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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 25, 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
In connection with its July 23, 1999 merger with Medical Manager Health
Systems, Inc. (formerly Medical Manager Corporation) accounted for by the
pooling of interests method as described in the notes to the consolidated
financial statements, Medical Manager Corporation (formerly Synetic, Inc.) (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) 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) Consolidated Financial Statements of the Company
Report of Independent Public Accountants................ 11
Report of Independent Certified Public Accountants...... 12
Consolidated Balance Sheets at June 30, 1999 and 1998... 13
Consolidated Statements of Operations for the
Years Ended June 30, 1999, 1998, and 1997............... 15
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 1999, 1998,
and 1997.............................................. 16
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997.................... 17
Notes to Consolidated Financial Statements.............. 19
2
<PAGE>
Item 6. 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 Medical Manager Health
Systems, Inc. ("MMHS") acquisition. Prior to acquisition, MMHS' year end was
December 31. For fiscal years ended June 30, 1999 and 1998, MMHS' results have
been restated to reflect its operations 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 MMHS
for the calendar years ended December 31, 1996, December 31, 1995 and December
31, 1994, respectively.
<TABLE>
<CAPTION>
Year Ended June 30,
1995 1996 1997 1998 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In Thousands, Except Per Share Data)
Income Statement Data:
Net revenues................................ $ 80,369 $ 92,486 $ 106,122 $ 184,514 $ 258,032
Income (loss) from continuing
operations before
provision for income
taxes..................................... 6,244 18,524 (19,252) 36,036 29,944
Provision for income taxes.................. 469 4,649 2,850 13,796 12,258
-------- -------- --------- --------- ---------
Income (loss) from continuing operations.... 5,775 13,875 (22,102) 22,240 17,686
Income from discontinued
operations................................ 15,459 - - - -
-------- -------- --------- --------- ---------
Net income (loss)........................... $ 21,234 $ 13,875 $ (22,102) $22,240 $17,686
======== ======== ========= ========= =========
Net income (loss) per share--basic:
Continuing operations..................... $ 0.27 $ 0.63 $ (0.98) $ 0.72 $ 0.53
Discontinued operations................... 0.70 - - - -
-------- -------- --------- --------- ---------
Net income (loss) per share--basic.......... $ 0.97 $ 0.63 $ (0.98) $ 0.72 $ 0.53
======== ======== ========= ========= =========
Net income (loss) per share--diluted:
Continuing operations..................... $ 0.25 $ 0.59 $ (0.98) $ 0.67 $ 0.48
Discontinued operations................... 0.68 - - - -
-------- -------- --------- --------- ---------
Net income (loss) per share--diluted........ $ 0.93 $ 0.59 $ (0.98) $ 0.67 $ 0.48
======== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
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(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................. $104,377 $166,212 $ 89,699 $160,542 $236,089
Total assets................................ 202,181 215,293 399,499 508,145 805,722
Long term debt, less
current portion........................... 2,260 2,186 167,562 161,922 168,948
Stockholders' equity........................ 170,410 185,195 189,359 290,445 484,841
</TABLE>
3
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth for the periods indicated the percentage
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.................................... 49.8 48.7 49.5
Selling, general and administrative................. 27.5 28.8 31.9
Research and development............................ 7.2 5.3 11.2
Depreciation and amortization....................... 5.7 4.4 3.8
Litigation costs.................................... 2.6 - -
Interest and other income........................... (7.9) (11.5) (11.7)
Interest expense.................................... 3.5 4.8 3.1
Acquired in-process research and development....... - - 30.3
----- ------ ------
88.4 80.5 118.1
----- ------ ------
Income (loss) before provision for income taxes...... 11.6 19.5 (18.1)
Provision for income taxes........................... 4.7 7.4 2.7
----- ------ ------
Net income (loss).................................... 6.9% 12.1% (20.8)%
===== ====== =======
</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) ("MMHS") 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. The Company's consolidated financial statements have been
restated to reflect the merger with Medical Manager Health Systems, Inc. Prior
to acquisition, MMHS' year end was December 31. For fiscal years ended June 30,
1999 and 1998, MMHS' 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 flow of MMHS for the calendar
year ended December 31, 1996. The Company recorded a $17,991,000 charge in its
first quarter ended September 30, 1999 for the costs associated with the merger.
The historical operations of the Company are primarily related to its
physician practice management information systems business through MMHS and its
plastics and filtration technologies business through its wholly owned
subsidiary, Porex Technologies 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 MMHS and Porex. 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 MMHS and Porex. 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 through the
Company's majority owned subsidiary, CareInsite, Inc. and its affiliated
companies ("CareInsite").
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 $73,518,000 or 39.8% over the comparable prior year period. Net
revenues for the year ended June 30, 1999 at MMHS increased $38,299,000 or 32.0%
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 $34,399,000 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 MMHS' network service revenues. Net revenues for the year ended
June 30, 1999 at Porex 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.
<PAGE>
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 Porex for consumer applications, primarily household components.
Net revenues for the year ended June 30, 1999 also include $1,364,000 from
CareInsite 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 49.8% from 48.7% in the prior year. Cost of revenues as a
percentage of revenues at MMHS increased to 51.7% from 50.4% in the prior year.
The increase relates to fewer sales by MMHS' enterprise business group, 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 MMHS' network services. Cost of revenues for the Porex group
were 46.3% versus 45.6% in the prior year. This increase is primarily
attributable to lower margin revenues of the KippGroup, which was acquired in
January 1999. Excluding the impact of the KippGroup's operations, cost of
revenues as a percentage of revenues for Porex decreased to 44.0% from 45.6% in
the prior year, principally due to improvements in manufacturing efficiencies.
The Company's consolidated selling, general and administrative expenses for
the fiscal year ended June 30, 1999 increased by $18,004,000 or 33.9% over the
comparable prior year period. Selling, general and administrative expenses at
MMHS increased slightly as a percentage of revenues to 27.1% from 26.9% 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 MMHS.
Selling, general and administrative costs in the Porex group increased
$6,657,000 or 54.2%. This increase was primarily related to (i) the acquisitions
of Point Plastics and the 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 in the Porex group 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 by CareInsite 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 CareInsite.
The Company's consolidated research and development expenses increased
$8,769,000 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 CareInsite'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
CareInsite's product, (iii) MMHS' 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 Porex's manufacturing processes.
Depreciation and amortization increased $6,571,000 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 the KippGroup, and the 1999 purchased companies acquired
at MMHS, 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 $1,105,000 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 40.9% versus the prior year effective rate of 38.3% 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
CareInsite, not taxable for federal or state purposes.
<PAGE>
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 $78,392,000 or 73.9% over the comparable prior year period. Net
revenues for the year ended June 30, 1998 at MMHS increased $66,332,000 or
124.6% 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 at MMHS 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. Porex'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 Porex's overall increase in net
revenues. The remaining 15.4% of Porex'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 48.7% from 49.5% in the prior year. Cost of revenues as a
percentage of revenues at MMHS decreased to 50.4% for the year ended June 30,
1998 as compared with 52.3% for the year ended December 31, 1996. The decrease
is due primarily to an increase in the number of sales by MMHS' Enterprise
business group, typically large, high margin sales made to larger national and
regional clients. Cost of revenues as a percentage of revenues at Porex
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 $19,261,000 or 57.0% to
$53,080,000. As a percentage of net revenues, MMHS reported selling , general
and administrative expenses of 26.9% for the year ended June 30, 1998 as
compared with 29.9% for the year ended December 31, 1996. The decrease was due
primarily to certain efficiencies gained as a result of MMHS' acquisition of the
Founding Companies. Porex 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, Porex'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 at
CareInsite 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
$2,098,000 versus the prior year. Research and development expenses for the
fiscal year ended June 30, 1997 include CareInsite'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, CareInsite'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 CareInsite's product. The $1,075,000 increase in MMHS'
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 Porex over the prior year was related to
the development of new and existing products and enhancements to current
manufacturing processes.
Depreciation and amortization increased $4,088,000 over the prior year.
Depreciation and amortization at MMHS for the year ended June 30, 1998 increased
$1,924,000, due primarily to the purchase acquisitions at MMHS 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. Porex'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 at CareInsite increased $1,061,000
<PAGE>
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
CareInsite 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 $3,359,000 or 36.9% 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 increased to 38.3%
from 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. The increase was primarily a result of the change in composition of
the Company's marketable securities resulting in the decrease in investment
income subject to the dividend received deduction.
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
<PAGE>
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.
Capital Resources and Liquidity
As of June 30, 1999, the Company had $152,530,000 of cash and cash
equivalents and $296,792,000 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 $9,365,000, a decrease of $ 2,161,000
from the fiscal year ended June 30, 1998. This decrease was primarily related to
higher expenditures related to the development of CareInsite.
Net cash used in investing activities was $137,852,000 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
$12,150,000, $14,912,000 and $6,315,000 for the years ended June 30, 1999, 1998
and 1997.
Net cash provided by financing activities was $144,819,000 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.
As a result of the continuing efforts in developing CareInsite, CareInsite
has incurred substantial operating losses since its inception and there can be
no assurance that CareInsite will generate significant revenues or profitability
in the future. CareInsite intends to significantly increase its expenditures
primarily in the areas of development, sales and marketing, data center
operations and customer support. As a result, CareInsite expects to incur
substantial operating losses for at least the next two fiscal years.
The Company recorded a $17,991,000 charge in its first quarter ending
September 30, 1999 for the costs associated with the merger.
The Company believes that its cash flow from operations, the income earned
on its investments, and the funds generated by CareInsite from the issuance of
its common stock are sufficient to meet the anticipated working capital
requirements of both the Company's and CareInsite's business, including the
anticipated increased expenditures related to CareInsite noted above.
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".
<PAGE>
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.
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.
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 CareInsite, MMHS, and Porex
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
tosupply 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.
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment in marketable securities. The Company does
not use derivative financial instruments in its investments. The Company'
investments consist primarily of U.S. Treasury Notes and Federal Agency Notes.
The table below presents principal amounts and related weighted average interest
rates by expected maturity date for the Company's investment portfolio and debt
obligations.
<TABLE>
<CAPTION>
Fiscal Years
(in thousands)
2000 2001 2002 2003 2004 Thereafter
----------------------------------------------------------------------------------
<S>
Assets <C> <C> <C> <C> <C> <C>
Cash equivalents:
Fixed rate....................... 139,153 - - - - -
Average interest rate............ 4.71% - - - - -
Short term investment:
Fixed rate....................... 57,601 - - - - -
Average interest rate............ 5.49% - - - - -
Long term investment:
Fixed rate....................... - - 119,800 46,040 71,765 5,000
Average interest rate............ - - 6.41% 6.05% 5.97% 6.00%
Total investment:
Securities....................... 196,754 - 119,800 46,040 71,765 5,000
Average interest rate............ 4.94% - 6.41% 6.05% 5.97% 6.00%
Long term debt:
Fixed rate...................... 3,323 846 569 6,984 319 160,229
Average interest rate............ 3.83% 8.23% 8.15% 6.35% 8.71% 5.02%
</TABLE>
<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 constituting 16.5 percent and 61.2 percent, respectively, in 1999 and
21.9 percent and 64.8 percent, respectively, in 1998 of the related consolidated
totals. These statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, 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 audit 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 audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated 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, after giving retroactive effect to the merger with Medical Manager Health
Systems, Inc. as described in Note 1, all in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
August 27, 1999
<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
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 1998
-----------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $152,530 $136,198
Marketable securities................................................. 55,345 9,995
Accounts receivable, net of allowances for
doubtful accounts and sales returns of $4,088 and
$2,950 at June 30, 1999 and 1998, respectively...................... 50,908 34,208
Inventories........................................................... 14,818 8,942
Other current assets.................................................. 23,834 16,804
-------- --------
Total current assets.................................................. 297,435 206,147
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements................................................. 3,563 1,986
Buildings and improvements............................................ 20,888 14,117
Machinery and equipment............................................... 59,369 31,379
Furniture and fixtures................................................ 5,943 6,760
Construction in progress.............................................. 5,031 6,853
-------- --------
94,794 61,095
Less: Accumulated depreciation....................................... (36,879) (28,374)
--------- ---------
Property, plant and equipment, net.................................. 57,915 32,721
-------- --------
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 $8,197 and $3,623 at June 30, 1999
and 1998, respectively.............................................. 167,834 36,734
Other................................................................. 9,761 10,504
-------- --------
Total other assets.................................................... 450,372 269,277
-------- --------
$805,722 $508,145
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
1999 1998
<S> ------------------------------
CURRENT LIABILITIES: <C> <C>
Notes payable....................................................... $ 2,394 $ 3,828
Accounts payable.................................................... 11,460 6,864
Accrued and other liabilities....................................... 31,616 17,754
Customer deposits and deferred maintenance revenue.................. 10,077 11,778
Income taxes payable................................................ 5,799 5,381
-------- --------
Total current liabilities........................................... 61,346 45,605
-------- --------
LONG-TERM DEBT......................................................... 168,948 161,922
-------- --------
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; 40,014,741 and 36,883,749 shares issued;
34,746,278 and 31,615,286 shares issued and outstanding
at June 30, 1999 and 1998, respectively............................. 400 369
Paid-in capital..................................................... 455,182 276,854
Retained earnings................................................... 68,467 51,509
Treasury stock, at cost; 5,268,463 shares
at June 30, 1999 and 1998........................................... (38,287) (38,287)
Accumulated other comprehensive income (loss)....................... (921) -
-------- --------
Total stockholders' equity.......................................... 484,841 290,445
-------- --------
$805,722 $508,145
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<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................................................................. $258,032 $184,514 $106,122
-------- -------- --------
Costs and expenses:
Cost of revenues.......................................................... 128,422 89,927 52,530
Selling, general and administrative....................................... 71,084 53,080 33,819
Research and development.................................................. 18,597 9,828 11,926
Litigation costs.......................................................... 6,666 - -
Depreciation and amortization............................................. 14,680 8,109 4,021
Interest and other income................................................. (20,454) (21,323) (12,448)
Interest expense.......................................................... 9,093 8,857 3,341
Acquired in-process research and development.............................. - - 32,185
-------- -------- --------
228,088 148,478 125,374
-------- -------- --------
Income (loss) before provision for income taxes.............................. 29,944 36,036 (19,252)
Provision for income taxes................................................... 12,258 13,796 2,850
-------- -------- --------
Net income (loss)............................................................ $ 17,686 $ 22,240 $(22,102)
======== ======== =========
Income per share - basic:
Net income (loss) per share............................................... $ .53 $ .72 $ (.98)
======== ======== =========
Weighted average shares outstanding....................................... 33,419 30,683 22,626
======== ======== ========
Income per share - diluted:
Net income (loss) per share............................................... $ .48 $ .67 $ (.98)
======== ======== =========
Weighted average shares outstanding....................................... 36,538 33,351 22,626
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<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.. 27,500 $275 $159,860 $61,636 $(36,575) $ - $185,196
Dividends.................... - - - (8,808) - - (8,808)
Net Loss..................... - - - (22,102) - - (22,102)
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................ 535 6 24,482 - - - 24,488
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....... 35,460 $355 $219,433 $30,788 $(39,462) - $211,114
------ ---- -------- ------- --------- -------- ---------
Dividends.................... - - - (1,519) - - (1,519)
Net Income................... - - - 22,240 - - 22,240
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 7,018 - - - 7,021
Purchase of 6 shares
of common stock for treasury. - - - - (216) - (216)
------ ---- -------- ------- --------- -------- ---------
Balance, June 30, 1998....... 36,884 $369 $276,854 51,509 $(38,287) - $290,445
------ ---- -------- ------- --------- -------- ---------
Dividends.................... - - - (728) - - (728)
Net Income................... - - - 17,686 - - 17,686
Foreign currency translation
adjustment................. - - - - - (1,121) (1,121)
Unrealized gain on marketable
securities............ - - - - - 200 200
---------
Comprehensive Income.... - - - - - - 16,765
Increase in carrying value of
CareInsite................. - - 54,257 - - - 54,257
Issuance of common stock for
acquired companies......... 1,991 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....... 40,015 $400 $455,182 $68,467 $(38,287) $ (921) $484,841
====== ==== ======== ======= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<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 operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,686 22,240 $(22,102)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Adjustment to reconcile fiscal year end of
pooled subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,214
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 14,680 8,109 4,021
Write-off capitalized software costs . . . . . . . . . . . . . . . . 2,381 - -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 192 1,228 (4,336)
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 . . . . . . . . . . . . . . . . . . . . . . . . (10,915) (11,176) (1,494)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 (1,660) 394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 914 (7,419) (7,455)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,826 (793) 925
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 5,197 290 1,949
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,171) 926 48
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,999 (526) (2,018)
Customer deposits and deferred maintenance
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,565) 307 1,797
----------- ---------- --------
Net cash provided by
operating activities . . . . . . . . . . . . . . . . . . . . . . . . 9,365 11,526 10,356
---------- ---------- --------
Cash flows used in investing activities:
Adjustment to reconcile fiscal year end of
pooled subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (9,961)
Maturities and redemptions of marketable securities . . . . . . . 74,741 102,786 396,748
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . (137,548) (91,323) (494,956)
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . (12,150) (14,912) (6,315)
Software development costs . . . . . . . . . . . . . . . . . . . . . . (7,768) - -
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 . . . . . . . . . . . . (137,852) (7,199) (125,096)
----------- ---------- ---------
</TABLE>
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997
-----------------------------------------------
<S>
Cash flows provided by financing activities:
Adjustment to reconcile fiscal year end of <C> <C> <C>
pooled subsidiary ............................................ - - 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 .................................... (350) - -
Proceeds from the issuance of notes payable ............... 5 266 708
Payments on notes payable................................... (4,141) (8,079) (823)
Dividends................................................... (728) (1,390) (6,099)
Proceeds from the sale of common stock...................... - 42,260 -
Equity contributions from certain stockholders of
one of the acquired companies.............................. - - 55
-------- -------- --------
Net cash provided by
financing activities................................... 144,819 37,504 184,842
-------- -------- --------
Net increase in cash and cash equivalents........................... 16,332 41,831 70,102
Cash and cash equivalents, beginning of period...................... 136,198 94,367 24,265
-------- -------- --------
Cash and cash equivalents, end of period............................ $152,530 $136,198 $94,367
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<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. ("MMHS") (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. These financial statements reflect the historical
operations of the Company for all years prior to the business combination, and
have been retroactively restated to include the financial position, results of
operations and cash flows of 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 $157,868,000 and $15,299,000, 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 $21,086,000, 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 Manger 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
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. As of June 30, 1999, the Company owned
72.1% of CareInsite.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
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, MMHS'
year end was December 31. For fiscal years ended June 30, 1999 and 1998, MMHS'
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 MMHS 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 MMHS
for the period from January 1, 1997 through June 30, 1997. During this period,
MMHS generated revenues and net income of $44,408,000 and $4,906,000,
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 income (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 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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
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 $298,037,000 and $229,683,000 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.......... 2,058 3,129
------- ------
$14,818 $8,942
======= ======
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).
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
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 (MMHS). 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.................................... 7,729 5,191
------- --------
Total................................ $31,616 $17,754
======= ========
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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
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), 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).............. 33,419 30,683 22,626
Common stock equivalents (1)............................. 3,119 2,668 -
------ ------ ------
Weighted average shares outstanding
assuming dilution (diluted)............................ 36,538 33,351 22,626
====== ====== ======
</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 tradenames 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. 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
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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
192
-------
$98,478
=======
The intangible assets consists of the fair market values of unpatented
technologies of $14,700,000 and tradename of $5,900,000. The goodwill,
unpatented technologies, and tradename 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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
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
=======
The intangible assets consist of the fair market values of patented
technology of $2,200,000, unpatented technology of $19,200,000 and tradename 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.
MMHS-
During the year ended June 30, 1998, MMHS 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, MMHS 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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
<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, MMHS 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 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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1999, MMHS or its affiliates executed and
closed agreements to acquire substantially all of the assets, or all of The
Medical Manager assets, of the following companies (the 1999 Purchased
Companies):
(2) Acquisitions: (continued)
<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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
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.
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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
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.
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):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1999 1998
---------------------------------
(unaudited)
<S> <C> <C>
Net revenues $278,103 $240,513
Net income 16,620 23,281
Net income per share-basic $ 0.49 $ 0.71
Net income per share-diluted $ 0.45 $ 0.66
</TABLE>
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions: (continued)
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%.
<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
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Significant Transactions: (continued)
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.
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-
On September 15, 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 18 million members, as well
as CompuServe members and visitors to AOL's Web-based brands Netscape, 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. 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
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Under a separate agreement entered into in September 1999, AOL purchased
100 shares of newly issued CareInsite convertible redeemable preferred stock
("Preferred Stock") at a price of $100,000 per share, or $10 million of
Preferred Stock in the aggregate, with an option to purchase up to an additional
100 shares of Preferred Stock in September 2000 at the same price. At the option
of AOL, in March 2002, the 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) subject to certain antidilution protections 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 subject to certain
antidilution protections. In the event that AOL elects to convert the 100 shares
of 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
203,046 shares at $49.25 per share. The Preferred Stock is non-voting and no
dividend is payable on the Preferred Stock unless CareInsite declares a dividend
on its common stock.
(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. The financial
statements have been adjusted retroactively to reflect this Amendment.
(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.
<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(1)............................. $ 159,484 $ 159,500
Note payable to former shareholders of Point
Plastics due April 2003 with interest at 6.23% payable
quarterly (2)........................................................ 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 (3)............................................... 4,214 2,046
--------- ---------
Total.................................................................. 172,270 165,750
Less current portion ................................................ 3,322 3,828
--------- ---------
Long-term portion...................................................... $ 168,948 $ 161,922
========= =========
</TABLE>
(1) 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.
(2) The Note payable of $6,531,000 is to a former shareholder of Point
Plastics. The note is callable under certain circumstances.
(3) The other long term debt included above consists of various loans with
interest rates ranging from 7.75% - 18.00%. The annual maturities of long-term
debt are as follows (in thousands):
June 30,
- --------
2000...................................................$ 3,322
2001................................................... 852
2002................................................... 574
2003................................................... 6,975
2004................................................... 318
THEREAFTER ............................................ 160,230
<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............................................ $ 8,989 $ 9,924 $ 5,614
Foreign............................................ 1,565 1,301 1,063
State.............................................. 1,512 1,343 509
--------- -------- --------
Total current.................................... 12,066 12,568 7,186
--------- -------- --------
Deferred:
Federal............................................ 768 1,336 (4,293)
State.............................................. (576) (108) (43)
---------- -------- --------
Total deferred................................... 192 1,228 (4,336)
---------- -------- --------
Total income tax provision......................... $ 12,258 $13,796 $ 2,850
========== ======== ========
</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.. - - (10.5)
Change in valuation allowance...................... 7.6 - -
Dividend exclusion................................. - - (2.6)
Non-deductible research and development............ - - 57.6
Other, net ....................................... (2.4) (0.6) 1.2
------ ------ --------
................................................. 40.9% 38.3% 14.8%
====== ====== ========
</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):
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes: (continued)
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1999 1998
--------------------------- --------------------------
Current Long-term Current Long-term
<S> <C> <C> <C> <C>
Deferred Tax Assets:
Accrued expenses...................................... $ 2,263 $ - $ 2,511 $ -
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............................ 4,018 21,623 3,781 5,376
--------- --------- --------- ---------
Valuation allowance related to net operating losses.. (216) (703) - -
--------- --------- --------- ---------
Total deferred tax assets............................ $ 3,802 $ 20,920 $ 3,781 $ 5,376
========= ========= ========= =========
Deferred Tax Liabilities:
Depreciation and amortization......................... $ - $ 10,881 $ - $ 1,063
Sale of stock by a subsidiary......................... - 33,285 - -
Section 481 (a) adjustmen............................. - - - 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)................ $ 3,802 $(26,177) $ 3,781 $ 2,092
========= ========= ========= =========
</TABLE>
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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. 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>
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 of 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>
Year ended June 30,
--------------------------------
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 consists primarily of debt and equity investments.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Pension and Profit Sharing Plans: (continued)
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.
(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
Exercise............................................ (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.
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Stock Options: (continued)
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 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) $ (3,909) $ 9,155 $(25,388)
Basic and diluted income (loss) per share $ (.12) $ (.27) $ (.85)
</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>
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Stock Options: (continued)
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
(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-Merco") filed a complaint in the Superior Court of New
Jersey against the Company, CareInsite, Martin J. Wygod, Chairman of the Company
and CareInsite, and three officers and/or directors of the Company and
CareInsite, Paul C. Suthern, Roger C. Holstein and Charles A. Mele. The
plaintiffs assert that the Company, CareInsite and the individual defendants are
in violation of certain non-competition, non-solicitation and other agreements
with Merck and Merck-Medco, and seek to enjoin the Company and them from
conducting CareInsite's healthcare e-commerce business and from soliciting
Merck-Medco's customers. The Medical Manager and Mr. Wygod's agreements expired
May 24, 1999. Mr. Suthern's, Mr. Mele's and Mr. Holstein's agreements expire in
December 1999, March 2000 and September 2002, respectively.
A hearing was held on March 22, 1999 on an application for preliminary
injunction filed by Merck and Merck-Medco. On April 15, 1999, the Superior Court
denied this application. The Company believes that Merck's and Merck-Medco's
positions in relation to it and the individual defendants are without merit and
the Company intends to vigorously defend the litigation. However, the outcome of
complex litigation is uncertain and cannot be predicted at this time. Any
<PAGE>
MEDICAL MANAGER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Commitments and Contingencies: (continued)
unanticipated adverse result could have a material adverse effect on the
Company's financial condition and results of operations.
The Company has recorded $4,300,000 in litigation costs associated with the
Merck and Merck-Medco litigation in fiscal year 1999.
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
upgraded Version of 8.11 software in addition to the 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 29 users who opted-out of the class
settlement.
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 compliant was served on March 2, 1999. The class
period is alleged to be between April 23, 1998 and August 5, 1998. 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.
<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 Net Income
Before Provision Per Share
For ---------------------
Quarter Ended Net Sales Income Taxes Net Income Basic Diluted
- -------------------------------- ----------- ---------------- ---------- ------- ---------
1999
- ----
<S> <C> <C> <C> <C> <C>
September 30, 1998.............. $ 58,567 $ 10,984 $ 6,535 $ .20 $ .19
December 31, 1998............... 62,320 4,971 2,893 .09 .08
March 31, 1999.................. 64,027 6,337 4,083 .12 .11
June 30, 1999................... 73,118 7,652 4,175 .12 .11
Year Ended June 30, 1999........ $258,032 $ 29,944 $17,686 $0.53 $0.48
</TABLE>
<TABLE>
<CAPTION>
Income Net Income
Before Provision Per Share
For ---------------------
Quarter Ended Net Sales Income Taxes Net Income Basic Diluted
- -------------------------------- ----------- ---------------- ---------- ------- ---------
1998
- ----
<S> <C> <C> <C> <C> <C>
September 30, 1997.............. $ 40,391 $ 6,816 $ 3,948 $ .13 $ .12
December 31, 1997............... 43,341 8,050 4,795 .16 .15
March 31, 1998.................. 47,924 9,545 5,925 .19 .18
June 30, 1998................... 52,858 11,625 7,572 .24 .22
Year Ended June 30, 1998........ $184,514 $ 36,036 $22,240 $ .72 $ .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.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------
Carrying Estimated
Amount Fair Value
--------- ----------
(in thousands)
--------------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 152,530 $ 152,530
Marketable securities.................................. 296,792 298,037
Liabilities:
Long-term debt......................................... 168,948 204,035
</TABLE>
Cash and cash equivalents--
The carrying amounts of these items are a reasonable estimate of their fair
value.
<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........................................ $ 8,463 $ 8,393 $ 211
Income taxes paid.................................... 6,715 11,385 1,811
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.
<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, plastics and filtration
technologies and healthcare electronic commerce. The Company, through its wholly
owned subsidiary, Medical Manager Health Systems, Inc. and its affiliated
companies ("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 its wholly owned subsidiary
Porex Technologies Corp. 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.......................... $157,868 $ 98,800 $ 1,364 $ - $258,032
Cost of revenues...................... 81,652 45,708 1,062 - 128,422
Selling, general and administrative... 42,802 18,928 3,327 6,027 71,084
Research and development.............. 5,032 2,312 11,253 - 18,597
Litigation Costs...................... 2,366 - 4,300 - 6,666
--------- --------- --------- --------- ---------
Earnings before interest, taxes,
depreciation and amortization ....... 26,016 31,852 (18,578) (6,027) 33,263
Depreciation and amortization......... 4,579 8,290 1,695 116 14,680
Interest, income, net................. 2,300 1,318 263 7,480 11,361
--------- --------- --------- --------- ---------
Income/(loss) before income taxes..... $ 23,737 $ 24,880 $(20,010) (a) $ 1,337 $29,944
========= ========= ========= ========= =========
Capital expenditures, net............. $ 3,494 $ 8,130 $ 276 $ 250 $12,150
========= ========= ========= ========= =========
Total assets.......................... $133,139 $235,128 $179,953 $257,502 $805,722
========= ========= ========= ======== =========
</TABLE>
<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............................ $ 119,569 $ 64,945 $ - $ - $184,514
Cost of revenues....................... 60,320 29,607 - - 89,927
Selling, general and administrative.... 32,160 12,271 4,573 4,076 53,080
Research and development............... 3,747 1,922 4,159 - 9,828
----------- ----------- ----------- ----------- ----------
Earnings before interest, taxes
depreciation and amortization........ 23,342 21,145 (8,732) (4,076) 31,679
Depreciation and amortization.......... 2,651 3,716 1,650 92 8,109
Interest, net.......................... 513 589 47 11,317 12,466
----------- ----------- ----------- ----------- ----------
Income/(loss) before income taxes..... $ 21,204 $ 18,018 $ (10,335) $ 7,149 $ 36,036
=========== ========== =========== =========== ==========
Capital expenditures, net.............. $ 2,753 $ 9,819 2,097 $ 243 $ 14,912
=========== ========== =========== =========== ==========
Total assets........................... $ 111,219 $ 69,768 $ 10,833 $ 316,325 $508,145
=========== ========== =========== =========== =========
Fiscal
1997
- -----------
Net revenue............................ $ 53,237 $ 52,885 $ - $ - $106,122
Cost of revenues....................... 27,855 24,675 - - 52,530
Selling, general and administrative.... 15,938 11,677 2,087 4,117 33,819
Research and development............... 2,672 1,749 7,505 - 11,926
Acquired in-process research
and
development............................ - - 32,185 - 32,185
----------- ----------- ----------- ----------- ----------
Earnings before interest, taxes,
depreciation and amortization........ 6,772 14,784 (41,777) (4,117) (24,338)
Depreciation and amortization.......... 727 2,631 589 74 4,021
Interest, net.......................... (671) 904 9 8,865 9,107
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes...... $ 5,374 $ 13,057 $ (42,357) $ 4,674 $(19,252)
=========== =========== =========== =========== ===========
Capital expenditures, net.............. $ 252 $ 4,948 $ 1,023 $ 92 $ 6,315
=========== =========== =========== =========== ===========
Total assets........................... $ 15,160 $ 55,007 $ 3,476 $ 325,856 $399,499
=========== =========== =========== =========== ===========
</TABLE>
(a) Includes Minority interest in net loss in CareInsite of $2,788,000 for the
year ended June 30, 1999.
<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>
Years Ended June 30,
---------------------
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
United States........................................ $ 227,904 $ 165,566 $ 92,055
Europe............................................... 19,073 13,354 11,440
Asia................................................. 7,448 3,576 2,418
All Other............................................ 3,607 2,018 209
---------- ---------- ----------
$ 258,032 $ 184,514 $ 106,122
========== ========== ==========
</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........................................ $ 797,511 $ 500,517 $ 393,164
Europe............................................... 8,211 7,628 6,335
---------- ---------- ----------
$ 805,722 $ 508,145 $ 399,499
========== ========== ==========
</TABLE>
