these lawsuits. Allscripts does not believe that the outcome of these lawsuits
will have a material adverse effect on its financial condition, results of
operations or cash flows.
Between October and December 2000, four complaints were filed in the United
States District Court for the Northern District of Illinois against Allscripts
and its President and Chief Financial Officer, David B. Mullen. The complaints
purported to be brought on behalf of a class of individuals who purchased the
common stock of Allscripts during the period of July 27, 2000 through and
including October 26, 2000 (the "Class Period") and alleged violations of
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based on
Allscripts' restatement of its financial results for the second quarter of
2000. The four complaints were deemed related, and the cases were reassigned
and consolidated for all purposes before Judge Charles Kocoras, before whom the
first filed case was pending. The consolidated action is entitled In re
Allscripts, Inc. Securities Litigation, No. 00C6796 (N.D. Ill.) and includes
all consolidated cases: Bredeson v. Allscripts, Inc. and David B. Mullen, Civ.
No. 00C-6796 (N.D. Ill., filed on October 31, 2000), Karmazin v. Allscripts,
Inc. and David B.
57
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mullen, Civ. No. 00C-6864 (N.D. Ill., filed on November 2, 2000), Mohr v.
Allscripts, Inc. and David B. Mullen, Civ. No. 00C-6992 (N.D. Ill., filed on
November 6, 2000), Nadav v. Allscripts, Inc. and David B. Mullen, Civ. No. 00C-
8126 (N.D. Ill., filed on December 26, 2000).
In January 2001, Lead Plaintiff and Lead Counsel were appointed in the
consolidated case. On March 12, 2001, plaintiffs filed a Consolidated and
Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint
continues to name Allscripts and David B. Mullen as defendants and alleges
violations of Section 10(b) and 20(a) of the Securities Exchange Act. Three
additional defendants are named in the Amended Complaint: Glen E. Tullman,
Allscripts' Chairman of the Board and Chief Executive Officer, J. Peter
Geerlofs, Allscripts' Chief Medical Officer, and Philip J. Langley, formerly
Allscripts' Senior Vice President of Business Development/Field Services. The
Amended Complaint purports to expand the Class Period in the consolidated case
to include all individuals who purchased the common stock of Allscripts during
the period from March 6, 2000 through and including February 27, 2001. The
Amended Complaint is based on the previous allegations regarding Allscripts'
restatement of its financial results for the second quarter of 2000 and new
allegations relating to, inter alia, the prospects for the TouchScript product.
Allscripts intends to move to dismiss the Amended Complaint, and Judge
Kocoras has set June 2001 as the prospective ruling date. At this time,
management is unable to determine the likely outcome of this matter or to
reasonably estimate the amount of any potential loss with respect to this
matter.
In addition, Allscripts is from time to time subject to legal proceedings
and claims that arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on Allscripts' consolidated financial
condition, results of operations or cash flows.
15. Savings Plan
Effective January 1, 1993, employees of Allscripts who meet certain
eligibility requirements can participate in Allscripts' 401(k) Savings and
Investment Plan. Under the plan, Allscripts may, at its discretion, match the
employee contributions. Allscripts recorded expenses from continuing operations
related to its matching contributions in 1998, 1999 and 2000 of $37,000,
$60,000 and $184,000, respectively.
16. Discontinued Operations
On March 18, 1999, Allscripts signed a definitive agreement to sell certain
assets of its pharmacy benefit management operation to Pharmacare Management
Services, Inc., Pharmacare Direct, Inc., and Procare Pharmacy, Inc. The sale
closed on March 31, 1999. The aggregate purchase price was $15,400,000, payable
in the form of an up-front payment at closing of $7,000,000 and a contingent
payment of up to $8,400,000 payable within 10 business days after the first
anniversary of the closing date. Additionally, the buyers purchased the
inventory at Allscripts' net cost, approximately $500,000, while Allscripts
retained the remaining working capital. The contingent payment was based upon
the number of prescription fillings (including original fillings and subsequent
refills) for the one-year period following the closing. In May 2000, Allscripts
received payment of $4,353,000, net of related expenses, as final payment of
the contingent consideration.
The operating results of the pharmacy benefit management segment have been
segregated from continuing operations and reported as a separate line item on
the Consolidated Statements of Operations under the caption "Income from
discontinued operations." Additionally, Allscripts has reclassified its prior
years' financial statements to present the operating results of the pharmacy
benefit management operations as a discontinued operation.
58
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating results from discontinued operations were as follows:
1998 1999 2000
------- ------- ----
(In thousands)
Revenue............................................. $52,866 $14,292 $--
Cost of revenue..................................... 49,313 13,378 --
------- ------- ----
Gross profit...................................... 3,553 914 --
Selling, general and administrative expenses........ 2,583 272 (83)
------- ------- ----
Income from discontinued operations................. $ 970 $ 642 $ 83
======= ======= ====
Included in revenue is $2,982,000, $375,000 and $0 in 1998, 1999 and 2000,
respectively, from Anthem, Inc., a related party (see Note 18).
For the twelve months ended December 31, 1999 and 2000, Allscripts
recognized a gain on the sale of this business of $3,547,000 and $4,353,000,
respectively, which has been reported as a separate line item on the
Consolidated Statement of Operations under the caption "Gain from sale of
discontinued operations, net of income tax expense." The gain in 2000
represents final payment of contingent consideration related to the sale, net
of certain transaction costs.
The components of assets and liabilities of discontinued operations included
in Allscripts' consolidated balance sheets at December 31 are as follows:
1999 2000
--------------
(In thousands)
Assets:
Accounts receivable..................................... $ 95 $ 4
Other................................................... 145 --
------ -------
Total assets.............................................. 240 4
Liabilities............................................... 226 317
------ -------
Net................................................... $ 14 $ (313)
====== =======
59
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Supplemental Cash Flow Information
1998 1999 2000
------- ------ --------
(In thousands, except
share
and per share amounts)
Interest paid.......................................... $ 294 $ 231 $ --
Income taxes paid...................................... -- -- --
Noncash investing and financing activity:
Accretion of mandatory redemption value of preferred
shares.............................................. 323 794 --
In connection with the Series I Unit Offering,
issuance of 1,803,838 shares of Series J Redeemable
Preferred shares and 1,326,661 warrants in exchange
for Allscripts' outstanding convertible subordinated
debentures (in the aggregate principal amount of
$11,219,000) plus accrued interest thereon through
April 15, 1998 ($437,000 in aggregate).............. 11,656 -- --
In connection with the 1999 acquisitions, issuance of
204,771 shares of common stock valued at an
aggregate amount of approximately $2,572,000 and the
issuance of a 6% promissory note in the principal
amount of $650,000 in exchange for net tangible
liabilities of $637,000............................. -- 3,222 --
In connection with the acquisition of MasterChart,
Inc., issuance of 1,617,873 shares of common stock
valued at an aggregate amount of approximately
$127,400,000 and $5,000,000 in cash, in exchange for
all outstanding common stock of MasterChart, Inc. .. -- -- 127,400
In connection with the acquisition of Medifor, Inc.,
issuance of 935,858 shares of common stock valued at
an aggregate amount of approximately $34,400,000 and
issuance of 142,786 common stock option replacements
of Medifor common stock options with a fair value of
approximately $4,200,000, in exchange for all
outstanding common and preferred A and B stock of
Medifor............................................. -- -- 38,600
In connection with other 2000 acquisitions, issuance
of 87,484 shares of common stock valued at an
aggregate amount of approximately $3,000,000 and
$8,000,000 in cash in exchange for net tangible
assets of $274,000.................................. -- -- 3,000
In connection with Allscripts' initial public
offering, conversion of 8,718,768 shares of
preferred stock into 2,977,483 shares of common
stock............................................... -- 8,719 --
Cumulative dividends in arrears on redeemable
preferred shares.................................... 1,927 1,404 --
18. Related Party Transactions
From June 1997 through March 1999, Allscripts provided pharmacy benefit
management services for Anthem, Inc. One of Allscripts' directors is Chairman
of the Board of Anthem.
One of Allscripts' directors was a partner in the law firm of Green,
Stewart, Farber & Anderson, P.C., which Allscripts retained to provide legal
services. Expense related to services provided by this law firm was $44,000,
$33,000 and $55,000 in 1998, 1999 and 2000, respectively.
60
19. Subsequent Events
On January 8, 2001, Allscripts acquired Channelhealth Incorporated in
exchange for 8,592,996 shares of common stock with a fair value of
approximately $218,400,000, the issuance of approximatley 493,000 common stock
options as replacement of Channelhealth common stock options with a fair value
of approximately $7,600,000 and transaction costs totaling approximately
$4,750,000. Allscripts will pay additional stock-based consideration if certain
revenue targets are achieved during 2002, resulting in the recording of
additional purchase price at the time that the targets are met.
In connection with the Channelhealth acquisition, Channelhealth and
Allscripts, Inc. each became a wholly owned subsidiary of a new holding
company, Allscripts Healthcare Solutions, Inc. As a result of the merger
transaction, each outstanding share of Allscripts Inc. common stock was
converted into one share of Allscripts Healthcare Solutions, Inc. common stock.
Allscripts Inc. no longer files reports with the Securities and Exchange
Commission, and its common stock is no longer listed on the Nasdaq National
Market; however, Allscripts Healthcare Solutions, Inc. does file reports with
the Securities and Exchange Commission, and its common stock is listed on the
Nasdaq National Market under the symbol "MDRX".
In conjunction with the acquisition of Channelhealth, Allscripts assumed the
Channelhealth 1999 Stock Option and Incentive Plan. Channelhealth reserved
2,500,000 shares of common stock for issuance under the plan. On the closing
date, January 8, 2001, there were a total of 1,461,166 options granted under
the plan at varying exercise prices. These options will be converted to options
in Allscripts based upon the perdetermined conversion rate. Accordingly, there
will be approximately 493,000 options to purchase Allscripts common stock at
exercise prices ranging from $26.74 to $68.31. Options to purchase 415,635
shares of Allscripts common stock are fully vested on the closing date. Options
generally expire ten years after issuance.
61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Allscripts Healthcare Solutions, Inc.:
Under date of February 23, 2001, except for note 14 as to which the date is
March 12, 2001, we reported on the consolidated balance sheet of Allscripts
Healthcare Solutions, Inc. and subsidiaries (Company) as of December 31, 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit) and comprehensive income (loss), and cash flows for the year then
ended. In connection with our audit of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in the accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 23, 2001
62
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Allscripts
Healthcare Solutions, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 17, 2000 appearing in this Form 10-K also included an
audit of the financial statement schedule for each of the two years in the
period ended December 31, 1999 listed in Item 14(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. We have not audited the financial
statement schedule of Allscripts Healthcare Solutions, Inc. (formerly
Allscripts, Inc.) and subsidiaries for any period subsequent to December 31,
1999.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 17, 2000
63
ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Schedule II
Beginning Charged to Deductions Ending
Balance Expense (Write-offs) Balance
--------- ---------- ------------ -------
(In thousands)
Allowance for accounts receivable
Year ended December 31, 1998.... $ 3,432 $1,241 $ (150) $ 4,523
Year ended December 31, 1999.... 4,523 (633) (147) 3,743
Year ended December 31, 2000.... 3,743 980 (339) 4,384
Valuation allowance for deferred
tax assets
Year ended December 31, 1998.... 13,588 1,696 -- 15,284
Year ended December 31, 1999.... 15,284 4,354 -- 19,638
Year ended December 31, 2000.... 19,638 7,338 (11,973)(1) 15,003
- --------
(1) Deduction related to net deferred tax liabilities established in connection
with acquisitions made in 2000.
64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 21, 2000, Allscripts dismissed PricewaterhouseCoopers LLP (PWC)
as Allscripts' independent accountant. At the recommendation of its audit
committee, the board of directors of Allscripts authorized the dismissal of
PWC.
The reports of PWC on Allscripts' consolidated financial statements as of
and for the two years ended December 31, 1998 and 1999 did not contain an
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
During Allscripts' two fiscal years ended December 31, 1999, and in the
interim period from January 1, 2000 through December 21, 2000, there were no
disagreements with PWC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC, would have caused
them to make reference thereto in their report of the financial statements for
those years.
During Allscripts' two fiscal years ended December 31, 1999 and in the
interim period from January 1, 2000 through December 21, 2000, there were no
"reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K
promulgated under the Securities Exchange Act of 1934 except that in connection
with PWC's review of Allscripts' financial statements for the quarter ended
September 30, 2000, PWC advised Allscripts of the existence of a material
weakness relating to the controls surrounding contract administration. To
immediately address this concern, Allscripts, among other things, hired a
contract attorney, who serves as a full-time Contract Administrator with the
responsibility for the retention, review, analysis, monitoring and maintenance
of individual customer contracts. Management and the audit committee believe
that the concerns expressed by PWC have been adequately addressed through the
actions taken by Allscripts.
Allscripts provided PWC with a copy of the disclosures made in its Current
Report on Form 8-K dated December 21, 2000 and filed with the Securities and
Exchange Commission on December 28, 2000 (the "Form 8-K") and requested that
PWC furnish Allscripts with a letter addressed to the Securities and Exchange
Commission stating whether PWC agrees with the statements made by Allscripts in
response to Item 304(a) of Regulation S-K and, if not, stating the respects in
which PWC does not agree. A copy of that letter is filed as Exhibit A to the
Form 8-K.
At the recommendation of the audit committee, the board authorized the
engagement of KPMG LLP as Allscripts' new independent accountants to audit and
report on the financial statements for the fiscal year ending December 31, 2000
and to act, on a continuing basis, as Allscripts' independent accountant. On
December 21, 2000, Allscripts requested that KPMG LLP be engaged as its
independent accountants, and KPMG LLP accepted the engagement on December 28,
2000.
During the two fiscal years ended December 31, 1999 and in the interim
period from January 1, 2000 through December 21, 2000, Allscripts did not
consult with KPMG LLP regarding either the application of accounting principles
to a specified transaction, either completed or proposed, or the types of audit
opinion that might be rendered on Allscripts' financial statements. In
addition, Allscripts did not consult with KPMG LLP regarding any matter that
was the subject of a disagreement or a reportable event within the meaning of
Item 304 of Regulation S-K.
65
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors, executive officers and other key employees
is included under the captions "Election of Directors" and "Executive Officers"
in Allscripts' proxy statement for the 2001 Annual Meeting of Stockholders and
is incorporated by reference herein.
Information regarding Section 16(a) reporting compliance is included under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
Allscripts' proxy statement for the 2001 Annual Meeting of Stockholders and is
incorporated by reference herein.
Item 11. Executive Compensation
Information regarding executive and director compensation is included under
the captions "Executive Compensation" and "Director Compensation" in
Allscripts' proxy statement for the 2001 Annual Meeting of Stockholders and is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership is included under the caption
"Ownership of Allscripts Common Stock" in Allscripts' proxy statement for the
2001 Annual Meeting of Stockholders and is incorporated by reference herein.
Item 13. Certain Relationships and Related Party Transactions
Information regarding certain relationships and related party transactions
is included under the caption "Certain Relationships and Related Party
Transactions" in Allscripts' proxy statement for the 2001 Annual Meeting of
Stockholders and is incorporated by reference herein.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Allscripts Healthcare
Solutions, Inc. and its subsidiaries are included in Part II of this report:
Page
----
Independent Auditors' Report........................................ 34
Report of Independent Accountants................................... 35
Consolidated Balance Sheets at December 31, 1999 and 2000........... 36
Consolidated Statements of Operations for the years ended December
31, 1998, 1999 and 2000............................................ 37
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the years ended December 31, 1998,
1999 and 2000...................................................... 38
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1999 and 2000............................................ 40
Notes to Consolidated Financial Statements.......................... 41
(a)(2) Financial Statement Schedules
Independent Auditors' Report........................................ 62
Report of Independent Accountants on Financial Statement Schedule... 63
Schedule II--Valuation and Qualifying Accounts...................... 64
(a)(3) List of Exhibits
Exhibit
Number Description Reference
- ------- ----------- ---------
2.1 Form of Plan of Merger between Incorporated herein by reference from
Allscripts, Inc. and Allscripts, Inc., the Allscripts, Inc. Registration
an Illinois corporation. Statement on Form S-1 as part of
Amendment No. 4 filed on July 20, 1999
(SEC file no. 333-78431)
2.2 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of March 13, 2000, among Allscripts, the Allscripts, Inc. Current Report on
Inc., MC Acquisition Corp., MasterChart, Form 8-K filed on May 24, 2000, as
Inc. and certain shareholders of amended on July 24, 2000 and July 25,
MasterChart, Inc., together with a list 2000
of exhibits and schedules thereto. Such
exhibits and schedules are not filed,
but the Registrant undertakes to furnish
a copy of any such exhibit or schedule
to the Securities and Exchange
Commission upon request.
2.3 Amendment No. 1 to Agreement and Plan of Incorporated herein by reference from
Merger, dated as of May 9, 2000, by and the Allscripts, Inc. Current Report on
among Allscripts Inc., MC Acquisition Form 8-K filed on May 24, 2000, as
Corp., MasterChart, Inc. and certain amended on July 24, 2000 and July 25,
shareholders of MasterChart, Inc. 2000
2.4 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of April 12, 2000, among Allscripts, the Allscripts, Inc. Current Report on
Inc., WebDoc Acquisition Corp., Medifor, Form 8-K filed on May 31, 2000, as
Inc. and certain shareholders of amended on July 25, 2000
Medifor, Inc., together with a list of
exhibits and schedules thereto. Such
exhibits and schedules are not filed,
but the Registrant
67
Exhibit
Number Description Reference
- ------- ----------- ---------
undertakes to furnish a copy of any such
exhibit or schedule to the Securities
and Exchange Commission upon request.
2.5 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of July 13, 2000, by and among the Allscripts, Inc. Current Report on
Allscripts Holding, Inc., Allscripts, Form 8-K filed on July 27, 2000
Inc., Bursar Acquisition, Inc., Bursar
Acquisition No. 2, Inc., IDX Systems
Corporation and Channelhealth
Incorporated.
2.6 First Amendment to Agreement and Plan of Incorporated herein by reference from
Merger, entered into as of November 29, the Allscripts Healthcare Solutions,
2000, by and among Allscripts Holding, Inc. Registration Statement on Form S-4
Inc., Allscripts, Inc., Bursar as part of Amendment No. 1 filed on
Acquisition, Inc., Bursar Acquisition December 7, 2000 (SEC file no. 333-
No. 2, Inc., IDX Systems Corporation and 49568)
Channelhealth Incorporated.
3.1 Amended and Restated Certificate of Incorporated herein by reference from
Incorporation of Allscripts Healthcare the Allscripts Healthcare Solutions,
Solutions, Inc. (formerly named Inc. Registration Statement on Form S-4
Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file no. 333-
49568)
3.2 Certificate of Amendment of Amended and Incorporated herein by reference from
Restated Certificate of Incorporation of the Allscripts Healthcare Solutions,
Allscripts Healthcare Solutions, Inc. Inc. Registration Statement on Form S-4
(formerly named Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file no. 333-
49568)
3.3 Certificate of Amendment of Amended and Incorporated herein by reference from
Restated Certificate of Incorporation of the Allscripts Healthcare Solutions,
Allscripts Healthcare Solutions, Inc. Inc. Registration Statement on Form S-4
(formerly named Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
3.4 Bylaws of Allscripts Healthcare Incorporated herein by reference from
Solutions, Inc. (formerly named the Allscripts Healthcare Solutions,
Allscripts Holding, Inc.). Inc. Registration Statement on Form S-4
as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
10.1+ Amended and Restated 1993 Stock Incorporated herein by reference from
Incentive Plan, as amended May 10, 2000. the Allscripts, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30,
2000
10.2 Asset Purchase Agreement, dated as of Incorporated herein by reference from
March 19, 1999, by and among Allscripts, the Allscripts, Inc. Registration
Inc., PharmaCare Management Services, Statement on Form S-1 as part of
Inc., PharmaCare Direct, Inc. and Amendment No. 1 filed on June 7, 1999
ProCare Pharmacy, Inc. (SEC file no. 333-78431)
10.3 Twelfth Restated Registration Agreement Incorporated herein by reference from
dated as of June 18, 1999, by and among the Allscripts, Inc. Registration
Allscripts, Inc., those Holders of Statement on Form S-1 as part of
Allscripts, Inc. Series A Preferred, Amendment No. 2 filed on June 29, 1999
Series B Preferred, Series C Preferred, (SEC file no. 333-78431)
Series D Preferred, Series F Preferred
and
68
Exhibit
Number Description Reference
------- ----------- ---------
Series G Preferred listed in Schedule I
attached thereto, the Holders of the
Extension Guaranty Warrants listed in
Schedule II thereto, the Holders of the
1996 Extension Guaranty Warrants listed
in Schedule II thereto, those Holders of
Common listed in Schedule III thereto,
the Holders of Series H Warrants and H
Unit Common listed in Schedule IV
thereto, the Holders of Extension Series
H Warrants listed in Schedule IV
thereto, the Holders of I Unit Common
listed in Schedule V thereto and the
Holders of Debenture Warrants listed in
Schedule VI thereto.
10.4 Industrial Building Lease dated April Incorporated herein by reference from
30, 1997 between G2 Limited Partnership the Allscripts, Inc. Registration
and Allscripts, Inc. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.5 Lease Agreement between American Incorporated herein by reference from
National Bank and Trust Company of the Allscripts, Inc. Registration
Chicago, as Trustee, and Allscripts, Statement on Form S-1 as part of
Inc. dated September 1996, as amended Amendment No. 1 filed on February 18,
December 31, 1999. 2000 (SEC file no. 333-95521)
10.6+ Employment Agreement effective August 1, Incorporated herein by reference from
1997 between Allscripts, Inc. and Glen the Allscripts, Inc. Registration
E. Tullman. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.7+ Employment Agreement effective August 1, Incorporated herein by reference from
1997 between Allscripts, Inc. and David the Allscripts, Inc. Registration
B. Mullen. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.8+ Agreement dated May 1, 1995 between Incorporated herein by reference from
Allscripts, Inc. and John G. Cull. the Allscripts, Inc. Registration
Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.9 Form of TouchScript Master License Incorporated herein by reference from
Agreement. the Allscripts, Inc. Registration
Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.10 Supply Agreement dated August 27, 1998 Incorporated herein by reference from
between McKesson U.S. Health Care and the Allscripts, Inc. Registration
Allscripts, Inc. Statement on Form S-1 as part of
Amendment No. 1 filed on June 7, 1999
(SEC file no. 333-78431)
10.11 Asset Purchase Agreement dated June 30, Incorporated herein by reference from
1999 by and among Allscripts, Inc. and the Allscripts, Inc. Registration
Shopping@Home, Inc., Glen Tullman, Lee Statement on Form S-1 as part of
Shapiro, Stanley Crane and Joseph E. Amendment No. 4 filed on July 20, 1999
Carey. (SEC file no. 333-78431)
10.12+ Employment Agreement, effective August Incorporated herein by reference from
2, 1999, between Allscripts, Inc. and the Allscripts, Inc. Quarterly Report on
Joseph E. Carey. Form 10-Q for the quarter ended
September 30, 1999
69
Exhibit
Number Description Reference
------- ----------- ---------
10.13+ Employment Agreement dated as of April Incorporated herein by reference from
5, 2000 by and between Allscripts, Inc. the Allscripts, Inc. Quarterly Report on
and Lee A. Shapiro. Form 10-Q for the quarter ended June 30,
2000
10.14 Stock Rights and Restrictions Agreement
by and between Allscripts Healthcare
Solutions, Inc. and IDX Systems
Corporation dated as of January 8, 2001.
10.15 Strategic Alliance Agreement by and
between Allscripts Healthcare Solutions,
Inc. and IDX Systems Corporation dated
as of January 8, 2000.
10.16 Asset Purchase Agreement, dated as of Incorporated herein by reference from
July 13, 2000, by and between the Allscripts Healthcare Solutions,
Channelhealth Incorporated and IDX Inc. Registration Statement on Form S-4
Systems Corporation. as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
10.17 Amended and Restated Cross License and
Software Maintenance Agreement by and
between IDX Systems Corporation and
Channelhealth Incorporated dated
January 8, 2001.
21.1 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
- --------
+Indicates management contract or compensatory plan.
(b) Reports on Form 8-K
Current report on Form 8-K filed December 28, 2000, which included
disclosure under Item 4 relating to Allscripts' change in its independent
accountants.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001.
ALLSCRIPTS HEALTHCARE SOLUTIONS,
INC.
/s/ David B. Mullen
By: _________________________________
David B. Mullen
President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2001 by the following persons on
behalf of the Registrant in the capacities indicated.
Signature Title
--------- -----
/s/ Glen E. Tullman Chairman and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
Glen E. Tullman
/s/ David B. Mullen President, Chief Financial Officer and
___________________________________________ Director (Principal Financial Officer)
David B. Mullen
/s/ John G. Cull Senior Vice President, Finance, Treasurer
___________________________________________ and Secretary (Principal Accounting
John G. Cull Officer)
/s/ Philip D. Green Director
___________________________________________
Philip D. Green
/s/ M. Fazle Husain Director
___________________________________________
M. Fazle Husain
/s/ Michael J. Kluger Director
___________________________________________
Michael J. Kluger
/s/ L. Ben Lytle Director
___________________________________________
L. Ben Lytle
/s/ Edward M. Philip Director
___________________________________________
Edward M. Philip
/s/ Richard E. Tarrant Director
___________________________________________
Richard E. Tarrant
71
INDEX TO EXHIBITS
Exhibit
Number Description Reference
------- ----------- ---------
2.1 Form of Plan of Merger between Incorporated herein by reference from
Allscripts, Inc. and Allscripts, Inc., the Allscripts, Inc. Registration
an Illinois corporation. Statement on Form S-1 as part of
Amendment No. 4 filed on July 20, 1999
(SEC file no. 333-78431)
2.2 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of March 13, 2000, among Allscripts, the Allscripts, Inc. Current Report on
Inc., MC Acquisition Corp., MasterChart, Form 8-K filed on May 24, 2000, as
Inc. and certain shareholders of amended on July 24, 2000 and July 25,
MasterChart, Inc., together with a list 2000
of exhibits and schedules thereto. Such
exhibits and schedules are not filed,
but the Registrant undertakes to furnish
a copy of any such exhibit or schedule
to the Securities and Exchange
Commission upon request.
2.3 Amendment No. 1 to Agreement and Plan of Incorporated herein by reference from
Merger, dated as of May 9, 2000, by and the Allscripts, Inc. Current Report on
among Allscripts Inc., MC Acquisition Form 8-K filed on May 24, 2000, as
Corp., MasterChart, Inc. and certain amended on July 24, 2000 and July 25,
shareholders of MasterChart, Inc. 2000
2.4 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of April 12, 2000, among Allscripts, the Allscripts, Inc. Current Report on
Inc., WebDoc Acquisition Corp., Medifor, Form 8-K filed on May 31, 2000, as
Inc. and certain shareholders of amended on July 25, 2000
Medifor, Inc., together with a list of
exhibits and schedules thereto. Such
exhibits and schedules are not filed,
but the Registrant undertakes to furnish
a copy of any such exhibit or schedule
to the Securities and Exchange
Commission upon request.
2.5 Agreement and Plan of Merger, dated as Incorporated herein by reference from
of July 13, 2000, by and among the Allscripts, Inc. Current Report on
Allscripts Holding, Inc., Allscripts, Form 8-K filed on July 27, 2000
Inc., Bursar Acquisition, Inc., Bursar
Acquisition No. 2, Inc., IDX Systems
Corporation and Channelhealth
Incorporated.
2.6 First Amendment to Agreement and Plan of Incorporated herein by reference from
Merger, entered into as of November 29, the Allscripts Healthcare Solutions,
2000, by and among Allscripts Holding, Inc. Registration Statement on Form S-4
Inc., Allscripts, Inc., Bursar as part of Amendment No. 1 filed on
Acquisition, Inc., Bursar Acquisition December 7, 2000 (SEC file
No. 2, Inc., IDX Systems Corporation and no. 333-49568)
Channelhealth Incorporated.
3.1 Amended and Restated Certificate of Incorporated herein by reference from
Incorporation of Allscripts Healthcare the Allscripts Healthcare Solutions,
Solutions, Inc. (formerly named Inc. Registration Statement on Form S-4
Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
72
Exhibit
Number Description Reference
- ------- ----------- ---------
3.2 Certificate of Amendment of Amended and Incorporated herein by reference from
Restated Certificate of Incorporation of the Allscripts Healthcare Solutions,
Allscripts Healthcare Solutions, Inc. Inc. Registration Statement on Form S-4
(formerly named Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
3.3 Certificate of Amendment of Amended and Incorporated herein by reference from
Restated Certificate of Incorporation of the Allscripts Healthcare Solutions,
Allscripts Healthcare Solutions, Inc. Inc. Registration Statement on Form S-4
(formerly named Allscripts Holding, Inc.). as part of Amendment No. 1 filed on
December 7, 2000 (SEC file no. 333-
49568)
3.4 Bylaws of Allscripts Healthcare Incorporated herein by reference from
Solutions, Inc. (formerly named the Allscripts Healthcare Solutions,
Allscripts Holding, Inc.). Inc. Registration Statement on Form S-4
as part of Amendment No. 1 filed on
December 7, 2000 (SEC file no. 333-
49568)
10.1+ Amended and Restated 1993 Stock Incorporated herein by reference from
Incentive Plan, as amended May 10, 2000. the Allscripts, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30,
2000
10.2 Asset Purchase Agreement, dated as of Incorporated herein by reference from
March 19, 1999, by and among Allscripts, the Allscripts, Inc. Registration
Inc., PharmaCare Management Services, Statement on Form S-1 as part of
Inc., PharmaCare Direct, Inc. and Amendment No. 1 filed on June 7, 1999
ProCare Pharmacy, Inc. (SEC file no. 333-78431)
10.3 Twelfth Restated Registration Agreement Incorporated herein by reference from
dated as of June 18, 1999, by and among the Allscripts, Inc. Registration
Allscripts, Inc., those Holders of Statement on Form S-1 as part of
Allscripts, Inc. Series A Preferred, Amendment No. 2 filed on June 29, 1999
Series B Preferred, Series C Preferred, (SEC file no. 333-78431)
Series D Preferred, Series F Preferred
and Series G Preferred listed in
Schedule I attached thereto, the Holders
of the Extension Guaranty Warrants
listed in Schedule II thereto, the
Holders of the 1996 Extension Guaranty
Warrants listed in Schedule II thereto,
those Holders of Common listed in
Schedule III thereto, the Holders of
Series H Warrants and H Unit Common
listed in Schedule IV thereto, the
Holders of Extension Series H Warrants
listed in Schedule IV thereto, the
Holders of I Unit Common listed in
Schedule V thereto and the Holders of
Debenture Warrants listed in Schedule VI
thereto.
10.4 Industrial Building Lease dated April Incorporated herein by reference from
30, 1997 between G2 Limited Partnership the Allscripts, Inc. Registration
and Allscripts, Inc. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.5 Lease Agreement between American Incorporated herein by reference from
National Bank and Trust Company of the Allscripts, Inc. Registration
Chicago, as Trustee, and Allscripts, Statement on Form S-1 as part of
Inc. dated September 1996, as amended Amendment No. 1 filed on February 18,
December 31, 1999. 2000 (SEC file no. 333-95521)
73
Exhibit
Number Description Reference
- ------- ----------- ---------
10.6+ Employment Agreement effective August 1, Incorporated herein by reference from
1997 between Allscripts, Inc. and Glen the Allscripts, Inc. Registration
E. Tullman. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.7+ Employment Agreement effective August 1, Incorporated herein by reference from
1997 between Allscripts, Inc. and David the Allscripts, Inc. Registration
B. Mullen. Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.8+ Agreement dated May 1, 1995 between Incorporated herein by reference from
Allscripts, Inc. and John G. Cull. the Allscripts, Inc. Registration
Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.9 Form of TouchScript Master License Incorporated herein by reference from
Agreement. the Allscripts, Inc. Registration
Statement on Form S-1 filed on May 14,
1999 (SEC file no. 333-78431)
10.10 Supply Agreement dated August 27, 1998 Incorporated herein by reference from
between McKesson U.S. Health Care and the Allscripts, Inc. Registration
Allscripts, Inc. Statement on Form S-1 as part of
Amendment No. 1 filed on June 7, 1999
(SEC file no. 333-78431)
10.11 Asset Purchase Agreement dated June 30, Incorporated herein by reference from
1999 by and among Allscripts, Inc. and the Allscripts, Inc. Registration
Shopping@Home, Inc., Glen Tullman, Lee Statement on Form S-1 as part of
Shapiro, Stanley Crane and Joseph E. Amendment No. 4 filed on July 20, 1999
Carey. (SEC file no. 333-78431)
10.12+ Employment Agreement, effective August Incorporated herein by reference from
2, 1999, between Allscripts, Inc. and the Allscripts, Inc. Quarterly Report on
Joseph E. Carey. Form 10-Q for the quarter ended
September 30, 1999
10.13+ Employment Agreement dated as of April Incorporated herein by reference from
5, 2000 by and between Allscripts, Inc. the Allscripts, Inc. Quarterly Report on
and Lee A. Shapiro. Form 10-Q for the quarter ended June 30,
2000
10.14 Stock Rights and Restrictions Agreement
by and between Allscripts Healthcare
Solutions, Inc. and IDX Systems
Corporation dated as of January 8, 2001.
10.15 Strategic Alliance Agreement by and
between Allscripts Healthcare Solutions,
Inc. and IDX Systems Corporation dated
as of January 8, 2000.
10.16 Asset Purchase Agreement, dated as of Incorporated herein by reference from
July 13, 2000, by and between the Allscripts Healthcare Solutions,
Channelhealth Incorporated and IDX Inc. Registration Statement on Form S-4
Systems Corporation. as part of Amendment No. 1 filed on
December 7, 2000 (SEC file
no. 333-49568)
74
Exhibit
Number Description Reference
- ------- ----------- ---------
10.17 Amended and Restated Cross License and
Software Maintenance Agreement by and
between IDX Systems Corporation and
Channelhealth Incorporated dated
January 8, 2001.
21.1 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
- --------
+Indicates management contract or compensatory plan.
75