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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 19, 2000
Commission file number 0-17822
MEDICAL MANAGER CORPORATION
(formerly known as Synetic, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 22-2975182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
669 River Drive
Elmwood Park, New Jersey 07407-1361
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-3400
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<PAGE>
Item 5. Other Events
During the three months ended March 31, 2000, Medical Manager
Corporation (the "Company") executed and closed agreements to acquire the
following companies: Direct 1 Medical, Inc. ("Direct 1"), Versyss-MidSouth
Business Systems, Inc. ("Midsouth"), Briar Hill Enterprises, Inc. ("Briar
Hill"), Aztec Financial, Inc. ("Aztec"), Innovative Healthcare Solutions, Inc.
("Innovative"), Altman Information Systems, Inc. ("Altman"), Medical Software
Specialists, Inc. ("MSS"), Americlaims, Ltd. ("Americlaims"), MedsAmerica, Inc.
("MedsAmerica), Medical Office Management Solutions, Inc. ("MOMS") and HealthPro
Solutions, Inc. ("HealthPro") (referred to collectively as the "Third Quarter
Acquired Companies"). In connection with the acquisitions of the Third Quarter
Acquired Companies, which have been accounted for by the pooling of interests
method (as described in the notes to the Company's consolidated financial
statements), the Company has restated its historical consolidated financial
statements and data for the years ended June 30, 1999, 1998, and 1997 and other
materials described below.
ITEM DESCRIPTION Page
---------------- ----
1
(1) Selected Financial Data............................................. 3
(2) Annual Financial Data of the Company
(a) Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 4
(b) Restated Consolidated Financial Statements of the Company
Report of Independent Public Accountants................... 12
Report of Independent Certified Public Accountants......... 13
Consolidated Balance Sheets at June 30, 1999 and 1998...... 14
Consolidated Statements of Operations for the
Years Ended June 30, 1999, 1998, and 1997................ 16
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 1999, 1998,
and 1997................................................. 17
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1999, 1998 and 1997................. 18
Notes to Consolidated Financial Statements................. 20
2
<PAGE>
Selected Financial Data.
The following table sets forth selected consolidated financial data for
the historical operations of the Company for each of the five years in the
period ended June 30, 1999. The selected financial data for the year ended June
30, 1995 has been restated to reflect the divestiture of the Company's
institutional pharmacies business in December 1994. The selected financial data
includes the retroactive restatement as it relates to the acquisition by the
Company of Medical Manager Health Systems, Inc. ("Health Systems") on July 23,
1999, the acquisition by the Company of the following companies during the three
months ended December 31, 1999: Clinical Management Solutions, Inc.
("Clinical"), MicroSense, Inc., Resource America, Inc., Service Dimensions,
Inc., Terry Kidd, Inc., d/b/a TKI Computer Services ("TKI") and PSI Computer
Systems (collectively referred to as the "Second Quarter Acquired Companies")
and the acquisition by the Company of the following companies during the three
months ended March 31, 2000: Direct 1 Medical, Inc. ("Direct 1"),
Versyss-MidSouth Business Systems, Inc. ("Midsouth"), Briar Hill Enterprises,
Inc. ("Briar Hill"), Aztec Financial, Inc. ("Aztec"), Innovative Healthcare
Solutions, Inc. ("Innovative"), Altman Information Systems, Inc. ("Altman"),
Medical Software Specialists, Inc. ("MSS"), Americlaims, Ltd. ("Americlaims"),
MedsAmerica, Inc. ("MedsAmerica), Medical Office Management Solutions, Inc.
("MOMS") and HealthPro Solutions, Inc. ("HealthPro") (collectively referred to
as the "Third Quarter Acquired Companies"). Prior to its acquisition by the
Company, Health Systems' year end was December 31. For the fiscal years ended
June 30, 1999 and 1998, Health Systems' results have been restated to correspond
with the Company's fiscal year end of June 30. The Company combined the selected
financial data of its historical operations for the fiscal years ended June 30,
1997, June 30, 1996 and June 30, 1995 with the financial position and results of
operations of Health Systems' for the calendar years ended December 31, 1996,
December 31, 1995 and December 31, 1994, respectively. Prior to acquisition,
each of the Second Quarter Acquired Companies' year ends were December 31,
except for Clinical and TKI which were June 30 and March 31, respectively. For
the fiscal year ended June 30, 1999, results for the Second Quarter Acquired
Companies that were not on a June 30 year end have been restated to correspond
with the Company's fiscal year end of June 30. The Company combined the selected
financial data of its historical operations for each of the fiscal years ended
prior to June 30, 1999 with each of the Second Quarter Acquired Companies'
financial position and results of operations for their respective years ends.
Prior to acquisition, each of the Third Quarter Acquired Companies' year ends
were December 31, except for Briar Hill, HealthPro and Altman which had year
ends of September 30, March 31, and March 31, respectively. For the fiscal year
ended June 30, 1999, results for the Third Quarter Acquired Companies have been
restated to correspond with the Company's fiscal year end of June 30. The
Company combined the selected financial data of its historical operations for
each of the fiscal years ended prior to June 30, 1999 with each of the Third
Quarter Acquired Companies' financial position and results of operations for
their respective years ends.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net revenues................................ $91,779 $116,063 $ 135,623 $216,609 $296,096
Income (loss) from continuing
operations before
provision for income
taxes..................................... 6,734 19,569 (18,516) 36,626 30,955
Provision for income taxes.................. 483 4,862 2,844 13,706 12,311
------- -------- -------- -------- --------
Income (loss) from continuing
operations................................ 6,251 14,707 (21,360) 22,920 18,644
Income from discontinued
operations................................ 15,459 - - - -
------- -------- --------- -------- --------
Net income (loss)........................... $21,710 $ 14,707 $(21,360) $ 22,920 $ 18,644
======= ======== ========= ======== ========
Net income (loss) per share--basic:
Continuing operations..................... $ 0.28 $ 0.64 $ (0.90) $ 0.72 $ 0.54
Discontinued operations................... 0.68 - - - -
------- -------- --------- -------- --------
Net income (loss) per share--basic.......... $ 0.96 $ 0.64 $ (0.90) $ 0.72 $ 0.54
======= ======== ========= ======== ========
Net income (loss) per share--diluted:
Continuing operations..................... $ 0.26 $ 0.60 $ (0.90) $ 0.67 $ 0.50
Discontinued operations................... 0.66 - - - -
------- -------- --------- -------- --------
Net income (loss) per share--diluted........ $ 0.92 $ 0.60 $ (0.90) $ 0.67 $ 0.50
======= ======== ========= ======== ========
</TABLE>
3
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<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In Thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital............................. $104,478 $166,241 $ 89,769 $160,465 $235,029
Total assets................................ 204,655 221,375 407,004 517,646 818,196
Long term debt, less
current portion........................... 2,315 2,634 168,119 162,960 170,041
Stockholders' equity........................ 170,724 185,762 190,374 291,677 485,343
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table sets forth for the periods indicated the percentage
by which certain items in the financial statements of the Company relate to net
revenues.
<TABLE>
<CAPTION>
Percentage Of Net Sales
Fiscal Years Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues......................................... 100% 100% 100%
Costs and expenses:
Cost of revenues.................................... 49.9 49.6 50.7
Selling, general and administrative................. 29.5 30.4 33.7
Research and development............................ 6.6 4.8 9.0
Litigation costs.................................... 2.2 - -
Depreciation and amortization........................ 5.1 4.0 3.2
Interest and other income........................... (6.9) (9.8) (9.1)
Interest expense.................................... 3.1 4.1 2.5
Acquired in-process research and development....... - - 23.7
------ ------ ------
89.5 83.1 113.7
------ ------ ------
Income (loss) before provision for income taxes...... 10.5 16.9 (13.7)
Provision for income taxes........................... 4.2 6.3 2.1
------ ------ ------
Net income (loss).................................... 6.3% 10.6% (15.8)%
====== ====== ======
</TABLE>
Overview
On July 23, 1999 Medical Manager Corporation (the "Company") (formerly
known as Synetic, Inc.) acquired all of the outstanding stock of Medical Manager
Health Systems, Inc. (formerly known as Medical Manager Corporation) ("Health
Systems") in exchange for 14,109,455 newly issued shares of Medical Manager
Corporation common stock. In connection with this merger, Synetic, Inc. changed
its name to Medical Manager Corporation. The merger has been accounted for as a
tax-free pooling-of-interests. During the three months ended December 31, 1999,
the Company executed and closed agreements to acquire the following companies in
exchange for 125,486 newly issued shares of Medical Manager Corporation common
stock: Clinical Management Solutions, Inc. ("Clinical"), MicroSense, Inc.,
Resource America, Inc., Service Dimensions, Inc., Terry Kidd, Inc., d/b/a TKI
Computer Services ("TKI") and PSI Computer Systems (referred to collectively as
the "Second Quarter Acquired Companies"). The acquisitions of the Second Quarter
Acquired Companies were accounted for by the pooling of interests method. During
the three months ended March 31, 2000, the Company executed and closed
agreements to acquire the following companies in exchange for 963,640 newly
issued shares of Medical Manager common stock: Direct 1 Medical, Inc. ("Direct
1"), Versyss-MidSouth Business Systems, Inc. ("Midsouth"), Briar Hill
Enterprises, Inc. ("Briar Hill"), Aztec Financial, Inc. ("Aztec"), Innovative
Healthcare Solutions, Inc. ("Innovative"), Altman Information Systems, Inc.
("Altman"), Medical Software Specialists, Inc. ("MSS"), Americlaims, Ltd.
("Americlaims"), MedsAmerica, Inc. ("MedsAmerica), Medical Office Management
Solutions, Inc. ("MOMS") and HealthPro Solutions, Inc. ("HealthPro") (referred
to collectively as the "Third Quarter Acquired Companies"). The acquisitions of
the Third Quarter Acquired Companies were accounted for by the pooling of
interests method. The Company's consolidated financial statements have been
restated to reflect the merger with Health Systems, the acquisitions of the
Second Quarter Acquired Companies and the acquisitions of the Third Quarter
Acquired Companies (Health Systems, the Second Quarter Acquired Companies and
the Third Quarter Acquired Companies are referred
4
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to collectively as "MMHS"). Prior to its acquisition by the Company, Health
Systems' year end was December 31. For fiscal years ended June 30, 1999 and
1998, Health Systems' results have been restated to correspond with the
Company's fiscal year end of June 30. The Company combined its historical
operations for the fiscal year ended June 30, 1997 with the financial position,
results of operations and cash flow of Health Systems for the calendar year
ended December 31, 1996. Prior to acquisition, each of the Second Quarter
Acquired Companies' year ends were December 31,except for Clinical and TKI which
were June 30 and March 31, respectively. For the fiscal year ended June 30,
1999, results for the Second Quarter Acquired Companies that were not on a June
30 year end have been restated to correspond with the Company's fiscal year end
of June 30. The Company combined its historical operations for the fiscal years
ended June 30, 1998 and June 30, 1997 with each of the Second Quarter Acquired
Companies' financial position and results of operations for their respective
years ends. Prior to acquisition, each of the Third Quarter Acquired Companies'
year ends were December 31, except for Briar Hill, HealthPro and Altman which
had year ends of September 30, March 31 and March 31, respectively. For the
fiscal year ended June 30, 1999, results for the Third Quarter Acquired
Companies have been restated to reflect their operations to correspond with the
Company's fiscal year end of June 30. The Company combined its historical
operations for the fiscal years ended June 30, 1998 and June 30, 1997 with each
of the Third Quarter Acquired Companies' financial position, results of
operations and cash flows for their respective years ends. The Company recorded
a $17,991,000 charge in its quarter ended September 30, 1999 for the costs
associated with the merger with Health Systems.
The historical operations of the Company are primarily related to its
physician practice management information systems business ("PPMIS") through
MMHS and its plastics and filtration technologies business ("PFT") through its
wholly owned subsidiary, Porex Corp. and its affiliated companies ("Porex"). For
the year ended June 30, 1999, the majority of the Company's consolidated
revenues and operating expenses were derived from its PPMIS and PFT businesses.
For the years ended June 30, 1998 and 1997, all of the Company's consolidated
revenues and a majority of its operating expenses were derived from its PPMIS
and PFT businesses. As discussed below, the consolidated financial statements
for the years ended June 30, 1999, 1998 and 1997 also include costs associated
with the Company's activities in developing its healthcare electronic commerce
business ("HEC") through the Company's majority owned subsidiary, CareInsite,
Inc. and its affiliated companies ("CareInsite").
On February 13, 2000, the Company and CareInsite signed definitive
agreements (the "Healtheon Agreements") to be acquired by Healtheon/WebMD Corp.
Under the terms of the agreement, as amended on June 18, 2000, Healtheon/WebMD
will pay 2.5 shares of Healtheon/WebMD common stock for each share of the
Company's common stock and 1.3 shares for each share of CareInsite's common
stock not owned by the Company. Completion of the acquisitions, which will be
accounted for as a purchase transaction, is subject to certain conditions,
including regulatory and shareholder approvals.
Fiscal Years Ended June 30, 1999 and 1998 Consolidated Results of Operations
The Company's consolidated net revenues for the year ended June 30,
1999 increased $79,487,000 or 36.7% over the comparable prior year period. Net
revenues for the year ended June 30, 1999 from PPMIS increased $44,268,000 or
29.2% over the prior year period. Of this increase, $3,900,000 was due to sales
from purchased companies acquired from September 1, 1998 through June 30, 1999,
for which there were no sales in the prior period. Excluding these acquisitions,
the increase in net revenues of $40,368,000 was due primarily to increases in
new system sales and upgrades to version 9.0 of the Medical Manager Software,
maintenance and support revenues related to the new system sales, as well as
increases in PPMIS' network service revenues. Net revenues for the year ended
June 30, 1999 from PFT increased $33,855,000 or 52.1% over the prior year
period. Included in this increase are revenues from Point Plastics and
KippGroup, which were acquired in July 1998 and January 1999, respectively.
Excluding the impact of these acquisitions, net revenues increased 4.3% over
the prior year. This increase is due primarily to increased sales of components
manufactured by PFT for consumer applications, primarily household components.
Net revenues for the year ended June 30, 1999 also include $1,364,000 from HEC
for which there were no revenues in the comparable prior year period.
The Company's consolidated cost of revenues as a percentage of revenues
increased to 49.9% from 49.6% in the prior year. Cost of revenues as a
percentage of revenues from PPMIS increased to 51.5% from 51.3% in the prior
year. The increase relates to fewer sales from PPMIS' enterprise business group
("EBG"), which are typically large, high margin sales made to larger national
and regional clients and to a lesser extent, additional payroll and related
costs related to the roll-out of PPMIS' network services. Cost of revenues for
PFT were 46.3% versus 45.6% in the prior year. This increase is primarily
attributable to lower margin revenues of KippGroup, which was acquired in
January 1999. Excluding the impact of KippGroup's operations, cost of revenues
as a percentage of revenues for PFT decreased to 44.0% from 45.6% in the prior
year, principally due to improvements in manufacturing efficiencies. Cost of
revenues for the year ended June 30, 1999 also include $1,062,000 from HEC for
which there were no cost of revenues in the comparable prior year period.
5
<PAGE>
The Company's consolidated selling, general and administrative expenses
for the fiscal year ended June 30, 1999 increased by $21,550,000 or 32.7% over
the comparable prior year period. Selling, general and administrative expenses
for PPMIS increased slightly as a percentage of revenues to 30.2% from 29.6% in
the prior year period. This increase was primarily due to additional costs in
the sales and administrative functions to support the continued growth at PPMIS.
Selling, general and administrative costs for PFT increased $6,657,000 or 54.2%.
This increase was primarily related to (i) the acquisitions of Point Plastics
and KippGroup in July 1998 and January 1999, respectively, which contributed
$5,135,000 of this increase, and (ii) increased costs related to higher sales.
As a percent of sales, selling, general and administrative costs for PFT was
19.2% for the year ended June 30, 1999 as compared to 18.9% in the prior year.
Selling, general and administrative expenses reported for HEC increased
$1,542,000, primarily due to the additional salaries and benefits for sales,
marketing and business development efforts, as well as the increased costs
incurred to support these efforts. Selling, general and administrative expenses
also includes a benefit of $2,788,000 related to the minority interest in the
net loss of HEC.
The Company's consolidated research and development expenses increased
$9,004,000 over the prior year. This increase was primarily related to (i) a
$2,381,000 write-off of capitalized software development costs which relate to
the abandonment of HEC's development efforts with respect to certain of its
products and services. Those efforts were abandoned as a result of encountering
a high risk development issue associated with integrating those products and
services with the acquired Cerner technology, (ii) increased research and
development expenses, which consist of employee compensation, the cost of
consultants and other direct expenses incurred in the development of HEC's
product, (iii) PPMIS' development projects regarding future versions of the
Medical Manager software with graphical user interfaces and relational database
technologies, along with web-based access and services and (iv) to a lesser
extent the development of new products, product applications and the continued
enhancements of HEC's manufacturing processes.
Depreciation and amortization increased $6,594,000 over the prior year,
primarily related to the depreciation and amortization of goodwill, other
intangible assets and property, plant and equipment related to the acquisitions
of Point Plastics and KippGroup, and the 1999 purchased companies acquired by
PPMIS, all acquired during the fiscal year ended June 30, 1999.
The Company recorded $6,666,000 in litigation charges for the fiscal
year ended June 30, 1999; $4,300,000 related to its ongoing defense against
assertions that it violated certain agreements with Merck & Co., Inc. and
Merck-Medco Managed Care, L.L.C. and $2,366,000 regarding a class action lawsuit
alleging Year 2000 issues regarding the Medical Manager software in versions
prior to Version 9.0.
Interest and other income, net of interest expense for the fiscal year
ended June 30, 1999 decreased by $1,109,000 or 8.9% versus the prior year due
primarily to net proceeds invested for a full year from the sale of common stock
in April, 1998, offset by (i) a decrease in funds available for investment
primarily due to the payment of the cash portion of the purchase price for Point
Plastics, (ii) declining yields in the Company's investment portfolio resulting
from the reinvestment of maturing or redeemed securities at lower rates and
(iii) the repurchase of $5,500,000 face amount of Convertible Debentures which
resulted in a $600,000 pre-tax gain during the prior year for which there is no
comparable amount in the current fiscal year. The Company's investments consist
primarily of U.S. Treasury Notes and Federal Agency Notes.
The increase in the effective tax rate for the fiscal year ended June
30, 1999 to 39.8% versus the prior year effective rate of 37.4% was primarily
attributable to the impact of deconsolidation of CareInsite for federal income
tax purposes offset by the minority interest benefit from the losses in HEC, not
taxable for federal or state purposes.
Fiscal Years Ended June 30, 1998 and 1997 Consolidated Results of Operations
The Company's consolidated net revenues for the year ended June 30,
1998 increased $80,986,000 or 59.7% over the comparable prior year period. Net
revenues for the year ended June 30, 1998 for PPMIS increased $68,926,000 or
83.3% over the year ended December 31, 1996. The majority of this increase is
due to a full year of sales of the five founding companies acquired in February
1997 at MMHS (Medical Manager Research and Development, Inc. (formerly
Personalized Programming, Inc.), Medical Manager Sales and Marketing, Inc.
(formerly Systems Plus, Inc.), Medical Manager Southeast, Inc. (formerly
National Medical Systems, Inc.), Medical Manager Northeast, Inc. (formerly RTI
Business Systems, Inc.) and Medical Manager Midwest, Inc. (formerly Systems
Management Inc.) referred to collectively as the "Founding Companies"). Net
revenues for PPMIS also increased due to revenues from purchase acquisitions
during the period from July 1, 1997 through June 30, 1998, of which there were
no sales in the prior period, as well as an increase in new systems sales and
support and maintenance revenues related to these new sales. PFT's net revenues
for the year ended June 30, 1998 include a full year of revenues by Interflo
Technologies, Inc., acquired in February 1997. Inclusion of a full year of
Interflo's net revenues accounted for 7.4% of
6
<PAGE>
PFT's overall increase in net revenues. The remaining 15.4% of PFT's increase in
net revenues was due principally to increased unit sales of writing components,
increased unit sales of diagnostic products and various filtration devices, and
increased unit sales of laboratory disposable products such as pipette tips and
test tubes.
The Company's consolidated cost of revenues as a percentage of revenues
decreased to 49.6% from 50.7% in the prior year. Cost of revenues as a
percentage of revenues for PPMIS decreased to 51.3% for the year ended June 30,
1998 as compared with 53.3% for the year ended December 31, 1996. Cost of
revenues as a percentage of revenues for PFT decreased to 45.6% from 46.7% in
the comparable prior year period principally due to increased leverage of
certain fixed costs which do not increase proportionately with sales, labor
efficiencies and increased sales of higher margin products.
The Company's consolidated selling, general and administrative expenses
for the fiscal year ended June 30, 1998 increased by $20,214,000 or 44.3% to
$65,860,000. As a percentage of net revenues, PPMIS reported selling, general
and administrative expenses of 29.6% for the year ended June 30, 1998 as
compared with 33.6% for the year ended December 31, 1997. The decrease was due
primarily to certain efficiencies gained as a result of MMHS' acquisition of the
Founding Companies. PFT reported total selling, general and administrative
expenses of $12,271,000 versus $11,677,000 in the prior year. As a percentage of
net revenues, PFT's selling, general and administrative expenses for the year
ended June 30, 1998 decreased to 18.9% from 22.1% due principally to increased
sales which were not proportionately offset by such expenses since these costs
do not vary directly with sales. Selling, general and administrative expenses
for HEC increased $2,486,000 over the prior year, again, due to the additional
salaries and benefits for sales, marketing and business development efforts, as
well as the increased costs incurred to support these efforts.
The Company's consolidated research and development expenses decreased
$1,744,000 versus the prior year. Research and development expenses for the
fiscal year ended June 30, 1997 include HEC's write-off of $5,228,000 in costs
associated with the acquisition of rights to certain intellectual property and
software technologies for which there was no comparable write-off for the year
ended June 30, 1998. This write-off primarily related to payments for a
royalty-free perpetual license for pharmacy and prescription related software
applications, together with the supporting documentation. CareInsite licensed
these assets for use in developing certain components of its computer
applications. As CareInsite had not established the technological feasibility of
its applications prior to the date the license was acquired, and there was no
alternative future use of the licensed technology, the entire cost was charged
to research and development expense. Excluding this item, HEC's research and
development expenses were $4,159,000 versus $2,277,000 in the prior year. This
increase is again due to increased employee compensation and related benefits,
as well as the costs of consultants and other direct expenses incurred in the
development of HEC's product. The $1,429,000 increase in PPMIS' research and
development expenses is related to future versions of the Medical Manager
software with graphical user interfaces and relational database technologies.
The $173,000 increase in PFT's research and development costs over the prior
year was related to the development of new and existing products and
enhancements to current manufacturing processes.
Depreciation and amortization increased $4,223,000 over the prior year.
Depreciation and amortization for PPMIS for the year ended June 30, 1998
increased $2,059,000, due primarily to the purchase acquisitions for the period
of January 1, 1997 through June 30, 1998 for which there was no comparable
amount in the year ended December 31, 1996. PFT's depreciation and amortization
increased $1,085,000 over the prior year, primarily due to the inclusion of a
full year of goodwill amortization related to the acquisition of Interflo in the
prior year. Depreciation and amortization for HEC increased $1,061,000 over the
prior year, due primarily to the inclusion of a full year of goodwill
amortization related to the acquisition of Avicenna.
Acquired in-process research and development for the fiscal year ended
June 30, 1997 was $32,185,000. This relates to the write-off of the portion of
the purchase price allocated to acquired in-process research and development
within the HEC for the Avicenna and CareAgents acquisitions, discussed below.
Interest and other income, net of interest expense for the fiscal year
ended June 30, 1998 increased by $3,371,000 or 37.3% over the comparable prior
year period primarily as a result of a full year of income earned on proceeds
from the sale of the Company's common stock in February 1997, as well as the
proceeds of the Company's $165,000,000 principal amount of its 5% Convertible
Subordinated Debentures due 2007 (the "Convertible Debentures") issued in
February 1997, offset by a full year of the interest expense associated with the
Convertible Debentures. The Company's investments consist primarily of U.S.
Treasury Notes and Federal Agency Notes.
The effective tax rate for the year ended June 30, 1998 remained
relatively flat at 37.4% versus 37.5%, excluding, in the prior year, the portion
of acquired in-process research and development charge relating to the
acquisitions of Avicenna and CareAgents for which no tax benefits were
recognized and excluding the entire MMHS operation for the year ended December
31, 1996. MMHS, prior to February 1997, was taxed as an S-Corporation and
therefore had no federal tax liabilities.
7
<PAGE>
Acquired in-process Research and Development-CareInsite-Fiscal Year Ended June
30, 1997
In connection with the acquisitions of Avicenna and CareAgents, the
Company allocated a portion of each purchase price to acquired in-process
research and development. The amount allocated to acquired in-process research
and development for each of these acquisitions was determined based on an income
approach valuation methodology. For both Avicenna and CareAgents a nine year
forecast of revenues and costs attributable to the acquired technology was
prepared. The nine year projection period was consistent with the expected
useful lives of the technology under development. The resulting operating cash
flows were then reduced by working capital and capital expenditures and
discounted to present value based on a discount rate of 30% for Avicenna and 50%
for CareAgents. These different discount rates were used because, at the time of
acquisition, Avicenna had commenced operations, had more than 30 employees and
had received financing. In contrast, CareAgents, at the time of acquisition, had
not commenced operations, had no employees other than its stockholders, and had
not received any financing. These amounts have been expensed on the respective
acquisition dates as the in-process research and development had not reached
technological feasibility and had no alternative future use. A description of
the acquired in-process research and development and the estimates made by the
Company are set forth below.
Avicenna. Avicenna's business plan was to design and market Intranets
to provider organizations to provide communication and reference capabilities to
these organizations. Doctors in these organizations would communicate via e-mail
and forum groups with centralized medical reference information with the
objective of reducing costs in a managed care environment. The fundamental
technology plan was to develop a client/server based application to allow
hospital affiliated doctors to access a local Intranet that housed medical
reference information, in-house policies and procedures, and communication among
the various parties. This required development of electronic search, medical
reference material storage and communication capabilities such as forums and
e-mail. The revenue model had been, prior to acquisition, primarily one based on
pharmaceutical and medical device manufacturer's advertising fees on these
Intranets. Avicenna also envisioned creating a search capability that would
allow doctors to quickly access relevant reference information on a variety of
medical topics from databases that were licensed to Avicenna. These databases
would be customized in format by Avicenna.
As of the acquisition date, Avicenna was in the early stages of its
development and the systems under development had not yet reached technological
feasibility. There was a working public Intranet site and they had begun to
implement the search techniques. Their primary mechanism to allow users to
search their Intranet sites and access content provided by hospitals,
advertisers, and others was to develop a method of customizing that content via
a software utility known as "Framework". Framework was in the initial stage of
development with the substantive system design, coding, and testing work
remaining incomplete. Framework was the fundamental piece of code that would
enable users to be able to both search and reference the content contained on an
Avicenna Intranet and thereby realize their business model.
As of the December 24, 1996 acquisition date, Avicenna had incurred
approximately $1,263,000 in research and development costs to develop the
technology to its status described above. It was estimated that over $3,000,000
of costs remained to complete the projects described above in the following
calendar year and that additional significant costs remained in subsequent years
to further enhance and maintain the capabilities of the Avicenna system.
Subsequent to the date of acquisition, we have modified the acquired technology
from both Avicenna and CareAgents and incorporated them into a broader system,
the CareInsite system.
CareAgents. CareAgents' business plan was to design and market Internet
based clinical commerce applications that allowed the various healthcare
participants to exchange information and conduct basic medical transactions with
each other. Participants included patients, providers, and suppliers. The
fundamental technology plan was to create an Internet and standards based
connection between the participants and then provide specific transaction
capabilities using both internally and externally developed application
software.
CareAgents' technology was in the very early stages of development with
basic user requirements, a business plan, preliminary system architecture with
process flow diagrams and prototyping efforts comprising the work completed to
date. In excess of $8,000,000 in costs remained over the next two years to
mature the technology to the point of technological feasibility and the complete
for first product deployment. No work had been completed on a detailed
engineering design or on building or testing any substantive code.
8
<PAGE>
Capital Resources and Liquidity
As of June 30, 1999, the Company had $154,893,000 of cash and cash
equivalents and $296,901,000 of marketable securities. At June 30, 1999, the
Company's marketable securities consisted primarily of U.S. Treasury Notes and
Federal Agency Notes. On June 16, 1999, CareInsite completed its initial public
offering of 6,497,500 shares at $18.00 of its Common Stock (the "Offering"),
which included an over allotment of 847,500 shares. The net cash proceeds of the
Offering were $106,446,000 after deducting anticipated amounts for underwriting
discounts and commissions and Offering expenses.
Net cash provided by operations was $13,452,000, an increase of $28,000
from the fiscal year ended June 30, 1998.
Net cash used in investing activities was $138,617,000 for the fiscal
year ended June 30, 1999, reflecting purchases of marketable securities, net of
maturities and redemptions as well as the net cash paid for the businesses the
Company acquired during the past fiscal year. Capital expenditures were
$12,899,000, $15,833,000 and $7,121,000 for the years ended June 30, 1999, 1998
and 1997.
Net cash provided by financing activities was $142,828,000 for the
fiscal year ended June 30, 1999, primarily a result of the issuance of common
stock by CareInsite, including the Offering referred to above as well as
proceeds from the issuance of the Company's stock options and 401(k) purchases.
The significant funds generated from financing activities are reinvested in
existing businesses and are used to fund capital expenditures.
On January 31, 2000, the Company called for redemption on February 15,
2000, the entire $159,388,000 aggregate principal amount of its outstanding 5%
Convertible Subordinated Debentures due 2007 ("Debentures"). As an alternative
to redemption, the outstanding Debentures were convertible into the Company's
common stock at the rate of approximately 16.667 shares of common stock per
$1,000 principal amount of Debentures, with cash to be paid in lieu of any
fractional shares, for Debentures surrendered on or prior to February 14, 2000.
$159,114,000 aggregate principal amount of the Debentures were surrendered to
the Company for conversion into 2,651,828 shares of the Company's common stock.
The remaining $274,000 aggregate principal amount of Debentures were redeemed at
a redemption price of $1,053.57 per $1,000 principal amount of Debentures
including accrued interest.
As a result of the continuing efforts in developing the Company's
healthcare electronic commerce business, CareInsite has incurred substantial
operating losses since its inception and there can be no assurance that it will
generate significant revenues or profitability in the future. CareInsite intends
to continue its expenditures primarily in the areas of development, sales and
marketing, data center operations and customer support. As a result, CareInsite
expects to continue to incur substantial operating losses.
In light of the Company's and CareInsite's pending acquisitions by
Healtheon/WebMD, the Company and CareInsite made certain strategic decisions,
including the decision to delay deployment of certain of its healthcare
e-commerce services. During this period of delay, CareInsite has been conducting
a review of its systems and applications to determine, among other things, what
additional efforts are required to fully develop certain services for broad
deployment to customers. As part of this review, CareInsite is also evaluating
(i) the possible integration of its technology with Healtheon/WebMD's technology
if the Company's and CareInsite's pending acquisitions by Healtheon/WebMD are
completed, (ii) the recently acquired technology of Provider Technology Group
and the possible integration of those assets into CareInsite's overall
technology platform, (iii) the unique requirements of existing customers and
potential customers with whom CareInsite is currently in discussions and (iv)
the limited availability of cost-effective, high-speed Internet connections into
physicians' offices in our target geographic markets, to assess any potential
impact that they may have on its development efforts. As a result of these
factors and risks and uncertainties described herein and in the Company's and
CareInsite's Form 10-K, the Company and CareInsite believe that the development
and deployment of certain services will take longer and cost more than
previously expected.
The Company and CareInsite currently anticipate that CareInsite may
require additional funding during fiscal 2001 to meet CareInsite's presently
anticipated working capital, capital expenditure and business expansion
requirements, including the requirements of CareInsite's acquisitions. If such
additional funds are required, CareInsite may seek additional equity or debt
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all, or that such financing will not be dilutive to
CareInsite's stockholders.
On February 14, 2000, CareInsite agreed to acquire substantially all of
the assets of Provider Technology Group ("PTG"), the e-commerce network of Blue
Cross Blue Shield of Massachusetts ("BCBSMA"), for $26,500,000 in cash and
651,968 shares of CareInsite's common stock. Pursuant to the asset purchase
agreement, if BCBSMA does not realize at least $22,500,068 in
9
<PAGE>
proceeds from the sale of 325,984 of the common shares issued, CareInsite has
agreed to pay BCBSMA an amount equal to such shortfall in cash. Based on the
March 31, 2000 closing price for CareInsite common stock of $23.375, CareInsite
would be obligated to remit $14,880,192 to BCBSMA pursuant to CareInsite's
guarantee of at least $22,500,068 in proceeds from the sale of 325,984 of the
common stock shares issued to acquire PTG.
BCBSMA has the right to require CareInsite to purchase from BCBSMA
325,984 shares of CareInsite common stock at $69.022 per common share if a
registration statement for these shares has not been declared effective on or
before November 15, 2000. Additionally, if the registration statement referred
to above is not declared effective by December 29, 2000, BCBSMA has the right to
require CareInsite to purchase up to 651,968 shares of CareInsite common stock
from BCBSMA for a price equal to the average closing price per share of
CareInsite common stock for the ten successive trading days ending December 29,
2000.
On May 25, 2000 CareInsite completed the acquisition of Medical Mutual
of Ohio's ("MMO") provider technology business for a total purchase price of
653,997 newly issued shares of CareInsite Common Stock. With respect to the
first 225,669 such shares sold by Medical Mutual after May 25, 2001, if the
price per share payable to Medical Mutual is less than $22.16 per share, then
CareInsite is obligated to pay the difference to MMO.
Under the terms of the strategic alliance and agreement with AOL,
CareInsite is required to make guaranteed payments of $10,000,000 in August 2000
and $10,000,000 in August 2001. If CareInsite's pending merger with
Healtheon/WebMD is completed, AOL will have the right to terminate its strategic
alliance with CareInsite, in which case these guarantees payments due to AOL
under the agreement shall become immediately payable by CareInsite.
Beginning in calendar year 2000, the industry in which the Company's
PPMIS division operates began to experience a slow down in demand. This impacted
the Company's operating results for the three months ended March 31, 2000. The
Company expects this trend to continue for the near term. With the introduction
of Intergy, the Company's new PPMIS software which will be introduced at the end
of the 2000 calendar year, the Company anticipates demand will increase.
The Company believes that its cash and investments, cash flow from
operations and the income earned on its investments are sufficient to meet the
anticipated working capital requirements of the Company's business.
The Company recorded a $17,991,000 charge in its first quarter ending
September 30, 1999 for the costs associated with the merger with Health Systems.
Subject to the provisions of the Healtheon Agreements, the Company
continues to pursue an acquisition program pursuant to which it seeks to effect
one or more acquisitions or other similar business combinations with businesses
it believes have significant growth potential. Financing for such acquisitions
may come from several sources, including, without limitation, (i) the Company's
cash, cash equivalents and marketable securities and (ii) proceeds from the
incurrence of additional indebtedness or the issuance of common stock, preferred
stock, convertible debt or other securities. There can be no assurance that the
Company's acquisition program will be successful. See "Business-Acquisition
Program".
Recently Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), effective for fiscal periods beginning after December 15,
1997. The new standard requires that comprehensive income, which includes net
income as well as certain changes in assets and liabilities recorded in
stockholders' equity, be reported in the financial statements. The Company
adopted SFAS No. 130 during the year ended June 30, 1999. The adoption of SFAS
No. 130 increased the reporting disclosures and had no impact on the results of
operations or financial position of the Company.
In 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the industry segment approach with the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 had no impact on the results of operations or
financial position of the Company (See Note 14).
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits"
("SFAS No. 132"), was issued and is effective for fiscal years beginning after
December 15, 1997. This statement revises employers' disclosures about pension
and other post-retirement benefit plans. The Company adopted SFAS No. 132 during
the year ended June 30, 1999. The adoption of SFAS No. 132 did not have any
impact on the results of operations or financial position of the Company.
10
<PAGE>
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accounts
issued Statement of Position or "SOP", 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending June 30, 2000. Adoption of SOP 98-1 is expected to have no
material impact on the Company's financial condition or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position or "SOP" 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that entities expense start-up costs as incurred.
The Company is required to implement SOP 98-5 for the year ending June 30, 2000.
Adoption of SOP 98-5 is expected to have no material impact on the Company's
financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivatives and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB approved SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133", which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 16, 2000. The Company
has not assessed the impact of the adoption of this Standard on the Company's
results of operations, financial position or cash flow.
Year 2000
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries for the year in the date
code field. This problem is often referred to as the "Year 2000 problem". These
systems and software products need to accept four digit year entries to
distinguish 21st century dates from 20th century dates. Though the Company did
not experience any year 2000 problems on January 1, 2000, additional year 2000
problems may become evident after that date.
The Company believes that the systems of its HEC, PPMIS, and PFT
businesses are year 2000 compliant and, to date, those systems have not
experienced any year 2000 problems. Although each of the Company's businesses
continues to have contingency plans in place for operational problems which may
arise as a result of a year 2000 problem, we cannot assure you that year 2000
issues will not potentially pose significant operational problems or have a
material adverse effect on the Company's business, financial condition and
results of operations in the future.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. The
Company does not expect its future costs related to year 2000 to be material.
The Company is not aware of any material year 2000 problems encountered
by suppliers or customers of the Company's businesses to date but have not yet
obtained confirmations from such suppliers and customers that they did not
experience year 2000 problems. Accordingly, the Company cannot determine whether
any suppliers have experienced year 2000 problems that may impact their ability
to supply the Company with equipment and services or any customers have
experienced disruptions to their business. Further, the Company cannot determine
the state of their year 2000 readiness on a going forward basis. The Company
cannot assure you that the Company's suppliers and customers will be successful
in ensuring that their systems have been and will continue to be or will be year
2000 compliant or that their failure to do so will not have an adverse effect on
the Company's business, financial condition and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from potential changes in
interest rates and foreign exchange rates. The Company believes that the amount
of risk as it relates to its investments, debts obligations and changes in
foreign exchange rates is not material to the Company's financial condition or
results of operations. The Company has taken the following steps to mitigate its
risks: the countries in which the Company owns assets and operates its foreign
operations are politically stable; the Company does not invest in derivative
financial instruments; the Company's investments consist primarily of highly
liquid U.S. Treasury Notes and Federal Agency Notes; the Company's debt
obligations consist primarily of its 5% Convertible Subordinated Debentures due
2007 ("the Debentures"). In addition, on January 31, 2000, the Company called
for redemption on February 15, 2000, the entire $159,388,000 aggregate principal
amount of its Debentures. The aggregate principal amount of $159,114,000 of the
Debentures were surrendered to the Company for conversion into 2,651,828 shares
of the Company's common stock. The remaining $274,000 aggregate principal amount
of Debentures that were not properly submitted for conversion, or not tendered
for redemption were redeemed at a redemption price of $1,053.57 per $1,000
principal amount of debentures including accrued interest.
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Medical Manager Corporation:
We have audited the accompanying consolidated balance sheets of Medical Manager
Corporation (a Delaware Corporation) and subsidiaries (formerly Synetic, Inc.)
as of June 30, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Medical Manager Health Systems, Inc. as of June 30, 1999
and 1998 and for the years ended June 30, 1999 and 1998 and for the twelve month
period ended December 31, 1996 included in the consolidated financial statements
of Medical Manager Corporation, which statements reflect total assets and
revenues of 16.3 percent and 53.3 percent, in 1999, and 21.5 percent and 55.2
percent in 1998, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Medical Manager Health Systems, Inc., is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Medical Manager Corporation and subsidiaries as of
June 30, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 31, 2000
12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Medical Manager Health Systems, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of income, stockholders' equity and cash flows of Medical Manager
Health Systems, Inc. (formerly Medical Manager Corporation) and its subsidiaries
(the "Company") (not presented separately herein) present fairly, in all
material respects, their consolidated financial position at June 30, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years then ended and the twelve month period ended December 31, 1996 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above .
As discussed in Note 1, on July 23, 1999, the Company merged with and into
Medical Manager Corporation (formerly Synetic, Inc.) in a pooling of interests
transaction.
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
August 27, 1999
13
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents............................................. $154,893 $137,230
Marketable securities................................................. 55,454 10,104
Accounts receivable, net of allowances for
doubtful accounts and sales returns of $4,713 and
$3,224 at June 30, 1999 and 1998, respectively...................... 55,874 38,677
Inventories........................................................... 16,618 9,929
Other current assets.................................................. 24,415 17,361
-------- --------
Total current assets.................................................. 307,254 213,301
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements................................................. 3,642 2,323
Buildings and improvements............................................ 21,436 14,248
Machinery and equipment............................................... 62,253 34,344
Furniture and fixtures................................................ 6,599 6,944
Construction in progress.............................................. 5,031 6,853
-------- --------
98,961 64,712
Less: Accumulated depreciation....................................... (39,302) (30,491)
-------- -------
Property, plant and equipment, net.................................. 59,659 34,221
-------- -------
OTHER ASSETS:
Marketable securities................................................. 241,447 217,067
Capitalized software development costs................................ 31,330 4,972
Goodwill and other intangible assets, net of accumulated
amortization of $8,655 and $3,674 at June 30, 1999
and 1998, respectively.............................................. 171,263 37,403
Other................................................................. 7,243 10,682
-------- -------
Total other assets.................................................... 451,283 270,124
-------- -------
$818,196 $517,646
======== ========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
14
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt................................... $ 4,206 $ 5,490
Accounts payable.................................................... 13,224 8,425
Accrued and other liabilities....................................... 33,394 18,987
Customer deposits and deferred maintenance revenue.................. 15,250 14,458
Income taxes payable................................................ 6,151 5,476
-------- --------
Total current liabilities........................................... 72,225 52,836
-------- --------
LONG-TERM DEBT......................................................... 170,041 162,960
-------- --------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY.......................................................... 57,205 -
-------- --------
OTHER LIABILITIES...................................................... 33,382 10,173
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued............................................. - -
Common stock, $.01 par value; 300,000,000 shares
authorized; 41,103,867 and 37,961,488 shares issued;
35,835,404 and 32,693,025 shares issued and outstanding
at June 30, 1999 and 1998, respectively............................. 411 380
Paid-in capital..................................................... 455,699 277,371
Retained earnings................................................... 68,441 52,213
Treasury stock, at cost; 5,268,463 shares
at June 30, 1999 and 1998........................................... (38,287) (38,287)
Accumulated other comprehensive loss................................ (921) -
-------- --------
Total stockholders' equity.......................................... 485,343 291,677
-------- --------
$818,196 $517,646
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues................................................................. $296,096 $216,609 $135,623
-------- -------- ---------
Costs and expenses:
Cost of revenues.......................................................... 147,719 107,484 68,777
Selling, general and administrative....................................... 87,410 65,860 45,646
Research and development.................................................. 19,454 10,450 12,194
Litigation costs.......................................................... 6,666 - -
Depreciation and amortization............................................. 15,183 8,589 4,366
Interest and other income................................................. (20,419) (21,290) (12,407)
Interest expense.......................................................... 9,128 8,890 3,378
Acquired in-process research and development.............................. - - 32,185
-------- -------- ---------
265,141 179,983 154,139
-------- -------- ---------
Income (loss) before provision for income taxes.............................. 30,955 36,626 (18,516)
Provision for income taxes................................................... 12,311 13,706 2,844
-------- -------- ---------
Net income (loss)............................................................ $ 18,644 $ 22,920 $(21,360)
======== ======== =========
Income per share - basic:....................................................
Net income (loss) per share............................................... $ 0.54 $ 0.72 $ (0.90)
======== ======== =========
Weighted average shares outstanding....................................... 34,508 31,760 23,703
======== ======== =========
Income per share - diluted:
Net income (loss) per share............................................... $ 0.50 $ 0.67 $ (0.90)
======== ======== =========
Weighted average shares outstanding....................................... 37,627 34,428 23,703
======== ======== =========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
16
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Accumulated
Number Other Total
of Paid-In Retained Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings Stock Income (Loss) Equity
------ ------ ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996............. 28,471 $285 $159,939 $62,113 $(36,575) $ - $185,762
Dividends.......................... - - (9,461) - - (9,461)
Net Loss........................... - - - (21,360) - - (21,360)
Adjustment to reconcile fiscal
year end of pooled
subsidiary....................... 7,102 71 21,588 62 - - 21,721
Issuance of common stock for
exercise of stock options,
awards and 401(k) plan........... 323 3 13,503 - - - 13,506
Issuance of common stock and
warrants for acquired
companies........................ 641 7 24,840 - - - 24,847
Adjustment to purchase price
of treasury stock................ - - - - (1,712) - (1,712)
Purchase of 50 shares of
common stock for treasury,
net of 18 shares reissued........ - - - - (1,175) - (1,175)
------- ------ -------- ------- -------- ------ --------
Balance, June 30, 1997............. 36,537 $366 $219,870 $31,354 $(39,462) $ - $212,128
------- ------ -------- ------- --------- ------ --------
Dividends.......................... - - - (2,360) - - (2,360)
Net Income......................... - - - 22,920 - - 22,920
Adjustment to reconcile fiscal
year end of pooled
subsidiary....................... - - - 299 - - 299
Sale of common stock, net of
transaction costs................ 937 9 42,251 - - - 42,260
Issuance of common stock for
exercise of stock options and
401(k) plan...................... 231 2 8,152 - 1,391 - 9,545
Issuance of common stock for
acquisition of acquired
companies........................ 256 3 7,098 - - - 7,101
Purchase of 6 shares of
common stock for treasury........ - - - - (216) - (216)
------ ------ -------- ------- -------- ------ --------
Balance, June 30, 1998............. 37,961 $ 380 $277,371 $52,213 $(38,287) $ - $291,677
------ ------ -------- ------- --------- ------ --------
Dividends.......................... - - - (1,996) - - (1,996)
Adjustment to reconcile fiscal
year end of pooled subsidiary.... - - - (420) - - (420)
Net Income......................... - - - 18,644 - - 18,644
Foreign currency translation
adjustment....................... - - - - - (1,121) (1,121)
Unrealized gain on marketable
securities....................... - - - - - 200 200
--------
Comprehensive Income............... - - - - - - 17,723
Increase in carrying value of
CareInsite....................... - - 54,257 - - - 54,257
Issuance of common stock for
acquired companies............... 2,003 20 90,035 - - - 90,055
Issuance of common stock for
exercise of stock options,
warrants, 401(k) plan and
redemption of convertible
securities....................... 1,140 11 34,036 - - - 34,047
------ ----- -------- ------- -------- ------ --------
Balance, June 30, 1999............. 41,104 $ 411 $455,699 $68,441 $(38,287) $ (921) $485,343
====== ===== ======== ======= ======== ====== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
17
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net income (loss)................................................. $ 18,644 $ 22,920 $(21,360)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Adjustment to reconcile fiscal year end of
pooled subsidiaries....................................... (420) 299 1,214
Depreciation and amortization................................. 15,183 8,589 4,366
Write-off capitalized software costs.......................... 2,381 - -
Deferred income taxes......................................... 330 1,221 (4,395)
Write-off of acquired in-process research and development..... - - 32,185
Write-off of acquired intellectual property and software
technologies.............................................. - - 5,228
Net loss from investment in unconsolidated affiliate.......... 596 - -
Minority interest in net loss in consolidated subsidiary...... (2,788) - -
Changes in operating assets and liabilities, net of the effects of
acquisitions:
Accounts receivable, net................................. (11,412) (11,671) (2,546)
Inventories.............................................. (481) (1,761) 572
Other assets............................................. 705 (7,539) (7,620)
Accounts payable......................................... 2,029 (481) 910
Accrued liabilities...................................... 6,672 581 2,402
Other liabilities........................................ (22,171) 926 48
Income taxes payable..................................... 5,256 (648) (1,936)
Customer deposits and deferred maintenance
revenue................................................ (1,072) 989 2,096
------- ------- --------
Net cash provided by operating activities............ 13,452 13,425 11,164
------- ------- --------
Cash flows used in investing activities:
Adjustment to reconcile fiscal year end of
pooled subsidiaries......................................... - - (9,961)
Maturities and redemptions of marketable securities........... 74,741 102,786 396,748
Purchases of marketable securities............................ (137,548) (91,380) (495,008)
Capital expenditures, net..................................... (12,899) (15,833) (7,121)
Software development costs.................................... (7,784) (422) (32)
Net cash paid for acquired businesses......................... (48,777) (3,750) (10,612)
Investment in unconsolidated affiliate........................ (1,350) - -
Issuance of notes receivable.................................. (5,000) - -
-------- ------- --------
Net cash used in investing activities................ (138,617) (8,599) (125,986)
-------- ------- --------
</TABLE>
18
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Cash flows provided by financing activities:
Adjustment to reconcile fiscal year end of
pooled subsidiaries........................................ - - 22,629
Purchases of treasury stock.................................. (364) (216) (3,656)
Proceeds from exercise of stock options, warrants and
401(k) issuances, including related tax benefits........ 30,245 9,505 11,138
Proceeds from issuance of Convertible Debentures,
net of underwriting discount............................ - - 160,890
Repurchase of Convertible Debentures......................... - (4,842) -
Net proceeds from issuance of common stock by
CareInsite.............................................. 120,152 - -
Payments on long-term debt................................... (430) (46) (237)
Proceeds from the issuance of notes payable................... 9 928 1,101
Payments on notes payable..................................... (4,788) (8,079) (823)
Dividends..................................................... (1,996) (2,232) (6,753)
Proceeds from the sale of common stock........................ - 42,260 -
Equity contributions from certain stockholders of
an acquired company......................................... - 80 414
-------- -------- --------
Net cash provided by financing activities........... 142,828 37,358 184,703
-------- -------- --------
Net increase in cash and cash equivalents............................. 17,663 42,184 69,881
Cash and cash equivalents, beginning of period........................ 137,230 95,046 25,165
-------- -------- --------
Cash and cash equivalents, end of period.............................. $154,893 $137,230 $ 95,046
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
19
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
On July 23, 1999 Medical Manager Corporation (the "Company") (formerly
known as Synetic, Inc.) acquired all of the outstanding stock of Medical Manager
Health Systems, Inc. ("Health Systems") (formerly known as Medical Manager
Corporation) in exchange for 14,109,455 newly issued shares of Medical Manager
Corporation common stock. In connection with this merger, Synetic, Inc. changed
its name to Medical Manager Corporation. The merger has been accounted for as a
tax-free pooling-of-interests. During the three months ended December 31, 1999,
the Company executed and closed agreements to acquire the following companies in
exchange for 125,486 newly issued shares of Medical Manager common stock:
Clinical Management Solutions, Inc. ("Clinical"), MicroSense, Inc., Resource
America, Inc., Service Dimensions, Inc., Terry Kidd, Inc., d/b/a TKI Computer
Services ("TKI") and PSI Computer Systems (referred to collectively as the
"Second Quarter Acquired Companies"). The acquisitions of the Second Quarter
Acquired Companies were accounted for by the pooling of interests method. During
the three months ended March 31, 2000, the Company executed and closed
agreements to acquire the following companies in exchange for 963,640 newly
issued shares of Medical Manager common stock: Direct 1 Medical, Inc. ("Direct
1"), Versyss-MidSouth Business Systems, Inc. ("Midsouth"), Briar Hill
Enterprises, Inc. ("Briar Hill"), Aztec Financial, Inc. ("Aztec"), Innovative
Healthcare Solutions, Inc. ("Innovative"), Altman Information Systems, Inc.
("Altman"), Medical Software Specialists, Inc. ("MSS"), Americlaims, Ltd.
("Americlaims"), MedsAmerica, Inc. ("MedsAmerica), Medical Office Management
Solutions, Inc. ("MOMS") and HealthPro Solutions, Inc. ("HealthPro") (referred
to collectively as the "Third Quarter Acquired Companies. The acquisitions of
the Third Quarter Acquired Companies were accounted for by the pooling of
interests method. The Company's consolidated financial statements reflect the
historical operations of the Company for all years prior to the business
combinations, and have been retroactively restated to include the financial
position, results of operations and cash flows of Health Systems, the Second
Quarter Acquired Companies and the Third Quarter Acquired Companies (referred to
collectively as "MMHS"). On a standalone basis, for the year ended June 30,
1999, the Company generated revenues and net income of $100,164,000 and
$2,387,000, respectively. During the same period, MMHS generated revenues and
net income of $195,932,000 and $16,257,000, respectively. On a standalone basis,
for the year ended June 30, 1999, changes in the Companies' and MMHS'
stockholders' equity was $173,310,000 and $20,356,000, respectively.
The consolidated financial statements of the Company include
reclassifications made to conform financial statement presentation of MMHS to
that of the Company.
MMHS is a leading provider of comprehensive physician practice
management information systems to independent physicians, independent practice
associations, management service organizations, physician practice management
organizations, management care organizations and other providers of health care
services in the United States. MMHS develops, markets and supports the Medical
Manager practice management system, which addresses the financial,
administrative, clinical and practice management needs of physician practices.
The Medical Manager system has been implemented in a wide variety of practice
settings from small physician groups to multi-provider independent practice
associations and management service organizations. MMHS's proprietary systems
enable physicians and their administrative staffs to efficiently manage their
practices while delivering quality patient care in a constantly changing health
care environment. Since the development of the Medical Manager software in 1982,
MMHS's installed base has grown to over 25,000 client sites, representing more
than 80 practice specialties, making it the most widely installed physician
practice management system in the United States to date.
The Company's plastics and filtration technologies business is
conducted through Porex Technologies Corp. and its affiliated companies
("Porex"). Over the past 36 years Porex has established a leading reputation in
the porous plastics industry as a designer, manufacturer and distributor of
porous and solid plastic components and products. Porex's porous and solid
plastic components and products are used by other manufacturers in a wide range
of healthcare, consumer, life sciences and industrial applications primarily to
filter, wick, diffuse, drain, vent or control the flow of fluids or gases.
In January 1999, the Company formed CareInsite, Inc. ("CareInsite") and
contributed to it substantially all of the assets and liabilities of the
Company's healthcare electronic commerce business. CareInsite is in the
development stage. CareInsite intends to provide a broad range of healthcare
electronic commerce services which will leverage Internet technology to improve
communication among physicians, payers, suppliers and patients and is developing
a comprehensive set of transaction, messaging and content services to the
healthcare industry participants. The provision of products and services using
20
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
Internet technology in the healthcare electronic commerce industry is subject to
risks, including but not limited, to those associated with competition from
existing companies offering the same or similar services, uncertainty with
respect to market acceptance of its products and services, rapid technological
change, management of growth, availability of future capital and minimal
previous record of operations or earnings.
On June 16, 1999, CareInsite completed its initial public offering of
6,497,500 shares of its common stock (the "Offering"). The net proceeds of the
Offering were approximately $106,446,000. The Company currently owns 67.4% of
CareInsite.
Principles of Consolidation--
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned operating subsidiaries, including MMHS and
Porex, and its majority owned subsidiary, CareInsite, after elimination of all
material intercompany accounts and transactions. Prior to acquisition, Health
Systems' year end was December 31. For fiscal years ended June 30, 1999 and
1998, Health Systems' results have been restated to reflect its operations to
correspond with the Company's fiscal year end of June 30. The Company combined
its historical operations for the fiscal year ended June 30, 1997 with the
financial position, results of operations and cash flows of Health Systems for
the calendar year ended December 31, 1996. The statement of changes in
stockholders' equity and statement of cash flows include adjustments to reflect
the operations of Health Systems for the period from January 1, 1997 through
June 30, 1997. During this period, Health Systems generated revenues and net
income of $44,408,000 and $4,906,000, respectively. Prior to acquisition, each
of the Second Quarter Acquired Companies' year ends were December 31, except for
Clinical and TKI which were June 30 and March 31, respectively. For the fiscal
year ended June 30, 1999, results for the Second Quarter Acquired Companies that
were not on a June 30 year end have been restated to reflect their operations to
correspond with the Company's fiscal year end of June 30. The Company combined
its historical operations for the fiscal years ended June 30, 1998 and June 30,
1997 with each of the Second Quarter Acquired Companies' financial position,
results of operations and cash flows for their respective years ends. The
statement of changes in stockholders' equity and statement of cash flows include
adjustments to reflect the operations of the Second Quarter Acquired Companies
with a December 31 year end for the period from July 1, 1998 through December
31, 1998 and TKI for the period from April 1, 1998 through June 30, 1998. During
this period, those Second Quarter Acquired Companies generated revenues and net
loss of $3,386,000 and $99,000, respectively. Prior to acquisition, each of the
Third Quarter Acquired Companies' year ends were December 31, except for Briar
Hill, HealthPro and Altman which had year ends of September 30, March 31 and
March 31, respectively. For the fiscal year ended June 30, 1999, results for the
Third Quarter Acquired Companies have been restated to reflect their operations
to correspond with the Company's fiscal year end of June 30. The Company
combined its historical operations for the fiscal years ended June 30, 1998 and
June 30, 1997 with each of the Third Quarter Acquired Companies' financial
position, results of operations and cash flows for their respective years ends.
The statement of changes in stockholders' equity and statement of cash flows
include adjustments to reflect the operations of the Third Quarter Acquired
Companies with a December 31 year end for the period from July 1, 1998 through
December 31, 1998, Briar Hill for the period from July 1, 1998 through September
30, 1998 and HealthPro and Altman for the period from April 1, 1998 through June
30, 1998. During this period, those Third Quarter Acquired Companies generated
revenues and net income of $10,478,000 and $443,000, respectively.
Foreign Currency Translation--
Assets and liabilities of Porex's foreign manufacturing facilities are
maintained in their functional currency and translated into U.S. dollars at the
exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at average exchange rates during the year. Foreign currency
translation adjustments resulting from this process are charged or credited to
accumulated other comprehensive loss in stockholders' equity.
Revenue Recognition--
Revenue is recognized for Porex's products upon shipment, net of sales
returns and allowances. Service revenues within CareInsite are recognized as
services are performed. Revenue from software licenses within MMHS is recognized
upon sale and shipment. For the year ended June 30, 1999, revenue from the sale
of systems within MMHS was recognized in
21
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
accordance with SOP 97-2, Software Revenue Recognition. SOP 97-2 requires the
total contract revenue to be allocated to the various elements of the contract
based upon objective evidence of the fair values of such elements and allows for
only the allocated revenue to be recognized upon completion of those elements.
Prior to adopting SOP 97-2, revenue from the sale of systems was recognized when
the system was installed and when the related client training was completed. The
effect of the adoption of SOP 97-2 was not significant to the Company's results
of operations. Amounts billed in advance of recognized revenue are deferred.
Revenue from support and maintenance contracts is recognized as the services are
performed ratably over the contract period, which typically does not exceed one
year. Revenue from other services are recognized as they are provided. Certain
expenses are allocated between the cost of revenue for systems and maintenance
and other based upon revenue, which basis management believes to be reasonable.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--
The Company considers all investment instruments with an original
maturity of three months or less to be the equivalent of cash for purposes of
balance sheet presentation and for the consolidated statements of cash flows.
These short-term investments are stated at cost, which approximates market.
Marketable Securities--
Management determines the appropriate classification of its investments
in debt securities at the time of purchase and re-evaluates such determinations
at each balance sheet date. Debt securities are classified as held to maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are carried at cost, net of unamortized
premium or discount. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value as of the balance sheet
date. At June 30,1999, the Company's investments consisted principally of U.S.
Treasury Notes and Federal Agency notes. These investments had an aggregate
market value of $298,146,000 and $229,792,000 at June 30, 1999 and 1998,
respectively. Of the investments at June 30,1999, $54,670,000 were debt
securities classified as available-for-sale maturing within one year. Unrealized
gains on these securities was $278,000 at June 30, 1999. All of the Company's
marketable securities at June 30, 1998 were classified as held-to-maturity. At
June 30, 1999, gross unrealized gains pertaining to marketable securities and
other investments were $1,523,000. Gains and losses on the sale of marketable
securities and other investments are calculated using the specific
identification method. Subsequent to year end, the Company purchased $50,000,000
principal amount of Federal Agency notes maturing June 2001.
Inventories--
Inventories are stated at the lower of (first-in, first-out) cost or
market. Cost for manufactured products includes raw materials, direct labor, and
manufacturing overhead. Market is based on current replacement cost for raw
materials and supplies and on net realizable value for work-in-process, finished
goods and peripheral computer equipment. Inventories consisted of the following
(in thousands):
June 30,
------------------
1999 1998
------ -------
Raw materials and supplies.............................. $4,645 $3,219
Work-in-process......................................... 1,600 677
Finished goods.......................................... 6,515 1,917
Peripheral computer equipment........................... 3,858 4,116
------- --------
$16,618 $9,929
======= ========
22
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
Property, Plant and Equipment--
Property, plant and equipment are stated at cost. For financial
reporting purposes, depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets. Annual depreciation rates
range from 2% to 5% for buildings and improvements and from 9% to 33% for
machinery and equipment and furniture and fixtures. For income tax purposes,
certain assets are depreciated using accelerated methods. Expenditures for
maintenance, repair and renewals of minor items are charged to operations as
incurred. Major betterments are capitalized.
Product Development Costs--
Software--
The Company incurs costs for the production of computer software for
use in the sale of CareInsite's services. All costs in the software development
process which are classified as research and development costs are expensed as
incurred until technological feasibility has been established. Once
technological feasibility has been established, software development costs are
capitalized until the software is commercially available. Costs capitalized
include direct labor and related overhead for software produced by CareInsite
and the costs of software licensed from third parties. Such costs are recorded
at the lower of unamortized cost or net realizable value. During the year ended
June 30, 1999, CareInsite abandoned its development efforts with respect to
certain of its products and services. Those efforts were abandoned as a result
of encountering a high risk development issue associated with integrating those
products and services with the acquired Cerner technology (See Note 3).
Accordingly, the capitalized software costs related to these products
and services in the amount of $2,381,000 were written off and included in
development expenses for the year ended June 30, 1999. As of June 30, 1999 and
1998, capitalized internally generated costs were $4,353,000 and $4,368,000,
respectively. As of June 30, 1999 and 1998, amounts capitalized for software
licensed from vendors were $26,977,000 and $604,000, respectively. Software
licensed from vendors primarily relates to the perpetual software licenses
obtained from Cerner. For the year ended June 30, 1997, $5,228,000 of costs
associated with the acquisitions of certain intellectual property and software
technologies were expensed as research and development as technological
feasibility had not been reached.
The Company also incurs costs for the development of software for sale
in its physician practice management information systems business. To date, the
period between achieving technological feasability and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant.
Plastics and Filtration Technologies--
The Company incurs costs for the development of new and improved
products, product applications and manufacturing processes using porous and
injection molded plastics. These development costs are expensed as incurred.
Accrued and other liabilities--
Accrued and other liabilities consisted of the following (in
thousands):
June 30,
-------------------
1999 1998
------ -------
Accrued payroll and benefit costs....................... $ 9,521 $ 6,641
Accrued acquisition costs............................... 2,177 839
Accrued interest........................................ 3,146 3,044
Accrued professional fees............................... 2,710 809
Accrued legal costs..................................... 6,333 1,230
Other................................................... 9,507 6,424
-------- --------
Total............................................... $ 33,394 $ 18,987
======== ========
23
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
Income Taxes--
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which uses
the liability method to calculate deferred income taxes. The realization of
deferred tax assets is based on historical tax positions and expectations about
future taxable income (See Note 7). A valuation allowance is provided against
the future benefits of deferred tax assets if it is determined that it is more
likely than not that the future tax benefits associated with the deferred tax
asset will not be realized.
Net Income (Loss) Per Share--
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). The new standard simplifies the computation of net income per share
and increases comparability to international standards. Under SFAS No. 128,
basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock. The Convertible Debentures (See Note 6 and Note 15), if converted, would
not have had a dilutive effect on net income per share for the periods
presented.
The Company adopted the new standard during fiscal 1998, beginning with
the December 31, 1997 interim consolidated financial statements. In accordance
with SFAS No. 128, all prior periods presented have been restated. The Company
has historically reported its EPS on a fully diluted basis, which reflects the
dilution resulting from employee stock options, warrants and convertible
securities, if dilutive, and is comparable to the new diluted EPS reported.
A reconciliation of weighted average shares outstanding (basic) to
weighted average shares outstanding assuming dilution (diluted) follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1999 1998 1997 (2)
------ ------ --------
<S> <C> <C> <C>
Weighted average shares outstanding (basic).............. 34,508 31,760 23,703
Common stock equivalents (1)............................. 3,119 2,668 -
------ ------- -------
Weighted average shares outstanding
assuming dilution (diluted)............................ 37,627 34,428 23,703
====== ======= ======
</TABLE>
(1) Issuable primarily under stock option plans.
(2) Common stock equivalents not reflected above as they were antidilutive.
Reclassifications--
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
Goodwill and other intangible assets--
Goodwill, which represents the excess of purchase price and related
costs over the value assigned to the net tangible assets of businesses acquired,
is amortized on a straight line basis over periods ranging from three to ten
years for CareInsite acquisitions, 20 years for MMHS acquisitions and 35 to 40
years for plastics and filtration technologies acquisitions. Intangible assets
primarily relate to patented and unpatented technologies and trade names and are
amortized on a straight line basis over periods ranging from 19 to 40 years.
Accounting for Stock-Based Compensation--
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to continue following the guidance of Accounting Principles Board
Opinion No.
24
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for measurement
and recognition of stock-based transactions with employees and non- employee
directors. The Company discloses on a pro forma basis both net income and
earnings per share as if the fair value based accounting method were used and
the difference between compensation cost recognized under APB No. 25 and the
fair value method of SFAS No. 123 (See Note 9).
Recently Adopted Accounting Standards--
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, " Reporting Comprehensive Income"
("SFAS No. 130"), effective for fiscal periods beginning after December 15,
1997. The new standard requires that comprehensive income, which includes net
income as well as certain changes in assets and liabilities recorded in
stockholders' equity, be reported in the financial statements. The Company
adopted SFAS No. 130 during the year ended June 30, 1999. The adoption of SFAS
No. 130 increased the reporting disclosures and had no impact on the results of
operations or financial position of the Company.
In 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", ("SFAS No. 131"). SFAS No. 131 supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the industry segment approach with the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 had no impact on the results of operations or
financial position of the Company. (See Note 14)
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits",
("SFAS No. 132"), was issued and is effective for fiscal years beginning after
December 15, 1997. This statement revises employers' disclosures about pension
and other post-retirement benefit plans. The adoption of SFAS No. 132 will not
have any impact on the results of operations or financial position of the
Company.
Recently Issued Accounting Standards-
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP" 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending June 30, 2000. Adoption of SOP 98-1 is expected to have no
material impact on the Company's financial condition or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that entities expense start-up costs as incurred. The Company is
required to implement SOP 98-5 for the year ending June 30, 2000. Adoption of
SOP 98-5 is expected to have no material impact on the Company's financial
condition or results of operations.
(2) Acquisitions:
Porex--
Point Plastics--
On July 21, 1998, the Company completed the acquisition of Point
Plastics, Inc.("Point Plastics"), a manufacturing company located in Petaluma,
California, for $34,399,942 in cash and 832,259 shares of the Company's common
stock. The shares issued are subject to certain limitations restricting the
liquidity and transferability of such shares. The fair value of the shares, as
determined by management, was approximately $51.18 per share. Point Plastics
designs, manufactures and distributes injection-molded, disposable laboratory
plastics used for liquid handling in the life sciences marketplace.
25
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
The acquisition was accounted for using the purchase method of
accounting with the purchase price being allocated to assets acquired based on
their estimated fair values. Point Plastics' results of operations have been
included in the Company's financial statements beginning July 21, 1998.
A preliminary summary of the purchase price allocation is as follows
(in thousands):
Cash and cash equivalents $ 5,089
Marketable securities- short-term 3,490
Accounts receivable 2,170
Inventories 3,629
Other current assets 4,863
Property, plant and equipment 13,665
Marketable securities- long-term 3,155
Goodwill 41,625
Intangible assets 20,600
Other assets 192
-------
$98,478
=======
The intangible assets consist of the fair market values of unpatented
technologies of $14,700,000 and trade name of $5,900,000. The goodwill,
unpatented technologies, and trade name are being amortized over a period of 40
years, 30 years and 40 years, respectively.
KippGroup-
On January 22, 1999, the Company completed the acquisition of the
KippGroup ("KippGroup"), a manufacturing company located in Ontario, California,
for $75,000 in cash and 1,150,028 shares of the Company's common stock. The fair
value of the shares, as determined by management, was approximately $40.70 per
share.
Of the purchase price, approximately $3,000,000 is held in escrow. If
the KippGroup's earnings before interest and taxes as defined in the Purchase
Agreement ("EBIT") for the 12 months ending June 30, 2000 are greater than
$5,500,000, then the sellers will receive the funds held in escrow and the
interest earned thereon. If the KippGroup's EBIT for such period is less than or
equal to $5,500,000, the Company will retain the funds held in escrow and the
interest earned thereon, which will be treated as a reduction in purchase price.
If the KippGroup's EBIT for the 12 month period ending June 30, 2000
("Determination Period EBIT") is greater than $5,500,000, then the sellers will
be entitled to receive additional purchase price of up to approximately
$13,500,000 (the "Earnout Amount"). Any additional purchase price is payable in
cash or shares of the Company's common stock, at the discretion of the Company.
The sellers will receive the same percentage of the Earnout Amount as the
percent of $2,000,000 represented by the amount, if any, of KippGroup's
Determination Period EBIT between $5,500,000 and $7,500,000.
The acquisition was accounted for using the purchase method of
accounting with the purchase price being allocated to assets acquired based on
their estimated fair values. KippGroup results of operations have been included
in the Company's financial statements beginning January 22, 1999.
A preliminary summary of the purchase price allocation is as follows
(in thousands):
Cash and cash equivalents $ 3,333
Accounts receivable 1,736
Inventories 2,107
Other current assets 73
Property, plant and equipment 9,001
Goodwill 5,522
Intangible assets 34,600
Other assets 54
-------
$56,426
=======
26
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
The intangible assets consist of the fair market values of patented
technology of $2,200,000, unpatented technology of $19,200,000 and trade name of
$13,200,000.
The goodwill, patented technology, unpatented technology and trademark
are being amortized on a straight-line method over a period of 40 years, 19
years, 30 years and 40 years, respectively.
Health Systems--
During the year ended June 30, 1998, Health Systems acquired the
following resellers (the "1998 Acquired Companies") of The Medical Manager
software: (i) The Computer Clinic, Inc. and its affiliates based in Valhalla,
New York; (ii) Medysis, Inc. based in Fort Wayne, Indiana; (iii) Computers for
Medicine Corporation and Carecom, Inc. based in Englewood, Colorado; (iv)
Unisource Systems, Inc. based in Corpus Christi, Texas; and (v) CompRx Systems
Corporation based in Hauppauge, New York; (vi) Medical Practice Support
Services, Inc. based in Pittsburgh, Pennsylvania; (vii) Health Care Management
Solutions, Inc. d/b/a Healthcare Informatics, Inc. based in Springfield,
Illinois ; (viii) Strategic Systems, Inc. based in Denver, Colorado; (ix)
Intelligent Concept, Ltd. (U.S.A.) based in Los Angeles, California; (x)
Health-Tech Systems, Inc. based in El Paso, Texas; (xi) Healthcare Automation
Associates, Inc. based in Phoenix, Arizona; (xii) Qualified Technology, Inc.
based in Baton Rouge, Louisiana. These acquisitions were accounted for using the
pooling of interests method of accounting. The aggregate consideration paid for
the 1998 Acquired Companies was 450,568 shares of common stock.
Also during the year ended June 30, 1998, Health Systems acquired
substantially all of the assets or all of the outstanding equity securities of
the following 14 resellers (the "1998 Purchased Companies") of The Medical
Manager software.
<TABLE>
<CAPTION>
Company Acquired Date of Acquisition Location
---------------- ------------------- --------
<S> <C> <C>
Artemis, Inc. July 30, 1997 Indianapolis, Indiana
Package Computer Systems, Inc.
D/b/a PAC-COMP August 1, 1997 Sterling Heights, Michigan
Boston Computer Systems, Inc. August 6, 1997 Norwood, Massachusetts
Matrix Computer Consultants, Inc. September 5, 1997 Norman, Oklahoma
Professional Management Systems, Inc. September 10, 1997 St. Charles, Illinois
AMSC, Inc., together with its
wholly-owned subsidiary, AMSC Midwest, Inc. September 11, 1997 Orlando, Florida and Topeka,
Kansas
Data Concepts, Inc. October 30, 1997 Boise, Idaho
Medical Systems Consultants, Inc. October 30, 1997 Boise, Idaho
Advanced Practice Management, Inc. November 10, 1997 San Diego, California
Medico Support Services, Inc. November 18, 1997 Salem, Oregon
Companion Technologies of Florida, Inc. December 31, 1997 Tampa, Florida
Companion Technologies of Texas December 31, 1997 Arlington, Texas
Management Integrated Solutions April 4, 1998 Houston, Texas
CSA Provider Services June 25, 1998 Phoenix, Arizona
</TABLE>
The 1998 Purchased Companies were accounted for using the purchase
method of accounting. The aggregate consideration paid for the 1998 Purchased
Companies was 251,047 shares of common stock, $4,450,041 in cash and the
issuance of $6,000,000 in debt.
During the year ended June 30, 1999, Health Systems executed and closed
agreements to acquire the following resellers of The Medical Manager software
(the 1999 Acquired Companies): (i) Medical Systems, Inc. based in Dallas, Texas;
(ii) Prism Microcomputers, Inc. based in Fairfax, Virginia; (iii) Advantage
Medical Systems, Inc. based in Hurricane, West Virginia; (iv) Medical Design and
Images, Inc. based in Austin, Texas; (v) Lee Data Systems, Inc. based in
Plymouth Meeting, Pennsylvania; and (vi) MedData Corporation based in Elliot
City, Maryland; (vii) Advanced Medical Office Systems, Inc. d/b/a I.E.
Corporation based in Stockton, California; (viii) Specialized Computer Systems,
Inc. based in DuBois, Pennsylvania; (ix) Shared Business Services, Inc. based in
Clearwater, Florida; (x) Uniserv, Inc. based in Baton Rouge, Louisiana; (xi)
Meditech, Inc. based in Clarksville, Indiana; (xii) Business Support Systems,
Inc. based in Chesapeake, Virginia; (xiii) Quantum
27
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
Healthcare Systems, Inc. based in Fresno, California; (xiv) Western Healthcare
based in San Luis Obispo, California; (xv) Donald Friesen & Associates based in
Bakersfield, California; and (xvi) Diversified Management Services, Inc. based
in Oklahoma City, Oklahoma. The acquisitions of the 1999 Acquired Companies were
accounted for using the pooling of interests method of accounting. The aggregate
consideration paid for the 1999 Acquired Companies consisted of 386,353 shares
of common stock.
During the year ended June 30, 1999, Health Systems or its affiliates
executed and closed agreements to acquire substantially of the assets, or all of
the Medical Manager assets, of the following companies (the 1999 Purchased
Companies):
<TABLE>
<CAPTION>
Company Acquired Date of Acquisition Location
---------------- ------------------- --------
<S> <C> <C>
Wahltek, Inc. September 1, 1998 Des Moines, Iowa
LLBC Enterprises, Inc. September 21, 1998 San Antonio, Texas
Circle Software November 30, 1998 Ft. Lauderdale, Florida
ProMed Systems, Inc. December 31, 1998 New Haven, Connecticut
MSO Billing Services, Inc. December 31, 1998 Dallas, Texas
Medical Systems Plus March 19, 1999 LaFayette, Louisiana
Premier Support Services, Inc. March 24, 1999 Dallas, Texas
PM2000 Business of CSC Healthcare, Inc. March 31, 1999 Birmingham, Alabama
Raven Healthcare Management, Inc. June 4, 1999 Nashville, Tennessee
Network Group Division of Blue Cross Blue
Shield of Georgia June 30, 1999 Atlanta, Georgia
</TABLE>
The acquisitions of the 1999 Purchased Companies were accounted for
using the purchase method of accounting. The aggregate consideration paid for
the 1999 Purchased Companies consisted of $8,801,680 in cash and 2,151 shares of
common stock.
The 1998 Acquired Companies and the 1999 Acquired Companies are
referred to collectively as the Acquired Companies. The 1998 Purchased Companies
and the 1999 Purchased Companies are referred to collectively as the Purchased
Companies.
The acquisitions of the Acquired Companies have been accounted for as
pooling-of-interests, and accordingly, the consolidated financial statements for
the periods presented have been restated to include the Acquired Companies. The
Acquired Companies generated revenues of $9,930,000 for the period July 1, 1998
through their respective acquisition date, revenues of $23,119,000 for the year
ended June 30, 1998 and $32,826,000 for the year ended December 31, 1996 (1999
Acquired Companies) or through their respective acquisition date (1998 Acquired
Companies). Net income of the Acquired Companies was $423,000 for the period
July 1, 1998 through their respective acquisition date and $298,000 for the year
ended June 30, 1998 (1999 Acquired Companies) or through their respective
acquisition date (1998 Acquired Companies) and a net loss of $475,000 for the
year ended December 31, 1996. Changes in the Acquired Companies' stockholders'
equity for the period July 1, 1998 through their respective acquisition date was
$731,000. Changes in the Acquired Companies' stockholders' equity was $1,386,000
for the year ended June 30, 1998 (1999 Acquired Companies) or through their
respective acquisition date (1998 Acquired Companies). Changes in the Acquired
Companies Stockholders' Equity for the year ended December 31, 1996 was
$422,000.
CareInsite--
Med-Link--
On May 24, 1999, CareInsite acquired Med-Link Technologies, Inc. ("Med-
Link"), a provider of electronic data interchange services based in Somerset,
New Jersey. The purchase price for the outstanding capital stock of Med-Link was
$14,000,000 in cash. The acquisition was accounted for using the purchase method
of accounting with the purchase price being allocated to assets acquired based
on their estimated fair values. The operations of Med-Link are included in the
Company's financial statements beginning May 24, 1999. Goodwill of $13,450,000
is being amortized over ten years based on a straight-line method.
28
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
A preliminary summary of the purchase price allocation is as follows
(in thousands):
Cash $ 20
Accounts receivable 711
Other assets 38
Property, plant and equipment 459
Goodwill 13,450
-------
$14,678
=======
Avicenna--
On December 24, 1996, the Company acquired the outstanding equity and
indebtedness (including employee stock options) of Avicenna, a privately-held,
developmental-stage company located in Cambridge, Massachusetts, for 428,643
shares of the Company's common stock and 161,015 shares of the Company's common
stock to be issued in connection with the exercise of employee stock options.
The shares issued are subject to certain limitations restricting the liquidity
and transferability of such shares. The fair value of the shares, as determined
by management, was approximately $47.37 per share. A discount was applied to the
market value of the Company's stock to reflect the limitations restricting the
liquidity and transferability of such shares to arrive at this amount. As
additional consideration, the Company agreed to issue to certain sellers,
nontransferable warrants covering 250,000 shares of the Company's common stock,
exercisable after December 23, 1998 at a price of $54.50 per share. Avicenna's
business plan has been to market and build Intranets for managed care
organizations, hospitals and physician groups. The acquisition was accounted for
using the purchase method with the purchase price being allocated to assets
acquired based on their estimated fair values. Avicenna's results of operations
have been included in the Company's financial statements since December 24,
1996.
A summary of the purchase price allocation is as follows (in
thousands):
Cash $ 42
Short-term investments 240
Other assets 216
Property, plant and equipment 759
Acquired in-process research and development 28,600
Intangible assets 1,502
Goodwill 116
-------
$31,475
=======
The intangible assets of $1,502,000 represent the estimated fair market
value of Avicenna's existing technical staff. The amount allocated to technical
staff was determined based on the estimated costs to recruit, train and develop
a replacement workforce. The significant assumptions include salary and benefit
levels and expected employee turnover rate.
The amount allocated to acquired in-process research and development of
$28,600,000 was determined using established valuation techniques. Remaining
amounts have been allocated to goodwill and were amortized over a two-year
period.
CareAgents--
On January 23, 1997, the Company acquired CareAgents for 106,029 shares
of the Company's common stock. The shares issued are subject to certain
limitations restricting the liquidity and transferability of such shares. The
fair value of the shares, as determined by management, was approximately $30.65
per share. A discount was applied to the market value of the Company's common
stock to reflect the two year limitation restricting the liquidity and
transferability of such shares to arrive at this amount. CareAgents was an early
development stage company focused on Internet-based clinical commerce
applications. The acquisition was accounted for using the purchase method with
the purchase price being allocated to acquired in-process research and
development of $3,585,000, based on its fair value. CareAgents' results of
operations have been included in the Company's financial statements since
January 23, 1997. The amount allocated to acquired in-process research and
development of $3,585,000 was determined using established valuation techniques.
29
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
Pro forma Information--
The following summary, prepared on a pro forma basis, combines the
results of operations of the Company, Point Plastics, KippGroup, Med-Link and
the acquisition of the Purchased Companies assuming the acquisitions were
consummated at the beginning of the periods presented (in thousands, except per
share data):
Year Ended June 30,
-----------------------------
1999 1998
------- ------
(unaudited)
Net revenues $316,167 $272,608
Net income 17,578 23,961
Net income per share-basic $0.50 $0.71
Net income per share-diluted $0.46 $0.66
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisitions had been in effect for the entire period
presented. In addition, they are not intended to be a projection of future
results.
Acquired In-Process Research and Development--
The amounts allocated to acquired in-process research and development
of approximately $28,600,000 and $3,585,000 related to Avicenna and CareAgents,
respectively, were expensed in the periods of acquisition, with no corresponding
tax benefits, as such research and development was in process at the time of the
acquisitions and had not reached technological feasibility and had no
alternative future use. A description of the acquired in-process research and
development and the estimates made are as follows:
Avicenna-
The amount allocated to acquired in-process research and development of
$28,600,000 was determined based on an income approach valuation methodology.
The valuation projected revenue and costs over a nine year period with
profitability commencing in three years and increasing steadily through year
nine. The assumptions on which the projections were based are subject to a high
degree of uncertainty. The more significant uncertainties were those regarding
the timing and extent of the estimated revenues associated with this technology
as well as the estimated costs to complete the development. A nine year forecast
of revenues and costs attributable to the acquired technology was prepared. The
nine year projection period was consistent with the expected useful life of the
Intranets under development. The resulting operating cash flows were then
reduced by working capital and capital expenditures and discounted to present
value based upon a discount rate of 30%.
Avicenna was in the early stages of its development and the systems
under development had not yet reached technological feasibility. There was no
alternative future use for the technology then developed.
Avicenna had incurred approximately $1,263,000 in research and
development costs to develop the technology to its then current status.
Significant costs remained to complete the technological capabilities of its
product line and then migrate those capabilities to a new business model
envisioned by the Company.
CareAgents--
The entire purchase price of $3,585,000 was assigned to acquired
in-process research and development. The purchase price allocation to acquired
in-process research and development was determined based on an income approach
methodology. The assumptions on which the projections were based are subject to
a high degree of uncertainty. The more significant uncertainties were those
regarding the timing and extent of the estimated revenues associated with this
technology as well as the estimated costs to complete the development, as the
company was in its initial stages of development. A nine year forecast of
revenues and costs attributable to the acquired technology was prepared. The
nine year projection period was consistent with the expected useful life of the
Intranets under development. The resulting operations cash flows were then
reduced by working capital and capital expenditures and discounted to present
value based upon a discount rate of 50%.
30
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Transactions:
In October 1998, the Company entered into agreements in principle with
two strategic partners for its healthcare electronic commerce business --The
Health Information Network Connection LLC ("THINC") and Cerner Corporation
("Cerner"). In January 1999, the Company formed CareInsite and contributed to it
substantially all of the assets and liabilities of the Company's healthcare
electronic commerce business and $10,000,000 in cash. During the year ended June
30, 1999, CareInsite completed the transactions described below:
THINC --
In January 1999, CareInsite, THINC, and THINC founding members, Greater
New York Hospital Association, Empire Blue Cross and Blue Shield ("Empire"),
Group Health Incorporated ("GHI") and HIP Health Plans ("HIP") entered into
definitive agreements and consummated a transaction for a broad strategic
alliance. Under this arrangement, among other things, CareInsite (i) acquired a
20% ownership interest in THINC in exchange for $1,500,000 and a warrant to
purchase an aggregate of 4,059,118 shares of common stock of CareInsite, (ii)
agreed to extend senior loans to THINC of $2,000,000 and $1,500,000 of working
capital line of credit (the "Working Capital Line of Credit"), (iii) entered
into a Management Services Agreement with THINC pursuant to which CareInsite
will manage all operations of THINC, including, providing THINC with certain
content and messaging services, (iv) licensed to THINC content and messaging
services for use over the THINC network and (v) entered into Clinical
Transaction Agreements with each of Empire, GHI, and HIP (the "THINC Payers") to
provide online prescription laboratory transaction services. CareInsite`s
Clinical Transaction Agreement with GHI specifies that CareInsite does not have
the right to provide prescription communication services to GHI unless either
CareInsite enters into an agreement with GHI's pharmacy benefit manager
outlining a methodology for the implementation of such services or GHI elects to
proceed without such an agreement. GHI's current pharmacy benefit manager is
Merck-Medco, a company with whom the Company and CareInsite are currently
involved in litigation (See Note 10). To date, CareInsite has not entered into
any such agreement with Merck-Medco and GHI has not made such election.
As part of this arrangement, THINC entered into Managed Care
Transaction Contracts with each of the THINC Payers whereby the THINC Payers
agreed to use the THINC network for their online medical claims submission,
eligibility, benefit plan detail, roster distribution, remittance advice
distribution, claims inquiry, referral/pre-certification and authorization, and
encounter submission transactions.
The warrant issued to THINC is exercisable at a price per share of
$4.00, 180 days following the Offering of CareInsite's common stock. The warrant
expires on January 1, 2006 subject to certain exceptions. The warrant and shares
of CareInsite's common stock issuable upon exercise of the warrant are subject
to certain restrictions on transfer. The estimated fair value of the warrant on
the date issued was approximately $1,700,000, as determined using the
Black-Scholes option pricing model. CareInsite accounts for its investment in
THINC using the equity method of accounting.
Cerner--
In January 1999, CareInsite also entered into definitive agreements and
consummated a transaction with Cerner for a broad strategic alliance. Cerner, a
publicly traded corporation, is a supplier of clinical and management
information systems for healthcare organizations. Under this arrangement,
CareInsite, among other things, obtained a perpetual software license to the
functionality embedded in Cerner's Health Network Architecture ("HNA") including
HNA Millennium Architecture in exchange for 12,437,500 shares of CareInsite's
common stock (such shares are subject to certain restrictions on transfer and
other adjustments). In addition, CareInsite has issued to Cerner a warrant to
purchase up to 1,008,445 shares of common stock at $4.00 per share, exercisable
only in the event THINC exercises its warrant. Also, CareInsite will issue to
Cerner 2,503,125 additional shares of common stock on or after February 15, 2001
at $0.01 per share in the event the CareInsite has achieved a stated level of
physician participation by 2001. The software acquired from Cerner was valued at
$20,800,000 based on the value of the equity consideration as determined using
an income approach valuation methodology. A ten year forecast of revenues and
costs was prepared with the resulting cash flows reduced by working capital and
capital expenditures and then discounted to present value based on a weighted
average discount rate of 30%. Additionally, because the shares issued to Cerner
have no ready market and contain restrictions on transferability, a 15% lack of
marketability discount was applied. In connection with CareInsite's strategic
relationship with Cerner, CareInsite sold Cerner a beneficial interest to 2% of
THINC.
31
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Transactions: (continued)
As beneficial owner Cerner will receive any dividends, income and
liquidation or disposition proceeds related to Cerner's 2% interest. However,
CareInsite will remain the owner of record, will exercise voting rights and will
have the right to sell, transfer, exchange, encumber, or otherwise dispose of
this 2% interest. Cerner has also agreed to fund $1,000,000 of CareInsite's
$2,000,000 senior loan to THINC. Additionally, CareInsite and Cerner entered
into a Marketing Agreement that allows for the marketing and distribution of
CareInsite's services to the physicians and providers associated with more than
1,000 healthcare organizations who currently utilize Cerner's clinical and
management information systems. In addition, Cerner committed to make available
engineering and systems architecture personnel and expertise to accelerate the
deployment of CareInsite's services, as well as ongoing technical support and
future enhancements to HNA. For the year ended June 30, 1999, CareInsite has
paid to Cerner $320,000 for these services.
Concurrent with the Offering CareInsite sold 537,634 shares of its
Common Stock to Cerner for cash proceeds of $9,000,000. As of June 30, 1999
Cerner owned 18.7% of CareInsite.
Horizon Blue Cross Blue Shield of New Jersey --
In June 1999, CareInsite entered into a five and one-half year
agreement with Horizon Blue Cross Blue Shield of New Jersey ("Horizon") to
provide online prescription, laboratory and managed care communication services.
In connection with this transaction, among other things, the CareInsite issued
to Horizon a warrant to purchase an aggregate of 811,824 shares of common stock
of CareInsite. The warrant issued to Horizon is exercisable 30 months following
the offering of CareInsite's common stock. The exercise price per share is
$18.00. The warrant expires January 4, 2005. The warrant and shares of
CareInsite's common stock issuable upon exercise of the warrant are subject to
certain restrictions on transfer. The estimated fair value of the warrant on the
date issued was approximately $6,725,000, as determined using the Black-Scholes
option pricing model. The Company has included the value of the warrant as part
of intangible assets, which is being amortized over the term of the contract.
Medical Manager Health Systems Inc. --
MMHS and CareInsite have entered into an agreement under which
CareInsite will be the exclusive provider of certain network, web hosting and
transaction services to MMHS. Under this agreement CareInsite intends to provide
healthcare e-commerce services to MMHS's physician base. CareInsite intends to
use MMHS's sales and support network as a platform from which to distribute,
install and support CareInsite's transaction, messaging and content services to
MMHS physicians.
America Online Agreement --
In September 1999, CareInsite entered into a strategic alliance with
America Online, Inc. ("AOL") for CareInsite to be AOL's exclusive provider of a
comprehensive suite of services that connect AOL's members, as well as
CompuServe members and visitors to AOL's Web-based services, Netcenter, AOL.COM
and Digital City (collectively, "AOL Members"), to physicians, health plans,
pharmacy benefit managers, covered pharmacies and labs. Under the agreement,
CareInsite and AOL have agreed to create co-branded sites which will enable AOL
Members to manage their healthcare through online communication with their
physicians, health plans, pharmacy benefit managers, covered pharmacies and
labs. The agreement has an initial term of four years, subject to the rights of
the parties to terminate the agreement under certain conditions, including the
right of AOL to terminate the agreement upon the completion of CareInsite's
pending merger with Healtheon/WebMD. Through this arrangement, AOL Members will
have access to CareInsite's secure, real-time services being developed that
allow them, among other things, to select and enroll in health plans, choose
their providers, schedule appointments, renew and refill plan-approved
prescriptions, view lab results, review claims status, receive explanations of
benefits, review patient education materials provided by their health plans,
understand plan policies and procedures and receive plan treatment
authorizations. CareInsite and AOL have also agreed to collaborate in sales and
marketing to the healthcare industry, and they intend to leverage their alliance
into cross-promotional and shared advertising revenue initiatives. Under the
financial terms of the arrangement, CareInsite has agreed to make $30,000,000 of
guaranteed payments to AOL over three years. CareInsite made the first payment
of $10,000,000 in September 1999. CareInsite is required to make the remaining
guaranteed payments of $10,000,000 on August 31, 2000 and $10,000,000 on August
31, 2001. If the pending merger with Healtheon/WebMD (Note 2) is completed, AOL
will have the right to terminate its strategic alliance with CareInsite, in
which case the remaining guaranteed payments due to AOL under the agreement
shall become immediately payable by CareInsite.
32
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Transactions: (continued)
CareInsite also entered into a four year agreement with Netscape
Communications Corporation ("Netscape") under which CareInsite acquired a
nonexclusive and nontransferable right and license for the use of an unlimited
quantity of the Netscape and Sun Microsystems software offered via the Sun
Microsystems-Netscape Alliance. The cost of the products was $3,750,000, with a
maintenance fee of $750,000 in the initial year, and an option to purchase
maintenance at $1,000,000 per year in the second, third and fourth years of the
agreement.
Under a separate agreement entered into in September 1999, AOL
purchased 100 shares of newly issued CareInsite Series A Convertible Redeemable
Preferred Stock ("CareInsite Preferred Stock") at a price of $100,000 per share,
or $10 million of CareInsite Preferred Stock in the aggregate, with an option to
purchase up to an additional 100 shares of CareInsite Preferred Stock in
September 2000 at the same price ("CareInsite Preferred Option"). At the option
of AOL, in March 2002, the CareInsite Preferred Stock is either redeemable in
whole for $100,000 per share in cash or convertible in whole, on a per share
basis, into (i) the number of shares of CareInsite's common stock equal to
$100,000 divided by $49.25 (or 2,030.5 shares) and (ii) a warrant exercisable
for the same number of shares of CareInsite's common stock, or 2,030.5 shares,
at a price of $49.25 per share. In the event that AOL elects to convert the 100
shares of CareInsite Preferred Stock it purchased in September 1999, it would
receive 203,046 shares of CareInsite's common stock and a warrant exercisable
into an additional 203,406 shares at a price of $49.25 per share. Prior to March
2002, AOL has the right to require CareInsite to redeem the CareInsite Preferred
Stock in whole at $100,000 per share in the event of certain changes in control
of CareInsite, which would not include the pending mergers of the Company and
CareInsite with Healtheon/WebMD under the Healtheon/WebMD Agreements. The
CareInsite Preferred Stock is non-voting except under certain extraordinary
circumstances and no dividend is payable on the CareInsite Preferred Stock
unless CareInsite declares a dividend on its common stock.
The proceeds received of $10,000,000 were allocated based on the
relative fair values of the CareInsite Preferred Stock and the CareInsite
Preferred Option, as determined by management. Accordingly, $7,608,000 was
allocated to the CareInsite Preferred Stock and $2,392,000 was allocated to the
CareInsite Preferred Option. Additionally, as the CareInsite Preferred Stock is
convertible into equity securities with a value in excess of $10,000,000 (the
"beneficial conversion feature"), a portion of the proceeds has been allocated
to the beneficial conversion feature and is reflected as a discount to the
CareInsite Preferred Stock. The value of the beneficial conversion feature, as
determined by management, was $5,268,000. The discount is being amortized
through March 2002 using the effective interest method and is reflected in
minority interest in net loss of consolidated subsidiary in the accompanying
statement of operations. The CareInsite Preferred Stock and CareInsite Preferred
Option are classified as a component of minority interest in the accompanying
balance sheets.
(4) Stockholders' Equity:
In April 1997, the Company announced that its Board of Directors
authorized a repurchase program involving the purchase of the Company's common
stock and outstanding convertible debentures not to exceed $15,000,000 in the
aggregate. For the years ended June 30, 1999 and June 30, 1998, the Company
repurchased 10,700 and 6,000 shares at a cost of approximately, $364,000 and
$216,000, respectively. The Company has reissued all of these shares for
employee stock option exercises. In August 1999, the board of directors
rescinded the repurchase program.
On July 23, 1999, the Company amended and restated Article Four of its
Certificate of Incorporation, increasing the number of authorized shares to
310,000,000 of which 300,000,000 were designated as common stock.
(5) Increase in Carrying Value of CareInsite:
Securities and Exchange Commission Staff Accounting Bulletin No. 51
Accounting for Sales of Stock by a Subsidiary, permits the difference between
the carrying value of the parent's investment in its subsidiary and underlying
book value of the subsidiary after a stock issuance by the subsidiary to be
reflected as a gain or loss in the consolidated financial statements, or as a
capital transaction. However, for sales of stock by a subsidiary in the
development stage, gain recognition is not permitted. Accordingly, as CareInsite
is a development stage company, the Company recorded a credit to paid-in capital
of $54,257,000, net of deferred taxes as a result of the shares issued by
CareInsite during the year ended June 30, 1999.
33
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Long-Term Debt:
The following table summarizes the company's long-term debt as of June 30, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
------ ------
<S> <C> <C>
Convertible subordinated debentures due 2007 with
interest at 5% payable semi-annually(a)............................. $159,484 $159,500
Note payable to former shareholders of Point
Plastics due April 2003 with interest at 6.23% payable
quarterly (b)........................................................ 6,531 -
Notes payable, remainder of purchase price for acquisitions with
interest at 5.5%, $41,000 due on demand and $2,000,000
due January 15, 2000................................................. 2,041 4,204
Other long-term debt (c)............................................... 6,191 4,746
-------- --------
Total.................................................................. 174,247 168,450
Less current portion ................................................ 4,206 5,490
-------- --------
Long-term portion...................................................... $170,041 $162,960
======== ========
</TABLE>
(a) In February 1997, the Company issued to the public $165,000,000
aggregate principal amount of its 5% convertible subordinated debentures due
2007 (the "Convertible Debentures"). The Convertible Debentures are convertible
at any time prior to maturity, unless previously redeemed into shares of the
Company's common stock, at a conversion price of $60.00 per share, subject to
adjustment under certain circumstances. In connection with the issuance of the
Convertible Debentures, the Company recorded debt issuance costs of
approximately $5,100,000 that are included in other assets, net of accumulated
amortization costs, in the consolidated financial statements. Such costs are
being amortized to interest expense using the effective interest method over the
life of the Convertible Debentures. In conjunction with the repurchase program
discussed in Note 4, the Company repurchased $5,500,000 face amount of
Convertible Debentures during the fiscal year ended June 30, 1998 and
subsequently retired these debentures during the fiscal year ended June 30,
1999. In addition, holders of $16,000 principal amount of the Company's
Convertible Debentures redeemed their Convertible Debentures into approximately
267 shares of the Company's common stock during the fiscal year ended June 30,
1999.
(b) The Note payable of $6,531,000 is to a former shareholder of Point
Plastics. The note is callable under certain circumstances.
(c) The other long term debt included above consists of various loans
with interest rates ranging from 7.75% - 18.00%.
The annual maturities of long-term debt are as follows (in thousands):
June 30,
--------
2000.................................................................... $ 4,206
2001.................................................................... 1,945
2002.................................................................... 574
2003.................................................................... 6,975
2004.................................................................... 318
THEREAFTER ............................................................. 160,229
34
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes:
The income tax provisions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $ 9,033 $ 9,834 $ 5,608
Foreign............................................ 1,565 1,301 1,063
State.............................................. 1,521 1,343 509
----------- -------- --------
Total current.................................... 12,119 12,478 7,180
----------- -------- --------
Deferred:
Federal............................................ 768 1,336 (4,293)
State.............................................. (576) (108) (43)
----------- -------- --------
Total deferred................................... 192 1,228 (4,336)
----------- -------- --------
Total income tax provision......................... $12,311 $13,706 $ 2,844
=========== ======== ========
</TABLE>
A reconciliation of the income tax provision, computed by applying the
federal statutory rate to income before taxes, and the actual provision for
income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate............................. 35.0% 35.0% (35.0)%
State tax, net of federal benefit.................. 2.4 2.9 3.5
Foreign tax........................................ 1.6 1.0 0.6
Minority interest of consolidated subsidiary....... (3.3) - -
S-Corporations acquired not subject to income tax.. (1.3) (0.9) (11.1)
Change in valuation allowance...................... 7.6 - -
Dividend exclusion................................. - - (2.6)
Non-deductible research and development............ - - 57.6
Other, net ....................................... (2.2) (0.6) 2.4
--------- -------- -------
39.8% 37.4% 15.4%
========= ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of June 30,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Current Long-term Current Long-term
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Deferred Tax Assets:
Accrued expenses.............................. $ 2,105 $ - $ 2,491 $ -
Net operating loss carryforwards.............. - 19,843 - 3,637
Bad debts .................................... 273 - 173 -
Inventory..................................... 387 - 319 -
Prepaid and other............................. 445 - 353 -
Deferred revenue.............................. 650 - 425 -
Deferred compensation (stock options)......... - 1,780 - 1,739
-------- ---------- -------- --------
Gross deferred tax assets................... 3,860 21,623 3,761 5,376
-------- ---------- -------- --------
Valuation allowance......................... (216) (703) - -
-------- ---------- -------- --------
Total deferred tax assets.................. $ 3,644 $ 20,920 $ 3,761 $ 5,376
-------- ---------- -------- --------
Deferred Tax Liabilities:
Depreciation and amortization................. $ - $ 10,881 $ - $ 1,063
Sale of stock by a subsidiary................. - 33,285 - -
Section 481 (a) adjustment.................... - - - 570
Capitalized research and development costs.... - 1,651 - 1,143
Accrued expenses ............................ - 763 - 122
Other ....................................... - 517 - 386
-------- ---------- -------- --------
Total noncurrent deferred tax liabilities . - 47,097 - 3,284
-------- ---------- -------- --------
Net deferred tax asset (liability) ........ $ 3,644 $ (26,177) $ 3,761 $ 2,092
======== ========== ======== ========
</TABLE>
35
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes: (continued)
As of June 30, 1999, the Company has available net operating loss
carryforwards totaling $55,738,000, $6,537,000 related to CareInsite. Effective
with the Offering of CareInsite's common stock on June 16, 1999, the Company
will no longer consolidate CareInsite for federal income tax purposes. As
CareInsite is in the development stage, a valuation allowance was established
for the net operating loss related to CareInsite for the period when CareInsite
was no longer included in the Company's consolidated federal income tax return.
The Company has assessed its past earnings history and trends and expiration
dates of its net operating loss carryforwards and has determined that it is more
likely than not that the net operating loss carryforwards, except those related
to CareInsite as CareInsite is in the development stage, will be realized.
Tax sharing agreement --
Effective June 16, 1999 CareInsite no longer files a consolidated
federal income tax return with the Company, but will continue to file a combined
tax return with the Company for California income tax purposes. The Company and
CareInsite entered into a tax sharing agreement providing, among other things,
that, for periods prior to the Offering and during which CareInsite was included
in the Company's consolidated federal income tax returns, the CareInsite will be
required to pay the Company an amount equal to CareInsite's federal income tax
liabilities for these periods, determined as if the CareInsite had filed federal
income tax returns on a separate company basis. Additionally, for periods both
before and after the Offering, in situations where the CareInsite files a
combined return with the Company for state income tax purposes, such as for
California, CareInsite will be required to pay the Company an amount equal to
CareInsite's state income tax liabilities, determined as if CareInsite had filed
state income tax returns on a separate company basis. If CareInsite experiences
a net operating loss resulting in no federal or state income tax liability for a
taxable period in which it was included in the Company's consolidated federal or
combined state income tax returns, CareInsite will be entitled to a payment from
the Company equal to the reduction, if any, in the federal or state income tax
liability of the Company consolidated group by reason of the use of CareInsite's
net operating loss. Further, under the tax sharing agreement, if CareInsite
receives a net tax benefit for certain equity based compensation arrangements
involving the Company stock, or for the payment by the Company of certain
litigation expenses and damages pursuant to the terms of an indemnification
agreement between CareInsite and the Company, then CareInsite is required to pay
an amount equal to those tax benefits to the Company when they are actually
realized by CareInsite. The tax sharing agreement also provides for the Company
to conduct tax audits and tax controversies on CareInsite's behalf for periods,
and with respect to returns, in which CareInsite is included in the Company
consolidated or combined returns.
(8) Pension and Profit Sharing Plans:
The Company has defined benefit pension plans covering a majority of
its employees. On May 1, 1998 the Company ceased all benefit accruals under the
plan. This event resulted in an immaterial curtailment gain. During the three
months ended March 31, 2000, the Company settled all of its obligations by
either a cash settlement paid to employees or the purchase of annuity contracts
on behalf of plan participants. The remaining assets, after settling all pension
plan obligations, reverted back to the Company resulting in a net gain of
$2,246,000, which was included in selling, general and administrative expense in
the three months ended March 31, 2000. The change in benefit obligation, change
in plan assets and reconciliation of funded status for 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1999 1998
--------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year........................ $5,426 $4,978
Service Cost................................................... - 248
Interest Cost.................................................. 306 360
Change in actuarial assumptions................................ 453 130
Change due to curtailment...................................... - (194)
Benefits paid.................................................. (97) (96)
--------- -------
Benefit obligation at end of year.............................. $ 6,088 $5,426
========= =======
</TABLE>
36
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1999 1998
--------- -------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year.................. $8,900 $6,704
Actual return on plan assets.................................... 709 2,132
Employer contributions.......................................... - 160
Benefits paid................................................... (98) (96)
--------- -------
Fair value of plan assets at end of year................... $9,511 $8,900
========= =======
Reconciliation of funded status:
Funded status................................................... 3,424 3,473
Unrecognized net gain........................................... (3,180) (3,207)
Unrecognized net transition amount.............................. (151) (173)
--------- -------
Prepaid pension benefit cost............................... $ 93 $ 93
========= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Net periodic pension (benefit) cost:
Service cost.................................................... - 248 277
Interest cost................................................... 306 360 338
Expected return on plan assets.................................. (175) (567) (1,377)
Net amortization................................................ (131) (97) 923
------ ------- --------
Net periodic (benefit) cost.................................. $ - $ (56) $ 161
====== ======= ========
</TABLE>
The Company funds the plans through annual contributions representing
no less than the minimum amounts required as computed by actuaries to be
consistent with the plans' objectives and government regulations.
Assumptions used in the accounting for the Company's defined benefit
plans as of June 30, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Discount rate..................................................... 5.7% 7.5% 7.5%
Cost-of-living increase on benefit and pay limits................. N/A 0%-5% 0%-5%
Expected rate of return on plan assets............................ 5.0% 8.0% 8.0%
</TABLE>
Plan assets consist primarily of debt and equity investments.
In addition to the defined benefit pension plans discussed above, the
Company maintains defined contribution profit sharing plans covering
substantially all of its employees. Participants must be at least 21 years of
age and have completed one year of service and may contribute up to $10,000 of
their earnings annually. Effective February 1, 1997 the Company matches 50% of
the first 2% and 25% of the second 4% of participants' earnings that are
contributed to the plan. From July 1, 1996 through January 31, 1997 the Company
matched 25% of the first 4% of participants earnings which were contributed to
the plan. For the years ended June 30, 1999, 1998 and 1997, the Company issued
8,394, 4,102 and 3,341 shares of common stock to the plan and recorded expense
of $446,000, $187,200, and $132,500, respectively.
On July 1, 1997, the Company began a qualified 401(k) savings plan (the
"Plan") covering certain MMHS employees meeting certain eligibility
requirements. The Plan permits each participant to reduce his or her taxable
compensation basis by up to 15% and have the amount of such reduction
contributed to the Plan. Through December 31, 1998, the Company made a matching
contribution of 15% of the first 6% of the compensation deferred by each
participant. Effective January 1, 1999, the Plan was amended so that the Company
makes a contribution of 25% of the first 6% of the compensation deferred by each
participant. Salary reduction contributions are immediately vested in full;
matching contributions vest 20% per year over a five year period. During the
years ended June 30, 1999 and 1998, the Company made contributions of $309,000
and $162,000, respectively.
37
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Stock Options:
The Company has various stock option plans ("Plans") for directors,
officers and key employees that provide for non-qualified and incentive stock
options. Generally, options granted become exercisable at a rate of 20% on each
annual anniversary of the grant. No options may be granted under any of the
Plans after July 21, 2008, and all options expire within ten to fifteen years
from the date of the grant. Generally, options granted under the Plans have an
exercise price equal to 100% of the fair market value of the Company's common
stock on the date of grant. There are 14,003,201 shares reserved for issuance
under these Plans.
In addition to the Plans, the Company has granted options to certain
directors, consultants and key employees. At June 30, 1999, there were 906,375
options granted to these individuals. The terms of these grants are similar to
the Company's non-qualified stock option plans.
A summary of the status of the Company's stock option plans for the
three-year period ended June 30, 1999 is presented below (shares in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------
1999 1998 1997
-------------------- ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year..................... 9,899 $28.23 8,179 $25.43 3,747 $12.52
Granted............................... 4,996 $48.59 2,716 $38.67 5,122 $34.67
Exercised............................. (1,191) $12.80 (242) $16.40 (344) $ 9.94
Canceled.............................. (1,811) $44.65 (754) $39.11 (346) $37.76
------- ----- -----
End of year........................... 11,893 $35.35 9,899 $28.23 8,179 $25.43
====== ===== =====
Exercisable at end of year............ 3,483(a) 3,146 2,379
====== ===== =====
</TABLE>
a) At July 23, 1999, an additional 675,173 shares of common stock vested upon
change in control as a result of the merger discussed in note 1.
The following table summarizes information with respect to options outstanding
and options exercisable at June 30, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------
Weighted Weighted Weighted
Range of Exercise Options Average Remaining Average Options Average
Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------- ----------- ----------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$1.25- $21.50 2,774 6.31 $14.16 2,068 $13.70
$22.38- $33.75 2,531 9.95 $31.59 593 $28.92
$34.80- $50.00 5,396 9.92 $40.53 783 $37.83
$50.25- $76.13 947 10.39 $64.83 39 $53.11
$78.44- $94.13 245 12.83 $86.13 - $ 0.00
</TABLE>
CareInsite Stock Option Plans--
During the year ended June 30, 1999, CareInsite adopted the CareInsite,
Inc. 1999 Officer Stock Option Plan (the "Officer Stock Plan") and the
CareInsite, Inc. 1999 Employee Stock Option Plan (the "Employee Stock Plan"),
collectively the "CareInsite Plans". The maximum number of shares of CareInsite
common stock that will be subject to options under the Employee Stock Plan is
4,000,000 and the maximum number of shares of CareInsite common stock that will
be subject to options under the Officer Stock Plan is 3,500,000, subject to
adjustment in accordance with the terms of the Plans. The options under the
CareInsite Plans vest forty percent at the end of a thirty month period
following the date of grant, and the
38
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Stock Options: (continued)
remainder will vest in increments of twenty percent at the end of each
subsequent twelve-month period, with the options being fully vested sixty-six
months from the date of grant. Generally, options granted under the CareInsite
Plans have an exercise price equal to 100% of the fair market value of
CareInsite's common stock on the date of grant and expire ten years after date
of grant. During the year ended June 30, 1999, CareInsite granted options to
purchase an aggregate of 4,652,500 shares of its common stock at a weighted
average exercise price of $18.00. None of these options were exercisable at June
30, 1999.
The Company has elected to follow APB No. 25 in accounting for its
employee stock options. Accordingly, no compensation cost has been recognized
for the Company's and CareInsite's option plans had the determination of
compensation costs for these plans been based on the fair value at the grant
dates for awards under these plans, consistent with the method of SFAS No. 123,
the Company's net income (loss) and basic and diluted income (loss) per share,
on a pro forma basis, would have been as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income (loss) $(2,951) $ 9,835 $(24,646)
======== ======== =========
Basic income (loss) per share $ (0.09) $ 0.31 $ (1.04)
======== ======== =========
Diluted income (loss) per share $ (0.09) $ 0.29 $ (1.04)
======== ======== =========
</TABLE>
The pro forma results indicated above are not intended to be indicative
of or a projection of future results.
The fair value of each Medical Manager option grant is estimated on the
date of grant by using the Black-Scholes option-pricing model. The following
weighted average assumptions were used:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected dividend yield........................ 0% 0% 0%
Expected volatility............................ .4105 .3174 .2722
Risk-free interest rates....................... 5.7% 6.3% 6.5%
Expected option lives (years).................. 0.5-5.0 0.5-5.0 0.083-1.74
Weighted average fair value of options
granted during the year........................ $ 20.07 $ 15.56 $ 10.11
</TABLE>
The fair value of each CareInsite option grant is estimated on the date
of grant by using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
June 30,1999
------------
Expected dividend yield............................................. 0%
Expected volatility................................................. .5327
Risk-free interest rates............................................ 5.65%
Expected option lives (years)....................................... .5 - 3.00
Weighted fair value of options granted during the year.............. $ 9.73
39
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Commitments and Contingencies:
Leases--
The Company leases office and warehouse space, equipment and
automobiles under various noncancellable operating leases. Certain facilities
leased by MMHS are leased under operating leases from entities owned by certain
stockholders. These leases expire between the years 2000 and 2001. Rental
expense was $7,099,000, $5,742,000, and $2,440,000 for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively, of which $448,000, $423,000 and
$254,000 for the fiscal years ended June 30, 1999, 1998 and 1997 was paid to
these stockholders.
The minimum aggregate rental commitments under noncancellable leases,
excluding renewal options, are as follows (in thousands):
Years Ending June 30,
---------------------
2000................................................ $6,149
2001................................................ 5,354
2002................................................ 4,102
2003................................................ 2,176
2004................................................ 1,625
Thereafter.......................................... 2,736
Legal proceedings--
In the normal course of business, the Company is involved in various
claims and legal proceedings. While the ultimate resolution of these matters has
yet to be determined, the Company does not believe that their outcome will have
a material adverse effect on its financial position.
On February 18, 1999, Merck & Co., Inc. ("Merck") and Merck-Medco
Managed Care, L.L.C. ("Merck-Medco") filed a complaint in the Superior Court of
New Jersey against the Company, CareInsite, Martin J. Wygod, Chairman of the
Company, and Paul C. Suthern, Roger C. Holstein and Charles A. Mele, officers
and/or directors of the Company. Merck and Merck-Medco asserted that the
Company, CareInsite and the individual defendants were in violation of certain
non-competition, non-solicitation and other agreements. The complaint sought to
enjoin the Company, CareInsite, and the individual defendants from conducting
the Company's healthcare e-commerce business and from soliciting Merck-Medco's
customers. A hearing was held on March 22, 1999 on the plaintiffs' application
for a preliminary injunction. On April 15, 1999, the Superior Court denied that
application. In March 2000, the Superior Court ruled in favor of the Company,
CareInsite and Messrs. Wygod, Suthern, Holstein and Mele and entered an order
dismissing with prejudice all of the plaintiffs' claims. The Court's orders
terminate Merck's and Merck-Medco's right to seek any claim for injunctive
relief or damages arising out of the Company's and CareInsite's activities to
deploy its healthcare e-commerce services. The Company's and CareInsite's
counterclaims against Merck and Merck-Medco are still pending.
The Company has recorded $4,300,000 in litigation costs associated with
the Merck and Merck-Medco litigation in fiscal year 1999.
On March 14, 2000, CareInsite was served with a summons in a lawsuit
which was filed on February 17, 2000 against CareInsite, the Company and certain
of their officers and directors, among other parties, in the New Jersey Superior
Court, Chancery Division, in Bergen County. The plaintiff purports to be a
holder of CareInsite common stock. The lawsuit, captioned Ina Levy, et al. vs.
Martin J. Wygod, et al. purports to bring an action on behalf of the plaintiff
and others similarly situated to enjoin the defendants from consummating the
proposed merger of the Company and CareInsite with Healtheon/WebMD Corp. (the
"Merger"). The plaintiff alleges that the defendants have breached their
fiduciary duties in
40
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Commitments and Contingencies: (continued)
that the proposed Merger favors the interests of the Company and its
shareholders over the interests of CareInsite's minority shareholders. The
plaintiff also alleges that the proposed Merger provides the defendants and
other shareholders of the Company with a premium which exceeds the premium
provided to CareInsite's minority shareholders. The lawsuit seeks, among other
things, an injunction prohibiting the proposed Merger unless certain mechanisms
are implemented by CareInsite, as well as plaintiff's costs and disbursements.
The Company and CareInsite believe that this lawsuit is without merit and intend
to vigorously defend against it.
Porex has been named as one of many co-defendants in a number of
actions brought by recipients of silicone mammary implants. One of the pending
claims is styled as a purported class action. Certain of the actions against
Porex have been dismissed or settled by the manufacturer or insurance carriers
of Porex without material cost to Porex. The Company believes its insurance
coverage provides adequate coverage against liabilities that could arise from
actions or claims arising out of Porex's distribution of implants.
A class action lawsuit was brought against the Company alleging Year
2000 issues regarding The Medical Manager software in versions prior to Version
9.0. Seven additional lawsuits were also brought against the Company, each
purporting to sue on behalf of those similarly situated and raising essentially
the same issues. In March 1999, the Company entered into an agreement to settle
the class action lawsuit, as well as five of the seven other similar cases. The
settlement created a settlement class of all purchasers of Version 7 and 8 and
upgrades to Version 9 of The Medical Manager software, and released the Company
from Year 2000 claims arising out of the sales of these versions of the
Company's product. Under the terms of the settlement, Version 8.12, containing
the Company's Version of 8.11 software with a Year 2000 patch, will be licensed
without a license fee to Version 7 and 8 users who participate in the
settlement. In addition, the settlement also provided that participating users
who purchased a Version 9 upgrade will have the option to obtain one of four
optional modules from the Company without a license fee, or to elect to take a
share of a settlement cash fund. The settlement required the Company to make a
cash payment of $1.455 million. Pursuant to the settlement, the Company was
released from liability due to the Year 2000 non-compliance of Versions 7 and 8
by all users of Versions 7 and 8 except 27 users who opted-out of the class
settlement and could potentially still bring lawsuits against the Company.
The Company has received notice of a lawsuit which was filed against
the Company and certain of its officers and directors, among other parties, on
October 23, 1998 in the United States District Court for the Middle District of
Florida. The lawsuit, styled George Ehlert, et al. vs. Michael A. Singer, et
al., purports to bring an action on behalf of the plaintiffs and others
similarly situated to recover damages for alleged violations of the federal
securities laws and Florida laws arising out of the Company's issuance of
allegedly materially false and misleading statements concerning its business
operations, including the development and sale of its principal product, during
the class period. An amended complaint was served on March 2, 1999. The amended
complaint was dismissed on a motion to dismiss but this dismissal is currently
being appealed. The lawsuit seeks, among other things, compensatory damages in
favor of the plaintiffs and the other purported class members and reasonable
costs and expenses. The Company believes that this lawsuit is without merit and
intends to vigorously defend against it.
Indemnification Agreement--
The Company and CareInsite entered into an indemnification agreement,
under the terms of which CareInsite will indemnify and hold harmless the
Company, on an after tax basis, with respect to any and all claims, losses,
damages, liabilities, costs and expenses that arise from or are based on the
operations of the business of CareInsite before or after the Offering.
Similarly, the Company will indemnify and hold harmless CareInsite, on an after
tax basis, with respect to any and all claims, losses damages, liabilities,
costs and expenses that arise from or are based on the operations of the Company
other than the business of CareInsite before or after the Offering. With respect
to the Merck litigation, this agreement provides that the Company will bear both
the actual costs of conducting the litigation and any monetary damages that may
be awarded to Merck and Merck-Medco in the litigation. The agreement further
provides that any damages awarded to the Company and CareInsite in the
litigation will be for the account of the Company. Finally, the agreement
provides that the Company shall not be responsible for any losses suffered by
CareInsite resulting from any equitable relief obtained by Merck-Medco against
CareInsite, including, but not limited to, any lost profits, other losses,
damages, liabilities, or costs or expenses arising from such equitable relief.
41
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Quarterly Financial Data (Unaudited):
The following table summarizes the quarterly financial data for the
fiscal years ended June 30, 1999 and 1998 (in thousands, except per share data).
Net income per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each period; therefore, the
sum of the quarters may not necessarily be equal to the full fiscal year per
share amount.
<TABLE>
<CAPTION>
Income
Before Provision Net Income
for Per Share
Quarter Ended Net Sales Income Taxes Net Income Basic Diluted
------------- ----------- -------------- ----------- ----- -------
1999
----
<S> <C> <C> <C> <C> <C>
September 30, 1998.......... $ 67,930 $11,696 $ 7,151 $ 0.21 $ 0.20
December 31, 1998........... 71,530 5,005 2,925 0.09 0.08
March 31, 1999............... 73,547 6,323 4,287 0.12 0.11
June 30, 1999............... 83,089 7,931 4,281 0.12 0.11
Year Ended June 30, 1999.... $296,096 $30,955 $18,644 $0.54 $0.50
</TABLE>
<TABLE>
<CAPTION>
Income
Before Provision Net Income
for Per Share
Quarter Ended Net Sales Income Taxes Net Income Basic Diluted
------------- ----------- -------------- ----------- ----- -------
1998
----
<S> <C> <C> <C> <C> <C>
September 30, 1997........... $ 48,415 $ 6,963 $ 4,117 $ 0.13 $ 0.12
December 31, 1997........... 51,365 8,197 4,964 0.16 0.15
March 31, 1998............... 55,948 9,693 6,096 0.19 0.18
June 30, 1998............... 60,881 11,773 7,743 0.24 0.22
Year Ended June 30, 1998.... $216,609 $36,626 $22,920 $ 0.72 $ 0.67
</TABLE>
(12) Fair Value of Financial Instruments :
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The Company using available market information has
determined the estimated fair value amounts. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
At June 30, 1999
--------------------------------
Carrying Estimated
Amount Fair Value
---------- ------------
(in thousands)
--------------
Assets:
Cash and cash equivalents............... . $154,893 $154,893
Marketable securities................... 296,901 298,146
Liabilities:
Long-term debt.......................... 170,041 205,128
Cash and cash equivalents--
The carrying amounts of these items are a reasonable estimate of their
fair value.
42
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Fair Value of Financial Instruments: (continued)
Marketable securities--
Marketable securities, consisting of publicly-traded U.S. Treasury
Notes and Federal Agency Notes, are valued based on quoted market prices or
dealer quotes.
Long-term debt--
The Convertible Debentures are publicly traded and are valued based on
quoted market prices. The carrying amount of all other long-term debt is a
reasonable estimate of its fair value.
The fair value estimates presented herein are based on information
available to the Company as of June 30, 1999. Although the Company is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been revalued since that date, and current estimates of
fair value may differ significantly from the amounts presented herein.
(13) Supplemental Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
-------- ------- -----
<S> <C> <C> <C>
Interest paid........................................ $ 8,654 $ 8,588 $ 398
Income taxes paid.................................... 7,116 11,443 1,891
Non-cash dividends................................... - 129 2,709
Conversion of note receivable into a
stock investment.................................... 2,000 - -
Issuance of warrants by CareInsite for contract
with Horizon........................................ 6,752 - -
Issuance of equity and warrants by CareInsite for
software technology licensed from Cerner............ 20,800 - -
Issuance of warrants by CareInsite for an
investment in THINC................................. 1,700 - -
</TABLE>
Additional information with respect to the acquisitions is as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
-------- ------- -----
<S> <C> <C> <C>
Net cash paid........................................ $ 48,777 $ 3,750 $10,612
Value of stock issued................................ 90,055 7,021 24,488
Liabilities assumed.................................. 33,882 12,028 12,437
--------- -------- -------
Fair value of assets acquired........................ $172,714 $22,799 $ 47,537
========= ======== ========
</TABLE>
(14) Segment Reporting:
During fiscal 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products, geographic information and major customers.
43
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Segment Reporting: (continued)
The Company's operations have been classified into three operating
segments, physician practice management information systems ("PPMIS"), plastics
and filtration technologies ("PFT") and healthcare electronic commerce ("HEC").
The Company, through MMHS, is a leading provider of comprehensive physician
practice management information systems to independent physicians, independent
practice associations, management service organizations, physician practice
management organizations, management care organizations and other providers of
health care services in the United States. The Company, through Porex designs,
manufactures and distributes porous and solid plastics components and products
used in life sciences, healthcare, industrial and consumer applications. Through
its majority owned subsidiary CareInsite, the Company is in the process of
developing an Internet-based healthcare electronic commerce, or e-commerce,
network that links physicians, payers, suppliers and patients and is developing
a comprehensive set of transaction, messaging and content services to the
healthcare industry participants.
The accounting policies of the reportable segments are the same as
those described in Note 1 to the consolidated financial statements. The Company
evaluates the performance of its operating segments based on pre-tax income.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands).
<TABLE>
<CAPTION>
Physician
Practice
Management Plastics Healthcare Corporate
Information Filtration Electronic and
Systems Technologies Commerce Other Total
------- ------------ -------- ----- -----
Fiscal 1999
-----------
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ 195,932 $ 98,800 $ 1,364 $ - $ 296,096
Cost of revenues......................... 100,949 45,708 1,062 - 147,719
Selling, general and administrative...... 59,128 18,928 3,327 6,027 87,410
Research and development................. 5,889 2,312 11,253 - 19,454
Litigation costs......................... 2,366 - 4,300 - 6,666
--------- -------- ------- -------- ---------
Earnings before interest, taxes,
depreciation and amortization........... 27,600 31,852 (18,578) (6,027) 34,847
Depreciation and amortization............ 5,082 8,290 1,695 116 15,183
Interest, net............................ 2,230 1,318 263 7,480 11,291
--------- -------- -------- -------- ---------
Income/(loss) before income taxes........ $ 24,748 $ 24,880 $(20,010)(a) $ 1,337 $ 30,955
========= ======== ======== ======== =========
Capital expenditures, net................ $ 4,243 $ 8,130 $ 276 $ 250 $ 12,899
========= ======== ======== ======== =========
Total assets............................. $ 145,613 $235,128 $179,953 $257,502 $ 818,196
========= ======== ======== ======== =========
</TABLE>
44
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Segment Reporting: (continued)
<TABLE>
<CAPTION>
Physician
Practice
Management Plastics Healthcare Corporate
Information Filtration Electronic and
Systems Technologies Commerce Other Total
------- ------------ -------- ----- ------
Fiscal 1998
-----------
<S> <C> <C> <C> <C> <C>
Net revenue............................ $ 151,664 $ 64,945 $ - $ - $ 216,609
Cost of revenues....................... 77,877 29,607 - - 107,484
Selling, general and administrative.... 44,940 12,271 4,573 4,076 65,860
Research and development............... 4,369 1,922 4,159 - 10,450
--------- -------- --------- --------- ----------
Earnings before interest, taxes
depreciation and amortization........ 24,478 21,145 (8,732) (4,076) 32,815
Depreciation and amortization.......... 3,131 3,716 1,650 92 8,589
Interest, net.......................... 447 589 47 11,317 12,400
--------- -------- --------- --------- ----------
Income/(loss) before income taxes..... $ 21,794 $ 18,018 $(10,335) $ 7,149 $ 36,626
========= ======== ========= ========= ==========
Capital expenditures, net.............. $ 3,674 $ 9,819 $ 2,097 $ 243 $ 15,833
========= ======== ========= ========= ==========
Total assets........................... $ 120,720 $ 69,768 $ 10,833 $316,325 $ 517,646
========= ======== ========= ========= ==========
Fiscal 1997
-----------
Net revenue............................ $ 82,738 $52,885 $ - $ - $ 135,623
Cost of revenues....................... 44,102 24,675 - - 68,777
Selling, general and administrative.... 27,765 11,677 2,087 4,117 45,646
Research and development............... 2,940 1,749 7,505 - 12,194
Acquired in-process research and
development............................ - - 32,185 - 32,185
--------- -------- --------- --------- ----------
Earnings before interest, taxes,
depreciation and amortization........ 7,931 14,784 (41,777) (4,117) (23,179)
Depreciation and amortization.......... 1,072 2,631 589 74 4,366
Interest, net.......................... (749) 904 9 8,865 9,029
--------- -------- --------- --------- ----------
Income/(loss) before income taxes...... $ 6,110 $13,057 $(42,357) $ 4,674 $ (18,516)
========= ======== ========= ========= ==========
Capital expenditures, net.............. $ 1,058 $ 4,948 $ 1,023 $ 92 $ 7,121
========= ======== ========= ========= ==========
Total assets........................... $22,665 $55,007 $ 3,476 $325,856 $ 407,004
========= ======== ========= ========= ==========
</TABLE>
(a) Includes Minority interest in net loss in CareInsite of $2,788,000
for the year ended June 30, 1999.
45
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Segment Reporting: (continued)
The following table represents revenues by region based on the location
of the use of the product (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1999 1998 1997
--------- ----------- --------
<S> <C> <C> <C>
United States................................... $265,968 $197,661 $121,556
Europe.......................................... 19,073 13,354 11,440
Asia............................................ 7,448 3,576 2,418
All Other....................................... 3,607 2,018 209
-------- --------- --------
$296,096 $216,609 $135,623
======== ========= ========
</TABLE>
For the fiscal years ended June 30, 1999, 1998 and 1997, no customer
accounted for more than 10% of the Company's net revenues.
The following table represent assets by region (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- --------
<S> <C> <C> <C>
United States................................... $809,985 $510,018 $400,669
Europe.......................................... 8,211 7,628 6,335
-------- -------- --------
$818,196 $517,646 $407,004
======== ========= ========
</TABLE>
(15) Subsequent Events (Unaudited):
Definitive Agreement with Healtheon/Web MD Corporation -
On February 13, 2000, the Company and CareInsite signed definitive
agreements to be acquired by Healtheon/WebMD Corp. Under the terms of the
agreement, as amended on June 18, 2000, Healtheon/WebMD will pay 2.5 shares of
Healtheon/WebMD common stock for each share of the Company's common stock and
1.3 shares for each share of CareInsite's common stock not owned by the Company.
Completion of the acquisitions, which will be accounted for as a purchase
transaction, is expected by mid-year, subject to regulatory and shareholder
approvals.
THINC Acquisition -
In January 2000, CareInsite acquired the remaining 80% equity interest
in The Health Information Network Connection ("THINC") owned by Empire Blue
Cross and Blue Shield, Group Health Incorporated, HIP Health Plans and Greater
New York Hospital Association ("THINC's founding members") in a stock
transaction valued at approximately $45,000,000. The acquisition will be
accounted for using the purchase method of accounting. Concurrently with the
acquisition, warrants to purchase an aggregate 3,247,294 shares of CareInsite's
common stock, which represented the THINC founding members' interest in the
warrants issued by CareInsite to THINC in January 1999, were distributed to the
THINC founding members. Immediately following this transaction the THINC
founding members exercised their warrants in full. All shares including those
issued upon the exercise of the warrants are subject to certain restrictions on
transfer. Simultaneously, CareInsite acquired Cerner Corporation's ("Cerner") 2%
non-voting ownership interest in THINC for a note payable of $2,735,000. As a
result of the exercise by the THINC founding members of their warrants, Cerner
has a warrant to purchase 806,756 shares of CareInsite common stock at an
exercise price of $4.00 per share.
46
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Subsequent Events (Unaudited): (continued)
Physician Computer Network, Inc. Acquisition -
On March 30, 2000, the Company completed the acquisition of
substantially all of the operating assets of Physician Computer Network, Inc.
("PCN"), a provider of physician practice management information systems located
in Morris Plains, New Jersey, for $22,500,000 in cash (including forgiveness of
$7,000,000 of outstanding loans made by the Company to PCN) and 778,867 shares
of the Company's common stock, subject to adjustment based on the net
liabilities assumed at the time of closing. The fair value of the shares, as
determined by management, was approximately $48.15 per share. The acquisition
was accounted for using the purchase method of accounting with the purchase
price being allocated to the assets acquired based on their estimated fair
values. The goodwill is being amortized over a period of 5 years.
Provider Technology Group ("PTG") Acquisition -
On March 27, 2000, CareInsite acquired substantially all of the assets
of Provider Technology Group ("PTG"), the e-commerce network of Blue Cross Blue
Shield of Massachusetts ("BCBSMA"), for $26,500,000 in cash and 651,968 shares
of CareInsite's common stock. Pursuant to the asset purchase agreement, if
BCBSMA does not realize at least $22,500,068 in proceeds from the sale of
325,984 of the common shares issued, CareInsite has agreed to pay BCBSMA an
amount equal to the shortfall in cash. Accordingly, the fair value of 325,984 of
the common shares issued was $69.022 per share.
The fair value of the remaining 325,984 shares of common stock, as
determined by management, was $40.646 per share. Based on the March 31, 2000
closing price for CareInsite's common stock of $23.375, CareInsite would be
obligated to remit $14,880,192 to BCBSMA pursuant to CareInsite's guarantee of
at least $22,500,068 in proceeds from the sale of 325,984 of the common shares
issued to acquire PTG.
BCBSMA has the right to require CareInsite to purchase from BCBSMA
325,984 shares of CareInsite's common stock at $69.022 per common share if a
registration statement for these shares has not been declared effective on or
before November 15, 2000. Additionally, if the registration statement referred
to above is not declared effective by December 29, 2000, BCBSMA has the right to
require CareInsite to purchase up to 651,968 shares of CareInsite common stock
from BCBSMA for a price equal to the average closing price per share of
CareInsite's common stock for the ten successive trading days ending December
29, 2000.
The acquisition of PTG was accounted for using the purchase method of
accounting with the purchase price being allocated to assets acquired and
liabilities assumed based on their fair values. The goodwill related to the
transaction will be amortized over a five year period. PTG's results of
operations have been included in the CareInsite's financial statements as of
March 27, 2000.
Agreement with Medical Mutual of Ohio ("MMO") -
On May 25, 2000 CareInsite completed the acquisition of Medical Mutual
of Ohio's ("MMO") provider technology business for a total purchase price of
653,997 newly issued shares of CareInsite Common Stock. With respect to the
first 225,669 such shares sold by Medical Mutual after May 25, 2001, if the
price per share payable to Medical Mutual is less than $22.16 per share, then
CareInsite is obligated to pay the difference to MMO.
47
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Subsequent Events (Unaudited): (continued)
Other Acquisitions -
During the nine months ended March 31, 2000, the Company acquired
substantially all of the assets or all of the outstanding equity securities of
the following companies which individually, and in the aggregate are not
significant:
<TABLE>
<CAPTION>
Company Acquired Date of Acquisition Location
---------------- ------------------- --------
<S> <C> <C>
The Wismer Martin division of
Physician Computer Network July 9, 1999 Spokane, Washington
Hyperion Business Systems July 20, 1999 Oakland, California
Mooney Edward Enterprises, Inc.
d/b/a Medical Information Systems, Inc. July 28, 1999 Pensacola, Florida
Turnkey Business Systems, Inc. September 23, 1999 Nashville, Tennessee
Intellex Medical Management Systems, Inc. September 24, 1999 Ft. Myers, Florida
Abacus Data Systems, Inc. September 27, 1999 Elkhart, Indiana
Health-Net Services of WA & AK, Inc. October 12, 1999 Eagle River, Alaska
Mupor LTD November 18, 1999 Scotland, United Kingdom
Micro Edge, Inc. December 16, 1999 Stamford, Connecticut
Mednetrix.com, Inc. January 21, 2000 Boca Raton, Florida
SCINET, Inc. March 7, 2000 Scottsdale, Arizona
Netics, Inc. March 13, 2000 Maryland
Delta Computing Solutions, LLC March 14, 2000 Pittsburgh, Pennsylvania
HCC Communications, Inc. March 20, 2000 Lincoln, Nebraska
PC Anywhere Group, LLC March 23, 2000 Danbury, Connecticut
</TABLE>
These acquisitions were accounted for using the purchase method of
accounting.
Subordinated Debentures -
On January 31, 2000, the Company called for redemption on February 15,
2000, the entire $159,388,000 aggregate principal amount of its outstanding 5%
Convertible Subordinated Debentures due 2007 ("Debentures"). As an alternative
to redemption, the outstanding Debentures were convertible into the Company's
common stock at the rate of approximately 16.667 shares of common stock per
$1,000 principal amount of Debentures, with cash to be paid in lieu of any
fractional shares, for Debentures surrendered on or prior to February 14, 2000.
$159,114,000 aggregate principal amount of the Debentures were surrendered to
the Company for conversion into 2,651,828 shares of the Company's common stock.
The remaining $274,000 aggregate principal amount of Debentures were redeemed at
a redemption price of $1,053.57 per $1,000 principal amount of Debentures
including accrued interest.
48
<PAGE>
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.
MEDICAL MANAGER CORPORATION
/s/ James R. Love
-------------------------------------------
James R. Love
Executive Vice President - Finance and
Administration and Chief Financial Officer
/s/ Kirk G. Layman
-------------------------------------------
Kirk G. Layman
Senior Vice President - Finance
and Chief Accounting Officer
Dated: June 19, 2000
