Back to GetFilings.com



10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

                                            

FORM 10-Q

                                            

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

For the quarterly period ended June 30, 2002

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)

Delaware 36-4392754
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)

2401 Commerce Drive
Libertyville, Illinois 60048

(Address of Principal Executive Offices)

                                            

(847) 680-3515
(Registrant's telephone number, including area code)

                                            

Indicate by check (X) 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___

As of July 31, 2002, there were 38,424,374 shares of the Registrant's $0.01 par value common stock outstanding.



ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION                                                                                                                                                       Page
   
Item 1. Financial Statements
   
  Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001 ............................................................. 1
   
  Consolidated Statememts of Operations for the three and six months ended June 30, 2002 and 2001 (unaudited) ..................................... 2
   
  Consolidated Statements of Cash Flow for the six months ended June 30, 2002 and 2001 (unaudited) ..................................................... 3
   
  Notes to Consolidated Financial Statements (unaudited) .......................................................................................................................... 4
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 9
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................................................................................... 13
   
PART II. OTHER INFORMATION
   
Item 4. Submission of Matters to a Vote of Security Holders ..................................................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K ................................................................................................................................................... 14
   
SIGNATURE ............................................................................................................................................................................................................. 15
 

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 su bsequent time periods, refer to Allscripts Healthcare Solutions, Inc. and its wholly owned subsidiaries, including Allscripts, Inc. and Channelhealth Incorporated, unless the context indicates otherwise.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
  June 30,   December 31,
  2002
  2001
  (Unaudited)    
       
ASSETS      
Current assets      
  Cash and cash equivalents $ 21,144   $ 34,124
  Marketable securities 17,384   6,352
  Accounts receivable, net of allowances of $5,318 at
    June 30, 2002 and $6,203 at December 31, 2001
17,083   13,811
  Other receivables 1,984   1,372
  Inventories 4,591   6,225
  Prepaid assets 2,538   2,573
  Other current assets 465
  389
Total current assets 65,189   64,846
       
Long-term marketable securities 29,201   37,814
Fixed assets, net 6,543   8,449
Intangible assets, net 4,313   4,783
Goodwill 733   733
Other assets 1,396
  819
Total assets $ 107,375
  $ 117,444
       
LIABILITIES      
Current liabilities      
Accounts payable $ 5,341   $ 5,626
Accrued expenses 2,866   3,113
Accrued compensation 2,452   2,873
Accrued restructuring and other charges 1,808   2,991
Deferred revenue 3,949
  3,882
Total current liabilities 16,416   18,485
       
Other non-current liabilities 193
  325
Total liabilities 16,609   18,810
       
STOCKHOLDERS' EQUITY      
Preferred stock: Undesignated, $0.01 par value, 1,000,000 shares authorized, no      
   shares issued and outstanding at June 30, 2002 and December 31, 2001 -   -
Common stock:      
  $0.01 par value, 150,000,000 shares authorized,      
    38,458,839 issued, 38,424,374 shares outstanding at      
    June 30, 2002; 38,050,001 shares issued, 38,015,536      
    shares outstanding at December 31, 2001 385   381
Additional paid-in capital 638,763   636,755
Unearned compensation (240)   (404)
Treasury stock at cost: 34,465 shares of common stock at      
  June 30, 2002 and December 31, 2001 (68)   (68)
Accumulated deficit (548,292)   (538,306)
Accumulated other comprehensive income 218
  276
Total stockholders' equity 90,766
  98,634
Total liabilities and stockholders' equity $ 107,375
  $ 117,444
       

The accompanying notes are an integral part of these consolidated financial statements

1


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
     
  Three Six
  Months Ended Months Ended
  June 30,
June 30,
2002
2001
2002
2001
  (Unaudited)
Revenue:        
  Prepackaged medications $12,480 $12,719 $24,959 $25,282
  Software and related services 5,018 5,379 9,457 8,701
  Information services 2,596
1,075
4,451
1,789
    Total revenue 20,094 19,173 38,867 35,772
Cost of revenue:  
  Prepackaged medications 10,102 10,405 20,330 20,718
  Software and related services 4,175 5,812 8,079 10,643
  Information services 847
651
1,666
1,095
    Total cost of revenue 15,124
16,868
30,075
32,456
Gross Profit 4,970 2,305 8,792 3,316
       
Selling, general and administrative expenses 9,577 15,176 20,002 30,083
Amortization of intangibles 134 18,628 272 36,416
Write-off of acquired in-process research and development -
-
-
3,000
  Loss from operations (4,741) (31,499) (11,482) (66,183)
       
Interest income 727 1,335 1,473 3,114
Interest expense (43) (68) (73) (198)
Other income, net 95
255
96
391
  Loss before income taxes (3,962) (29,977) (9,986) (62,876)
       
Income tax benefit -
2,249
-
4,348
Net loss $(3,962)
$(27,728)
$(9,986)
$(58,528)
       
Per-share data - basic and diluted:      
    Net loss $(0.10)
$(0.73)
$(0.26)
$(1.55)
       
Weighted-average shares of common stock outstanding      
  used in computing basic and diluted net loss per share 38,422
37,993
38,248
37,659

The accompanying notes are an integral part of these consolidated financial statements

2


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
       
  Six Months Ended
  June 30,
  2002
  2001
  (Unaudited)
Cash flows from operating activities:      
  Net loss $ (9,986)   $ (58,528)
  Adjustments to reconcile net loss to net cash used in operating activities:      
    Depreciation and amortization 3,088   43,568
    Write-off of acquired in-process research and development -   3,000
    Non-cash compensation expense 164   247
    Realized gain on investments (96)   (164)
    Deferred taxes -   (4,348)
    Provision for doubtful accounts 411   153
  Changes in assets and liabilities, net of effects of acquisitions:      
    Accounts receivable (3,683)   (3,631)
    Other receivables (487)   3,797
    Inventories 1,884   (1,041)
    Prepaid and other current and non-current assets 149   769
    Accounts payable (285)   (1,099)
    Accrued compensation (421)   (1,582)
    Accrued expenses (265)   (524)
    Deferred revenue 67   535
    Accrued restructuring and other charges (1,183)   -
    Other non-current liabilities (8)
  3
Net cash used in operating activities (10,651)   (18,845)
       
Cash flows from investing activities:      
  Capital expenditures (1,072)   (3,392)
  Purchase of marketable securities (19,676)   (28,186)
  Maturities of marketable securities 17,257   25,251
  Capitalized software development costs (744)   -
  Cash used for acquisitions, net of acquired cash -
  (5,337)
Net cash used in investing activities (4,235)   (11,664)
       
Cash flows from financing activities:      
  Payment of capital lease obligations (106)   (108)
  Proceeds from issuance of common stock 1,987   -
  Proceeds from exercise of common stock options 25
  23
Net cash provided (used) by financing activities 1,906
  (85)
Net decrease in cash and cash equivalents (12,980)   (30,594)
Cash and cash equivalents, beginning of period 34,124
  76,513
Cash and cash equivalents, end of period $ 21,144
  $ 45,919
       
Supplemental disclosure of cash flow information:      
  Cash paid during the period for interest $28   $49
Supplemental disclosure of non-cash investing
   and financing activities:
     
  Issuance of common stock and options in acquisitions -   226,000
       

The accompanying notes are an integral part of these consolidated financial statements.

3


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation
 
The quarterly financial information presented herein should be read in conjunction with Allscripts' audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K. The unaudited interim consolidated financial statements have been prepared on a basis consistent with those consolidated financial statements and reflect all adjustments (all of which are of a normal recurring nature) that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The consolidated financial statements include the accounts of Allscripts Healthcare Solutions, Inc. and its wholly owned subsidiaries (collectively referred to as "Allscripts"). All significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim periods are not necessarily indicative of the results to be expected for the year. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.

2. Revenue Recognition

Allscripts' revenue is, in part, 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 based on historical experience following the guidelines of Statement of Financial Accounting Standards (SFAS) No. 48, "Revenue Recognition When Right of Return Exists." Revenue from the sale of medications, net of provisions for estimated returns, is recognized upon shipment of the pharmaceutical products when no performance obligations remain and collection of the receivable is probable.

Revenue is also generated from sales of software licenses and related consulting services as well as from subscriptions for software and hardware.

Revenue from software licensing arrangements requiring significant installation and configuration is accounted for under American Institute of Certified Public Accountants Statement of Position (SOP) 81-1 "Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts." Revenue is recognized on an output basis as contract milestones are reached provided that the fee is fixed and determinable and collection of the resulting receivable is considered probable. Maintenance and support revenue from these agreements is recognized over the term of the support agreement based on the fair value of the maintenance revenue, which is generally based on contracted renewal rates. For agreements whose payment terms extend beyond twelve months, revenue is recognized as amounts become due and payable upon invoicing, not to exceed the amount of revenue supported by milestones reached.

As of June 30, 2002, there was $1,038,000 of revenue earned on contracts in excess of billings and $1,655,000 of billings in excess of revenue earned on contracts in progress. Billings on contracts where revenue has been earned in excess of billings are expected to occur according to the contract terms.

Revenue from software licensing arrangements not requiring significant installation and configuration is accounted for under SOP 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." Revenue is recognized upon shipment of the software or as services are performed, provided persuasive evidence of an arrangement exists, fees are considered fixed and determinable, and collection of the resulting receivable is considered probable. The revenue to be recognized for each separate element of a multiple-element software contract is based upon vendor-specific objective evidence of fair value, which is based upon the price the customer is required to pay when the element is sold separately. For agreements where payment terms extend beyond twelve months, revenue is recognized as the customer is billed over the term of the agreement.

Revenue from custom service arrangements is recognized as services are performed.

Revenue from physician education products is recognized as physician participation occurs.

In November 2001, the Emerging Issues Task Force (EITF) reached a consensus codified as Topic D-103, "Income Statement Characterization of Reimbursements for 'Out-of-Pocket' Expenses Incurred." The consensus requires that reimbursements for out-of-pocket expenses be classified as revenue in the statement of operations. The consensus is effective for fiscal years beginning after December 15, 2001. Allscripts has adopted EITF Topic D-103 and reimbursements are now being recorded as revenue. Out-of-pocket expenses reimbursed by customers that were classified as revenue for the three months ended June 30, 2002 and 2001 were $178,000 and $54,000, respectively, and for the six months ended June 30, 2002 and 2001 were $269,000 and $54,000, respectively. This classification had the effect of reducing gross margin percentage by 0.3% and 0.2% for the three and six months ended June 30, 2002, respectively.


3. Comprehensive Loss
 
Comprehensive loss includes all changes in stockholders' equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive loss for the three and six months ended June 30, 2002 and 2001 consisted of the following (in thousands):

  Three Months Ended Six Months Ended
  June 30, June 30,
  2002
2001
2002
2001
Net loss $(3,962) $(27,728) $(9,986) $(58,528)
Other comprehensive income:
  Unrealized gain on marketable securities, net of taxes

95


(2)


(58)


97

Comprehensive loss $(3,867)
$(27,730)
$(10,044)
$(58,431)

4. Restructuring and Other Charges

  In July 2001, Allscripts announced and began implementation of a restructuring plan to realign its organization; prioritize its initiatives around high-growth areas of its business; focus on profitability; reduce operating expenses; improve efficiencies in light of recent acquisitions; and focus sales and service efforts on larger physician practices, academic medical centers, and integrated delivery networks. The restructuring plan included workforce and overhead reduction and the termination of certain unprofitable strategic agreements and customer relationships. As a result of the restructuring plan, Allscripts recorded restructuring and other charges of $4,370,000 and $4,266,000, respectively, in fiscal 2001, of which $6,435,000 was classified as operating expenses and $2,201,000 was classified as cost of revenue in the statement of operations.

Restructuring

  Workforce reduction

   The restructuring plan will result in the termination of approximately 190 employees across all business functions, of which 186 were terminated as of June 30, 2002. The workforce reductions started in the third quarter of 2001 and were substantially completed by the end of the first quarter of 2002. As part of the restructuring charge, Allscripts recorded a workforce reduction charge in fiscal 2001 of $3,317,000 consisting primarily of severance and related benefits, which will be paid out over time.

  Termination of agreements

  Allscripts recorded a charge of $1,053,000 in fiscal 2001 related to the termination of certain agreements and non-cancelable leases that were originally expected to increase product distribution and enhance product offerings. The charge includes estimated payments for the early termination of these agreements, all of which have been terminated as of June 30, 2002, except the lease agreements, which will expire through January 2006.

Other Charges

  Termination of unprofitable customer contracts

  Allscripts recorded a charge in fiscal 2001 of $4,266,000 related to the termination of unprofitable customer contracts. The termination of unprofitable customer contracts occurred in client sites where system utilization was low. The charge relates to the reduction of the carrying value of receivables to their expected realizable value and the costs for disposition of assets relating to these sites resulting from terminating the customer relationship.

5


A summary of the activity and balances of the restructuring and other charges reserve accounts is outlined as follows (in thousands):

Balance at
December 31, 2001


Write-offs

Cash
Payments

Balance at
June 30, 2002

 





Restructuring

 

 

 

 

Workforce reduction

$1,693

$       -   

$     842

$851

Termination of agreements

658

-   

341

317

 





Subtotal

2,351

-   

1,183

1,168

Other charges

 

 

 

 

Termination of unprofitable customer
    contracts and strategic agreements

 
640

 
-   

 
-   

 
640

 





Total

$2,991

$        -   

$1,183

$1,808

 





At June 30, 2002 and December 31, 2001, Allscripts had reclassified reserves of $357,000 and $1,512,000, respectively, to a contra asset account in accounts receivable. During the six months ended June 30, 2002, Allscripts had write-offs of $1,155,000 of accounts receivable related to terminated customer relationships.

5. Net Loss Per Share

Allscripts accounts for net loss per share in accordance with SFAS No. 128, "Earnings per Share," which requires the presentation of basic and diluted earnings per share. Basic loss per share is computed by dividing the net loss by the weighted average shares of outstanding common stock (including additional shares that may be issued pursuant to business combinations). For purposes of calculating diluted loss per share, the denominator includes both the weighted average shares of common stock outstanding (including shares to be issued pursuant to business combinations) and dilutive common stock equivalents.

In accordance with SFAS No. 128, basic and diluted net loss per share have 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 because all such securities are antidilutive for all periods presented. Antidilutive potential common stock securities excluded from the diluted loss per share computation consisted of 8,283,326 and 6,502,935 options and 3,333 and 7,737 warrants at June 30, 2002 and 2001, respectively.

6. Sale of Common Stock

On March 21, 2002, Allscripts sold a strategic partner 378,501 shares of Allscripts common stock at an average fair market value for the 15 days preceding the transaction date for a purchase price of $1,987,000, net of related expenses of $13,000.

7. Business Segments

SFAS No. 131, "Disclosures about Segments of a Business Enterprise and Related Information," establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Allscripts currently organizes its business around groups of similar products, which results in three reportable segments: prepackaged medications; software and related services; and information services. The prepackaged medications segment derives its revenues from the repackaging, sale, and distribution of medications. The software and related services segment derives its revenues from the sale and installation of software that provides point-of-care decision support solutions. The information services segment derives its revenues from the sale of interactive physician education sessions. All corporate operating expenses are allocated to each reportable segment, using a reasonable basis for each expense. Allscripts does not allocate interest income, interest expense, other income or income tax benefit to its operating segments.

Allscripts does not report its assets by segment or allocate its assets to its segments. Allscripts allocates depreciation and amortization to each segment, but does not allocate the related assets.

6


  For the Three Months Ended For the Six Months Ended
  June 30, June 30,
  2002
2001
2002
2001
Revenue (in thousands)
   Prepackaged medications $12,480 $12,719 $24,959 $25,282
   Software and related services 5,018 5,379 9,457 8,701
   Information services 2,596

1,075

4,451

1,789

Total revenue $20,094
$19,173
$38,867
$35,772
Depreciation and amortization
   Prepackaged medications $   319 $     548 $   687 $  2,016
   Software and related services 1,131 21,460 2,230 40,712
   Information services 88

343

171

840

Total depreciation and amortization $1,538
$22,351
$3,088
$43,568
Profit (loss) from operations
   Prepackaged medications $      558 $       157 $    1,052 $       212
   Software and related services (5,910) (30,687) (13,162) (64,205)
   Information services 611

(969)

628

(2,190)

Total loss from operations (4,741) (31,499) (11,482) (66,183)
   Net interest and other income 779

1,522

1,496

3,307

Total loss before income taxes $(3,962)
$(29,977)
$ (9,986)
$(62,876)

8. Goodwill Amortization

As of January 1, 2002, Allscripts adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 eliminates the requirement to amortize goodwill. The transitional impairment test required within the first six months of the adoption of SFAS No. 142 has been performed. No indicators of impairment for any reporting unit were identified as a result of the transitional impairment test.

The following table is a reconciliation of reported net loss and basic and diluted loss per share to adjusted net loss and basic and diluted loss per share reflecting the impact if SFAS No. 142 had been effective for the three and six months ended June 30, 2001 (in thousands, except per-share data):

  For the Three Months Ended For the Six Months Ended
  June 30, June 30,
  2002
2001
2002
2001
Reported net loss $(3,962) $(27,728) $(9,986) $(58,528)
Goodwill amortization -

14,772

-

28,952

Adjusted net loss $(3,962)
$(12,956)
$(9,986)
$(29,576)
Per-share data - basic and diluted
   Reported net loss $(0.10) $(0.73) $(0.26) $(1.55)
   Goodwill amortization -

0.39

-

0.77

   Adjusted net loss $(0.10)
$(0.34)
$(0.26)
$(0.78)

Amortization of intangible assets for the three and six months ended June 30, 2002 totaled $152,000 and $344,000, respectively. The following table reflects the carrying amounts and accumulated amortization for each type of intangible asset (in thousands):

  June 30, 2002
December 31, 2001
  Carrying
Amount
Accumulated
Amortization
Intangible
Assets, Net
Carrying
Amount
Accumulated
Amortization
Intangible
Assets, Net
Software $   149 $149 $     -    $   149 $  61 $     88
Strategic agreements 4,700

387

4,313

4,825

130

4,695

Total $4,849
$536
$4,313
$4,974
$191
$4,783

Allscripts estimates that the amortization expense will be $253,000 for the remainder of 2002 and $506,000 per year for the next five fiscal years.

7


9. 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, Allscripts has been indemnified by the primary manufacturer of the drugs at issue in these cases. 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 and its indemnity from the drug manufacturer 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 consolidated financial position, results of operations or cash flows.

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 position, results of operations or cash flows.

8


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, and pharmaceutical manufacturers.

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 our TouchWorks software 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 b y 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 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 TouchWorks enables physicians to submit claims electronically for reimbursement by managed care payers, a large portion of the medications dispensed by our TouchWorks customers is dispensed to managed care patients. Accordingly, we expect that this 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.

In addition to medication management, there are other aspects of the physician's daily work flow that we address through technology-focused solutions. We have enhanced and intend to continue to enhance our current offerings by integrating new products and services. In May 2000, we acquired MasterChart, Inc., a software developer providing dictation, integration and patient record technology, and Medifor, Inc., a provider of electronic patient education. In addition, on January 8, 2001, we acquired Channelhealth Incorporated, a software developer providing modular software for physicians to access medical information and manage clinical workflow. Our TouchWorks software now provides a full electronic medical record for physicians practicing in an ambulatory environment.

In July 2001, we announced and began implementation of a restructuring plan to realign our organization; prioritize our initiatives around high-growth areas of our business; focus on profitability; reduce operating expenses; improve efficiencies in light of the aforementioned acquisitions; and focus sales and service efforts on larger physician practices, academic medical centers, and integrated delivery networks. The restructuring plan includes workforce and overhead reduction, and the termination of certain strategic agreements and unprofitable customer contracts. As a result of the restructuring plan, we recorded restructuring and other charges of $4,370,000 and $4,266,000, respectively, during the third quarter of 2001, of which $6,435,000 was classified as operating expenses and $2,201,000 was classified as cost of revenue. In addition, certain events and changes in circumstances caused us to conduct a review of the carrying value of our goodwill and purchased intangible assets. These events inc lude the restructuring plan, the business climate, which has generated valuation declines of enterprises in our industry, and the failure of certain assets to generate the cash flows that were projected at the time of acquisition. As a result of this review, we recorded an asset impairment charge of $354,984,000 during 2001.

We currently operate in three reportable business segments: prepackaged medications; software and related services; and information services. Software and related services include revenue from software licenses, computer hardware, and related services. Information services include physician education and information products.

9


The following table illustrates the quarterly revenue trend for the three reportable segments for the quarters ended (unaudited in thousands):

 

2002

2001

 



 

June 30,

March 31,

Dec. 31,

Sept. 30,

June 30,

March 31,

 







Prepackaged medications

$12,480

$12,479

$12,777

$11,613

$12,719

$12,563

Software and related services

5,018

4,439

4,455

3,937

5,379

3,322

Information services

2,596

1,855

1,459

904

1,075

714

 







Total revenue

$20,094

$18,773

$18,691

$16,454

$19,173

$16,599

 







Critical Accounting Policy

Software Capitalization

In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," we capitalize certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements, which is generally evidenced by a detailed program design. Capitalization of costs occurs from this point until the product is available for general release to our customers.

At each balance sheet date, we compare the carrying value of each capitalized software product to its estimated net realizable value, which is determined by estimating future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.

We amortize capitalized software costs for product available for general release based upon the greater of the ratios that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the estimated useful life of the product.

Significant management judgment and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs. If we determine in the future that the carrying value of the capitalized software is not realizable, a write-down of the carrying value of the capitalized software to its estimated net realizable value would be required. Factors that affect our assessment of net realizable value include: the estimated useful life of the product; the level of revenues which are expected to be generated in the future; the level of costs which are expected to be incurred in completion, sale, and support of the product; and identification of any high risk development issues which may render a product, for which costs have been capitalized, unsaleable.

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Prepackaged Medications

Prepackaged medication revenue decreased by 1.9%, or $239,000, from $12,719,000 in the second quarter of 2001 to $12,480,000 in the second quarter of 2002. The decrease reflects a decrease in the volume of prepackaged medications sold resulting from the termination of unprofitable customer arrangements, offset by an increase in the average selling prices of medications sold, due primarily to general price inflation.

Cost of revenue for prepackaged medications for the three months ended June 30, 2002 decreased by 2.9%, or $303,000, from $10,405,000 in 2001 to $10,102,000 in 2002. The decrease was due to decreased volume of sales of prepackaged medications and more favorable buying arrangements with suppliers.

Operating expenses for prepackaged medications for the three months ended June 30, 2002 decreased by 15.6%, or $337,000, from $2,157,000 in 2001 to $1,820,000 in 2002. The decrease was primarily due to lower intangible amortization expense resulting from an intangible asset impairment charge taken during 2001, and the elimination of the requirement to amortize goodwill pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets."

10


Software and Related Services

Software and related service revenue for the three months ended June 30, 2002 decreased by 6.7%, or $361,000, from $5,379,000 in 2001 to $5,018,000 in 2002. The decrease reflects lower revenue derived from our software sales to smaller physician practices as a result of a decision we made in 2001 to focus sales and service efforts on larger physician practices, as well as our exit from unprofitable customer arrangements.

Cost of revenue for software and related services decreased by 28.2%, or $1,637,000, from $5,812,000 in the second quarter of 2001 to $4,175,000 in the second quarter of 2002. The decrease was primarily due to lower amortization expense of acquired software and lower depreciation expense due to the decision to exit unprofitable customer contracts, offset by increased cost of implementation, training, and support.

Operating expenses for software and related services for the three months ended June 30, 2002 decreased by 77.7%, or $23,501,000, from $30,254,000 in 2001 to $6,753,000 in 2002. The decrease was primarily due to lower intangible amortization expense resulting from an intangible asset impairment charge taken during 2001, and the elimination of the requirement to amortize goodwill pursuant to SFAS No. 142. In addition, operating expenses were lower as a result of workforce reductions that were aimed at improving efficiencies in light of acquisitions made during 2001 and 2000, the decision to focus sales and service efforts on larger physician practices, and the subsidization of marketing expenses by our strategic partners. Also, during the second quarter of 2002, we capitalized $638,000 of software development costs pursuant to SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."

Information Services

Information services revenue increased by 141.5%, or $1,521,000, from $1,075,000 in the second quarter of 2001 to $2,596,000 in 2002. The increase in information services revenue reflects an increase in the number of interactive physician education programs sold and completed.

Cost of revenue for information services for the three months ended June 30, 2002 increased 30.1%, or $196,000, from $651,000 in 2001 to $847,000 in 2002. The increase was due to a higher number of physician education sessions completed.

Operating expenses for information services for the three months ended June 30, 2002 decreased by 18.3%, or $255,000, from $1,393,000 in 2001 to $1,138,000 in 2002. The decrease was primarily due to lower intangible amortization expense as the related intangible asset was fully amortized during 2001.

Interest Income and Income Taxes

Interest income for the three months ended June 30, 2002 was $727,000 as compared to $1,335,000 for the prior year period. The decrease related to a lower average cash and marketable securities balance and a decrease in the average interest rates earned on our investments as compared to the prior year period.

We recorded a benefit for income taxes during the three months ended June 30, 2001 of $2,249,000 from the scheduled reversal of deferred tax liabilities related to the amortization of non-goodwill intangible assets. No other provision or tax benefit for income taxes was recorded in either period because we currently anticipate that annual income taxes payable will be minimal or zero, and we have provided a valuation allowance for our net deferred tax assets.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Prepackaged Medications

Prepackaged medication revenue decreased by 1.3%, or $323,000, from $25,282,000 in the first six months of 2001 to $24,959,000 in the first six months of 2002. The decrease reflects a decrease in the volume of prepackaged medications sold resulting from the termination of unprofitable customer arrangements, offset by an increase in the average selling prices of medications sold, due primarily to general price inflation.

Cost of revenue for prepackaged medications for the six months ended June 30, 2002 decreased by 1.9%, or $388,000, from $20,718,000 in 2001 to $20,330,000 in 2002. The decrease was due to decreased volume of sales of prepackaged medications and more favorable buying arrangements with suppliers.

11


Operating expenses for prepackaged medications for the six months ended June 30, 2002 decreased by 17.8%, or $775,000, from $4,352,000 in 2001 to $3,577,000 in 2002. The decrease was primarily due to lower intangible amortization expense resulting from an intangible asset impairment charge taken during 2001, and the elimination of the requirement to amortize goodwill pursuant to SFAS No. 142.

Software and Related Services

Software and related service revenue for the six months ended June 30, 2002 increased by 8.7%, or $756,000, from $8,701,000 in 2001 to $9,457,000 in 2002. The increase reflects an increase in sales of our integrated content and clinical workflow products, offset by lower revenue derived from our software sales to smaller physician practices as a result of a decision we made in 2001 to focus sales and service efforts on larger physician practices, as well as our exit from unprofitable customer arrangements.

Cost of revenue for software and related services decreased by 24.1%, or $2,564,000, from $10,643,000 in the first six months of 2001 to $8,079,000 in the first six months of 2002. The decrease was primarily due to lower amortization expense of acquired software and lower depreciation expense due to the decision to exit unprofitable customer contracts, offset by increased cost of implementation, training, and support.

Operating expenses for software and related services for the six months ended June 30, 2002 decreased by 76.6%, or $47,723,000, from $62,263,000 in 2001 to $14,540,000 in 2002. The decrease was primarily due to lower intangible amortization expense resulting from an intangible asset impairment charge taken during 2001, and the elimination of the requirement to amortize goodwill pursuant to SFAS No. 142. In addition, operating expenses were lower as a result of workforce reductions that were aimed at improving efficiencies in light of acquisitions made during 2001 and 2000, the decision to focus sales and service efforts on larger physician practices, and the subsidization of marketing expenses by our strategic partners. Also, during the first six months of 2002, we capitalized $744,000 of software development costs pursuant to SFAS No. 86. During the six months ended June 30, 2001, we recorded a write-off of acquired in-process research and development of $3,000,000 related to an acquisition.

Information Services

Information services revenue increased by 148.8%, or $2,662,000, from $1,789,000 in the first six months of 2001 to $4,451,000 in 2002. The increase in information services revenue reflects an increase in the number of interactive physician education sessions sold and completed.

Cost of revenue for information services for the six months ended June 30, 2002 increased 52.1%, or $571,000, from $1,095,000 in 2001 to $1,666,000 in 2002. The increase was due to the higher number of physician education sessions completed.

Operating expenses for information services for the six months ended June 30, 2002 decreased by 25.2%, or $727,000, from $2,884,000 in 2001 to $2,157,000 in 2002. The decrease was primarily due to lower intangible amortization expense as the related intangible asset was fully amortized during 2001.

Interest Income and Income Taxes

Interest income for the six months ended June 30, 2002 was $1,473,000 as compared to $3,114,000 for the prior year period. The decrease related to a lower average cash and marketable securities balance and a decrease in the average interest rates earned on our investments as compared to the prior year period.

We recorded a benefit for income taxes during the six months ended June 30, 2001 of $4,348,000 from the scheduled reversal of deferred tax liabilities related to the amortization of non-goodwill intangible assets. No other provision or tax benefit for income taxes was recorded in either period because we currently anticipate that annual income taxes payable will be minimal or zero, and we have provided a valuation allowance for our net deferred tax assets.

Liquidity and Capital Resources

At June 30, 2002, our principal sources of liquidity consisted of $21,144,000 of cash and cash equivalents and $46,585,000 of marketable securities. At June 30, 2002, we had working capital of $48,773,000 and an accumulated deficit of $548,292,000.

12


Net cash used in operating activities was $10,651,000 for the six months ended June 30, 2002. Cash used in operating activities resulted primarily from a loss from operations of $9,986,000, partially offset by depreciation and amortization of $3,088,000. Accounts receivable increased by $3,683,000 in the six months ended June 30, 2002, primarily due to growth in revenue. Inventories decreased by $1,884,000 during the six months ended June 30, 2002 due to the sale of advance purchases of certain medications where shortages were expected. Accrued restructuring and other charges decreased by $1,183,000 during the six months ended June 30, 2002 primarily due to cash payments made for employee severance arrangements.

Net cash used in investing activities was $4,235,000 for the six months ended June 30, 2002. Cash used in investing activities resulted primarily from net purchases of marketable securities of $2,419,000. In addition, capital expenditures were $1,072,000 for the six months ended June 30, 2002 as a result of capital outlays to support the future growth of our business. We also capitalized software development costs of $744,000 during the six months ended June 30, 2002. Currently, we have no material commitments for capital expenditures, although we anticipate ongoing capital expenditures in the ordinary course of business.

Net cash provided by financing activities was $1,906,000 for the six months ended June 30, 2002, primarily as a result of the sale of common stock to a strategic partner.

The following table summarizes our contractual obligations at June 30, 2002, and the effect such obligations are expected to have on our liquidity and cash in future periods (in thousands):


Total

Remainder
of 2002


2003-2004


2005+

 





Contractual obligations:

 

 

 

 

  Non-cancelable capital leases

$   320

$  135

$   185

$    -

  Non-cancelable operating leases

2,517

516

1,694

307

  Marketing programs

1,600

740

860

-

 





Total contractual cash obligations

$4,437

$1,391

$2,739

$307

 





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 at least 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 impact 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.

Safe Harbor For Forward-Looking Statements

This report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements," and statements we or our representatives make may contain forward-looking statements that involve risks and uncertainties. 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 in this report. We make these statements under the protection afforded them by Section 21E of the Securities Exchange Act of 1934. Because we cannot predict all of the risks and uncertainties that may affect us, or control the ones we do predict, our actual results may be materially different from the results we express in our forward-looking statements. Unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For a more complete discussion of the risks, uncertainties and assumptions that may affect us, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2002, we did not own any derivative instruments but we were exposed to market risks, primarily changes in U.S. interest rates. As of June 30, 2002, we had cash, cash equivalents and marketable securities in financial instruments of $67,729,000. Maturities range from less than one month to approximately 18 years. 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 as of June 30, 2002, a decrease in interest rates of 1.0% would cause a corresponding decrease in our annual interest income of approximately $677,000.

13


PART II. OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security Holders

At Allscripts' Annual Meeting of Stockholders held on May 2, 2002, the stockholders (1) elected M. Fazle Husain, Richard E. Tarrant, and Glen E. Tullman as directors of the Company to hold office until the 2005 annual meeting of stockholders (subject to the election and qualification of their successors or their earlier death, resignation or removal); and (2) approved the amendment of the Company's Amended and Restated 1993 Stock Incentive Plan to increase the number of shares that may be issued under the plan by 1,000,000 shares. The votes were as follows:

Votes for

Votes against

Withheld/Abstain

 




(1) Election of directors:

 

 

 

    M. Fazle Husain

33,571,041

-

60,322

    Richard E. Tarrant

33,577,617

-

53,746

    Glen E. Tullman

33,008,404

-

622,959

 
(2)Approval of amendment of the Amended and
    Restated 1993 Stock Incentive Plan

30,200,374

3,382,038

48,951

ITEM 6. Exhibits and Reports on Form 8-K

(A) Exhibits -- See Index to Exhibits.

(B) Reports on Form 8-K -- None.

14


SIGNATURES

 

    Pursuant to the requirements 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.

 

 

                                                                         ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.
  (Registrant)

 

                        By:      /s/ David B. Mullen
                                      David B. Mullen
                                              Chief Financial Officer
                                              (Duly Authorized Officer and
                                               Principal Financial Officer)

 

Date: August 13, 2002

15


INDEX TO EXHIBITS

Exhibit
Number
  Description
  References
2.1   Agreement and Plan of Merger, dated as of March 13, 2000, among Allscripts, Inc., MC Acquisition Corp., MasterChart, Inc. and certain shareholders of MasterChart, 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.   Incorporated herein by reference from the Allscripts, Inc. Current Report on Form 8-K filed on May 24, 2000, as amended on July 24, 2000 and July 25, 2000
2.2   Amendment No. 1 to Agreement and Plan of Merger, dated as of May 9, 2000, by and among Allscripts Inc., MC Acquisition Corp., MasterChart, Inc. and certain shareholders of MasterChart, Inc.   Incorporated herein by reference from the Allscripts, Inc. Current Report on Form 8-K filed on May 24, 2000, as amended on July 24, 2000 and July 25, 2000
2.3   Agreement and Plan of Merger, dated as of April 12, 2000, among Allscripts, Inc., WebDoc Acquisition Corp., Medifor, Inc. and certain shareholders of 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.   Incorporated herein by reference from the Allscripts, Inc. Current Report on Form 8-K filed on May 31, 2000, as amended on July 25, 2000
2.4   Agreement and Plan of Merger, dated as of July 13, 2000, by and among Allscripts Holding, Inc., Allscripts, Inc., Bursar Acquisition, Inc., Bursar Acquisition No. 2, Inc., IDX Systems Corporation, and Channelhealth Incorporated.   Incorporated herein by reference from the Allscripts, Inc. Current Report on Form 8-K filed on July 27, 2000
2.5   First Amendment to Agreement and Plan of Merger, entered into as of November 29, 2000, by and among Allscripts Holding, Inc., Allscripts, Inc., Bursar Acquisition, Inc., Bursar Acquisition No. 2, Inc., IDX Systems Corporation, and Channelhealth Incorporated.   Incorporated herein by reference from the Allscripts Healthcare Solutions, Inc. Registration Statement on Form S-4 as part of Amendment No. 1 filed on December 7, 2000 (SEC file no. 333-49568)
3.1   Amended and Restated Certificate of Incorporation of Allscripts Healthcare Solutions,Inc. (formerly named Allscripts Holding, Inc.).   Incorporated herein by reference from the Allscripts Healthcare Solutions, Inc. Registration Statement on Form S-4 as part of Amendment No. 1 filed on December 7, 2000 (SEC file no. 333-49568)
3.2   Certificate of Amendment of Amended and Restated Certificate of Incorporation of Allscripts Healthcare Solutions, Inc. (formerly named Allscripts Holding, Inc.).   Incorporated herein by reference from the Allscripts Healthcare Solutions, Inc. Registration Statement on Form S-4 as part of Amendment No. 1 filed on December 7, 2000 (SEC file no. 333-49568)
3.3   Certificate of Amendment of Amended and Restated Certificate of Incorporation of Allscripts Healthcare Solutions, Inc. (formerly named Allscripts Holding, Inc.).   Incorporated herein by reference from the Allscripts Healthcare Solutions, Inc. Registration Statement on Form S-4 as part of Amendment No. 1 filed on December 7, 2000 (SEC file no.333-49568)
3.4   Bylaws of Allscripts Healthcare Solutions, Inc.(formerly named Allscripts Holding, Inc.).   Incorporated herein by reference from the Allscripts Healthcare Solutions, 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 Incentive Plan, as amended    
99.1   Certification of Chief Executive Officer and Chief Financial Officer    

16