<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-37070
SUPPLEMENT NO. 1 DATED AUGUST 18, 2000
TO PROSPECTUS DATED JULY 28, 2000
E-MEDSOFT.COM
QUARTERLY RESULTS
A copy of the consolidated condensed financial statements of
e-MedSoft.com. as of June 30, 2000 and for the three months ended June 30, 2000
and 1999 are attached hereto, along with Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<PAGE> 2
E-MEDSOFT.COM
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents ...................... $ 32,434,958 $ 59,860,827
Accounts receivable, net ..................... 28,596,456 17,261,883
Accounts receivable from affiliates, net ..... 6,654,709 739,499
Other receivables ............................ 4,769,219 1,927,310
Inventory .................................... 6,557,549 1,106,960
Other current assets ......................... 1,173,280 1,559,956
------------- -------------
80,186,171 82,456,435
Long-term assets:
Property and equipment, net .................. 7,998,005 2,603,302
Goodwill, net ................................ 92,606,847 37,867,333
Investments .................................. 28,285,000 26,285,000
Technology license fee ....................... 2,800,000 2,800,000
Deferred software costs ...................... 12,119,496 8,640,202
Distribution channel ......................... 36,100,000 36,100,000
Deferred contract ............................ 67,462,914 67,462,914
Other assets ................................. 2,423,223 881,467
------------- -------------
249,795,485 182,640,218
------------- -------------
Total assets ..................... $ 329,981,656 $ 265,096,653
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ............................... $ 3,548,361 $ 807,180
Accounts payable ............................. 23,523,271 21,269,973
Accrued liabilities .......................... 6,858,167 4,443,805
Other current liabilities .................... 982,655 582,191
Current maturities of long-term debt
and capital leases ......................... 4,477,800 942,981
------------- -------------
39,390,254 28,046,130
------------- -------------
Long-term liabilities:
Capital leases ............................... 2,090,966 739,306
Bridge financing ............................. 5,378,054 67,528
Other long-term liabilities .................. 3,356,901 3,063,700
------------- -------------
10,825,921 3,870,534
------------- -------------
Commitments and contingencies:
Minority interest .............................. 11,324,672 4,176,862
Stockholders' equity:
Common shares ................................ 80,208 75,735
Paid in capital .............................. 287,494,052 244,495,796
Stock subscription ........................... (5,000,000) (5,000,000)
Accumulated deficit .......................... (14,076,857) (10,569,951)
Accumulated other comprehensive (loss)
income ...................................... (56,594) 1,547
------------- -------------
268,440,809 229,003,127
------------- -------------
Total liabilities and stockholders' equity $ 329,981,656 $ 265,096,653
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
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<PAGE> 3
E-MEDSOFT.COM
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net sales:
Non affiliates ................................. $ 32,547,178 $ 4,443,251
Affiliates ..................................... 6,507,951 --
------------ ------------
Total net sales ..................... 39,055,129 4,443,251
------------ ------------
Costs and expenses:
Cost of sales .................................. 26,594,788 3,629,499
Research and development ....................... 977,218 247,959
Sales and marketing ............................ 2,779,508 611,775
General and administrative ..................... 10,263,584 1,276,598
Non-cash compensation .......................... 182,517 129,380
Depreciation and amortization .................. 2,435,975 344,519
Total costs and expenses ............ 43,233,590 6,239,730
------------ ------------
Operating loss ...................... (4,178,461) (1,796,479)
Other income (expense):
Interest expense ............................... (375,341) (1,335,277)
Interest income ................................ 696,311 --
Other .......................................... (65,686) 3,577
Loss before income taxes, extraordinary income and
minority interest ............................. (3,923,177) (3,128,179)
Extraordinary income ............................. -- 357,152
Loss before income taxes and minority interest ... (3,923,177) (2,771,027)
Tax benefit ...................................... 184,764 242,611
Minority interest, net of taxes .................. 231,507 --
------------ ------------
Net loss ......................................... $ (3,506,906) $ (2,528,416)
------------ ------------
Basic and diluted loss per share ................. $ (0.04) $ (0.05)
============ ============
Weighted average shares outstanding .............. 78,959,514 51,834,107
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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<PAGE> 4
E-MEDSOFT.COM
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net cash used in operating activities: ...................... $(15,834,648) $ (293,161)
Cash flows from investing activities:
Business acquisitions, net of cash acquired ............... (2,985,387) (31,526)
Capital expenditures ...................................... (2,364,765) (70,463)
Investment in software .................................... (3,015,601) --
Other investments ......................................... (2,936,371) --
------------ ------------
Cash used in investing activities ............. (11,302,124) (101,989)
Cash flows from financing activities:
Payments on bridge loans .................................. (2,314,392) --
Proceeds from bridge loans ................................ 2,317,764 638,932
Decrease to credit facility ............................... -- (165,024)
Repayments of capital lease obligations ................... (193,520) (72,816)
Other ..................................................... (98,949) --
------------ ------------
Cash (used in) provided by financing activities.... (289,097) 401,092
(Decrease) increase in cash and cash equivalents ............ (27,425,869) 5,942
Cash and cash equivalents at the beginning of the period .... 59,860,827 51,712
------------ ------------
Cash and cash equivalents at the end of the period .......... $ 32,434,958 $ 57,654
============ ============
Non cash transactions:
Issuance of restricted stock and warrants for
acquisitions............................................ $ 43,303,649 $ --
Property and equipment purchased through capitalized
leases.................................................. 323,482 391,969
------------ ------------
$ 43,627,131 $ 391,969
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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<PAGE> 5
E-MEDSOFT.COM
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) Consolidated Condensed Financial Statements
The financial statements included herein have been prepared by
e-MedSoft.com (the Company or e-MedSoft) without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted as allowed by such rules and regulations, and e-MedSoft believes that
the disclosures are adequate to make the information presented not misleading.
Operating results for the three months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2001. While management believes the procedures followed in preparing these
financial statements are reasonable, the accuracy of the amounts are in some
respects dependent upon the facts that will exist, and procedures that will be
accomplished by e-MedSoft later in the year. These financial statements should
be read in conjunction with the March 31, 2000 audited financial statements and
the accompanying notes thereto, the Forms 8K filed by the Company on April 5,
2000, May 5, 2000 and June 16, 2000 and the S1 filed by the Company on July 21,
2000.
The management of e-MedSoft believes that the accompanying unaudited
consolidated condensed financial statements contain all adjustments (including
normal recurring adjustments) necessary to present fairly the financial position
of e-MedSoft.com and subsidiaries at June 30, 2000 and the results of their
operations and their cash flows for the periods presented.
(2) Business Combinations
Prior Year Acquisition
In February 2000, e-MedSoft acquired privately held VirTx, Inc.
(VirTx), a leading provider of secure collaborative medical networks that are
able to support the implementation of multimedia telemedicine, telehealth, and
telescience collaboration. In connection with the transaction, the Company
issued approximately 1.9 million shares of e-MedSoft's common stock to the VirTx
shareholders and may issue up to an additional $23 million in shares pursuant to
an earn-out arrangement. This transaction has been accounted for as a purchase
resulting in approximately $31 million of goodwill. The goodwill determination
is preliminary and subject to adjustment. The Company is amortizing the goodwill
over a seven year period which is managements' best estimate of the future
benefit of this acquisition. The following pro forma information for the three
months ended June 30, 1999, gives effect to the acquisition of VirTx as if such
transaction had occurred at April 1, 1999 (unaudited):
<TABLE>
<S> <C>
Net sales ................... $ 4,650,031
Costs and expenses .......... 7,334,733
Amortization of goodwill..... 1,302,873
Net loss .................... (3,987,575)
Net loss per share .......... (.07)
</TABLE>
Current Year Acquisitions
In May 2000, the Company acquired Illumea Corporation (Illumea) in
exchange for approximately 1.3 million shares of the Company's common stock,
valued at approximating $10 million. Illumea develops and markets Internet-based
remote inspection and image sharing solutions in the medical and life sciences
industries. FiberPix, Illumea's first application, enables multiple simultaneous
users to view interactively a microscope's high fidelity images in real time
over the Internet. For example, pathologists can view tissue samples without
traveling to a hospital. This acquisition has been accounted for under the
purchase method.
5
<PAGE> 6
In June 2000, the Company acquired VidiMedix for assumption of
approximately $6.2 million in debt and liabilities. Of this amount,
approximately $3.3 million was repaid with approximately 380,000 shares of
common stock and warrants to purchase approximately 336,000 shares of common
stock at an exercise price of $8.63 per share. In addition, the Company has
committed to issue up to an additional $6 million in shares of common stock to
the VidiMedix shareholders as an earn out payment based on VidiMedix achieving
certain sales targets over the next fiscal year. VidiMedix provides network
medicine solutions that enable physicians to deliver remote examination,
diagnosis, and treatment to patients via secure, private and collaborative
interactions using advanced Internet and Web technologies. This acquisition has
been accounted for under the purchase method.
Also in June 2000, the Company acquired Resource Healthcare (Resource)
for approximately $1.5 million in cash and $1 million in common stock. In
addition the Company has committed to issue additional common stock with a value
of $500,000 as an earn out payment based on Resource achieving certain earning
targets over the next fiscal year. Resource provides pharmaceutical and infusion
services to long-term care, assisted living and residential care facilities
throughout Nevada. Services offered by Resource include consulting, training,
billing, supplies management and facility systems development. This acquisition
has been accounted for under the purchase method.
The following table details the allocation of the purchase price of
these acquisitions (in thousands):
<TABLE>
<CAPTION>
ILLUMEA VIDIMEDIX RESOURCE
------- --------- --------
<S> <C> <C> <C>
Purchase price .............. $10,284 $ 5,762 $ 2,517
Less: net equity of entity... 335 (2,029) 576
------- ------- -------
Goodwill .................... $ 9,949 $ 7,791 $ 1,941
======= ======= =======
</TABLE>
The goodwill determination is preliminary and subject to adjustment.
Goodwill resulting from the acquisitions of Illumea and VidiMedix is amortized
over a 7year period. Goodwill resulting from the acquisition of Resource is
amortized over a 15year period. The amortization periods are based on
management's best estimate of the future benefit of these acquisitions.
The operating results included in the period ended June 30, 2000 for
these entities were not material, therefore, pro forma information is not
presented herein.
Other Business Agreements
In April 2000, the Company entered into a 30year management agreement
and a preferred provider agreement with PrimeRx.com, Inc. (PrimeRx previously
known as PrimeMed Pharmacy Services, Inc.), a pharmacy management services
company. PrimeRx offers a variety of managed care pharmacy services that enable
its clients to more effectively manage their pharmacy benefits. PrimeRx's
customers include physician offices and clinics, independent physician
associations, physician practice management organizations, managed care health
plans, nursing homes, correctional facilities, and community health centers.
PrimeRx also operates more than 40 pharmacies across 9 states serving more than
1 million managed care enrollees. The agreement provides for an option to
exchange up to 33 percent of PrimeRx stock for 3 million e-MedSoft shares. On
April 12, 2000, the Company acquired 29 percent of PrimeRx for 2,640,000 shares
of the Company's common stock. The agreement gives full control over PrimeRx
operations to the Company. Accordingly, the Company has consolidated the
operations of PrimeRx for the three month period ended June 30, 2000 and has
included 100 percent of its losses as e-MedSoft is responsible for funding
PrimeRx's operations. The Company has reflected its 29 percent investment and
the negative equity at acquisition date as goodwill of approximately $32
million. The goodwill will be amortized over the management contract term of 30
years. The following pro forma information for the three months ended June 30,
1999, gives effect to the consolidation of PrimeRx as if such transaction had
occurred at April 1, 1999 (unaudited):
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<PAGE> 7
<TABLE>
<S> <C>
Net sales .................. $ 14,641,775
Costs and expenses ......... 17,064,986
Amortization of goodwill.... 516,361
Net loss ................... (2,939,572)
Net loss per share ......... (.05)
</TABLE>
(3) Deferred Software Development Costs
During the three months ended June 30, 2000 and 1999, the Company
incurred approximately $4.0 million and $248 thousand in development costs,
respectively. In accordance with SOP 981 and FASB 86, the Company capitalized
approximately $3 million and $0 of these costs during the three months ended
June 30, 2000 and 1999, respectively. Such deferred costs along with acquired
software costs will be amortized over a three to seven year life once the
related products are in service or available for sale.
(4) Warrants and Stock Options
During the three months ended June 30, 2000, the Company granted
1,472,750 options to its employees to purchase 1,472,750 shares of the Company's
stock at prices ranging from $7.00 to $11.06. These options were granted in
accordance with the Company's stock option plan with exercise prices based on
the market price of the Company's stock at time of grant. These grants are
subject to Board of Directors approval.
(5) Basic and Fully Diluted Loss Per Share
In accordance with SFAS No. 128, "Computation of Earnings Per Share,"
basic earnings per share is computed by dividing the net earnings available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of incremental common shares
issuable upon the exercise of stock options and warrants are excluded from the
diluted earnings per share calculation if their effect is anti-dilutive.
A summary of the shares used to compute net loss per share is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Weighted average common shares used
to compute basic net loss per share ... 78,959,514 51,834,107
Effect of dilutive securities ............ -- --
---------- ----------
Weighted average common shares used
to compute diluted net loss per share.. 78,959,514 51,834,107
========== ==========
</TABLE>
As of June 30, 2000 and 1999, options and warrants to purchase
7,461,917 and 7,049,574 shares of common stock were outstanding, respectively.
These common stock equivalents were excluded from the computation of diluted
loss per share for the three months ended June 30, 2000 and 1999 as such options
and warrants were anti-dilutive.
(6) Segment Information
e-MedSoft derives its net sales from three operating segments: (1)
transaction and information services, primarily healthcare, delivered over the
Internet, private intranets or other networks and consulting contracts related
to these service, (2) the sale and installation of hardware and software
products and (3) pharmacy services.
The accounting policies of the segments are the same as those for
financial reporting purposes and the Company evaluates performance based on
operating earnings of the respective business segments.
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<PAGE> 8
The Company's financial information by business segment are summarized
as follows (in thousands). The "Other" column includes corporate related items
and other expenses not allocated to reportable segments, including assets
relating to goodwill and certain other intangibles and the amortization of such
assets.
<TABLE>
<CAPTION>
INTERNET PRODUCT PHARMACY OTHER TOTAL
-------- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Three months June 30, 2000
Net sales ......................... $ 6,755 $ 14,874 $ 17,426 $ -- $ 39,055
Operating income (loss) before
depreciation and amortization.... 1,023 184 (1,074) (1,875) (1,742)
Depreciation and amortization ..... 121 165 334 1,816 2,436
Total assets ...................... 55,420 24,196 20,884 229,482 329,982
Capital expenditures .............. 1,722 146 413 84 2,365
Three months June 30, 1999
Net sales ......................... $ -- $ 4,443 $ -- $ -- $ 4,443
Operating income (loss) before
depreciation and amortization.... (219) (378) -- (855) (1,452)
Depreciation and amortization ..... -- 133 -- 212 345
Total assets ...................... 36 8,000 -- 8,599 16,635
Capital expenditures .............. -- 45 -- 25 70
</TABLE>
The Company's net sales from external customers, operating loss and
depreciation and amortization for the three month periods ended June 30, 2000
and 1999 and the long-lived assets at June 30, 2000 and 1999, classified by
geographic area, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM AUSTRALIA TOTAL
------ ------- --------- -----
<S> <C> <C> <C> <C>
Three months June 30, 2000
Net sales ........................ $ 24,171 $ 14,872 $ 12 $ 39,055
Operating loss before depreciation
and amortization ............... (1,298) (196) (248) (1,742)
Depreciation and amortization .... 2,246 188 2 2,436
Long-lived assets ................ 246,770 2,086 940 249,796
Three months June 30, 1999
Net sales ........................ $ -- $ 4,443 $ -- $ 4,443
Operating loss before depreciation
and amortization ............... (894) (558) -- (1,452)
Depreciation and amortization .... 204 141 -- 345
Long-lived assets ................ 7,877 1,622 -- 9,499
</TABLE>
The Company's U.K. subsidiary, e-Net, had five customers who's sales,
on an individual basis, represented over 5% of e-Net's net sales for an
aggregate of 56.4 percent for the three month period ended June 30, 2000.
e-MedSoft U.S. operations, excluding pharmacy services, had two customers who's
sales, on an individual basis, represented over 5% of e-MedSoft's net sales for
an aggregate of 96.5 percent for the three month period ended June 30, 2000.
(7) Contingencies
The Company has national and international operations which,
occasionally, result in litigation that the Company does not view as material
and arising in the ordinary course of business. Because of the significant value
of the Company's technologies, it may occasionally be appropriate for the
Company to initiate litigation of its own to protect those technologies. Whether
brought by the Company or defended against by the Company, the litigation is
often immaterial and at this time the Company is unaware of any material
litigation involving any of its national or international operations. The
Company is involved in a pending litigation regarding a lawsuit brought against
16
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<PAGE> 9
defendants, including the Company, by Icon Capital Corporation in the Superior
Court of the State of California for the County of Los Angeles, which is a
dispute between a small minority shareholder of Sanga International, Inc. and a
shareholder of the Company over stock in the Company. After evaluating the
matter with the Company's legal counsel, management is of the opinion that the
litigation creates no material or significant risk of exposure to the Company.
(8) Related Party Transactions
During the three months ended June 30, 2000, the Company recorded
revenue of $855 thousand from consulting and software services provided to a
company related to a director of the Company. During the same period the Company
also recorded approximately $5.5 million in revenue from another entity, also
related through a member of the board of directors, for project management,
infrastructure development, e-business implementation and planning and other
consulting services. Approximately 20 percent of these services were provided
prior to March 31, 2000 but not recognized into revenues until acceptance by the
customer in the first quarter of fiscal 2001. The Company recorded these related
party receivables based on its best estimate of the amount ultimately to be
realized. As of June 30, 2000, these billings are outstanding, increasing the
total receivable from the two related entities to approximately $11.5 million.
Company management, in consultation with its legal counsel, believes that the
billings are collectible and expects to collect these outstanding receivables
during the second and third quarters of fiscal 2001.
(9) Minority Interest
The Company recorded minority interest relating to its subsidiary in
Australia and its management contract with PrimeRx of approximately $4.0 million
and $7.3 million, respectively. The PrimeRx minority interest represents the
right of 735,144 series A preferred shareholders in PrimeRx. This series A
preferred stock has a $10 per share liquidation preference on the net assets of
PrimeRx (as adjusted) upon a change in control and is otherwise redeemable at
the option of the preferred shareholders by 2005. The Australia subsidiary
minority interest represents the rights of shareholders of the Australia
subsidiary held through the Australian stock exchange.
(10) Subsequent Event
On August 12, 2000, the Company's Board of Directors approved the
repurchase on the open market of up to 2 million shares of its common stock over
the next eighteen months.
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements in this Report that relate to management's expectations,
intentions or beliefs concerning future plans, expectations, events and
performance are "forward-looking" within the meaning of the federal securities
laws. These forward-looking statements include assumptions, beliefs and opinions
relating to the Company's business and growth strategy based upon management's
interpretation and analysis of its own contractual and legal rights, of
management's ability to satisfy industry and consumer needs with its
technologies, of healthcare industry trends, and of management's ability to
successfully develop, implement, market and/or sell its network transaction
processing services, software programs, clinical and financial transaction
services, and e-commerce systems to its clientele. Management's forward-looking
statements further assume that the Company will be able to successfully develop
and execute on its strategic relationships. Actual results or events could
differ materially from those anticipated in the forward-looking statements due
to a variety of factors, in addition to those set out above, including, without
limitation, acceptance by customers of the Company's products, changing
technology, competition in the healthcare market, government regulation of
health care, the Company's limited operating history, general economic
conditions, availability of capital and other factors.
OVERVIEW
We began operations with the acquisition of the Internet-based health
care management system on January 7, 1999 and the subsequent acquisition of
e-Net on March 19, 1999. During the following fiscal year ended March 31, 2000
and the first quarter of 2001, we have continued the development, upgrading,
testing, and implementation of our health care management system. In addition,
in accordance with our strategy to develop or acquire additional technologies,
during fiscal 2000 we acquired a managed care computer technology to service a
network of over 2,500 physicians and a multimedia company to provide various
telemedicine technologies. During the first quarter of 2001 we have expanded our
multimedia technology with two additional acquisitions. During fiscal 2000 we
entered into several contracts and strategic partnerships to implement and roll
out various Internet-based health care management systems and to provide other
products including "e-financing" distribution networks. In our first quarter of
2001 we entered into a 30year management agreement and preferred provider
agreement with a pharmacy management services company, further expanding our
outreach to the healthcare community.
RESULTS OF OPERATIONS
The results of operations presented herein reflect our and our
subsidiaries' consolidated net sales and expenses. The financial statements
included herein present the unaudited financial statements for the three months
ended June 30, 2000 and 1999. In addition, we have included in the comparisons
below the unaudited pro forma financial information for the three months ended
June 30, 1999 to include the acquisition of VirTx, Inc. and the consolidation of
PrimeRx as if these transactions occurred on April 1, 1999. Other acquired
business during the quarter are not included in the pro forma financial
information herein as their operating results included in the period ended June
30, 2000 were not material.
Information presented in the table below is unaudited (in thousands):
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<PAGE> 11
<TABLE>
<CAPTION>
JUNE 30,
JUNE 30, PRO FORMA
2000 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales .......................... $ 39,055 $ 4,443 $ 14,849
Costs and expenses:
Cost of sales ................... 26,595 3,629 11,565
Research and development ........ 977 248 554
Sales and marketing ............. 2,779 612 1,367
General and administrative ...... 10,263 1,276 3,011
Non cash compensation ........... 183 129 129
Depreciation and amortization.... 2,436 345 1,836
-------- -------- --------
43,233 6,239 18,462
======== ======== ========
Operating loss ..................... (4,178) (1,796) (3,613)
Net loss ........................... $ (3,507) $ (2,528) $ (4,399)
</TABLE>
NET SALES
Net sales for the three months ended June 30, 2000 increased 779% as
compared to June 30, 1999 reported sales and increased 163% compared to 1999 pro
forma sales. The increase in reported net sales for June 30, 2000 was
approximately $34.6 million and $24.2 million compared to actual and pro forma
results for June 30,1999, respectively. The increase in reported revenues
resulted from the inclusion of $17.4 million in sales from our pharmacy
services, $10.4 million increased revenues from our U.K. subsidiary and $6.8
from U.S. Internet services and related consulting. Essentially all sales
generated by the U.K. were from the sale, service, and installation of computer
systems. The growth in these sales is a direct result of our penetration into
the market through strategic alliances with Sun Microsystems, Cisco, and Oracle
and the focus on business-to-business e-business solutions and the ability to
leverage infrastructure alongside the e-commerce software and services. Sales
from the U.S. operations were mainly through services provided to our strategic
partners which we have entered into contracts or agreements. These companies are
considered related parties since certain officers of these entities are members
of the Company's Board of Directors.
COSTS AND EXPENSES
Cost of Sales
Cost of sales (excluding depreciation and amortization) for the three
month period ended June 30, 2000 consist of the cost of providing hardware and
software, the cost of pharmaceuticals sold through our pharmacy services and the
cost of providing our Internet healthcare management system. During the reported
period ended June 30, 1999, cost of sales primarily consisted of hardware and
software. Cost of sales for the current quarter decreased as a percent of net
sales from 78 percent for the pro forma period ended June 30, 1999 to 68
percent. The reduction in cost of sales is due to the additional sales from
Internet and related consulting services provided in the first quarter of 2001,
which carry a lower cost of sale component. In addition, a portion of the U.S.
sales relating to Internet and business consulting services were provided by
executive management whose compensation is not reflected in the cost of sales.
Research and Development
Research and development costs mainly consist of salaries, consultant
fees, and equipment costs of the internal development of new software and
Internet products in the United Kingdom and in the United States. During the
three months ended June 30, 2000 and 1999 we expensed approximately $977
thousand and $248 thousand in development costs, respectively, and capitalized
approximately $3 million and $0, respectively. These development costs were
incurred in the United Kingdom for the development of new Internet products and
software and in the United States for new Internet products and additional
solutions to be integrated with our existing Internet-based health care
management system. Pro forma research and development costs of $554 thousand for
the prior year period include costs incurred for the development of multimedia
technology. The costs incurred and capitalized to
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<PAGE> 12
deferred software will be amortized into expense over the useful life of the
resulting software products once such software products are in service or
available for sale.
Sales and Marketing
Sales and marketing costs consist primarily of costs for salaries,
travel, advertising, marketing literature, and seminars. These costs reflect our
business plan to increase markets and customers throughout the United States,
United Kingdom, Australia, and Europe. Sales and marketing costs for the three
month period ended June 30, 2000 increased over the reported and pro forma
results for June 30, 1999 by approximately $2.2 million and $1.4 million,
respectively. Of the increase in reported sales and marketing costs $850
thousand was in the United Kingdom as the result of increasing our sales force
to implement e-Net's planned market penetration into the Internet market as well
as for the sale of hardware and software. In addition, the U.S. operations
incurred approximately $1.3 million in additional sales and marketing costs for
the period ended June 30, 2000 as a result of the marketing of our
Internet-based health care management system. However, these costs as a
percentage of net sales decreased from 9.2 percent to 7.1 percent when comparing
the pro forma 1999 costs to the June 30, 2000 costs. The change in sales mix
resulting from increased sales in pharmacy services and Internet related
consulting has contributed to this decrease as these type of sales do not
require as much marketing efforts as product sales.
General and Administrative, including Non Cash Compensation
General and administrative costs mainly consist of salaries, facility
costs, and professional fees. Non-cash compensation costs represents
compensation paid to employees and consultants through the issuance of shares,
warrants, and options. These combined costs increased for the three months ended
June 30, 2000 by $9.0 million and $7.3 million over the reported and proforma
amounts for June 30, 1999, respectively. Approximately $5.1 million of the costs
for the current quarter were related to the pharmacy operations and
approximately $4.3 million related to expansion of our U.S. Internet operations
in accordance with our business plans and infrastructure development. These
costs, which include legal fees, accounting fees, and other consulting fees,
also represent our efforts to broaden our financial and investment market
visibility for future financing opportunities for our operations and planned
expansion as well as establishing good communication channels with our
shareholders.
Depreciation and Amortization
Depreciation and amortization for the period ended June 30, 2000
includes depreciation of equipment of approximately $656 thousand and the
amortization of goodwill of $1.8 million. Compared to reported and the pro forma
quarter results in 1999, these amounts reflect an increase of approximately $514
thousand and $438 thousand for depreciation of equipment, respectively, and $1.6
million and $162 thousand for the amortization of goodwill, respectively. During
the last quarter of fiscal 2000 and the first quarter of fiscal 2001 we acquired
three multimedia companies that resulted in approximately $49 million in
goodwill. This goodwill is being amortized over a seven-year period. We also
entered into a 30year management contract with a pharmacy services company and
acquired approximately 29 percent of its stock. We are consolidating this
company and have, therefore, recorded the investment and negative equity at the
acquisition date of approximately $32 million as goodwill. This goodwill is
being amortized over a 30year period consistent with our management contract
term. In addition, we acquired a pharmacy services company in the first quarter
of this year that resulted in approximately $2 million of goodwill. This
goodwill is being amortized over a 15year period. The goodwill recorded in March
1999 for the acquisition of E-Net is being amortized over a ten-year period. The
amortization periods are based on managements' best estimate of the useful lives
of the businesses acquired.
OTHER INCOME (EXPENSE)
Other income (expense) includes interest expense, interest income, and
other income. These costs and income on a combined basis have decreased in the
current period compared to prior year. Interest expense, of approximately $1.3
million for the quarter ended June 30, 1999, included approximately $1.2 million
of amortization of deferred financing costs incurred as a result of the bridge
financing obtained for the acquisition of E-Net. In addition, interest costs
include interest expense on our bridge debt and e-Net's credit facility. During
our third and fourth quarter of 2000, we raised approximately $63.6 million of
net proceeds through the sale of our
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common stock. As a result of the cash flow, we have recorded interest income for
the three months ended June 30, 2000 of approximately $696 thousand.
EXTRAORDINARY GAIN
The extraordinary gain of approximately $357,000 in the period ended
June 30, 1999 is due to the recognition of the gain associated with the exchange
of bridge debt and its related origination fees and interest payable for the
issuance of warrants.
LIQUIDITY
Since inception, the operating costs of the Company have been funded by
its operations, sale of equity, its credit facility, and through loans from
private investors. As of June 30, 2000, the Company had working capital of
approximately $40.8 million, including cash of $32.4 million. During the period
ended June 30, 2000, we used cash in operating activities of approximately $15.8
million, primarily due to the net loss from the period of $3.5 million, and by
the net change in operating assets and liabilities of $15.0 million partially
offset by depreciation and amortization expense of $2.4 million. We used cash in
investing activities of approximately $11.3 million, primarily due to $3.0
million investment in software development and $8.3 million in capital
expenditures, investments and business acquisitions. The $27.4 million use in
cash was in accordance with our business strategy and plans for acquisitions and
their required integration into our Company. Additional investments and capital
expenditures were also required to implement our contracts and rollout our
healthcare management system.
On August 12, 2000, the Company's Board of Directors approved the
repurchase in the open market of up to 2 million shares of our common stock over
the next eighteen months.
We believe that our current cash balances along with our current credit
facilities and operations will be sufficient to support our capital needs over
the next 12 months to continue the implementation of our plan. However, we may
need to raise additional financing to support further expansion, develop new or
enhanced applications and services, respond to competitive pressures, acquire
complementary businesses or technologies, or take advantage of unanticipated
opportunities. We may need to raise additional funds by selling debt or equity
securities, by entering into strategic relationships, or through other
arrangements. We may be unable to raise any additional amounts on reasonable
terms, or at all, when they are needed. The inability of the Company to raise
such additional funding would have an adverse effect on the Company's financial
position and results of operation.
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