-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PsggcJsaAQ54tCVJQcZQDrz1L+Nirq7mWgWEs3LeADwH+ihMikQ+iG3Zsz72yQdu /BehElqOz8fLHLXtG+IQng== 0000950123-99-007335.txt : 19990811 0000950123-99-007335.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950123-99-007335 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990727 ITEM INFORMATION: FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL MANAGER CORP/NEW/ CENTRAL INDEX KEY: 0000850436 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 222975182 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-17822 FILM NUMBER: 99681743 BUSINESS ADDRESS: STREET 1: 669 RIVER DRIVE STREET 2: RIVER DRIVE CENTER II CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-1361 BUSINESS PHONE: 2017033400 MAIL ADDRESS: STREET 1: 669 RIVER DRIVE STREET 2: RIVER DRIVE CENTER II CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-1361 FORMER COMPANY: FORMER CONFORMED NAME: MEDICAL MANAGER CORP /NEW/ DATE OF NAME CHANGE: 19990723 FORMER COMPANY: FORMER CONFORMED NAME: SYNETIC INC DATE OF NAME CHANGE: 19920703 8-K/A 1 AMENDED FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: July 27, 1999 MEDICAL MANAGER CORPORATION (Exact name of Registrant as specified in its charter) Delaware 0-17822 22-2975182 (State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification No.) incorporation) 669 River Drive, River Drive Center II, Elmwood Park, NJ 07407 (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (201) 703-3400 2 This Current Report on Form 8-K/A amends the Current Report on Form 8-K, event dated July 27, 1999, filed with the Securities and Exchange Commission on July 27, 1999 (the "Form 8-K") by Medical Manager Corporation (formerly known as Synetic, Inc.), a Delaware corporation (the "Registrant"). Unless otherwise defined herein, all capitalized terms shall have the meanings ascribed to them in the Form 8-K. The following amendments to Item 7 of the Form 8-K are hereby made. Item 7. Financial Statements and Exhibits.
Page (a) Financial statements of businesses acquired. The following historical statements and notes thereto are of Medical Manager Health Systems, Inc., f/k/a Medical Manager Systems, Inc., f/k/a Medical Manager Corporation ("Medical Manager Health Systems"; all references to Medical Manager in the Form 8-K shall hereafter mean "Medical Manager Health Systems") and are included herein: - Consolidated Balance Sheets (unaudited) as of March 31, 1999 and December 31, 1998. F-1 - Consolidated Statements of Income (unaudited) for the three month periods ended March 31, 1999 and March 31, 1998. F-2 - Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 1999 and March 31, 1998. F-3 - Notes to the Consolidated Condensed Financial Statements. F-4 - Report of Independent Certified Public Accountants. F-8 - Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997. F-9 - Consolidated Statements of Operations for the years ended December 31, 1998, December 31, 1997, and December 31, 1996. F-10 - Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, December 31, 1997, and December 31, 1996. F-11 - Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, and December 31, 1996. F-12 - Notes to Consolidated Financial Statements. F-13
2 3
Page (b) Pro forma financial information. The following pro forma financial statements and notes thereto are included herein: - Note Preceding Unaudited Pro Forma Combined Condensed Financial Data F-31 - Pro Forma Combined Condensed Statement of Income (unaudited) for the year ended June 30, 1996. F-32 - Pro Forma Combined Condensed Statement of Income (unaudited) for the year ended June 30, 1997. F-33 - Pro Forma Combined Condensed Statement of Income (unaudited) for the year ended June 30, 1998. F-34 - Pro Forma Combined Condensed Statement of Income (unaudited) for the nine months ended March 31, 1999. F-35 - Pro Forma Combined Condensed Balance Sheet (unaudited) as of March 31, 1999. F-36 - Pro Forma Combined Condensed Statement of Income (unaudited) for the nine months ended March 31, 1998. F-37 - Notes to Unaudited Pro Forma Combined Condensed Financial Data. F-37
3 4 (c) Exhibits. Exhibit No. Description - ----------- ----------- 23.1 Consent of PricewaterhouseCoopers LLP. 4 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MEDICAL MANAGER CORPORATION Date: August 9, 1999 By: /s/ Charles A. Mele ----------------------------------------- Name: Charles A. Mele Title: Executive Vice President and General Counsel 5 6 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23.1 Consent of PricewaterhouseCoopers LLP. 6 7 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
MARCH 31, DECEMBER 31, 1999 1998 -------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 43,173 $ 49,803 Accounts receivable, net 28,836 28,065 Inventory 2,062 2,321 Prepaid expenses and other current assets 2,420 1,764 Note receivable 5,000 0 Deferred income taxes 1,291 1,291 -------- -------- Total current assets 82,782 83,244 PROPERTY AND EQUIPMENT, net 9,306 9,194 GOODWILL AND OTHER INTANGIBLES, net 31,665 28,266 OTHER ASSETS 2,449 1,354 -------- -------- Total assets $126,202 $122,058 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,487 $ 2,512 Accounts payable and accrued liabilities 11,061 12,311 Customer deposits and deferred maintenance revenue 9,027 9,936 Income taxes payable 2,768 1,021 -------- -------- Total current liabilities 25,343 25,780 LONG-TERM OBLIGATIONS, net of current maturities 250 2,436 -------- -------- Total liabilities 25,593 28,216 -------- -------- STOCKHOLDERS' EQUITY Common stock 224 223 Additional paid-in capital 76,870 75,643 Retained earnings 23,515 17,976 -------- -------- Total stockholders' equity 100,609 93,842 -------- -------- Total liabilities and stockholders' equity $126,202 $122,058 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. F-1 8 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 -------- -------- Revenue Systems $ 27,468 $ 19,715 Maintenance and other 13,860 11,266 -------- -------- Total revenue 41,328 30,981 -------- -------- Cost of revenue Systems 12,863 9,660 Maintenance and other 7,716 6,155 -------- -------- Total costs of revenue 20,579 15,815 -------- -------- Gross margin 20,749 15,166 -------- -------- Operating expenses Selling, general and administrative 10,352 7,694 Research and development 1,296 1,026 Depreciation and amortization 1,140 728 -------- -------- Total operating expenses 12,788 9,448 -------- -------- Income from operations 7,961 5,718 Other income (expense) Interest expense (8) (127) Interest income 574 70 Other (expense) 18 16 -------- -------- Income before income taxes 8,545 5,677 Income taxes 2,993 2,147 -------- -------- Net income $ 5,552 $ 3,530 ======== ======== Basic earnings per share $ 0.25 $ 0.17 Shares used in computing basic earnings per share 22,363 20,541 Diluted earnings per share $ 0.24 $ 0.16 Shares used in computing diluted earnings per share 23,288 21,481
The accompanying notes are an integral part of these consolidated condensed financial statements. F-2 9 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net Income $ 5,552 $ 3,530 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,140 728 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable (445) (2,392) Inventory 565 (318) Prepaid expenses and other current assets (565) (1,015) Other assets (1,133) (24) Accounts payable and accrued liabilities (1,631) (1,102) Customer deposits and deferred maintenance revenue (1,748) 841 Income taxes payable 1,747 277 -------- -------- Net cash provided by operating activities 3,482 525 -------- -------- Cash flow from investing activities: Issuance of notes receivable (5,000) 0 Purchases of property and equipment (805) (1,096) Payments for acquisitions made, net of cash acquired (3,409) 0 -------- -------- Net cash used in investing activities (9,214) (1,096) -------- -------- Cash flow from financing activities: Proceeds from the issuance of notes payable 0 121 Payments of notes payable (2,211) (630) Net proceeds from the exercise of stock options 1,326 469 Dividends (13) (105) -------- -------- Net cash used in financing activities (898) (145) -------- -------- Net change in cash and cash equivalents (6,630) (716) -------- -------- Cash and cash equivalents: Beginning of period 49,803 6,976 -------- -------- End of period $ 43,173 $ 6,260 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. F-3 10 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. ORGANIZATION Medical Manager Health Systems, Inc. (the "Company") was founded on July 10, 1996 to bring together the research and development, sales, marketing and support resources for The Medical Manager(R) software, a leading physician practice management system for independent physicians, physician groups, management service organizations ("MSOs"), physician practice management companies ("PPMs"), independent practice associations ("IPAs"), managed care organizations and other providers of health care services in the United States. During the three months ended March 31, 1999, the Company or its affiliate acquired the following resellers of The Medical Manager software (the "1999 Acquired Companies"): (i) Specialized Computer Systems, Inc. based in DuBois, Pennsylvania; (ii) Advanced Medical Office Systems, Inc. d/b/a I.E. Corporation based in Stockton, California; (iii) Shared Business Services, Inc. based in Clearwater, Florida; (iv) Uniserv, Inc. based in Baton Rouge, Louisiana; (v) Meditech, Inc. based in Clarksville, Indiana; and (vi) Business Support Systems, Inc. based in Chesapeake, Virginia. 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 188,489 shares of Common Stock. On March 19, 1999, the Company or its affiliate acquired substantially all of the assets of Medical Systems Plus ("MPS"), a reseller of The Medical Manager software based in LaFayette, Louisiana. On March 24, 1999, the Company or its affiliate acquired substantially all of the assets of Premier Support Services, Inc. ("PSS"), a reseller of The Medical Manager software based in Dallas, Texas. On March 31, 1999, the Company or its affiliate acquired substantially all of the assets of the PM2000 Business of CSC Healthcare, Inc. ("CSC") based in Birmingham, Alabama. The acquisitions of MPS, PSS and CSC (the "1999 Purchased Companies") were accounted for using the purchase method of accounting. The aggregate consideration paid for the 1999 Purchased Companies consisted of $3,408,840 in cash, resulting in goodwill of $3,288,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying interim financial statements do not include all disclosures included in the financial statements for the year ended December 31, 1998 as included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "Form 10-K"), and therefore should be read in conjunction with the financial statements included in the Form 10-K. In the opinion of management, the interim financial statements filed as part of this Quarterly Report on Form 10-Q reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods presented. F-4 11 Prior year financial statements have been restated to reflect the results of the 1999 Acquired Companies. The results of the 1999 Purchased Companies are reflected from their respective acquisition dates. Revenue Recognition. Revenue from the sale of systems is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). 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. 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 is recognized as the services are provided. Certain expenses are allocated between the cost of revenue for systems and cost of revenue for maintenance and other based upon revenue, which basis management believes to be reasonable. Note Receivable. The Company issued a note receivable to an unrelated party in the amount of $5 million. The note receivable is due February 28, 2000 and bears interest at the rate of 14% per annum, payable on September 1, 1999 and February 28, 2000. 3. SUMMARY FINANCIAL DATA OF THE ACQUISITIONS The acquisitions of the 1999 Acquired Companies discussed in Note 1 have been accounted for using the pooling of interests method of accounting, and accordingly, the consolidated financial statements for the periods presented have been restated to include the results of operations of the 1999 Acquired Companies. The 1999 Acquired Companies generated revenues of $2,273,000 for the period from January 1, 1999 through their respective acquisition date and revenues of $1,436,000 for the three months ended March 31, 1998. Net income of the 1999 Acquired Companies was $257,000 for the period from January 1, 1999 through their respective acquisition date and $59,000 for the three months ended March 31, 1998. There were changes in the 1999 Acquired Companies' stockholders' equity of $13,000, excluding net income, for the period from January 1, 1999 through their respective acquisition date. There were no changes in the 1999 Acquired Companies' stockholders' equity other than net income for the three months ended March 31, 1998. The acquisitions of the 1999 Purchased Companies discussed in Note 1 were accounted for using the purchase method of accounting, and accordingly the consolidated financial statements reflect the results of operations for the 1999 Purchased Companies only since their respective dates of acquisition. The impact of the 1999 Purchased Companies on revenues, net income, and earnings per share is not significant. F-5 12 4. EARNINGS PER SHARE Basic and diluted earnings per share for the three months ended March 31, 1999 and 1998 are calculated as set forth below (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 1998 ------------------ -------------- Net income ................................................. $ 5,552 $ 3,530 ------- ------- BASIC EARNINGS PER SHARE: Weighted average common shares outstanding ................. 22,363 20,541 ------- ------- Basic earnings per share ................................... $ 0.25 $ 0.17 ------- ------- DILUTED EARNINGS PER SHARE: Weighted average common shares outstanding ................. 22,363 20,541 Effect of dilutive shares: Stock awards ............................................... 0 36 Stock options .............................................. 925 904 ------- ------- Diluted shares ............................................. 23,288 21,481 ------- ------- Diluted earnings per share ................................. $ 0.24 $ 0.16 ------- -------
5. SEGMENT REPORTING In 1998, the Company adopted SFAS 131. The segment information below presents the Company's three reportable segments - (1) Research & Development, (2) Sales & Marketing and (3) the Dealer Network, which represents the Company-owned dealers. The Company is organized primarily on the basis of the production, distribution and service processes broken into nine production or distribution units. Six of the distribution and service units have been aggregated into the "Dealer Network" segment. These units derive their revenue from the sale and service of The Medical Manager software. The "Sales & Marketing" unit consists of a single distribution and service unit and derives its revenue from the sale, licensing and distribution of The Medical Manager software to the Dealer Network segment and the independent dealer network. Two of the production units have been aggregated to form the "Research & Development" segment. These units derive their revenue primarily from license royalty fees for The Medical Manager software and other software packages. The accounting policies of the segments are the same as those described in footnote 2. Individual segment data includes intersegment revenues, which are then eliminated on a consolidated basis. Revenues and net income reported in the Research & Development segment and the Sales & Marketing segment are derived primarily from intersegment sales. The Dealer Network segment purchases software and licenses from the Sales & Marketing segment, which recognizes these sales as revenue. The Research & Development segment then collects royalties from the Sales & Marketing segment as it's primary source of revenues. Sales to the Dealer Network segment by the Sales & Marketing segment are made at the same wholesale F-6 13 price sold to independent dealers. Royalties to the Research & Development segment are based on royalty agreements with Sales & Marketing. The Company evaluates the performance of all three segments based on revenues and net income, and additionally, it evaluates the Dealer Network on operating margins. The table below presents information about reported segments and the reconciliation of total segment information to the consolidated information as reflected on the accompanying financial statements for the three months ending March 31, 1999 and 1998.
Elimination of Research & Sales & Dealer Intersegment Sales Development Marketing Network Total All Others or Receivables Consolidated --------------------------------------------------------------------------------------------------------------- 1999: Revenues $ 7,271 $ 7,857 $ 32,481 $ 47,609 $ 603 $ (6,884) $ 41,328 Net income 3,433 2,766 3,204 9,403 (3,851) 0 5,552 Total assets 38,268 33,070 177,253 248,590 201,353 (323,742) 126,202 1998: Revenues $ 4,790 $ 5,095 $ 26,750 $ 36,635 $ 354 $ (6,008) $ 30,981 Net income 2,470 1,102 2,455 6,027 (2,497) 0 3,530 Total assets 23,144 24,497 118,763 166,404 106,785 (207,232) 65,958
6. COMMITMENTS AND CONTINGENCIES 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 December 1998, the Company preliminarily 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 provides 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. The settlement was approved by the District Court of New Jersey on March 15, 1999. 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. A lawsuit was brought against the Company and certain of its officers and directors, among other parties, on October 23, 1998 in the United States District Court for the Middle District of Florida. The lawsuit, styled George Ehlert, et al. vs. Michael A. Singer, et al., purports to bring an action on behalf of the plaintiffs and others similarly situated to recover damages for alleged violations of the federal securities laws and Florida laws arising out of the Company's issuance of allegedly materially false and misleading statements concerning its business operations, including the development and sale of its principal product, during the class period. An amended complaint was served on March 2, 1999. The 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. The Company is from time to time involved in other routine litigation incidental to the conduct of its business. The Company believes that no such currently pending routine litigation to which it is party will have a material adverse effect on its financial condition or results of operations. 7. SUBSEQUENT EVENTS Subsequent to March 31, 1999, the Company executed and closed agreements to acquire the following resellers of The Medical Manager software: (i) Quantum Healthcare Systems, Inc., based in Fresno, California, on June 9, 1999; (ii) Western Healthcare, based in San Luis Obispo, California, on June 11, 1999; (iii) Donald Friesen & Associates, based in Bakersfield, California, on June 12, 1999; and (iv) Diversified Management Services, Inc., based in Oklahoma City, Oklahoma, on June 30, 1999. The acquisitions were accounted for using the pooling of interests method of accounting. The aggregate consideration paid was 53,863 shares of Common Stock. Also subsequent to March 31, 1999, the Company executed and closed agreements to acquire substantially all of the assets of the following companies or divisions: (i) Raven Healthcare Management, Inc., based in Nashville, Tennessee, on June 4, 1999; (ii) the Network Group Division of Blue Cross Blue shield of Georgia, based in Columbus, Georgia, on June 30, 1999, (iii) the Wismer * Martin division of Physician Computer Network, Inc., based in Spokane, Washington, on July 2, 1999; and (iv) Hyperion Business Systems, based in Oakland, California, on July 20, 1999. The acquisitions were accounted for using the purchase method of accounting. The aggregate consideration paid was $12,500,000 in cash, the issuance of $350,000 of debt, and 74,277 shares of Common Stock. On July 23, 1999, the Company merged with Synetic, Inc. providing for a strategic business combination in a tax-free pooling of interests transaction. Each outstanding share of the Company's Common Stock was exchanged into 0.625 newly issued shares of Synetic, Inc's common stock. In connection with the merger, Synetic, Inc. changed its name to Medical Manager Corporation, and the Company changed its name to Medical Manager Health Systems, Inc. F-7 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Medical Manager Health Systems, Inc. In our opinion, the consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders' equity and the consolidated statements of cash flows present fairly, in all material respects, the financial position of Medical Manager Health Systems, Inc. (formerly Medical Manager Corporation) and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and of their cash flows for each of the three years in the period ended December 31, 1998 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 14, on July 23, 1999, the Company merged with and into Synetic, Inc. in a pooling of interests transaction. PricewaterhouseCoopers LLP February 5, 1999, except for the second paragraph of Note 13, the third paragraph of Note 14, the first and second paragraphs of Note 14 and the fourth paragraph of Note 14, as to which the dates are March 2, 1999, March 15, 1999, July 20, 1999 and July 23, 1999, respectively F-8 15 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 49,583 $ 6,901 Accounts receivable, net of allowance of $2,413 and $1,392, respectively................................... 27,624 17,769 Inventory................................................. 1,673 2,517 Prepaid expenses and other current assets................. 1,707 2,813 Deferred income taxes..................................... 1,291 727 -------- ------- Total current assets.............................. 81,878 30,727 PROPERTY AND EQUIPMENT, net................................. 8,888 6,724 GOODWILL AND OTHER INTANGIBLES, net......................... 28,266 23,775 OTHER ASSETS................................................ 1,354 125 -------- ------- Total assets...................................... $120,386 $61,351 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable, current.................................... $ 2,438 $ 5,115 Accounts payable and accrued liabilities.................. 11,855 8,582 Customer deposits and deferred maintenance revenue........ 8,350 9,466 Income taxes payable...................................... 1,021 617 -------- ------- Total current liabilities......................... 23,664 23,780 LONG-TERM OBLIGATIONS, net of current maturities............ 2,243 4,224 -------- ------- Total liabilities................................. 25,907 28,004 -------- ------- Commitments and contingencies (Notes 4, 5 and 13) STOCKHOLDERS' EQUITY Preferred stock, 500,000 shares authorized, none issued and outstanding Common stock, $.01 par value, 50,000,000 shares authorized......................................... 221 203 Additional paid-in capital................................ 75,704 29,818 Retained earnings......................................... 18,554 3,326 -------- ------- Total stockholders' equity........................ 94,479 33,347 -------- ------- Total liabilities and stockholders' equity........ $120,386 $61,351 ======== =======
See accompany notes to the consolidated financial statements. F-9 16 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ------- ------- ------- Revenue Systems................................................... $87,317 $55,028 $32,229 Maintenance and other..................................... 48,595 36,800 16,659 ------- ------- ------- Total revenue.......................................... 135,912 91,828 48,888 ------- ------- ------- Cost of revenue Systems................................................... 40,802 24,978 16,565 Maintenance and other..................................... 26,796 20,604 8,582 ------- ------- ------- Total costs of revenue................................. 67,598 45,582 25,147 ------- ------- ------- Gross margin...................................... 68,314 46,246 23,741 ------- ------- ------- Operating expenses Selling, general and administrative....................... 34,877 26,450 14,560 Year 2000 litigation expenses............................. 2,366 0 0 Research and development.................................. 4,506 3,170 2,672 Depreciation and amortization............................. 3,488 1,688 661 ------- ------- ------- Total operating expenses............................... 45,237 31,308 17,893 ------- ------- ------- Income from operations............................ 23,077 14,938 5,848 Other income (expense) Interest expense.......................................... (170) (288) (200) Interest income........................................... 1,571 610 119 Other income (expense).................................... (39) 110 (570) ------- ------- ------- Income before income taxes.................................. 24,439 15,370 5,197 Income taxes................................................ 8,666 5,678 9 ------- ------- ------- Net income........................................ $15,773 $ 9,692 $ 5,188 ======= ======= ======= Basic earnings per share (Note 8):.......................... $ 0.73 $ 0.48 ======= ======= Diluted earnings per share (Note 8):........................ $ 0.70 $ 0.47 ======= =======
See accompanying notes to the consolidated financial statements. F-10 17 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
COMMON STOCK ADDITIONAL --------------- PAID IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ---------- -------- -------- Balance, January 1, 1996, as restated............ 8,583 $ 86 $ 1,660 $ 2,749 $ 4,495 Dividends...................................... (8,691) (8,691) Other.......................................... (33) (33) Net income..................................... 5,188 5,188 ------ ---- -------- ------- -------- Balance, December 31, 1996....................... 8,583 86 1,627 (754) 959 Dividends...................................... (5,567) (5,567) Issuance of common stock at the Offering, net......................................... 6,000 60 58,170 58,230 Mergers: Payments to MMR&D Stockholder............... (35,062) (35,062) Issuance of Common Stock and payment to other Founding Companies' stockholders, net....................................... 5,335 53 (1,609) (1,556) Acquisitions: Issuance of Common Stock for Acquisitions of Purchased Companies....................... 380 4 6,521 6,525 Contributions from former stockholders of certain of the Acquired Companies......... 45 (45) 0 Stock options exercised........................ 11 0 126 126 Net income..................................... 9,692 9,692 ------ ---- -------- ------- -------- Balance, December 31, 1997....................... 20,309 203 29,818 3,326 33,347 Dividends...................................... (545) (545) Secondary public offering, net of transaction costs....................................... 1,500 15 42,245 42,260 Acquisitions: Issuance of Common Stock for Acquisitions of Purchased Companies....................... 21 0 572 572 Stock options exercised and related tax benefit..................................... 230 3 3,069 3,072 Net income..................................... 15,773 15,773 ------ ---- -------- ------- -------- Balance, December 31, 1998....................... 22,060 $221 $ 75,704 $18,554 $ 94,479 ====== ==== ======== ======= ========
See accompanying notes to the consolidated financial statements. F-11 18 MEDICAL MANAGER HEALTH SYSTEMS CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------- -------- ------- Cash flows from operating activities: Net income................................................ $15,773 $ 9,692 $ 5,188 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 3,488 1,688 661 Deferred income taxes................................... (563) (615) 0 Loss on sale of property and equipment.................. 0 6 1 Loss on impaired asset.................................. 0 0 533 Realized gain on marketable securities.................. 0 (52) (8) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable..................................... (10,229) (5,863) (687) Inventory............................................... 503 (908) 258 Prepaid expenses and other assets....................... (187) (1,119) (227) Accounts payable and accrued liabilities................ 3,021 (1,914) 381 Customer deposits and deferred maintenance revenue...... (1,323) (1,093) 1,724 Income taxes payable.................................... 1,497 345 8 ------- -------- ------- Net cash provided by operating activities................. 11,980 167 7,832 ------- -------- ------- Cash flow from investing activities: Purchases of investments.................................. (30) 0 (61) Proceeds from sale of investments......................... 30 264 110 Purchases of property and equipment....................... (3,891) (1,342) (641) Proceeds from sale of property and equipment.............. 0 47 50 Payments for acquisitions made, net of cash acquired...... (4,069) (13,189) 0 ------- -------- ------- Net cash used in investing activities..................... (7,960) (14,220) (542) ------- -------- ------- Cash flow from financing activities: Proceeds from the issuance of notes payable............... 196 333 609 Payments of notes payable................................. (5,261) (7,704) (806) Due to affiliates......................................... 0 4,998 17 Repurchase of treasury shares by one of the Acquired Companies............................................... 0 0 (86) Net proceeds from the issuance of common stock............ 42,260 58,230 0 Proceeds from the exercise of stock options............... 2,012 126 0 Equity contributions from a certain shareholder of one of the Acquired Companies.................................. 0 0 55 Payments made to stockholder of MMR&D..................... 0 (35,062) 0 Dividends................................................. (545) (3,080) (5,982) ------- -------- ------- Net cash provided by (used in) financing activities....... 38,662 17,841 (6,193) ------- -------- ------- Net change in cash and cash equivalents..................... 42,682 3,788 1,097 ------- -------- ------- Cash and cash equivalents: Beginning of period....................................... 6,901 3,113 2,016 ------- -------- ------- End of period............................................. $49,583 $ 6,901 $ 3,113 ======= ======== ======= Non-cash dividends.......................................... $ 0 $ 2,468 $ 2,709 ======= ======== ======= Cash paid for interest:..................................... $ 87 $ 275 $ 211 ======= ======== ======= Cash paid for taxes:........................................ $ 7,435 $ 5,726 $ 17 ======= ======== =======
See accompanying notes to the consolidated financial statements. F-12 19 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Medical Manager Health Systems ("MMC") was founded on July 10, 1996 to bring together the research and development, sales, marketing and support resources for The Medical Manager(R) software, a leading physician practice management system for independent physicians, physician groups, management service organizations ("MSOs"), Physician Practice Management companies ("PPMs"), independent practice associations ("IPAs"), managed care organizations and other providers of health care services in the United States. On February 4, 1997, MMC acquired in separate mergers (the "Mergers") simultaneously with the consummation of the initial public offering ("IPO"), five companies: (i) Medical Manager Research & Development, Inc. (formerly Personalized Programming, Inc.) ("MMR&D"), the owner and developer of The Medical Manager software; (ii) Medical Manager Sales & Marketing, Inc. (formerly Systems Plus, Inc.) ("MMS&M"), the long-time national distributor of the software; (iii) Medical Manager Southeast (formerly National Medical Systems, Inc.) ("MMSE"), a national dealer located in Tampa, Florida; (iv) Medical Manager Northeast (formerly RTI Business Systems, Inc.) ("MMNE"), a large, regional dealership in Albany, New York; and (v) Medical Manager Midwest, Inc. (formerly Systems Management, Inc.) ("MMMW"), a large, regional dealership in South Bend, Indiana (collectively, the "Founding Companies"), which became separate, wholly-owned subsidiaries of MMC. The aggregate consideration paid by MMC for the Founding Companies was approximately $46.9 million in cash and 11.7 million shares of MMC's common stock par value $.01 per share (the "Common Stock") for an aggregate value of $175.7 million. The acquisitions were accounted for as a combination of the Founding Companies at historical cost for accounting purposes. MMR&D is identified as the acquirer for financial statement presentation purposes and is presented on a combined basis with MMC from July 10, 1996. MMC conducted no significant operations and generated no revenue prior to the closing of the IPO. During the year ended December 31, 1997, MMC or its affiliates executed and closed agreements to acquire 10 resellers (the "1997 Acquired Companies") of The Medical Manager software. These acquisitions were accounted for using the pooling of interests method of accounting. The aggregate consideration paid for the 1997 Acquired Companies consisted of 1,644,836 shares of Common Stock. Also during the year ended December 31, 1997, MMC or its affiliates executed and closed definitive agreements to acquire substantially all of the assets or all of the outstanding equity securities of the following 12 resellers (the "1997 Purchased Companies") of The Medical Manager software.
COMPANY ACQUIRED DATE OF ACQUISITION LOCATION - ---------------- ------------------- -------- 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 Orlando, Florida and subsidiary, AMSC Midwest, Inc. September 11, 1997 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
F-13 20 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1997 Purchased Companies were accounted for using the purchase method of accounting. The aggregate consideration paid for the 1997 Purchased Companies was 380,230 shares of Common Stock, $4,265,866 in cash and the issuance of $6,000,000 in debt. During the year ended December 31, 1998, MMC or its affiliates executed and closed agreements to acquire the following resellers of The Medical Manager software (the "1998 Acquired Companies"): (i) Medical Practice Support Services, Inc. ("MPSS") based in Pittsburgh, Pennsylvania; (ii) Health Care Management Solutions, Inc. d/b/a Healthcare Informatics, Inc. ("HCMS") based in Springfield, Illinois ; (iii) Strategic Systems, Inc. ("Strategic") based in Denver, Colorado; (iv) Intelligent Concept, Ltd. (U.S.A.) ("IC") based in Los Angeles, California; (v) Health-Tech Systems, Inc. ("Health-Tech") based in El Paso, Texas; (vi) Healthcare Automation Associates, Inc. ("HAA") based in Phoenix, Arizona; (vii) Qualified Technology, Inc. ("Qualified") based in Baton Rouge, Louisiana; (viii) Medical Systems, Inc. ("MSI") based in Dallas, Texas; (ix) Prism Microcomputers, Inc. ("Prism") based in Fairfax, Virginia; (x) Advantage Medical Systems, Inc. ("Advantage") based in Hurricane, West Virginia; (xi) Medical Design and Images, Inc. ("Medical Design") based in Austin, Texas; (xii) Lee Data Systems, Inc. ("Lee Data") based in Plymouth Meeting, Pennsylvania; and (xiii) MedData Corporation ("MedData") based in Elliot City, Maryland. The acquisitions of the 1998 Acquired Companies were accounted for using the pooling of interests method of accounting. The aggregate consideration paid for the 1998 Acquired Companies consisted of 567,823 shares of Common Stock. During the year ended December 31, 1998, MMC or its affiliates executed and closed agreements to acquire substantially all of the assets, or all of The Medical Manager assets, of the following resellers ("the 1998 Purchased Companies") of The Medical Manager software:
COMPANY ACQUIRED DATE OF ACQUISITION LOCATION - ---------------- ------------------- -------- Management Integrated Solutions April 4, 1998 Houston, Texas CSA Provider Services June 25, 1998 Phoenix, Arizona 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
The acquisitions of the 1998 Purchased Companies were accounted for using the purchase method of accounting. The aggregate consideration paid for the 1998 Purchased Companies consisted of 21,445 shares of the MMC's Common Stock and $4,082,500 in cash. The 1997 Acquired Companies and the 1998 Acquired Companies are referred to collectively as the Acquired Companies. The 1997 Purchased Companies and the 1998 Purchased Companies are referred to collectively as the Purchased Companies. MMC, the Founding Companies, the Acquired Companies, and the Purchased Companies are referred to collectively as the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The accompanying financial statements have been presented on a consolidated basis for the years ended December 31, 1998, 1997 and 1996. The consolidated financial statements include MMC and its wholly owned subsidiaries. All significant intercompany balances and intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements F-14 21 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) include MMC, MMR&D and the Acquired Companies through February 4, 1997, the date of MMC's acquisition of the Founding Companies, after which the historical financial statements reflect the results of MMC, MMR&D, the Acquired Companies, and the other Founding Companies. The results of the Purchased Companies are reflected subsequent to their respective acquisition date. The accompanying financial statements have been adjusted retroactively to show the effect of the acquisitions of the Acquired Companies as if they had occurred on January 1, 1996. Revenue Recognition. Revenue from software licenses is recognized upon sale and shipment. For the years ended December 31, 1997 and 1996, revenue from the sale of systems was recognized when the system was installed and when the related client training was completed, as established in Statement of Position ("SOP") 91-1, Software Revenue Recognition. Beginning January 1, 1998, revenue from the sale of systems is 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. The effect of the adoption of SOP 97-2 was not significant to the Company's results of operations for the year ended December 31, 1998. 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. Goodwill and Other Intangibles. Goodwill and other intangibles consist of covenants not to compete and goodwill arising from business acquisitions, detailed as follows (in thousands):
1998 1997 ------- ------- Goodwill arising from business acquisitions................. $30,032 $24,523 Covenants not to compete.................................... 300 227 ------- ------- Total gross goodwill and other intangibles.................. 30,332 24,750 Accumulated amortization.................................... 2,066 975 ------- ------- Total net goodwill and other intangibles.................... $28,266 $23,775 ======= =======
The covenants not to compete are being amortized over periods of two to three years and the goodwill arising from business acquisitions is being amortized over a 20 year period. Asset Impairment. Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain intangibles to be held and used by the Company be reviewed for impairment. The Company periodically assesses whether there has been a permanent impairment of its long-lived assets, in accordance with SFAS No. 121. No write-down of assets due to impairment was required in the years ended December 31, 1998 or 1997. Approximately $500,000 of goodwill was recorded by one of the Acquired Companies, prior to their acquisition by the Company, and was written off in the year ended December 31, 1996. Property and Equipment. Property and equipment are stated at cost. Additions and major renewals are capitalized. Repairs and maintenance are charged to expense as incurred. Upon disposal, the related cost and accumulated depreciation are removed from the accounts, with the resulting gain or loss included in income. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided for over the shorter of the estimated service life of the leased asset or the lease term using the straight-line method. F-15 22 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventory. Inventory primarily consists of peripheral computer equipment. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. Research and Development. Software development costs are included in research and development and are expensed as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," requires the capitalization of certain software development costs once technological feasibility is established. The capitalized cost is then amortized over the estimated product life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Cash and Cash Equivalents. The Company considers all highly liquid investments with maturity dates of three months or less when purchased to be cash equivalents. These cash equivalents are predominantly in U.S. dollar domestic tax free municipal instruments. Income Taxes. The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years differences between the tax basis of assets and liabilities and their financial reported amounts at each year end based on enacted laws and statutory rates applicable to the periods in which differences are expected to affect taxable income. 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. See Note 11. 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 revenue and expenses during the reported period. Actual results could differ from those estimates; however, management does not believe these differences would have a material effect on operating results. Concentration of Credit Risk. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. With regard to accounts receivables, credit risk is limited due to the wide variety of customers in the health care industry and the geographic areas into which the Company's systems and services are sold. With regards to cash, the Company places its funds with high credit quality institutions. At times, such monies may be in excess of the FDIC or other insurance limits, however, the Company has not experienced any losses in such accounts. Non-cash Transactions. Non-cash investing and financing activities during the year ended December 31, 1998 included the purchase of approximately $2.3 million of assets of the 1998 Purchased Companies through the assumption of liabilities and the issuance of Common Stock and the purchase of equipment through the assumption of a lease obligation. Non-cash transactions during the year ended December 31, 1997 included the purchase of approximately $23.7 million of assets of the other Founding Companies and the 1997 Purchased Companies through the assumption of liabilities and the issuance of Common Stock. Reclassifications. Certain prior year amounts have been reclassified to conform with 1998 presentations. These reclassifications had no impact on net income or stockholders' equity. Segment Reporting. In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 supersedes SFAS 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 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of F-16 23 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information. See Note 12. Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income". In June 1997, the Financial Accounting Standards Board issued 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 common equity, be reported in the financial statements. The Company adopted SFAS No. 130 during the year ended December 31, 1998. For the years ended December 31, 1998, 1997 and 1996 there were no components of comprehensive income other than net income. Employee Benefits Disclosures. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". In February 1998, the Financial Accounting Standards Board issued SFAS No. 132 which is effective for periods ending after December 15, 1998. The new standard revises employers' disclosures about pensions and other postretirement benefits. For the years ended December 31, 1998, 1997 and 1996, there was no impact on the Company's financial statements. SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities". SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The Company does not maintain any derivative investments nor does it conduct any hedging activities, therefore, SFAS 133 is not expected to impact the Company. 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998 and 1997 consisted of the following (in thousands):
1998 1997 ------- ------- Land and improvements....................................... $ 375 $ 360 Buildings................................................... 2,253 2,253 Furniture and fixtures...................................... 2,964 2,458 Office equipment and computers.............................. 7,952 5,328 Software.................................................... 871 160 Vehicles.................................................... 918 880 Leasehold improvements...................................... 533 288 ------- ------- 15,866 11,727 Less accumulated depreciation............................... (6,978) (5,003) ------- ------- Net property and equipment.................................. $ 8,888 $ 6,724 ======= =======
Depreciation expense was approximately $2.1 million, $1.1 million, and $609,000 for the years ended December 31, 1998, 1997 and 1996, respectively. F-17 24 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. NOTES PAYABLE Notes payable at December 31, 1998 and 1997 consist of the following (in thousands):
1998 1997 ------ ------ Note payable, stockholder (AAA distribution)(1) Interest: 5.8%, repaid in 1998...................................... $ 0 $ 693 Notes payable, stockholders Interest: various between 0% and 11%, repaid in 1998....................................... 0 404 Notes payable, remainder of purchase price for acquisitions(2) Interest: 5.5%............................ 4,116 6,294 Promissory note, ($250,000 note)(3) Interest: 18%........... 250 250 Lines of credit(4) Interest: various between lender base plus 2% and 10.5%, repaid in 1998......................... 0 189 Notes payable, various Interest: various between 6% and 12.75%, repaid in 1998.................................... 0 278 Mortgages payable Interest: 9%, repaid in 1998.............. 0 1,112 Non-compete agreements Due: various monthly amounts through 1998, repaid in 1998...................................... 0 34 Obligations under capital leases............................ 315 85 ------ ------ Total debt.................................................. 4,681 9,339 Less current maturities..................................... 2,438 5,115 ------ ------ Long-term debt.............................................. $2,243 $4,224 ====== ======
- --------------- (1) Upon consummation of the IPO, MMR&D elected to terminate its S Corporation status. The Notes Payable, Stockholder (AAA Distribution) represented amounts due to the stockholder of MMR&D for dividends equal to the estimated balance in the S Corporation's Accumulated Adjustment Account as of February 4, 1997. (2) The Notes payable for the remainder of the purchase price for acquisitions are due as follows: $25,000 due on demand; $2,000,000 due January 15, 1999; $50,000 due April 7, 1999; $41,000 due June 29, 1999; $2,000,000 due January 15, 2000. (3) On August 10, 1994, one of the Acquired Companies entered into a note payable in the amount of $250,000. The note was issued in connection with the Acquired Company's purchase of certain assets of Solutions Plus, Inc. The note is payable in 48 monthly installments, beginning September, 1994. Payment of this note is in dispute. The Company has not made payments according to its terms; accordingly, the Company may be considered to be in default. As a result of the potential default, the entire principal amount, plus accrued interest of $99,900, has been recorded as a current liability. (4) These lines of credit were all closed during the year ended December 31, 1998. On January 14, 1998, the Company entered into a $10.0 million line of credit agreement with NationsBank of Tampa. The line of credit matures on May 31, 1999. The line of credit bears interest at Prime or LIBOR, at the election of the borrower, plus an applicable margin, as defined in the agreement. This debt instrument is due on demand. The agreement contains customary events of default and a number of customary covenants including certain financial ratios and restrictions on dividends. As of December 31, 1998 and 1997, there were no outstanding balances on this line of credit. F-18 25 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under all other debt obligations, excluding capital lease obligations, during the fiscal years subsequent to December 31, 1998 are as follows (in thousands): 1999........................................................ $2,366 2000........................................................ 2,000 ------ Total....................................................... 4,366 Less current maturities..................................... 2,366 ------ Long-term portion........................................... $2,000 ======
Future minimum payments under capital lease obligations during the years subsequent to December 31, 1998 are as follows (in thousands): 1999........................................................ $ 88 2000........................................................ 73 2001........................................................ 73 2002........................................................ 73 2003........................................................ 28 ---- Total....................................................... 335 Less amount representing interest........................... 20 ---- Present value of future minimum lease payments.............. 315 Less current maturities..................................... 72 ---- Long-term portion........................................... $243 ====
The carrying amount of all debt obligations approximates fair market value because of the short maturity of these instruments. 5. COMMITMENTS AND CONTINGENCIES The Company leases its office facilities and certain equipment under operating leases which have remaining lease terms ranging from one to six years. Future minimum rental commitments under noncancellable operating leases are as follows (in thousands): 1999........................................................ $2,891 2000........................................................ 2,215 2001........................................................ 1,785 2002........................................................ 867 2003........................................................ 526 Thereafter.................................................. 166 ------ Total....................................................... $8,450 ======
Rent expense was approximately $4.2 million, $2.6 million and $1.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. MMR&D and MMMW leases certain of its facilities under operating leases from an entities owned by certain stockholders. The leases expire between the years 1999 and 2001. The MMR&D lease provides for two options to renew for one year each and the MMMW lease provides for three options to renew for five years each. Rent paid to the stockholders for these leases was $448,000, $423,000 and $254,000 for the years ended December 31, 1998, 1997 and 1996, respectively. F-19 26 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. SUMMARY FINANCIAL DATA OF THE ACQUISITIONS The acquisitions of the Acquired Companies discussed in Note 1 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 $11,138,000 for the period January 1, 1998 through their respective acquisition date, revenues of $23,873,000 for the year ended December 31, 1997 or through their respective acquisition date and revenues of $36,418,000 for the year ended December 31, 1996. Net income of the Acquired Companies was $1,165,000 for the period January 1, 1998 through their respective acquisition date, a net loss of $793,000 for the year ended December 31, 1997 or through their respective acquisition date, and a net loss of $229,000 for the year ended December 31, 1996. Changes in the Acquired Companies' stockholders' equity for the period January 1, 1998 through their respective acquisition date was $545,000. Changes in the Acquired Companies' stockholders' equity was $1,631,000 for the year ended December 31, 1997 or through their respective acquisition date. Changes in the Acquired Companies' stockholders' equity was $917,000 for the year ended December 31, 1996. The acquisitions of the Purchased Companies discussed in Note 1 were accounted for using the purchase method of accounting, and accordingly the consolidated financial statements reflect the results of operations for the Purchased Companies only since their respective date of acquisition. Pro forma revenues, net income and earnings per share of the Company are presented below (in thousands, except per share data) as though the acquisitions of Companion Technologies of Florida, Inc., Companion Technologies of Texas, and AMSC, Inc. had occurred as of January 1, 1996. The remainder of the Purchased Companies' revenues, net income, and earnings per share are not considered significant. The results of operations for Companion Technologies of Florida, Inc., Companion Technologies of Texas, and AMSC, Inc. are included in the full year ended December 31, 1998 and accordingly, no pro forma information is necessary for the year ended December 31, 1998.
PRO FORMA YEAR ENDED DECEMBER 31, ------------------ 1997 1996 -------- ------- Revenues.................................................... $106,393 $63,613 Net income.................................................. 8,942 5,415 Basic earnings per share.................................... $ 0.45 Diluted earnings per share.................................. $ 0.44
7. STOCKHOLDERS' EQUITY At December 31, 1998, the Company had two stock option plans as described below: AMENDED AND RESTATED 1996 LONG-TERM INCENTIVE PLAN In September 1996, the Company adopted the 1996 Long-Term Incentive Plan, amended on June 9, 1998 (the "Incentive Plan"), under which the Compensation Committee has discretion to grant one or more of the following awards to executive officers, key employees, consultants and other service providers: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted or deferred stock, (v) dividend equivalents, (vi) bonus shares and awards in lieu of the Company's obligations to pay cash compensation, and (vii) other awards the value of which is based in whole or in part upon the value of the Common Stock. Upon a change of control of the Company (as defined in the Incentive Plan), certain conditions and restrictions relating to an award with respect to the ability to exercise or settle such award will be accelerated. The maximum number of shares of Common Stock that may be subject to outstanding awards under the Incentive Plan may not exceed the greater of 2,000,000 shares or 12% of the aggregate number of shares of F-20 27 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock outstanding. The number of shares deliverable upon exercise of incentive stock options is limited to 500,000, and the number of shares deliverable as non-performance based restricted stock and deferred stock, is limited to 500,000. Information regarding the stock option component of the Incentive Plan is summarized below:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE --------- -------------- Balance, January 1, 1997.................................... 0 -- Granted..................................................... 1,753,100 $11.238 Exercised................................................... (11,525) 11.000 Forfeited................................................... (84,413) 11.120 --------- Balance, December 31, 1997.................................. 1,657,162 11.245 Granted..................................................... 411,397 25.493 Exercised................................................... (180,453) 11.150 Forfeited................................................... (29,062) 14.320 --------- Balance, December 31, 1998.................................. 1,859,044 $14.289 =========
The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED NUMBER AVERAGE NUMBER WEIGHTED OUTSTANDING REMAINING EXERCISABLE AVERAGE EXERCISE AT DECEMBER 31, CONTRACTUAL AT DECEMBER 31, EXERCISE PRICES 1998 LIFE 1998 PRICE - -------- ----------------- ----------- ----------------- -------- $ 8.875 10,000 9 10,000 $ 8.875 11.000 1,389,795 9 621,920 11.000 17.000 61,001 9 12,126 17.000 17.875 125,000 10 0 17.875 21.750 15,000 10 0 21.750 23.125 1,000 10 250 23.125 26.563 10,000 10 0 26.563 26.688 4,000 10 0 26.688 27.000 3,000 10 750 27.000 29.563 240,248 10 60,062 29.563 --------- ------- 1,859,044 705,108 ========= =======
With exception of 10,000 options, all of the 1,859,044 options which were outstanding as of December 31, 1998, have a vesting schedule providing for 25% vesting at 6 months, 18 months, 30 months, and 42 months after the grant date. There are a total of 10,000 options which vested fully on April 30, 1998. All options expire 10 years after the date of grant. As of December 31, 1998, 705,108 options granted under the Incentive Plan were exercisable with a weighted average exercise price of $12.68. No compensation expense related to the options has been recorded as the options were granted at an exercise price equal to or greater than the fair market value of the Common Stock on the date of grant. A total of 50,000 shares of restricted stock awards were granted under the Incentive Plan on April 18, 1997. Compensation expense equal to the fair value of the Common Stock on the date of grant ($8.375 per share) is being recognized over a six year vesting period of these stock awards. F-21 28 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1996 NON-EMPLOYEE DIRECTORS' STOCK PLAN In September 1996, the Company adopted the 1996 Non-Employee Directors' Stock Plan (the "Directors' Plan") which provides for the automatic grant to each non-employee director an initial option to purchase 10,000 shares upon such person's initial election as a director. In addition, the Directors' Plan provides for an automatic annual grant to each non-employee director of an option to purchase 5,000 shares at each annual meeting of stockholders; provided, however, that a director will not be granted an annual option if he or she was granted an initial option during the preceding three months, later amended to sixty days. This plan also provides that each non-employee director may elect to receive 2,000 stock options in each calendar year in lieu of an annual cash fee and other cash payments for attending board meetings. A total of 250,000 shares are reserved for issuance under the Directors' Plan. The exercise price of options granted under the Directors' Plan may be no less than the fair market value of the Common Stock on the date of grant, and accordingly, no compensation expense has been recorded in connection with the stock options granted. Information regarding the Directors' Plan is summarized below:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE --------- -------------- Balance, January 1, 1997............................. 0 -- Granted.............................................. 51,000 $12.250 ------ Balance, December 31, 1997........................... 51,000 12.250 Granted.............................................. 28,000 29.000 ------ Balance, December 31, 1998........................... 79,000 $18.187 ======
All options under the Directors' Plan vest one year after the date of grant and expire 10 years after the date of grant. The exercise price of the options outstanding under this plan range from $8.875 to $29.00. As of December 31, 1998, 51,000 options granted under the Directors' Plan were exercisable with a weighted average exercise price of $12.25. FINANCIAL ACCOUNTING STANDARD NO. 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" In October of 1995, the Financial Accounting Standards Board issued Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation" ("FAS 123") which is effective for fiscal years beginning after December 15, 1995. As permitted by FAS 123, the Company has elected to account for its stock based plans under APB No. 25, "Accounting for Stock Issued to Employees". F-22 29 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average fair value of the options granted during the year ended December 31, 1998 was $13.12. If the Company had elected to recognize compensation expense for stock options based on the fair value at grant date, consistent with the method prescribed in FAS 123, net income and earnings per share would have been reduced to the pro forma amounts shown below (in thousands, except per share data): FOR THE YEAR ENDED DECEMBER 31, 1998: Net income As reported............................................... $15,773 Pro forma................................................. 14,285 Basic earnings per common share As reported............................................... $ 0.73 Pro forma................................................. 0.66 Diluted earnings per common share and common equivalent share As reported............................................... $ 0.70 Pro forma................................................. 0.64 FOR THE YEAR ENDED DECEMBER 31, 1997: Net income As reported............................................... $ 9,692 Pro forma................................................. 6,605 Basic earnings per common share As reported............................................... $ 0.48 Pro forma................................................. 0.33 Diluted earnings per common share and common equivalent share As reported............................................... $ 0.47 Pro forma................................................. 0.32
There were no options outstanding as of December 31, 1996, thus pro forma information is not provided for the year ended December 31, 1996. The pro forma amounts were determined using the Black-Scholes Valuation Model with the following key assumptions: (i) a 52% volatility factor initially based on the Company's average trading price since the IPO, as well as the average trading stock price of comparable companies over the previous five years; (ii) no dividend yield; (iii) a discount rate equal to the rate available on U.S. Treasury Strip (zero-coupon) bond on the grant date, and (iv) an average expected option life of four years for directors' options and five years for employees' options. F-23 30 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. EARNINGS PER SHARE Basic and diluted earnings per share for the years ended December 31, 1998 and 1997 are calculated as set forth below (in thousands, except per share data):
1998 1997 ------- ------- Net income.................................................. $15,773 $ 9,692 ======= ======= BASIC EARNINGS PER SHARE: Weighted average shares outstanding......................... 21,554 20,054 ------- ------- Basic shares................................................ 21,554 20,054 ======= ======= Basic earnings per share.................................... $ 0.73 $ 0.48 ======= ======= DILUTED EARNINGS PER SHARE: Weighted average shares outstanding......................... 21,554 20,054 Effect of dilutive shares: Stock options............................................. 877 410 Stock awards.............................................. 0 11 ------- ------- Diluted shares.............................................. 22,431 20,475 ======= ======= Diluted earnings per share.................................. $ 0.70 $ 0.47 ======= =======
9. EMPLOYEE BENEFIT PLAN On July 1, 1997, the Company began a qualified 401(k) savings plan (the "Plan") covering all 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. During the year ended 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 December 31, 1998 and 1997, the Company made contributions of $181,000 and $69,000 respectively. F-24 31 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data for the years ended December 31, 1998 and 1997 is as follows (in thousands, except per share data): FOR THE YEAR ENDED DECEMBER 31, 1998
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------- -------- ------------- ------------ REVENUE As reported.............................. $27,651 $30,637 $35,233 $37,586 Effect of acquisitions treated as poolings of interests completed subsequent to quarter end............. 2,040 2,029 736 -- As adjusted.............................. 29,691 32,666 35,969 37,586 GROSS MARGIN As reported.............................. $13,844 $15,693 $17,912 $18,818 Effect of acquisitions treated as poolings of interests completed subsequent to quarter end............. 813 993 241 -- As adjusted.............................. 14,657 16,686 18,153 18,818 NET INCOME As reported.............................. $ 3,523 $ 4,210 $ 4,485 $ 3,375 Effect of acquisitions treated as poolings of interests completed subsequent to quarter end............. (91) 322 (51) -- As adjusted.............................. 3,432 4,532 4,434 3,375 BASIC EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT As reported.............................. $ 0.18 $ 0.20 $ 0.21 $ 0.15 Effect of acquisition treated as pooling of interests completed subsequent to quarter end........................... ($ 0.01) $ 0.01 ($ 0.01) -- As adjusted.............................. $ 0.17 $ 0.21 $ 0.20 $ 0.15 DILUTED EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT As reported.............................. $ 0.17 $ 0.19 $ 0.20 $ 0.15 Effect of acquisition treated as pooling of interests completed subsequent to quarter end........................... ($ 0.01) $ 0.01 ($ 0.01) -- As adjusted.............................. $ 0.16 $ 0.20 $ 0.19 $ 0.15
F-25 32 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- -------- ------------- ------------ REVENUE As reported.............................. $16,554 $20,800 $23,105 $26,659 Effect of acquisitions treated as poolings of interests completed subsequent to quarter end............. 2,117 1,809 784 -- As adjusted.............................. 18,671 22,609 23,889 26,659 GROSS MARGIN As reported.............................. $ 8,631 $10,997 $11,545 $13,173 Effect of acquisitions treated as poolings of interest completed subsequent to quarter end............. 729 853 318 -- As adjusted.............................. 9,360 11,850 11,863 13,173 NET INCOME As reported.............................. $ 2,740 $ 2,276 $ 2,282 $ 2,440 Effect of acquisitions treated as poolings of interests completed subsequent to quarter end............. (365) 210 109 -- As adjusted.............................. 2,375 2,486 2,391 2,440 BASIC EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT As reported.............................. $ 0.14 $ 0.12 $ 0.12 $ 0.12 Effect of acquisition treated as pooling of interests completed subsequent to quarter end........................... ($ 0.02) -- -- -- As adjusted.............................. $ 0.12 $ 0.12 $ 0.12 $ 0.12 DILUTED EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT As reported.............................. $ 0.14 $ 0.12 $ 0.11 $ 0.12 Effect of acquisition treated as pooling of interests completed subsequent to quarter end........................... ($ 0.02) -- -- -- As adjusted.............................. $ 0.12 $ 0.12 $ 0.11 $ 0.12
F-26 33 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INCOME TAXES The provision for income taxes consists of the following (in thousands):
1998 1997 1996 ------ ------ ---- Current: Federal................................................... $8,076 $5,916 $ 9 State..................................................... 1,153 846 -- ------ ------ ---- Total..................................................... 9,229 6,762 9 Deferred: Federal................................................... (493) (949) -- State..................................................... (70) (135) -- ------ ------ ---- Total..................................................... (563) (1,084) -- ------ ------ ---- Total....................................................... $8,666 $5,678 $ 9 ====== ====== ====
Upon the consummation of the IPO and the acquisition of the Acquired Companies, MMR&D and certain of the Acquired Companies which were S-Corporations (collectively, the "S-Corporations") terminated their S-Corporation status. Accordingly, current and deferred income taxes reflecting the tax effects of temporary differences between the Company's financial statement tax bases of certain assets and liabilities became assets and liabilities of the Company. Accordingly, the above provisions for 1998 and 1997 income taxes include a $548,000 and $650,000, respectively, nonrecurring benefit resulting from the termination of the S-Corporation election and the corresponding required adoption of SFAS 109. The significant components of deferred tax assets (liabilities) as of December 31, 1998 and 1997 are as follows:
1998 1997 ------ ------ Bad debts................................................... $ (646) $ (570) Deferred revenue............................................ 856 425 Accrued expenses............................................ 1,033 848 Inventory................................................... (21) (21) Other....................................................... 69 45 ------ ------ Total....................................................... $1,291 $ 727 ====== ======
The following table accounts for the differences between the actual tax provision and amounts obtained by applying the statutory U.S. federal income rate of 35% to the income before income taxes.
1998 1997 1996 ------ ------ ------- Statutory tax provision at 35%.............................. $8,554 $5,379 $ 1,819 State taxes, net of federal benefit......................... 1,189 778 -- S-Corporation income not subject to tax..................... (231) (227) (1,810) Change in valuation allowance............................... -- 36 -- Termination of S-Corporation status......................... (548) (650) -- Tax exempt income........................................... (547) (180) -- Non-deductible expense and other............................ 249 542 -- ------ ------ ------- Total....................................................... $8,666 $5,678 $ 9 ====== ====== =======
F-27 34 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SEGMENT REPORTING In 1998, the Company adopted SFAS 131. The segment information below presents the Company's three reportable segments -- (1) Research & Development, (2) Sales & Marketing and (3) Dealer Network, which represents the Company-owned dealers. The Company is organized primarily on the basis of the production, distribution and service processes broken into nine production or distribution units. Six of the distribution and service units have been aggregated into the "Dealer Network" segment. These units derive their revenue from the sale and service of The Medical Manager software. The "Sales & Marketing" unit consists of a single distribution and service unit and derives its revenue from the sale, licensing and distribution of The Medical Manager software to the Dealer Network segment and the independent dealer network. Two of the production units have been aggregated to form the "Research & Development" segment. These units derive their revenue primarily from license royalties fees for The Medical Manager software and other software packages. The accounting policies of the segments are the same as those described in footnote 2. Segment data includes intersegment revenues. Revenues and net income reported in the Research & Development segment and the Sales & Marketing segment are derived primarily from intersegment sales. The Dealer Network segment purchases software and licenses from the Sales & Marketing segment, which recognizes these sales as revenue. The Research & Development segment then collects royalties from the Sales & Marketing segment as it's primary source of revenues. Sales to the Dealer Network segment by the Sales & Marketing segment are made at the same wholesale price sold to independent dealers. Royalties to the Research & Development segment are based on royalty agreements with Sales & Marketing. The Company evaluates the performance of all three of its segments based on revenues and net income, and additionally, it evaluates the Dealer Network on operating margins. The table below presents information about reported segments and the reconciliation of total segment information to the consolidated information as reflected on the accompanying financial statements for the years ending December 31, 1998, 1997 and 1996 (in thousands):
ELIMINATION OF RESEARCH & SALES & DEALER INTERSEGMENT SALES DEVELOPMENT MARKETING NETWORK TOTAL ALL OTHERS OR RECEIVABLES CONSOLIDATED ----------- --------- -------- -------- ---------- ------------------ ------------ 1998: Revenues............... $22,897 $22,895 $115,203 $160,995 $ 461 $ (25,544) $135,912 Interest income........ 0 0 138 138 1,433 0 1,571 Interest expense....... 27 0 143 170 0 0 170 Depreciation and amortization......... 347 214 2,695 3,256 232 0 3,488 Income tax expense..... 456 0 259 715 7,951 0 8,666 Net income............. 11,321 5,619 13,169 30,109 (14,336) 0 15,773 Total assets........... 30,313 24,529 141,192 196,034 159,791 (235,439) 120,386 Expenditures for goodwill additions in connection with the Purchased Companies............ $ 0 $ 0 $ 270 $ 270 $ 3,799 $ 0 $ 4,069
F-28 35 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELIMINATION OF RESEARCH & SALES & DEALER INTERSEGMENT SALES DEVELOPMENT MARKETING NETWORK TOTAL ALL OTHERS OR RECEIVABLES CONSOLIDATED ----------- --------- -------- -------- ---------- ------------------ ------------ 1997: Revenues............... $15,684 $17,078 $ 72,087 $104,849 $ 0 $ (13,021) $ 91,828 Interest income........ 11 0 36 47 563 0 610 Interest expense....... 90 22 176 288 0 0 288 Depreciation and amortization......... 304 155 1,208 1,667 21 0 1,688 Income tax expense..... 278 1 21 300 5,378 0 5,678 Net income............. 8,197 3,303 6,367 17,867 (8,175) 0 9,692 Total assets........... 18,168 18,735 94,981 131,884 77,822 (148,355) 61,351 Expenditures for goodwill additions in connection with the Purchased Companies............ $ 0 $ (31) $ 1,338 $ 1,307 $ 11,882 $ 0 $ 13,189 1996: Revenues............... $11,956 $ 0 $ 38,324 $ 50,280 $ 0 $ (1,392) $ 48,888 Interest income........ 108 0 11 119 0 0 119 Interest expense....... 0 0 200 200 0 0 200 Depreciation and amortization......... 266 0 395 661 0 0 661 Income tax expense..... 0 0 9 9 0 0 9 Net income............. 5,846 0 (363) 5,483 (295) 0 5,188 Total assets........... 4,444 0 9,743 14,187 86 0 14,273 Expenditures for goodwill additions in connection with the Purchased Companies............ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
13. LEGAL PROCEEDINGS 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 December 1998, the Company preliminarily 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 version 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 provides 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. See Note 14. The Company has received notice of a lawsuit which was filed against the Company and certain of its officers and directors, among other parties, on October 23, 1998 in the United States District Court for the Middle District of Florida. The lawsuit, styled George Ehlert, et al. vs. Michael A. Singer, et al., purports to bring an action on behalf of the plaintiffs and others similarly situated to recover damages for alleged violations of the federal securities laws and Florida laws arising out of the Company's issuance of allegedly materially false and misleading statements concerning its business operations, including the development and sale of its principal product, during the class period. An amended complaint was served on March 2, 1999. The 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 F-29 36 MEDICAL MANAGER HEALTH SYSTEMS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) costs and expenses. The Company believes that this lawsuit is without merit and intends to vigorously defend against it. The Company is from time to time involved in other routine litigation incidental to the conduct of its business. The Company believes that no such currently pending routine litigation to which it is party will have a material adverse effect on its financial condition or results of operations. 14. SUBSEQUENT EVENTS Subsequent to December 31, 1998, the Company executed and closed agreements to acquire the following resellers of The Medical Manager software: (i)Advanced Medical Office Systems, Inc. d/b/a I.E. Corporation, based in Stockton, California, on February 26, 1999; (ii) Specialized Computer Systems, Inc., based in DuBois, Pennsylvania, on February 26, 1999; (iii) Shared Business Services, Inc., based in Clearwater, Florida, on March 17, 1999; (iv) Uniserv, Inc., based in Baton Rouge, Louisiana, on March 19, 1999; (v) Meditech, Inc., based in Clarksville, Indiana, on March 31, 1999; (vi) Business Support Systems, Inc., based in Chesapeake, Virginia, on March 31, 1999; (vi) Quantum Healthcare Systems, Inc., based in Fresno, California, on June 9, 1999; (vii) Western Healthcare, based in San Luis Obispo, California, on June 11, 1999; (viii) Donald Friesen & Associates, based in Bakersfield, California, on June 12, 1999; and (ix) Diversified Management Services, Inc., based in Oklahoma City, Oklahoma, on June 30, 1999. The acquisitions were accounted for using the pooling of interests method of accounting. The aggregate consideration paid was 242,352 shares of Common Stock. These acquisitions, in aggregate, had revenues of $8.3 million and a net loss of $0.1 million for the year ended December 31, 1998. Also subsequent to December 31, 1998, the Company executed and closed agreements to acquire substantially all of the assets of the following companies or divisions: (i) Medical Systems Plus, based in LaFayette, Louisiana, on March 19, 1999; (ii) Premier Support Services, Inc., based in Dallas, Texas, on March 24, 1999; (iii) the PM2000 Business of CSC Healthcare, Inc., based in Birmingham, Alabama, on March 31, 1999; (iv) Raven Healthcare Management, Inc., based in Nashville, Tennessee, on June 4, 1999; (v) the Network Group Division of Blue Cross Blue Shield of Georgia, based in Columbus, Georgia, on June 30, 1999; (vi) the Wismer* Martin division of Physician Computer Network, Inc., based in Spokane, Washington, on July 2, 1999; and (vii) Hyperion Business Systems, based in Oakland, California, on July 20, 1999. The acquisitions were accounted for using the purchase method of accounting. The aggregate consideration paid was $15.9 million in cash, the issuance of $0.3 million of debt and 3,224 shares of Common Stock. These acquisitions, in aggregate, had revenues of approximately $14.1 million and net income of approximately $1.8 million for the year ended December 31, 1998. The settlement of the Company's Year 2000 class action lawsuit was approved by the District Court of New Jersey on March 15, 1999. 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 Version 7 and 8 except 29 users who "opted-out" of the class settlement. On July 23, 1999, the Company merged with Synetic, Inc. providing for a strategic business combination in a tax-free pooling of interests transaction. Each outstanding share of the Company's Common Stock was exchanged into 0.625 newly issued shares of Synetic, Inc.'s common stock. In connection with the merger, Synetic, Inc. changed its name to Medical Manager Corporation, and the Company changed its name to Medical Manager Health Systems, Inc. F-30 37 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA Medical Manager Corporation's historical fiscal year ends on June 30, while Medical Manager Health Systems's historical fiscal year ends on December 31. For purposes of combining Medical Manager Health Systems's historical financial data with Medical Manager Corporation's historical financial data in the pro forma condensed combined statements of operations in this document, the audited financial data of Medical Manager Corporation for the fiscal years ended June 30, 1996, 1997 and 1998 have been combined with Medical Manager Health Systems's unaudited financial data for the twelve months ended June 30, 1996, 1997 and 1998. Medical Manager Health Systems's unaudited data for the twelve months ended June 30, 1996, 1997 and 1998 was derived from Medical Manager Health Systems's books and records for the appropriate twelve month periods. Medical Manager Corporation's unaudited financial data for the nine months ended March 31, 1999 have been combined with Medical Manager Health Systems's unaudited financial data for the nine months ended March 31, 1999. We have included this unaudited pro forma condensed combined summary data only for the purpose of illustration, and it does not necessarily indicate what the operating results or financial position would have been if the merger between Medical Manager Corporation and Medical Manager Health Systems had been completed at the dates indicated. Moreover, this data does not necessarily indicate what the future operating results or financial position of the combined company will be. You should read this unaudited pro forma condensed combined summary financial data in conjunction with the "Summary Unaudited Pro Forma Combined Condensed Financial Information" included elsewhere in this document and with the historical financial statements of Medical Manager Corporation and Medical Manager Health Systems and the related notes thereto, that are incorporated by reference in this document. This unaudited pro forma combined condensed summary financial data does not reflect any adjustments to conform accounting practices as a result of the merger or any future merger related expenses, as discussed in Note 4. F-31 38 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1)(6) ADJUSTMENTS COMBINED ------------ ------------- ----------- --------- Net Sales.................... $45,128 $50,166 $ -- $95,294 ------- ------- ------- Costs and expenses: Cost of sales.............. 25,108 26,998 -- 52,106 Selling general and administrative(8)(9).... 14,930 17,013 -- 31,943 Interest and other income.................. (8,112) (134) -- (8,246) Interest and other expenses................ -- 233 -- 233 ------- ------- ---- ------- 31,926 44,110 -- 76,036 ------- ------- ---- ------- Income before provision for taxes...................... 13,202 6,056 -- 19,258 Provision for taxes.......... 4,617 30 -- 4,647 ------- ------- ---- ------- Net income(4)................ $ 8,585 $ 6,026 -- $14,611 ======= ======= ==== =======
F-32 39 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1) ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Net sales...................... $ 52,885 $70,746 $ -- $123,631 -------- ------- ---- -------- Costs and expenses: Cost of sales................ 29,035 35,768 -- 64,803 Selling general and administrative(8)(9)...... 20,841 25,652 -- 46,493 Acquired in-progress research and development costs and other..................... 37,413(2) -- -- 37,413 Interest and other income.... (12,894) (437) -- (13,331) Interest and other expenses.................. 3,116 862 -- 3,978 -------- ------- ---- -------- 77,511 61,845 -- 139,356 -------- ------- ---- -------- (Loss) income before provision for taxes.................... (24,626) 8,901 -- (15,725) Provision for taxes............ 2,834 2,174 -- 5,008 -------- ------- ---- -------- Net (loss) income(4)........... $(27,460) $ 6,727 $ -- $(20,733) ======== ======= ==== ======== (Loss) income per share -- basic:(5) Net (loss) income per share.... $ (1.60) $ 0.50 $ (0.81) ======== ======= ======== Weighted average shares outstanding.................. 17,133 13,494 25,567 ======== ======= ======== (Loss) income per share -- diluted:(5) Net (loss) income per share.... $ (1.60) $ 0.50 $ (0.81) ======== ======= ======== Weighted average shares outstanding.................. 17,133 13,520 25,567 ======== ======= ========
F-33 40 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1) ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Net sales...................... $ 64,945 $117,665 $ -- $182,610 -------- -------- ----- -------- Costs and expenses: Cost of sales................ 34,508 59,226 -- 93,734 Selling general and administrative(8)(9)...... 27,558 37,910 -- 65,468 Interest and other income.... (20,567) (754) -- (21,321) Interest and other expenses.................. 8,614 236 -- 8,850 -------- -------- ----- -------- 50,113 96,618 -- 146,731 -------- -------- ----- -------- Income before provision for taxes........................ 14,832 21,047 -- 35,879 Provision for taxes............ 5,788 8,029 -- 13,817 -------- -------- ----- -------- Net income(4).................. $ 9,044 $ 13,018 $ -- $ 22,062 ======== ======== ===== ======== Income per share -- basic:(5) Net income per share........... $ 0.51 $ 0.63 $ 0.72 ======== ======== ======== Weighted average shares outstanding.................. 17,671 20,765 30,649 ======== ======== ======== Income per share -- diluted:(5) Net income per share........... $ 0.46 $ 0.60 $ 0.66 ======== ======== ======== Weighted average shares outstanding.................. 19,834 21,573 33,317 ======== ======== ========
F-34 41 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1) ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Net sales......................... $68,730 $117,572 $ -- $186,302 ------- -------- ---- -------- Costs and expenses: Cost of sales................... 36,513 58,780 -- 95,293 Selling general and administrative(8)(9)......... 31,890(3) 37,886 -- 69,776 Litigation costs................ 2,500(10) 2,366(7) -- 4,866 Interest and other income....... (13,669) (1,701) -- (15,370) Interest and other expenses..... 6,726 70 -- 6,796 ------- -------- ---- -------- 63,960 97,401 -- 161,361 ------- -------- ---- -------- Income before provision for taxes........................... 4,770 20,171 -- 24,941 Provision for taxes............... 2,517 7,184 -- 9,701 ------- -------- ---- -------- Net income(4)..................... $ 2,253 $ 12,987 $ -- $ 15,240 ======= ======== ==== ======== Income per share -- basic:(5) Net income per share.............. $ 0.12 $ 0.58 $ 0.46 ======= ======== ======== Weighted average shares outstanding..................... 18,977 22,363 32,954 ======= ======== ======== Income per share -- diluted:(5) Net income per share.............. $ 0.11 $ 0.56 $ 0.43 ======= ======== ======== Weighted average shares outstanding..................... 21,093 23,194 35,589 ======= ======== ========
F-35 42 PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1) ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- ASSETS Current assets: Cash & cash equivalents............ $ 47,575 $ 43,173 $ -- $ 90,748 Accounts receivable, net........... 15,056 28,836 -- 43,892 Other current assets............... 39,234 10,773 -- 50,007 -------- -------- ---- --------- Total current assets................. 101,865 82,782 -- 184,647 -------- -------- ---- --------- Property, plant and equipment, net... 46,707 9,306 -- 56,013 Marketable securities................ 234,493 -- -- 234,493 Capitalized software development costs.............................. 31,330 -- -- 31,330 Goodwill and other intangibles, net................................ 112,509 31,665 -- 144,174 Other assets......................... 13,058 2,449 -- 15,507 -------- -------- ---- --------- Total assets......................... $539,962 $126,202 $ -- $ 666,164 ======== ======== ==== ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities.................. $ 22,073 $ 25,343 $ -- $ 47,416 Long-term debt, less current portion............................ 168,965 250 -- 169,215 Deferred taxes and other............. 28,960 -- -- 28,960 Stockholders' equity................. 319,964 100,609 -- 420,573 -------- -------- ---- --------- Total liabilities and stockholders' equity............................. $539,962 $126,202 $ -- $ 666,164 ======== ======== ==== =========
F-36 43 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
MEDICAL MEDICAL MANAGER MANAGER HEALTH PRO FORMA PRO FORMA CORPORATION SYSTEMS(1) ADJUSTMENTS COMBINED ----------- ------------- ----------- --------- Net sales............................ $ 46,710 $83,593 $ -- $130,303 -------- ------- ---- -------- Costs and expenses: Cost of sales...................... 24,986 42,492 -- 67,478 Selling general and administrative(8)(9)............ 20,735 27,235 -- 47,970 Interest and other income.......... (15,732) (385) -- (16,117) Interest and other expenses........ 6,496 207 -- 6,703 -------- ------- ---- -------- 36,485 69,549 -- 106,034 -------- ------- ---- -------- Income before provision for taxes.... 10,225 14,044 -- 24,269 Provision for taxes.................. 4,064 5,678 -- 9,742 -------- ------- ---- -------- Net income(4)........................ $ 6,161 $ 8,366 $ -- $ 14,527 ======== ======= ==== ======== Income per share -- basic:(5) Net income per share................. $ 0.35 $ 0.41 $ 0.48 ======== ======= ======== Weighted average shares outstanding........................ 17,652 20,464 30,442 ======== ======= ======== Income per share -- diluted:(5) Net income per share................. $ 0.32 $ 0.39 $ 0.44 ======== ======= ======== Weighted average shares outstanding........................ 19,558 21,202 32,809 ======== ======= ========
- ------------------------- (1) Historical amounts have been adjusted to reflect all acquisitions accounted for using the pooling of interests method of accounting for all periods. (2) Relates to write-off of acquired in-process research and development costs in conjunction with the purchase of Avicenna Systems Corporation and CareAgents, Inc. and certain software costs. (3) Includes a write-off of $2,381 of capitalized software costs which relate to the abandonment of our development efforts with respect to certain of our products and services. These services were abandoned as a result of encountering a high risk development issue associated with integrating those products and services with the acquired Cerner technology. (4) Amount does not reflect the pro forma effect of future expenses for the merger. In connection with the merger, Medical Manager Corporation and Medical Manager Health Systems expect to incur investment banking, legal, accounting and other related transaction costs and fees. Additionally, the companies expect to incur other merger-related costs associated with the integration of the separate companies. The merger-related expenses will be charged to expense in the period in which the merger is consummated or in subsequent periods when incurred. Since the merger has not yet been consummated F-37 44 and transition plans are currently being developed, the merger-related costs cannot be estimated at this time. The accounting policies of Medical Manager Corporation and Medical Manager Health Systems are currently being reviewed from a conformity perspective. The impact of conforming accounting policies (if any) is not presently estimable. If conforming adjustments are required, they will be recorded as part of the restatement of prior periods, as required by the pooling-of-interests accounting method. (5) Net earnings per common share amounts assume the conversion of each share of Medical Manager Health Systems Common Stock into .625 of a share of Medical Manager Corporation Common Stock, based on the exchange ratio. (6) On January 30, 1997 the common stock of Medical Manager Health Systems began trading on the Nasdaq National Market System. Prior to this date, there was no established trading market for Medical Manager Health Systems Common Stock. As such, no per share data is presented for periods ending prior to January 30, 1997. (7) Includes $2,366 ($1,400 after tax) in charges relating to the settlement of a class action lawsuit alleging that versions of The Medical Manager software prior to version 9.0 will not properly recognize and process information relating to dates in and after the year 2000. (8) Includes $5,761, $7,670, $8,976, $12,358 and $6,584 of research and development expenses for the years ended June 30, 1996, 1997 and 1998 and for the nine months ended March 31, 1999 and 1998, respectively. (9) Includes $5,234, $4,345, $4,739, $10,054 and $5,027 for depreciation and amortization expenses for the years ended June 30, 1996, 1997 and 1998 and for the nine months ended March 31, 1999 and 1998, respectively. (10) Relates to $2,500 ($1,628 after tax) in charges incurred with the Merck litigation. F-38 EX-23.1 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Post-Effective Amendment on Form S-8 (No. 333-81123) and Form S-8 (No. 33-34925, 33-34926, 33-38446, 33-46639, 33-46640, 333-19043, 333-21555 and 333-36041) of Medical Manager Corporation (formerly Synetic, Inc.) of our report dated February 5, 1999, except for the second paragraph of Note 13, the third paragraph of Note 14, the first and second paragraphs of Note 14 and the fourth paragraph of Note 14, as to which the dates are March 2, 1999, March 15, 1999, July 20, 1999 and July 23, 1999, respectively, relating to the financial statements of Medical Manager Health Systems, Inc. (formerly Medical Manager Corporation), which appears in the Current Report on Form 8-K of Medical Manager Corporation (formerly Synetic, Inc.). August 9, 1999 /s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP -----END PRIVACY-ENHANCED MESSAGE-----