<PAGE> 1
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-13101
PROSPECTUS
JANUARY 30, 1997
6,000,000 SHARES
MEDICAL MANAGER CORPORATION LOGO
COMMON STOCK
All of the 6,000,000 shares of Common Stock offered hereby are being sold
by Medical Manager Corporation. Prior to this offering, there has been no public
market for the Common Stock. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
The Common Stock has been authorized for quotation on the Nasdaq National
Market under the symbol "MMGR," subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $11.00 $0.77 $10.23
Total(3).......................... $66,000,000 $4,620,000 $61,380,000
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $2,320,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days hereof, to purchase up to an aggregate of 900,000 additional shares of
Common Stock at the Price to the Public less Underwriting Discounts and
Commissions, for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$75,900,000, $5,313,000 and $70,587,000, respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions, including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about February 4, 1997.
DONALDSON, LUFKIN & JENRETTE DEAN WITTER REYNOLDS INC.
SECURITIES CORPORATION
<PAGE> 2
PASTE-UP
[Chart listing features of The Medical Manager core application and other
modules]
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS AND WITH QUARTERLY REPORTS CONTAINING UNAUDITED SUMMARY FINANCIAL
INFORMATION FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
---------------------
THE COMPANY OWNS OR OTHERWISE HAS RIGHTS TO TRADEMARKS AND TRADE NAMES THAT
IT USES IN CONJUNCTION WITH THE SALE AND LICENSING OF ITS PRODUCTS. THE MEDICAL
MANAGER(R) TRADEMARK MENTIONED IN THIS PROSPECTUS IS OWNED BY THE COMPANY. OTHER
TRADEMARKS OR TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE OWNERS.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the historical and pro
forma financial statements, including the notes thereto, appearing elsewhere in
this Prospectus. Simultaneously with the closing of this Offering, Medical
Manager Corporation ("MMC") will acquire, in separate transactions (the
"Mergers") in exchange for cash and shares of its Common Stock, five businesses
(each, a "Founding Company" and, collectively, the "Founding Companies")
involved in one or more aspects of the development, sale and support of The
Medical Manager practice management system. Unless otherwise indicated, all
references to the "Company" herein include MMC and the Founding Companies, and
references herein to "MMC" mean Medical Manager Corporation prior to the
consummation of the Mergers. Unless otherwise indicated, all share, per share
and financial data set forth herein (i) have been adjusted to give effect to all
of the Mergers; and (ii) assume no exercise of the Underwriters' over-allotment
option.
THE COMPANY
The Company is a leading provider of comprehensive physician practice
management systems to independent physicians, physician groups, management
service organizations ("MSOs"), independent practice associations ("IPAs"),
managed care organizations and other providers of health care services in the
United States. The Company develops, markets and supports The Medical Manager
practice management system, which addresses the financial, administrative,
clinical and practice management needs of physicians. The Company's system has
been implemented in a wide variety of practice settings from small physician
groups to multi-provider IPAs and MSOs and enables physicians and their
administrative staffs to efficiently manage their practices while delivering
quality patient care in a constantly changing health care environment. Since the
development of The Medical Manager in 1982, the Company's installed base has
grown to over 22,500 client sites, representing more than 80 practice
specialities, making it the most widely installed physician practice management
system in the United States.
Based on industry sources, there are over 650,000 physicians in more than
140,000 medical practices in the United States. Increasing economic and
regulatory pressures and the growth of managed care organizations have
significantly expanded the demand for all physicians to produce, maintain and
utilize better practice information while controlling costs. As a result, the
Company believes approximately 70% of physician practices now use some type of
computer system for all or a portion of their information processing
requirements.
The Company's strategy is to integrate its research and development, sales,
marketing and support resources and to build upon its leadership position as the
most widely utilized physician practice management system. Key elements of this
strategy include: (i) capitalizing on the Company's national market presence and
the synergies to be created by the Mergers; (ii) consolidating and rationalizing
the existing national network of independent dealers for The Medical Manager
system; (iii) increasing penetration of MSOs and other large physician groups;
(iv) cross-selling existing and new products and services to its installed
client base; and (v) expanding the Company's offering of health care information
products and services.
The Company has entered into agreements to acquire, simultaneously with the
consummation of this Offering, the five Founding Companies. These five entities
include: (i) Personalized Programming, Inc. ("PPI"), the developer of The
Medical Manager practice management system; (ii) Systems Plus, Inc. ("SPI"), the
"master" distributor for The Medical Manager, which coordinates the sales,
support and training activities of approximately 180 independent dealers and
implements national marketing strategies; (iii) National Medical Systems, Inc.
("NMS"), a national dealer for The Medical Manager; (iv) RTI Business Systems,
Inc. ("RTI"), a regional dealer serving the Northeastern region of the United
States; and (v) Systems Management, Inc. ("SMI"), a regional dealer serving the
Midwestern region of the United States. The vertical integration of these five
entities will bring together the research and development, sales, marketing and
support resources for The Medical Manager in one entity covering the entire
United States.
3
<PAGE> 4
Although the five Founding Companies have not previously operated as a
single entity, they have successfully worked together for many years. PPI has
been expanding and improving The Medical Manager system since developing it in
1982; SPI has been the master distributor of The Medical Manager since 1982; and
NMS, RTI and SMI have been selling and supporting The Medical Manager as
independent dealers since 1994, 1988 and 1987, respectively.
The Company expects to realize significant benefits as a result of the
Mergers. The Company anticipates achieving economies of scale and scope with
respect to customer service, research and development, sales and marketing,
administrative functions and purchasing. The Mergers also will allow the Company
both to establish a national accounts group capable of assisting regional
dealers in marketing to, and addressing the support needs of, large health care
provider organizations and to establish resource centers, supported by
centralized corporate and regional operations, including help desks, EDI
departments and advanced technical and programming personnel. This structure is
expected to result in greater overall consistency and a higher level of client
support and service.
THE OFFERING
Common Stock offered by the
Company............................. 6,000,000 shares
Common Stock to be outstanding after
this Offering....................... 17,705,470 shares(1)
Use of Proceeds..................... To pay the cash portion of the purchase
price for the Founding Companies and
for working capital and other general
corporate purposes, including future
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol....... MMGR
- ---------------
(1) Includes 11,705,470 shares of Common Stock to be issued in connection with
the Mergers, but excludes 1,530,000 shares of Common Stock subject to
options to be granted in connection with this Offering at an exercise price
equal to the initial public offering price. See "The Company -- Summary of
the Terms of the Mergers," "Management -- 1996 Long-Term Incentive Plan"
and "-- 1996 Non-Employee Directors' Stock Plan."
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
4
<PAGE> 5
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
MMC will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, PPI has been identified as the accounting acquiror. The
following summary unaudited pro forma combined financial data present certain
data for the Company, as adjusted for (i) the effects of the Mergers on an
historical basis; (ii) the effects of certain pro forma adjustments to the
historical financial statements; and (iii) the consummation of this Offering.
See "Selected Financial Data" and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue.................................................. $36,312 $25,844 $29,699
Cost of revenue.......................................... 14,928 10,590 12,567
------- ------- -------
Gross profit............................................. 21,384 15,254 17,132
Selling, general and administrative expenses(2).......... 9,005 6,221 7,114
Research and development expenses........................ 2,123 1,558 2,395
Depreciation and amortization............................ 812 585 871
------- ------- -------
Income from operations................................... 9,444 6,890 6,752
Other income (expense) net............................... (24) 0 0
------- ------- -------
Income before income taxes............................... 9,420 6,890 6,752
Income taxes............................................. 3,627 2,653 2,600
------- ------- -------
Net income............................................... $ 5,793 $ 4,237 $ 4,152
======= ======= =======
Net income per share..................................... $ 0.33 $ 0.24 $ 0.23
======= ======= =======
Pro forma weighted average shares outstanding............ 17,705 17,705 17,705
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------
PRO FORMA(1) AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,354 $16,470
Working capital........................................... 3,127 15,243
Total assets.............................................. 17,836 29,952
Total debt................................................ -- --
Stockholders' equity...................................... 11,135 23,251
</TABLE>
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(1) The pro forma combined statements of operations and the pro forma balance
sheet assume that the Mergers were closed on January 1 of each period
presented and as of September 30, 1996, respectively. These results are not
necessarily indicative of the results the Company would have obtained or of
the Company's future results. The pro forma combined financial information
contained in these statements (i) is based on preliminary estimates,
available information and certain assumptions that management deems
appropriate; and (ii) should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this
Prospectus.
(2) The pro forma combined statements of operations include the effect of
certain reductions in salary and benefits to the owners and employees of
two of the Founding Companies to which they have agreed prospectively, as
follows: for fiscal 1995, $682,000; and for the nine months ended September
30, 1995, $292,000 and September 30, 1996, $743,000. Additionally, the pro
forma combined statements include the effect of certain assets distributed
to and certain expenses assumed by the owners of certain of the Founding
Companies.
(3) Gives effect to the receipt and application of an estimated $59.1 million of
the net proceeds of this Offering. See "Use of Proceeds."
5
<PAGE> 6
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents summary data for each of the individual
Founding Companies for the three most recent years as well as the most recent
interim period and comparative period of the prior year, as applicable. See the
financial statements of each of the Founding Companies, the related notes
thereto and the other information relating to the Founding Companies contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PPI:
Revenue................................. $ 6,890 $ 9,617 $11,020 $ 8,347 $ 8,487
Gross profit............................ 6,080 8,250 9,438 7,069 7,231
Selling, general and administrative
expenses............................. 982 1,184 1,350 908 1,041
Research and development expenses....... 1,040 1,502 2,024 1,484 1,935
SPI:
Revenue................................. $10,836 $13,501 $15,179 $10,954 $12,203
Gross profit............................ 3,723 5,182 6,078 4,258 4,776
Selling, general and administrative
expenses............................. 2,472 3,023 3,345 2,357 2,921
RTI:
Revenue................................. $ 3,047 $ 4,327 $ 4,954 $ 3,353 $ 4,379
Gross profit............................ 505 1,751 2,253 1,260 1,606
Selling, general and administrative
expenses............................. 925 1,711 2,269 1,313 1,741
NMS(1):
Revenue................................. -- $ 241 $ 2,131 $ 1,591 $ 4,100
Gross profit (loss)..................... -- (62) 406 334 1,157
Selling, general and administrative
expenses............................. -- 201 396 250 1,069
Research and development expenses....... -- -- -- -- 410
SMI:
Revenue................................. $ 1,744 $ 2,129 $ 2,717 $ 1,738 $ 2,947
Gross profit............................ 414 473 486 277 711
Selling, general and administrative
expenses............................. 314 371 426 323 377
</TABLE>
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(1) Information relating to 1994 is for the four months ended December 31, 1994.
6
<PAGE> 7
THE COMPANY
MMC was founded in July 1996 to bring together the research and
development, sales, marketing and support resources for The Medical Manager, a
leading physician practice management system for independent physicians,
physician groups, MSOs, IPAs, managed care organizations and other providers of
health care services in the United States. Simultaneously with the closing of
this Offering, MMC will acquire in the Mergers the five Founding Companies,
which will become separate, wholly-owned subsidiaries of MMC.
FOUNDING COMPANIES
PERSONALIZED PROGRAMMING, INC.
PPI was founded in 1981 and is the developer of The Medical Manager
practice management system. Its progressive and innovative approach to computer
programming has made it a leader in the health care information industry. PPI's
research and development staff works closely with its installed client base and
academic institutions to ensure that the product reflects the latest
technologies, changes in health care industry practices and modifications to
state and federal governmental regulations. PPI pioneered electronic claims
submission software as well as electronic data interfaces that allow a direct
interchange of data with hospitals, laboratories, pharmacies and other health
care providers. PPI representatives serve on the President's Workgroup for
Electronic Data Interchange and the American National Standards Institute ("ANSI
X12") committee. Its research and development facility is located in Alachua,
Florida. Michael A. Singer, the founder of PPI, has been employed by PPI since
its inception and will sign a five-year employment agreement with the Company
under which he will become Chairman of the Board and Chief Executive Officer of
the Company following the consummation of this Offering and continue in his
present position with PPI.
SYSTEMS PLUS, INC.
SPI was founded in 1980 and is principally responsible for sales and
marketing of The Medical Manager. SPI coordinates the sales, support and
training activities of approximately 180 independent dealers. It markets
products, conducts user and dealer training programs, provides technical support
and performs quality assurance testing of The Medical Manager software prior to
general release. SPI also conducts market research, develops arrangements with
providers of complementary products and services, and directs national
advertising, press and media relations. SPI represents The Medical Manager at
major regional and national trade shows and hosts user events such as Basic and
Advanced Training Seminars and its annual MSO Users Conference. SPI is based in
Mountain View, California. Richard W. Mehrlich, the President of SPI, has been
employed by SPI since its inception and will sign a five-year employment
agreement with the Company under which he will become Executive Vice President
of Sales and Marketing of the Company following the consummation of this
Offering and continue in his present position with SPI.
NATIONAL MEDICAL SYSTEMS, INC.
NMS was founded in 1994 and is a national dealer for The Medical Manager
system. Based in Tampa, Florida, NMS maintains six offices located in various
regions of the United States that market, install and support The Medical
Manager and related hardware and software. NMS has entered into a Management
Services Agreement and Option Agreement (the "Agreements"), effective as of
September 1, 1996, with the Medical Manager Division (the "Division") of Medix,
Inc. ("Medix"), a wholly-owned subsidiary of Blue Cross and Blue Shield of New
Jersey, Inc. The Agreements provided for NMS to acquire the Division for $3.2
million and to manage the Division, which is an independent dealer of a private
label physician practice management system licensed from PPI, until December 31,
1996 or the date of its purchase by NMS, if earlier. The closing occurred on
December 31, 1996, at which time NMS issued to Medix a note for approximately
$2.1 million, representing the balance of the purchase price after giving effect
to a deposit made by NMS and management fees owed to NMS by Medix. NMS was given
a credit of approximately $80,000 on such $2.1 million note, representing the
cash in Medix's bank accounts relating to the Division at the time
7
<PAGE> 8
of such closing. In addition, all cash collections of Medix's accounts
receivable relating to the Division subsequent to December 31, 1996 will be
deposited in a Medix bank account and applied against the amount owed by NMS on
such note. John H. Kang, the President of NMS, has been employed by NMS for two
years and will sign a five-year employment agreement with the Company under
which he will become President of the Company following the consummation of this
Offering and continue in his present position with NMS.
RTI BUSINESS SYSTEMS, INC.
RTI was founded in 1988 and is a regional dealer for The Medical Manager
system in the Northeastern region of the United States. It is based in Albany,
New York. Henry W. Holbrook, President and Director of Sales and Marketing of
RTI, has been with RTI since its inception and will sign a five-year employment
agreement with the Company under which he will both become Vice
President -- Northeast Region of the Company following the consummation of this
Offering and continue in his present position with RTI.
SYSTEMS MANAGEMENT, INC.
SMI was founded in 1987 and is a regional dealer for The Medical Manager
system in the Midwestern region of the United States. Its headquarters are in
South Bend, Indiana. Thomas P. Liddell, a founder of SMI, has been employed by
SMI since its inception and will sign a five-year employment agreement with the
Company under which he will both become Vice President -- Midwest Region of the
Company following the consummation of this Offering and continue in his present
position with SMI.
SUMMARY OF THE TERMS OF THE MERGERS
Discussions regarding the Mergers and this Offering were begun in early
1996 by NMS with PPI and SPI. Terms for PPI and SPI were determined by
arm's-length negotiations between representatives of NMS and each of PPI and
SPI, with valuations based primarily on pro forma earnings as compared to
comparable companies. Consideration also was given to other assets, such as
intellectual property owned by PPI and SPI and dealer contracts. NMS's terms
were negotiated with PPI and SPI based on the number of NMS client sites, its
national client base, its commitment for capital funding described below, its
planned acquisitions and its role as promoter for the proposed transactions.
In order to obtain a revenue base that would be expected of a publicly-held
company, other dealers were considered for the proposed transactions.
Representatives of NMS negotiated with other major dealers in the spring and
summer of 1996. As of July 31, 1996, RTI and SMI had agreed to participate as
Founding Companies. Terms for RTI and SMI were negotiated between
representatives of each of them and NMS with valuations based on revenues,
number of client sites and pro forma EBITDA.
The cash amounts payable to stockholders of the Founding Companies
generally were structured to approximate 30% of the aggregate consideration
payable. Stockholders of NMS will be receiving all of their consideration in
shares of Common Stock of the Company as the valuation of NMS was based in part
on the contribution of cash through the commitment for capital funding described
below.
Upon consummation of the Mergers, each of the Founding Companies will
become a wholly-owned subsidiary of the Company.
The closing of each Merger is subject to a minimum price requirement for
the Common Stock sold in this Offering and to certain other conditions. These
conditions include, among others, the accuracy on the closing date of the
representations and warranties made by the Founding Companies, their principal
stockholders and the Company; the performance of each of their respective
covenants included in the merger agreements; and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
the Company.
In addition, the stockholders of NMS are obligated, on or prior to the
consummation of this Offering, (i) to cause a capital contribution of $23.7
million to be made to NMS (the "Capital Contribution"); (ii) to pay down all
indebtedness (approximately $2.4 million) of NMS (other than trade payables);
and (iii) to pay to NMS $3.2 million, representing the aggregate purchase price
for the Division of Medix acquired by NMS, for an estimated total capital
contribution as of September 30, 1996 of $29.3 million. The Company estimates
that, as of the closing of this Offering, such indebtedness of NMS will be
approximately $2.5 million and the
8
<PAGE> 9
remaining net purchase price to be paid for the Division of Medix acquired by
NMS will be approximately $1.5 million, for an estimated total capital
contribution as of such closing of $27.7 million (the "Total Capital
Contribution"). In the event that all or part of the Total Capital Contribution
is not made, the aggregate number of shares of Common Stock of the Company
(3,890,175) to be received by the stockholders of NMS pursuant to the merger
agreement among them, NMS, the Company and its acquisition subsidiary (the "NMS
Merger Agreement") will be reduced by a number of shares equal to the shortfall
divided by the initial offering price of the Company's Common Stock to the
public. The Capital Contribution is based upon the initial public offering price
of $11.00. In addition, for purposes of determining if the Capital Contribution
has been met, the stockholders of NMS may include in the computation of the
Capital Contribution a credit of up to 12% for any fees, discounts and placement
expenses actually incurred on any sale of equity to meet such requirement. No
assurance can be given that the conditions to the closing of all the Mergers
will be satisfied or waived or that each Merger will close. See "Business,"
"Certain Transactions" and the Unaudited Pro Forma Combined Financial Statements
and the notes thereto.
The stockholders of NMS intend to meet a portion of the Total Capital
Contribution by causing NMS to sell shares of its common stock to Electronic
Data Systems Corporation, a Delaware corporation ("EDS"). Pursuant to a Stock
Purchase Agreement among NMS, EDS and the Company (the "Stock Purchase
Agreement"), EDS has agreed to purchase a number of shares of common stock of
NMS that, upon consummation of the Merger of NMS into a subsidiary of the
Company, will result in the acquisition by EDS of shares of Common Stock of the
Company for an aggregate price of $12,500,000 and a price per share equal to 93%
of the initial public offering price of $11.00. EDS will be entitled to the same
registration rights with respect to the shares of Common Stock of the Company to
be received in the Merger of NMS into a subsidiary of the Company as are
afforded to the other stockholders of NMS under the merger agreement entered
into among them, NMS, MMC and its acquisition subsidiary. EDS also will be
entitled to designate an observer to attend all meetings of the Board of
Directors of the Company and to get advance notice of all meetings for so long
as EDS owns at least 25% of the number of shares of Common Stock of the Company
to be owned by it after giving effect to (i) the transactions contemplated by
the Stock Purchase Agreement and (ii) such merger.
The stockholders of NMS intend to satisfy the balance of their obligation
to cause the Total Capital Contribution to be made to NMS through the
cancellation of shares of Common Stock of the Company to be received by them
pursuant to such merger agreement at a deemed value per share of $11.00.
The Company also has agreed in the Stock Purchase Agreement to afford EDS
preferential treatment in the creation of an electronic data interchange ("EDI")
relationship that leverages the physician base of the Company and EDS's
government sector and Blue Cross/Blue Shield relationships. Both parties have
agreed that the foregoing relationship will not be to the financial or
competitive detriment of the Company. The Company also has agreed that, prior to
the first anniversary of the Merger of NMS into a subsidiary of the Company, it
will not enter into any exclusive relationship for EDI services involving the
government sector and Blue Cross/Blue Shield unless EDS has publicly announced
that it will no longer provide EDI services or, in the good faith judgment of
the Company, EDS has materially and repeatedly failed to provide satisfactory
services to the Company. The Company and EDS have also agreed to cooperate in
good faith to establish a business relationship for the provision of EDI and
other services within 90 days of the date of such Merger.
The obligation of EDS to purchase shares of common stock of NMS pursuant to
the Stock Purchase Agreement is conditioned on various things. These include,
among other things: (i) there being no material adverse change in the condition,
business, operations, assets or prospects of the Company or NMS between the date
of execution of the Stock Purchase Agreement and the closing of the purchase by
EDS of the shares of common stock of NMS pursuant thereto; (ii) there being no
material adverse change to the Registration Statement since Amendment No. 2
thereof; (iii) the Company and the Founding Companies being prepared to effect
contemporaneously the closings of the Mergers and this Offering; and (iv) the
truth and correctness, as of the closing of the purchase by EDS of such shares,
of the representations and warranties of the Company and NMS.
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<PAGE> 10
The proposed transaction with EDS arose out of meetings between
representatives of NMS, PPI and EDS during the period from September through
December 1996. The principal purpose of the meetings was to explore the
possibility of creating an EDI relationship for electronic transactions.
During the course of these meetings, EDS indicated its interest in forming
an EDI relationship with MMC. As part of this relationship, EDS agreed to
finance a portion of the capital contribution required to be obtained by the
stockholders of NMS pursuant to the NMS Merger Agreement. A letter of intent
setting forth the relationship between EDS and MMC and EDS' intention to invest
in shares of common stock of NMS that thereafter will convert into shares of
Common Stock of the Company upon the closing of this Offering was discussed
principally during November 1996, but never fully executed. Discussions
continued in December 1996, and eventually led to the execution by EDS, NMS and
the Company of the Stock Purchase Agreement described above.
For further information regarding the proposed transaction with EDS, see
the Unaudited Pro Forma Combined Financial Statements of the Company and related
notes thereto included elsewhere in this Prospectus.
The following table sets forth the aggregate cash and shares of Common
Stock to be paid by MMC to the stockholders of each of the Founding Companies
and their respective percentage ownership of the Common Stock to be outstanding
immediately following the Mergers and this Offering, based on the initial public
offering price of $11.00 and assuming: (i) EDS invests $12,500,000 in NMS as
described above; and (ii) the commitment of the stockholders of NMS to cause the
balance of the Total Capital Contribution to be made is satisfied through the
cancellation of shares of Common Stock of the Company at a deemed value per
share equal to $11.00. Such table also gives effect to an agreement by the
stockholders of the Founding Companies to take a 22.1% pro rata reduction in the
cash payable to them under their merger agreements with the Company.
<TABLE>
<CAPTION>
COMMON SHARES OF PERCENTAGE
CASH STOCK TOTAL COMMON STOCK OWNERSHIP
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PPI....................................... $35,062 $ 70,070 $105,132 6,370 36.0%
SPI....................................... 9,350 24,310 33,660 2,210 12.5%
RTI....................................... 1,753 3,850 5,603 350 2.0%
NMS....................................... 0 28,556 28,556 2,596 14.6%
SMI....................................... 779 1,980 2,759 180 1.0%
------- -------- -------- ------ ----
Total........................... $46,944 $128,766 $175,710 11,706 66.1%
======= ======== ======== ====== ====
</TABLE>
The discussion of the Mergers and this Offering in the remainder of this
Prospectus assumes that the Total Capital Contribution is satisfied through the
EDS investment and the cancellation of shares described above at a deemed value
per share of $11.00.
For additional information regarding the Mergers, including payments to be
made to principals of the Founding Companies who will become officers,
directors, key employees or holders of more than 5% of the Company's Common
Stock, see "Certain Transactions." For further information concerning the
employment agreements to be entered into by certain officers of the Founding
Companies, see "Management -- Executive Compensation."
Medical Manager Corporation is a Delaware corporation. Its executive
offices are located at 3001 North Rocky Point Drive, Suite 100, Tampa, Florida,
and its telephone number at that address is (813) 287-2990.
10
<PAGE> 11
RISK FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY
MMC was founded in July 1996 but has conducted no operations and generated
no revenue to date. MMC has entered into agreements to acquire the Founding
Companies simultaneously with the closing of this Offering. The Founding
Companies have been operating as separate independent entities, and there can be
no assurance that the Company will be able to successfully integrate the
operations of these businesses or institute the necessary Company-wide systems
and procedures to successfully manage the combined enterprise on a profitable
basis. The Company's management group has been assembled only recently, and
there can be no assurance that the management group will be able to successfully
manage the combined entity or effectively implement the Company's internal
growth strategy and acquisition program or that such strategy will be
successful. The pro forma financial results of the Company cover periods when
the Founding Companies and MMC were not under common control or management and,
therefore, may not be indicative of the Company's future financial or operating
results. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's results of
operations, financial condition or business and would negatively impact the
Company's ability to acquire dealers or otherwise execute its acquisition
strategy. See "Business -- Business Strategy" and "Management."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
As part of its growth strategy, the Company intends to acquire additional
independent dealers of The Medical Manager physician practice management system
and complementary technologies. Increased competition for acquisition candidates
among the independent dealers may develop, in which event there may be fewer
acquisition opportunities available to the Company as well as higher acquisition
prices. There can be no assurance that the Company will be able to identify,
acquire or profitably integrate and manage additional dealers or complementary
technologies, if any, into the Company without substantial costs, delays or
other operational or financial problems. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Company's operating
results, diversion of management's attention, failure to retain key acquired
personnel, amortization of acquired intangible assets and risks associated with
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the Company's results of operations, financial condition or
business. Customer dissatisfaction or performance problems at a single acquired
company could have an adverse effect on the reputation of the Company and render
ineffective the Company's national sales and marketing initiative. In addition,
there can be no assurance that the Founding Companies or other dealers or
complementary technologies acquired in the future will achieve anticipated
revenue and earnings. There also can be no assurance that the existing dealer
network will be receptive to the Company's acquisition program or that dealers
who are not acquired by the Company will adhere to the Company's marketing,
training, support and pricing directives, thereby impairing the Company's plans
to rationalize its distribution network. See "Business -- Business Strategy."
POSSIBLE NEED FOR ACQUISITION FINANCING
The Company currently intends to finance future acquisitions by using
shares of its Common Stock for all or a substantial portion of the consideration
to be paid. In the event that its Common Stock does not maintain a sufficient
market value, or potential acquisition candidates are otherwise unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, in order to initiate and maintain its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings. The Company has negotiated a line of credit of approximately $30.0
million with Barnett Bank of Tampa and intends to have the line of credit
executed and effective upon the consummation of this Offering. There can be no
assurance that the Company will be able to obtain any or all the financing it
will need on terms it deems acceptable. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
11
<PAGE> 12
DEPENDENCE ON PRINCIPAL PRODUCTS
The Company currently derives a significant percentage of its revenue from
sales of The Medical Manager core system. As a result, any event adversely
affecting sales of its core product could have a material adverse effect on the
Company's results of operations, financial condition or business. Although the
Company, on a pro forma basis, has experienced increasing annual sales, revenue
associated with existing products could decline as a result of several factors,
including price competition and sales practices. There can be no assurance that
the Company will continue to be successful in marketing its current products or
any new or enhanced products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Research and
Development."
DEPENDENCE ON PROPRIETARY SOFTWARE
The Company's success is dependent to a significant extent on its ability
to protect the proprietary and confidential aspects of its software technology.
The Company's software technology is not patented and existing copyright laws
offer only limited practical protection. The Company relies on a combination of
trade secret, copyright and trademark laws, license agreements, nondisclosure
and other contractual provisions and technical measures to establish and protect
its proprietary rights in its products. There can be no assurance that the legal
protections afforded to the Company or the steps taken by the Company will be
adequate to prevent misappropriation of the Company's technology. In addition,
these protections do not prevent independent third-party development of
competitive products or services. The Company believes that its products,
trademarks and other proprietary rights do not infringe upon the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against the Company in the future or that
any such assertion will not require the Company to enter into a license
agreement or royalty arrangement with the party asserting the claim. As
competing health care information systems increase in complexity and overall
capabilities and the functionality of these systems further overlap, providers
of such systems may become increasingly subject to infringement claims.
Responding to and defending any such claims may distract the attention of the
Company's management and otherwise have a material adverse effect on the
Company's results of operations, financial condition or business. See
"Business -- Proprietary Rights and Licenses."
RISKS RELATED TO TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapid change and
technological advances requiring ongoing expenditures for research and
development and the timely introduction of new products and enhancements of
existing products. The Company's future success will depend in part upon its
ability to enhance its current products, to respond effectively to technological
changes, to sell additional products to its existing client base and to
introduce new products and technologies that address the increasingly
sophisticated needs of its clients. The Company will devote significant
resources to the development of enhancements to its existing products and the
migration of existing products to new software platforms. There can be no
assurance that the Company will successfully complete the development of new
products or the migration of products to new platforms or that the Company's
current or future products will satisfy the needs of the market for practice
management systems. Further, there can be no assurance that products or
technologies developed by others will not adversely affect the Company's
competitive position or render its products or technologies noncompetitive or
obsolete. See "Business -- Research and Development."
QUALITY ASSURANCE AND PRODUCT ACCEPTANCE CONCERNS
Health care providers demand the highest level of reliability and quality
from their information systems. Although the Company devotes substantial
resources to meeting these demands, its products may, from time to time, contain
errors. Such errors may result in loss of, or delay in, market acceptance of its
products. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
results of operations, financial condition or business. See "Business --
Research and Development" and " -- Competition."
12
<PAGE> 13
COMPETITION
The market for practice management systems such as The Medical Manager is
highly competitive. The Company's competitors vary in size and in the scope and
breadth of the products and services that they offer. The Company competes with
different companies in each of its target markets. Many of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. In addition, other entities not currently offering
products and services similar to those offered by the Company, including claims
processing organizations, hospitals, third-party administrators, insurers,
health care organizations and others, may enter certain markets in which the
Company competes. There can be no assurance that future competition will not
have a material adverse effect on the Company's results of operations, financial
condition or business. See "Business -- Competition."
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products provide applications that relate to
financial records, patient medical records and treatment plans. Any failure of
the Company's products to provide accurate, confidential and timely information
could result in product liability or breach of contract claims against the
Company by its clients, their patients or others. The Company's products manage
and report on financial data, and any errors in such financial data could result
in liability to the Company. In addition, because the Company's products
facilitate electronic claims submissions, any resulting loss of financial data
could result in liability to the Company. The Company intends, following this
Offering, to maintain insurance to protect against claims associated with the
use of its products, but there can be no assurance that such insurance coverage
will be available or, if available, will adequately cover any claim asserted
against the Company. A successful claim brought against the Company in excess of
its insurance coverage could have a material adverse effect on the Company's
results of operations, financial condition or business. Even unsuccessful claims
could result in the expenditure of funds in litigation, as well as diversion of
management time and resources. There can be no assurance that the Company will
not be subject to product liability or breach of contract claims, that such
claims will not result in liability in excess of its insurance coverage, that
the Company's insurance will cover such claims or that appropriate insurance
will continue to be available to the Company in the future at commercially
reasonable rates.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of the
executive officers and the senior management of the Founding Companies.
Furthermore, the Company will likely be dependent on the senior management of
any businesses acquired in the future. If any of these persons becomes unable or
unwilling to continue in his or her role with the Company, or if the Company is
unable to attract and retain other qualified employees, the Company's business
or prospects could be adversely affected. Although the Company will enter into
an employment agreement, which will include confidentiality and non-compete
provisions, with each of the Company's executive officers, there can be no
assurance that any individual will continue in his present capacity with the
Company for any particular period of time. The success of the Company is also
dependent to a significant degree on its ability to attract, motivate and retain
highly skilled sales, marketing and technical personnel, including software
programmers and systems architects skilled in the computer language with which
the Company's products operate. Competition for such personnel in the software
and information services industries is intense. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material adverse
effect on the Company's results of operations, financial condition or business.
Although the Company has been successful to date in attracting and retaining
skilled personnel, there can be no assurance that the Company will continue to
be successful in attracting and retaining the personnel it requires to
successfully develop new and enhanced products and to continue to grow and
operate profitably. See "Business -- Employees" and "Management."
UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT HEALTH CARE REFORM PROPOSALS
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The
13
<PAGE> 14
Company's products are designed to function within the structure of the health
care financing and reimbursement system currently being used in the United
States. During the past several years, the health care industry has been subject
to increasing levels of government regulation of, among other things,
reimbursement rates and certain capital expenditures. From time to time, certain
proposals to reform the health care system have been considered by Congress.
These proposals, if enacted, may increase government involvement in health care,
lower reimbursement rates and otherwise change the operating environment for the
Company's clients. Health care organizations may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments, including those for the Company's products and services. The
Company cannot predict with any certainty what impact, if any, such proposals or
health care reforms might have on its results of operations, financial condition
or business.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION
The U.S. Food and Drug Administration (the "FDA") has jurisdiction under
the 1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act
(the "FDC Act") to regulate computer products and software as medical devices if
they are intended for use in the diagnosis, cure, mitigation, treatment or
prevention of disease in humans. The FDA has issued a draft policy statement
under which manufacturers of medical image storage devices and related software
are required to submit to the FDA premarket notification applications and
otherwise comply with the requirements of the FDC Act applicable to medical
devices. Recently, the FDA initiated agency rulemaking to exempt certain medical
image management devices from premarket notification procedures. There can be no
assurance that such rulemaking will be adopted, and if so, that the rulemaking
will apply to the Company's products.
The Company marketed The Medical Manager with a medical image management
capability until recently, when it decided to cease offering this feature after
considering the draft policy statement and other regulatory factors. The Company
believes that The Medical Manager, when marketed without a medical image
management capability, would not be subject to FDA regulation requiring
registration, listing, premarket notification or approval and adherence with
device good manufacturing practices or medical device reporting requirements.
The FDA is currently reviewing its policy for the regulation of computer
software and there is a risk that The Medical Manager could in the future become
subject to some or all of the above requirements, which could have a material
adverse effect on the Company's results of operations, financial condition or
business.
In addition, prior to the decision to remove its medical image management
capability, a small number of The Medical Manager systems possessing a graphical
image capability were sold. Although the Company believes that enforcement
action by the FDA relating to the prior sales is unlikely due to the nature of
the product and the small number of sales, there can be no assurance that the
FDA will not take such action. Enforcement action can consist of warning
letters, refusal to approve or clear products, revocation of approvals or
clearances previously granted, civil penalties, product seizures, injunctions,
recalls, operating restrictions and criminal prosecutions. Any enforcement
action by the FDA could have a material adverse effect on the Company's results
of operations, financial condition or business. See "Business -- Government
Regulation."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Mergers and this Offering, the Company's
directors, executive officers and holders of more than 5% of the Common Stock
will beneficially own approximately 59.6% of the outstanding shares of Common
Stock (56.7% if the Underwriters' over-allotment option is exercised in full).
Although these persons do not presently have any agreements or understandings to
act in concert, any such agreement or understanding would allow them to continue
to exercise control over the Company's affairs, to elect the entire Board of
Directors and to control the disposition of any matter submitted to a vote of
stockholders. See "Principal Stockholders."
14
<PAGE> 15
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES
Approximately $46.9 million, representing approximately 79.4%, of the net
proceeds of this Offering (or approximately 68.7% of the net proceeds of this
Offering, if the Underwriters' over-allotment option is exercised in full) will
be paid as the cash portion of the purchase price for the Founding Companies.
The cash portion of the purchase price will be paid directly or indirectly to
stockholders of the Founding Companies who will become directors, officers or
holders of more than 5% of the Common Stock. Proceeds available for working
capital and other uses by the Company will be approximately $12.2 million,
representing 20.6% of the net proceeds of this Offering (or $21.4 million,
representing 31.3% of the net proceeds of this Offering, if the Underwriters'
over-allotment option is exercised in full). See "Use of Proceeds" and "Certain
Transactions."
BENEFITS OF THE OFFERING TO STOCKHOLDERS OF THE FOUNDING COMPANIES
As a result of this Offering and the public market for the Common Stock
that will be created thereby, there will be a significant increase in the value
of the investment of the stockholders of the Founding Companies in the Company.
Based on the combined pro forma stockholders' equity of the Founding Companies,
as adjusted to reflect the aggregate payment of $46.9 million in cash to the
stockholders of the Founding Companies in connection with the Mergers, the
stockholders of the Founding Companies will have paid an average price of
$(3.54) per share of Common Stock to be received by them in connection with the
Mergers. Accordingly, based on the initial public offering price of $11.00 per
share, the stockholders of the Founding Companies will realize an immediate gain
in the value of their investment of $14.54 per share of Common Stock. See "The
Company -- Summary of the Terms of the Mergers," "Dilution" and "Certain
Transactions."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the Common Stock in the
public market following this Offering. The 6,000,000 shares being sold in this
Offering will be freely tradable unless acquired by affiliates of the Company.
Simultaneously with the closing of this Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 11,705,470 shares of Common
Stock as a portion of the consideration for the sale of their businesses to the
Company. These shares have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and, therefore, may not be sold unless
registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. Furthermore, all of
the stockholders who will receive these shares other than EDS have agreed with
MMC not to sell, transfer or otherwise dispose of any of these shares for two
years following consummation of this Offering, subject to reduction in the event
the two-year "holding" period for restricted securities under Rule 144 is
reduced by the Securities and Exchange Commission (the "Commission"). However,
the stockholders who will receive these shares also have certain demand and
piggyback registration rights with respect to these shares. The Company plans to
register an additional 5,000,000 shares of its Common Stock under the Securities
Act within 90 days after completion of this Offering for use by the Company as
consideration for future acquisitions. Upon such registration, these shares will
generally be freely tradable after issuance, unless acquired by parties to the
acquisition or affiliates thereof, other than the issuer, in which case they may
be sold pursuant to Rule 145 under the Securities Act. In addition, resale of
these shares may be contractually restricted. The registration rights described
above will not apply to the registration statement to be filed with respect to
these 5,000,000 additional shares. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
and continue subsequent to this Offering or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price for the Common Stock will be determined by negotiation
among the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after this
Offering. See "Underwriting" for the factors to be considered in determining the
initial
15
<PAGE> 16
public offering price. The Common Stock has been authorized for quotation on the
Nasdaq National Market, subject to notice of issuance. After this Offering, the
market price of the Common Stock may be subject to significant fluctuations in
response to numerous factors, including variations in the annual or quarterly
financial results of the Company or its competitors, changes by financial
research analysts in their estimates of the earnings of the Company, conditions
in the economy in general or in the health care or technology sectors in
particular, announcements of technological innovations or new products or
services by the Company or its competitors, proprietary rights development,
unfavorable publicity or changes in applicable laws and regulations (or judicial
or administrative interpretations thereof) affecting the Company or the health
care or technology sectors. Moreover, from time to time, the stock market
experiences significant price and volume volatility that may affect the market
price of the Common Stock for reasons unrelated to the Company's performance.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their shares of $10.01 per share. In the event the Company issues additional
Common Stock in the future, including shares issued in connection with future
acquisitions, purchasers of Common Stock in this Offering may experience further
dilution. See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
in one or more series without stockholder action. The existence of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, the Company's Certificate of
Incorporation (the "Certificate of Incorporation") provides for a classified
Board of Directors, which may also have the effect of inhibiting or delaying a
change in control of the Company. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. The Company's By-laws contain other
provisions that may have an anti-takeover effect. See "Management -- Directors
and Executive Officers," "Principal Stockholders" and "Description of Capital
Stock."
16
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
estimated offering expenses, are estimated to be approximately $59.1 million
($68.3 million if the Underwriters' over-allotment option is exercised in full).
Of the net proceeds, $46.9 million will be used to pay the cash portion of
the purchase price for the Founding Companies, which will be paid directly or
indirectly to former stockholders of the Founding Companies who will become
officers, directors, key employees or holders of more than 5% of the Common
Stock of the Company.
The approximately $12.2 million of remaining net proceeds will be used for
working capital, to repay $100,000 of interest-free indebtedness owed to two
directors and officers of the Company and for general corporate purposes, which
are expected to include future acquisitions. See "Certain
Transactions -- Certain Indebtedness." The Company currently has no binding
agreements to effect any acquisitions. Pending such uses, the net proceeds will
be invested in short-term, interest-bearing, investment grade securities.
The Company has negotiated a line of credit of approximately $30.0 million
with Barnett Bank of Tampa to be used for working capital and other general
corporate purposes, including future acquisitions. The Company intends to have
the line of credit executed and effective upon the consummation of this
Offering. There can be no assurance that any line of credit will be obtained or
that, if obtained, it will be on terms that are favorable to the Company. See
"Risk Factors -- Risks Related to Acquisition Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's proposed line of
credit with Barnett Bank of Tampa includes restrictions on the ability of the
Company to pay dividends without the consent of the lender.
17
<PAGE> 18
CAPITALIZATION
The following table sets forth the long-term obligations and capitalization
at September 30, 1996 of (i) the Company on a pro forma basis to give effect to
the Mergers; and (ii) the Company on a pro forma as adjusted basis to give
effect to the Mergers, this Offering and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Selected Financial Data." This
table should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------
PRO FORMA AS ADJUSTED(2)
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, including current maturities...... $ -- $ --
Stockholders' equity:
Preferred Stock: $0.01 par value, 500,000 shares
authorized; none issued or outstanding.............. -- --
Common Stock: $0.01 par value, 50,000,000 shares
authorized; 11,705,470 shares issued and
outstanding, pro forma; and 17,705,470 shares issued
and outstanding, pro forma as adjusted(1)........... 117 177
Additional paid-in capital............................. 11,018 23,074
------- -------
Total stockholders' equity.......................... 11,135 23,251
------- -------
Total capitalization........................... $11,135 $23,251
======= =======
</TABLE>
- ---------------
(1) Excludes 1,530,000 shares of Common Stock subject to options to be granted
in connection with this Offering at an exercise price equal to the initial
public offering price. See "Management -- 1996 Long-Term Incentive Plan"
and "-- 1996 Non-Employee Directors' Stock Plan."
(2) Gives effect to the receipt and application of an estimated $59.1 million of
the net proceeds of this Offering. See "Use of Proceeds."
18
<PAGE> 19
DILUTION
The pro forma deficit in net tangible book value of the Company as of
September 30, 1996 was approximately $(41.4) million, or approximately $(3.54)
per share of Common Stock, after giving effect to the Mergers. The deficit in
pro forma net tangible book value per share represents the amount by which the
Company's pro forma total liabilities, as adjusted for the payment of $46.9
million in cash to the stockholders of the Founding Companies, exceeds the
Company's pro forma net tangible assets, divided by the number of shares of
Common Stock to be outstanding after giving effect to the Mergers. After giving
effect to the sale of the 6,000,000 shares of Common Stock offered hereby, and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the Company's pro forma net tangible book value
at September 30, 1996 would have been approximately $17.6 million, or
approximately $0.99 per share, based on the initial public offering price of
$11.00 per share. This represents an immediate increase in pro forma net
tangible book value of approximately $4.53 per share to existing stockholders
and an immediate dilution of approximately $10.01 per share to new investors
purchasing the shares in this Offering. The following table illustrates this pro
forma dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price(1)............................ $ 11.00
Pro forma (deficit) in net tangible book value before this
Offering............................................... $ (3.54)
Increase attributable to new investors.................... 4.53
----------
Pro forma net tangible book value after this Offering....... 0.99
----------
Dilution in net tangible book value to new investors........ $ 10.01
==========
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Mergers as of September 30, 1996, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by existing stockholders and the new investors purchasing shares of Common
Stock from the Company in this Offering (before deducting underwriting discounts
and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
-------------------- ---------------------- PER SHARE
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)......... 11,705,470 66.1% $(41,411,000) (168.4)% $ (3.54)
New investors.................... 6,000,000 33.9 66,000,000 268.4 11.00
---------- ------ ------------ ------
Total.................. 17,705,470 100.0% $ 24,589,000 100.0%
========== ====== ============ ======
</TABLE>
- ---------------
(1) Before deducting underwriting discounts and commissions and offering
expenses to be paid by the Company.
(2) Total consideration for existing stockholders represents the combined pro
forma stockholders' equity, including the stockholders of the Founding
Companies, before this Offering, adjusted to reflect the payment of $46.9
million in cash to the stockholders of the Founding Companies as part of
the consideration for the Mergers and excluding intangibles. See "Use of
Proceeds," "Capitalization" and "Certain Transactions."
19
<PAGE> 20
SELECTED FINANCIAL DATA
MMC will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, PPI has been identified as the accounting acquiror. The
following selected historical financial data of PPI at December 31, 1994 and
1995 and for the years ended December 31, 1993, 1994 and 1995 have been derived
from the audited financial statements of PPI included elsewhere in this
Prospectus. The following selected historical financial data for PPI at December
31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and 1992 have
been derived from unaudited financial statements of PPI, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of PPI, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The following
summary unaudited pro forma financial data present certain data for the Company,
as adjusted for (i) the effects of the Mergers on an historical basis; (ii) the
effects of certain pro forma adjustments to the historical financial statements;
and (iii) the consummation of this Offering. See the Unaudited Pro Forma
Financial Combined Statements and the notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PPI STATEMENT OF OPERATIONS DATA:
Revenue............................. $7,042 $8,377 $6,890 $9,617 $11,020 $8,347 $8,487
Cost of revenue..................... 1,009 1,187 810 1,367 1,582 1,278 1,256
------ ------ ------ ------ ------- ------ ------
Gross profit........................ 6,033 7,190 6,080 8,250 9,438 7,069 7,231
Selling, general and administrative
expenses......................... 657 745 982 1,184 1,350 908 1,041
Research and development expenses... 716 878 1,040 1,502 2,024 1,484 1,935
Depreciation and amortization....... 29 21 105 197 226 140 189
------ ------ ------ ------ ------- ------ ------
Income from operations.............. 4,631 5,546 3,953 5,367 5,838 4,537 4,066
Other income........................ 160 110 173 55 108 143 83
------ ------ ------ ------ ------- ------ ------
Income before income taxes.......... 4,791 5,656 4,126 5,422 5,946 4,680 4,149
Income taxes........................ 0 0 0 0 0 0 0
------ ------ ------ ------ ------- ------ ------
Net income.......................... $4,791 $5,656 $4,126 $5,422 $5,946 $4,680 $4,149
====== ====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
------------------------------------------ SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PPI BALANCE SHEET DATA:
Working capital......................... $1,455 $1,527 $778 $2,009 $1,921 $3,057
Total assets............................ 1,865 3,097 3,253 4,716 5,819 5,189
Total debt.............................. -- -- -- -- -- --
Stockholder's equity.................... 1,509 2,479 2,582 3,827 4,763 3,501
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue.................................................. $36,312 $25,844 $29,699
Cost of revenue.......................................... 14,928 10,590 12,567
------- ------- -------
Gross profit............................................. 21,384 15,254 17,132
Selling, general and administrative expenses(2).......... 9,005 6,221 7,114
Research and development expenses........................ 2,123 1,558 2,395
Depreciation and amortization............................ 812 585 871
------- ------- -------
Income from operations................................... 9,444 6,890 6,752
Other income (expense) net............................... (24) 0 0
------- ------- -------
Income before income taxes............................... 9,420 6,890 6,752
Income taxes............................................. 3,627 2,653 2,600
------- ------- -------
Net income............................................... $ 5,793 $ 4,237 $ 4,152
======= ======= =======
Net income per share..................................... $ 0.33 $ 0.24 $ 0.23
======= ======= =======
Pro forma weighted average shares outstanding............ 17,705 17,705 17,705
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------
PRO FORMA(1) AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,354 $16,470
Working capital........................................... 3,127 15,243
Total assets.............................................. 17,836 29,952
Total debt................................................ -- --
Stockholders' equity...................................... 11,135 23,251
</TABLE>
- ---------------
(1) The pro forma combined statements of operations and the pro forma balance
sheet assume that the Mergers were closed on January 1 of each period
presented and as of September 30, 1996, respectively. These results are not
necessarily indicative of the results the Company would have obtained or of
the Company's future results. The pro forma combined financial information
contained in these statements (i) is based on preliminary estimates,
available information and certain assumptions that management deems
appropriate; and (ii) should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this
Prospectus.
(2) The pro forma combined statements of operations include the effect of
certain reductions in salary and benefits to the owners and employees of
two of the Founding Companies to which they have agreed prospectively, as
follows: for fiscal 1995, $682,000; and for the nine months ended September
30, 1995, $292,000 and September 30, 1996, $743,000. Additionally, the pro
forma combined statements include the effect of certain assets distributed
to and certain expenses assumed by the owners of certain of the Founding
Companies.
(3) Gives effect to the receipt and application of an estimated $59.1 million of
the net proceeds of this Offering. See "Use of Proceeds."
21
<PAGE> 22
SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents selected financial data for each of the
individual Founding Companies for the three most recent years as well as the
most recent interim period and comparative period of the prior year, as
applicable. See the financial statements of each of the Founding Companies, the
related notes thereto and the other information relating to the Founding
Companies contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PPI:
Revenue......................................... $ 6,890 $ 9,617 $11,020 $ 8,347 $ 8,487
Gross profit.................................... 6,080 8,250 9,438 7,069 7,231
Selling, general and administrative expenses.... 982 1,184 1,350 908 1,041
Research and development expenses............... 1,040 1,502 2,024 1,484 1,935
SPI:
Revenue......................................... $10,836 $13,501 $15,179 $10,954 $12,203
Gross profit.................................... 3,723 5,182 6,078 4,258 4,776
Selling, general and administrative expenses.... 2,472 3,023 3,345 2,357 2,921
RTI:
Revenue......................................... $ 3,047 $ 4,327 $ 4,954 $ 3,353 $ 4,379
Gross profit.................................... 505 1,751 2,253 1,260 1,606
Selling, general and administrative expenses.... 925 1,711 2,269 1,313 1,741
NMS(1):
Revenue......................................... -- $ 241 $ 2,131 $ 1,591 $ 4,100
Gross profit (loss)............................. -- (62) 406 334 1,157
Selling, general and administrative expenses.... -- 201 396 250 1,069
Research and development expenses............... -- -- -- -- 410
SMI:
Revenue......................................... $ 1,744 $ 2,129 $ 2,717 $ 1,738 $ 2,947
Gross profit.................................... 414 473 486 277 711
Selling, general and administrative expenses.... 314 371 426 323 377
</TABLE>
- ---------------
(1) Information relating to 1994 is for the four months ended December 31, 1994.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of each of the Founding Companies and the related notes thereto and
"Selected Financial Data" appearing elsewhere in this Prospectus.
OVERVIEW
The Company is a leading provider of comprehensive physician management
systems to independent physicians, physician groups, MSOs, IPAs, managed care
organizations and other providers of health care services in the United States.
The Company's revenue is derived primarily from the licensing of various
software products, including its core product, The Medical Manager, the
provision of services and the sale of hardware. The Company's primary focus is
on the sale of value-added products and services, while hardware is sold
primarily in response to customer demand. Since the development of The Medical
Manager in 1982, the Company's installed base has grown to over 22,500 client
sites, representing more than 80 practice specialities, making it the most
widely installed physician practice management software in the United States.
The Company derives revenue from systems sales, software licensing and
maintenance and other services. Systems sales include sales of physician
practice management systems to new customers and sales of system upgrades and
add-ons to existing customers. Systems sales to new customers include software
licensing, hardware, installation, training, 90 days of software maintenance and
varying periods of hardware maintenance, depending on the warranty of the
manufacturer. System upgrades include software licensing, hardware, installation
and training. System add-ons include additional software licensing, peripheral
hardware and installation. Cost of system sales reflects primarily the cost of
The Medical Manager software, associated hardware, operating systems and
salaries, related benefits, travel and allocations of other overhead costs.
Software license revenue principally represents the licensing of software
to independent dealers for resale. Cost of software license revenue principally
includes the costs of media, duplication, technical documentation and delivery
and allocations of other overhead costs.
Maintenance and other services revenue includes software and hardware
maintenance contracts, training, programming and sales of additional peripheral
hardware. Software maintenance represents revenue derived from maintenance
agreements, providing customers with updates and enhancements developed by the
Company and access to the Company's toll-free telephone support centers.
Hardware maintenance represents revenue derived from maintenance agreements for
repairs and preventative maintenance to the hardware. Both hardware and software
maintenance are optional to the customer for smaller installations and required
for MSO and larger installations. Cost of maintenance contracts revenue reflects
primarily salaries and related benefits, travel and allocations of other
overhead costs.
The Company recognizes systems revenue in accordance with the provisions of
AICPA Statement of Position No. 91-1 "Software Revenue Recognition." 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 sales for systems, software
license and maintenance and other based upon management's estimates.
Selling, general and administrative expenses consist primarily of marketing
and advertising, salaries and related benefits, professional fees,
administrative costs and allocations of other overhead costs.
Research and development expenses represent salaries and related benefits
expenses and allocations of other overhead costs associated with research and
development activities. Software development costs are included in research and
development and are expensed as incurred. Statement of Financial Accounting
Standards No. 86 requires the capitalization of certain software development
costs once technological feasibility is established. The capitalized cost is
then amortized over the estimated product life. 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.
23
<PAGE> 24
The Company has entered into agreements to acquire, simultaneously with the
consummation of this Offering, the five Founding Companies: PPI, SPI, NMS, RTI
and SMI. The Founding Companies have been managed throughout the periods
presented as independent private companies, and, as such, their results of
operations reflect different tax structures (S corporations and C corporations),
which have influenced, among other things, their historical levels of owners'
compensation. Certain owners and certain key employees have agreed to reductions
in their compensation and benefits pursuant to employment agreements entered
into in connection with the Mergers.
MMC, which has conducted no operations to date, intends to integrate these
businesses, their operations and administrative functions over a period of time.
This integration process may present opportunities to reduce costs through the
elimination of duplicative functions and through economies of scale, but may
necessitate additional costs and expenditures for corporate management and
administration, corporate expenses related to being a public company, systems
integration and facilities expansion. These various costs and potential cost
savings may make historical operating results not comparable to, or indicative
of, future performance. Accordingly, neither the anticipated savings nor the
anticipated costs have been included in the unaudited pro forma financial data
presented herein.
Accounting for the acquisition will be subject to the procedures specified
in Staff Accounting Bulletin No. 97. As such, PPI has been identified as the
acquiring entity for financial statement presentation purposes. See "-- Results
of Operations -- The Combined Founding Companies."
RESULTS OF OPERATIONS -- PERSONALIZED PROGRAMMING, INC.
Founded in 1981, PPI is the developer of The Medical Manager practice
management system. Its progressive and innovative approach to
computer-programming has made it a leader in the health care information
industry. The following table sets forth certain selected financial information
for the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Systems.............................. $ 694 10.0% $1,014 10.5% $ 1,018 9.2% $ 751 9.0% $ 566 6.7%
Software license..................... 4,840 70.3 6,328 65.8 7,529 68.3 5,771 69.1 6,055 71.3
Maintenance and other................ 1,356 19.7 2,275 23.7 2,473 22.5 1,825 21.9 1,866 22.0
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Total revenue...................... 6,890 100.0 9,617 100.0 11,020 100.0 8,347 100.0 8,487 100.0
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
COST OF REVENUE:
Systems.............................. 572 8.3 752 7.8 704 6.4 487 5.8 553 6.5
Software license..................... 63 0.9 381 4.0 651 5.9 600 7.2 381 4.5
Maintenance and other................ 175 2.6 235 2.4 227 2.1 191 2.3 322 3.8
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Total cost of revenue.............. 810 11.8 1,368 14.2 1,582 14.4 1,278 15.3 1,256 14.8
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Gross margin................... 6,080 88.2 8,249 85.8 9,438 85.6 7,069 84.7 7,231 85.2
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
OPERATING EXPENSES:
Selling, general and
administrative..................... 982 14.2 1,184 12.3 1,351 12.3 908 10.9 1,041 12.3
Research and development............. 1,040 15.1 1,502 15.6 2,024 18.4 1,484 17.8 1,935 22.8
Depreciation and amortization........ 105 1.5 196 2.0 226 2.0 140 1.6 189 2.2
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Total operating expenses........... 2,127 30.8 2,882 29.9 3,601 32.7 2,532 30.3 3,165 37.3
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Income from operations......... 3,953 57.4 5,367 55.9 5,837 52.9 4,537 54.4 4,066 47.9
OTHER INCOME (EXPENSE):
Interest income...................... 92 1.3 70 0.6 136 1.2 143 1.7 83 1.0
Other................................ 81 1.2 (15) (0.1) (27) (0.2) 0 0
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Net income..................... $4,126 59.9% $5,422 56.4% $ 5,946 53.9% $4,680 56.1% $4,149 48.9%
====== ===== ====== ===== ======= ===== ====== ===== ====== =====
</TABLE>
24
<PAGE> 25
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenue. PPI's total revenue for the nine months ended September 30, 1996
increased to $8.5 million from $8.3 million for the corresponding period in
1995, an increase of $0.2 million or 1.7%. Revenue from systems for the nine
months ended September 30, 1996 decreased to $0.6 million (6.7% of total
revenue) from $0.8 million (9.0% of total revenue) for the corresponding period
in 1995, a decrease of $0.2 million or 24.6%. The decrease was primarily due to
turnover in sales personnel. Revenue from software license for the nine months
ended September 30, 1996 increased to $6.1 million (71.3% of total revenue) from
$5.8 million (69.1% of total revenue) for the corresponding period in 1995, an
increase of $0.3 million or 4.9%. The increase was primarily due to increased
sales of systems to MSOs, which typically generate greater revenue per system
sold than do systems sold to individual practices. Revenue from maintenance and
other sources for the nine months ended September 30, 1996 was essentially
unchanged from the prior year's period at approximately $1.9 million (22.0% of
total revenue in 1996 compared to 21.9% in 1995).
Cost of revenue. The total cost of revenue for the nine months ended
September 30, 1996 was essentially unchanged at $1.3 million. The slight growth
in revenue resulted in a modest increase in gross margin to 85.2% for the nine
months ended September 30, 1996 from 84.7% for the corresponding period in 1995.
Cost of revenue for systems for the nine months ended September 30, 1996
increased to $0.6 million from $0.5 million for the corresponding period in
1995, an increase of $0.1 million or 13.6%. The increase was primarily
attributable to an increase in equipment costs. Cost of revenue for software
license for the nine months ended September 30, 1996 decreased to $0.4 million
from $0.6 million for the corresponding period in 1995, a decrease of $0.2
million or 36.5%. The decrease was primarily due to reduced software royalties
to SPI. Cost of revenue for maintenance and other sources for the nine months
ended September 30, 1996 increased to $0.3 million from $0.2 million for the
corresponding period in 1995, an increase of $0.1 million or 68.6%. The increase
was primarily due to increased cost associated with an annual training and
information seminar held by PPI for its dealers, resulting from the relocation
to a costlier site for the seminar.
Selling, general and administrative expenses. Selling general and
administrative expenses for the nine months ended September 30, 1996 increased
to $1.0 million (12.3% of total revenue) from $0.9 million (10.9% of total
revenue) for the corresponding period in 1995, an increase of $0.1 million or
14.6%. The increase was primarily attributable to an increase in occupancy costs
for the office facilities distributed in March 1996 to PPI's stockholder and
leased back to PPI and increased professional fees indirectly related to the
Mergers.
Research and development expenses. Research and development expenses
("R&D") for the nine months ended September 30, 1996 increased to $1.9 million
(22.8% of total revenue) from $1.5 million (17.8% of total revenue) for the
corresponding period in 1995, an increase of $0.4 million or 30.4%. The increase
was due to an approximate 40% increase in R&D personnel hired to support
development activities relating to: (i) a new release of The Medical Manager
incorporating an advanced appointment scheduler and other enhancements; (ii) the
development of graphical user interface and relational database technologies for
use in future versions of The Medical Manager; (iii) the development of an
electronic medical records module; and (iv) the development of a module for use
in the management of multiple physician practices. Certain of these initiatives
were begun in previous periods, but required additional resources as they
reached more advanced stages of development. Although the Company believes that
the increase in staffing levels and the development of these initiatives are
essential to the continued success of The Medical Manager, they are not expected
to yield any immediate revenue to PPI.
Other income. Other income for the nine months ended September 30, 1996
decreased to $83,593 from $142,843 for the corresponding period in 1995. This
decrease was primarily the result of a decrease in investment income.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue. PPI's total revenue for 1995 increased to $11.0 million from $9.6
million for 1994, an increase of $1.4 million or 14.6%. Revenue from software
license for 1995 increased to $7.5 million (68.3% of total revenue) from $6.3
million (65.8% of total revenue) for 1994, an increase of $1.2 million or 19.0%.
The
25
<PAGE> 26
increase was primarily due to increased sales to MSOs, which typically generate
greater revenue per system sold than do systems sold to individual practices, as
well as a release of a new version of The Medical Manager and the availability
of a new module for use in managed care. Revenue from system sales for 1995 was
essentially unchanged at $1.0 million (9.2% of total revenue for 1995 compared
to 10.5% in 1994) from 1994. Revenue from maintenance and other sources for 1995
increased to $2.5 million (22.4% of total revenue) from $2.3 million (23.7% of
total revenue) for 1994, an increase of $0.2 million or 8.7%.
Cost of revenue. The total cost of revenue increased in 1995 to $1.6
million from $1.4 million in 1994, an increase of 15.6%, but remained
essentially unchanged as a percentage of total revenue (approximately 14%).
Gross margin decreased slightly to 85.6% in 1995 from 85.8% in 1994. Cost of
revenue for systems for 1995 decreased to $0.7 from $0.8 for 1994, a decrease of
$0.1 million or 6.4%. The decrease was primarily due to a decrease in equipment
cost. Cost of revenue for software license for 1995 increased to $0.7 million
from $0.4 in 1994, an increase of $0.3 million or 70.9%. The increase was
primarily due to a change in the sales mix towards sales requiring royalty
payments to SPI. The requirement to make such payments will be eliminated with
the Mergers. Cost of revenue for maintenance and other sources for 1995 was
essentially unchanged at $0.2 million from the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.4 million in 1995 from $1.2 million in
1994, an increase of $0.2 million or 14.0%, but were essentially unchanged as a
percentage of total revenue (12.3%).
Research and development expenses. Research and development expenses for
1995 increased to $2.0 million (18.4% of total revenue) from $1.5 million (15.6%
of total revenue) for 1994, an increase of $0.5 million or 34.8%. The increase
was due to an approximate 35% increase in R&D personnel hired to support
development activity relating to: (i) a new release of The Medical Manager
incorporating an advanced appointment scheduler and other enhancements; (ii) the
development of a module for use in the management of multiple physician
practices; and (iii) the development of an electronic medical records module.
Certain of these initiatives were begun in previous periods, but required
additional resources as they reached more advanced stages of development.
Other income. Other income for 1995 increased to $108,470 from $54,853 for
1994. This increase was primarily the result of an increase in interest income
in 1995.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenue. PPI's total revenue for 1994 increased to $9.6 million from $6.9
million for 1993, an increase of $2.7 million or 39.6%. Revenue from software
license for 1994 increased to $6.3 million (65.8% of total revenue) from $4.8
million in 1993 (70.3% of total revenue), an increase of $1.5 million or 30.7%.
Revenue from system sales for 1994 increased to $1.0 million (10.5% of total
revenue) from $0.7 million (10.1% of total revenue), an increase of $0.3 million
or 46.1%. Revenue from maintenance and other sources for 1994 increased to $2.3
million (23.7% of total revenue) from $1.4 million (19.7% of total revenue) for
1993, an increase of $0.9 million or 67.8%. These increases were primarily due
to sales postponed by customers to 1994 due to concerns regarding the impact of
proposed health care legislation.
Cost of revenue. The total cost of revenue for 1994 increased to $1.4
million from $0.8 million in 1993, an increase of 68.9%. The growth in cost of
revenue resulted in a decline in gross margin to 85.8% in 1994 from 88.2% in
1993. Cost of revenue for systems for 1994 increased to $0.8 million from $0.6
million in 1993, an increase of $0.2 million or 31.5%. This increase was due
primarily to increased systems sales and was partially offset by a decrease in
the cost of equipment. Cost of revenue for software license for 1994 increased
to $0.4 million from $0.1 million in 1993, an increase of $0.3 million or
504.8%. The increase was primarily due to an increase in revenue from software
license and sales requiring royalty payments to SPI that will not be necessary
following the Mergers. Cost of revenue for maintenance and other was essentially
unchanged at $0.2 million.
26
<PAGE> 27
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.2 million in 1994 from $1.0 million in
1993, an increase of $0.2 million or 20.5%, but decreased moderately as a
percentage of total revenue.
Research and development expenses. Research and development expenses for
1994 increased to $1.5 million (15.6% of total revenue) from $1.0 million (15.1%
of total revenue) for 1994, an increase of $0.5 million or 44.4%. The increase
was due to an approximate 63% increase in R&D personnel hired to support the
development of a new version of The Medical Manager incorporating additional
core and office management applications, which was released in June 1995.
Other income. Other income for 1994 decreased to $54,853 from $172,994 in
1993. The decrease was primarily the result of a decrease in interest income and
other commissions income.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from PPI's statements
of cash flows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1993 1994 1995 1995 1996
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operations.................... $ 5.1 $ 5.3 $ 6.2 $ 5.1 $ 4.7
Net cash used in investing activities.............. (1.0) (0.2) (1.2) (1.1) (0.2)
Net cash used in financing activities.............. (4.0) (4.1) (5.1) (2.5) (2.7)
----- ----- ----- ----- -----
Net increase (decrease) in cash and cash
equivalents...................................... $ 0.1 $ 1.0 $(0.1) $ 1.5 $ 1.8
===== ===== ===== ===== =====
</TABLE>
PPI has historically funded its operations with cash flows from operations.
From 1993 through the nine months ended September 30, 1996, PPI generated $21.3
million in cash from operations. Substantially all of the cash generated from
operations was generated by net income plus depreciation and amortization, with
little change in non-cash working capital. During this same period, cash used in
investing activities totaled $2.6 million and was primarily used for the
acquisition of additional office facilities and computer and other equipment.
Cash used in financing activities during this period consisted of S corporation
distributions to PPI's stockholder. In addition, prior to the consummation of
the Mergers, PPI will make distributions to its stockholder in respect of its
estimated S corporation Accumulated Adjustment Account (the "AAA Account")
(currently estimated to be approximately $4.0 million) as of the date of the
closing.
As of September 30, 1996, PPI had a working capital surplus of $3.1 million
and no long-term debt outstanding. While there can be no assurance, management
of PPI believes that PPI has adequate cash flow from operations to fund its
operations through the fourth quarter of 1997.
RESULTS OF OPERATIONS -- THE COMBINED FOUNDING COMPANIES
The Combined Founding Companies' Statement of Operations data for the years
ended December 31, 1993, 1994 and 1995 and for the nine months ended September
30, 1995 and 1996 do not purport to present the results of operations of the
combined Founding Companies in accordance with generally accepted accounting
principles. Instead, they represent merely a summation of revenue, cost of
revenue, gross profit, SG&A and R&D of the individual Founding Companies, on a
historical basis, after the elimination of intercompany revenue and expense, and
exclude the effects of pro forma adjustments, such as the adjustment to
compensation-related expenses reflecting the implementation of the employment
agreements to be entered into by certain members of management. This data will
not be comparable to and may not be indicative of the Company's post-combination
results of operations.
27
<PAGE> 28
The following table sets forth certain selected unaudited combined
financial information on a historical basis, excluding the effects of pro forma
adjustments, for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Systems..................... $ 3,108 17.0% $ 4,333 17.9% $ 7,106 24.3% $ 4,142 20.1% $ 7,129 26.9%
Software license............ 9,552 52.2 12,215 50.5 13,319 45.5 9,846 47.7 10,559 39.9
Maintenance and other....... 5,624 30.8 7,636 31.6 8,862 30.2 6,652 32.2 8,782 33.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total revenue............. 18,284 100.0 24,184 100.0 29,287 100.0 20,640 100.0 26,470 100.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
COST OF REVENUE:
Systems..................... 2,113 11.6 1,990 8.2 2,914 10.0 1,317 6.4 4,084 15.4
Software license............ 1,818 9.9 2,532 10.5 2,278 7.8 1,857 9.0 1,577 6.0
Maintenance and other....... 3,632 19.9 4,067 16.8 5,434 18.5 4,268 20.7 5,328 20.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total cost of revenue..... 7,563 41.4 8,589 35.5 10,626 36.3 7,442 36.1 10,989 41.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross margin.......... 10,721 58.6 15,595 64.5 18,661 63.7 13,198 63.9 15,481 58.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
OPERATING EXPENSES:
Selling, general and
administrative............ 4,692 25.7 6,490 26.8 7,785 26.6 5,151 25.0 7,149 27.0
Research and development.... 1,040 5.7 1,502 6.2 2,024 6.9 1,484 7.2 2,345 8.8
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenue. The Company's total revenue for the nine months ended September
30, 1996 increased to $26.5 million from $20.6 million for the corresponding
period in 1995, an increase of $5.9 million or 28.2%. Revenue from systems for
the nine months ended September 30, 1996 increased to $7.1 million (26.9% of
total revenue) from $4.1 million (20.1% of total revenue) for the corresponding
period in 1995, an increase of $3.0 million or 72.1%. The increase was primarily
due to increased sales to MSOs, which typically generate greater revenue per
system sold than do systems sold to individual practices and from additional
system sales resulting from the acquisition in January 1996 of GBP With
Excellence, Inc. ("GBP"), a dealer for The Medical Manager serving the state of
Florida. Revenue from software license for the nine months ended September 30,
1996 increased to $10.6 million (39.9% of total revenue) from $9.8 million
(47.7% of total revenue) for the corresponding period in 1995, an increase of
$0.8 million or 7.2%. The increase was due primarily to increased sales to MSOs.
Revenue from maintenance and other sources for the nine months ended September
30, 1996 increased to $8.8 million (33.2% of total revenue) from $6.7 million
(32.2% of total revenue) for the corresponding period in 1995, an increase of
$2.1 million or 32.0%. The increase was primarily a result of sales of
additional maintenance contracts due to continued growth in the Company's
installed base and the acquisition of GBP.
Cost of Revenue. The total cost of revenue for the nine months ended
September 30, 1996 increased to $11.0 million from $7.4 million for the
corresponding period in 1995, an increase of $3.6 million or 47.7%. The growth
in cost of revenue resulted in a decline in gross margin to 58.5% for the nine
months ended September 30, 1996 from 63.9% for the corresponding period in 1995.
Cost of revenue for systems for the nine months ended September 30, 1996
increased to $4.1 million from $1.3 million for the corresponding period in
1995, an increase of $2.8 million or 210.1%. The increase was due principally to
the inclusion of GBP in the Company's results for the nine months ended
September 30, 1996. The Company believes that sales by GBP carried a gross
margin which was significantly lower than the Company's consolidated gross
margin. This was partially offset by a substantial increase in sales to MSOs,
which carry lower unit costs than sales to individual practices. Cost of revenue
for software license for the nine months ended September 30, 1996 decreased to
$1.6 million from $1.9 million for the corresponding period in 1995, a decrease
of $0.3 million or 15.1%. The decrease was primarily due to greater allocation
of overhead to cost of revenue for systems and maintenance and other sources as
revenue increased for these components at a rate greater than that for software
license. Cost of revenue for maintenance and other sources for the nine months
ended September 30, 1996 increased to $5.3 million from $4.3 million for the
corresponding period in 1995, an increase of $1.0 million or 24.8%. The increase
was due principally to cost inefficiencies associated with the integration of
GBP into the Company's distribution network.
28
<PAGE> 29
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $7.1 million for the nine months ended
September 30, 1996 (27.0% of total revenue) from $5.2 million (25.0% of total
revenue) for the corresponding period in 1995, an increase of $1.9 million or
38.8%. The increase was due primarily to an increase of $0.4 million of
additional owners' compensation at RTI, $0.3 million of indirect transaction
costs at NMS, increased selling commissions and other costs from increased
revenue and the hiring of additional administrative and operational personnel in
anticipation of the Mergers.
Research and development. R&D for the nine months ended September 30, 1996
increased to $2.3 million (8.8% of total revenue) from $1.5 million (7.2% of
total revenue) for the corresponding period in 1995, an increase of $0.8 million
or 58.0%. The increase was due to an approximate 50% increase in R&D personnel
hired to support development activity relating to: (i) a new release of The
Medical Manager incorporating an advanced appointment scheduler and other
enhancements; (ii) graphical user interface and relational database technologies
for use in future versions of The Medical Manager; (iii) an electronic medical
records module; (iv) a module for use in the management of multiple physician
practices; and (v) a module for use in claims adjudication. Certain of these
initiatives were begun in previous periods, but required additional resources as
they reached more advanced stages of development.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue. The Company's total revenue for 1995 increased to $29.3 million
from $24.2 million for 1994, an increase of $5.1 million or 21.1%. Revenue from
systems sales for 1995 increased to $7.1 million (24.3% of total revenue) from
$4.3 million (17.9% of total revenue) for 1994, an increase of $2.8 million or
64.0.%. The increase was primarily due to increased sales to MSOs. Revenue for
software license for 1995 increased to $13.3 million (45.5% of total revenue)
from $12.2 million (50.5% of total revenue) for 1994, an increase of $1.1
million or 9.0%. The increase was primarily due to increased sales of systems to
MSOs. Revenue from maintenance and other sources for 1995 increased to $8.9
million (30.2% of total revenue) from $7.6 million (31.6% of total revenue) for
1994, an increase of $1.3 million or 16.1%. The increase was primarily a result
from inclusion of operations of NMS for a full year.
Cost of revenue. The total cost of revenue for 1995 increased to $10.6
million from $8.6 million in 1994, an increase of $2.0 million or 23.7%.Cost of
revenue for systems for 1995 increased to $2.9 million from $2.0 million in
1994, an increase of $0.9 million or 46.4%. The increase was primarily due to
increased revenue and was partially offset by a substantial increase in sales to
MSOs. Cost of revenue for software license for 1995 decreased slightly to $2.3
million from $2.5 million in 1994, a decrease of $0.2 million or 10.0%. The
decrease was primarily due to greater allocation of overhead to cost of revenue
for systems and maintenance and other sources as revenue increased for these
components at a rate greater than that for software license. Cost of revenue for
maintenance and other sources for 1995 increased to $5.4 million from $4.1
million in 1994, an increase of $1.3 million or 33.6%. The increase was
primarily due to the new initiatives for centralized support desk services. The
growth in the cost of revenue resulted in a modest decline in gross margin to
63.7% for 1995 from 64.5% in 1994. The decline in gross margin was principally
due to the Company's decision to hire additional employees to implement new
initiatives in professional and technical services, including centralized
support desk and project managers for large system installations. The Company
does not, however, expect to recognize additional revenue from certain of these
services until future periods.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $7.8 million for 1995 from $6.5 million for
1994, an increase of $1.3 million or 20.0%, but were essentially unchanged as a
percentage of total revenue (27.0%).
Research and development expenses. Research and development expenses for
1995 increased to $2.0 million (6.9% of total revenue) from $1.5 million (6.2%
of total revenue) for 1994, an increase of $0.5 million or 34.8%. The increase
was due to an approximate 35% increase in R&D personnel hired to support
development activity relating to: (i) a new release of The Medical Manager
incorporating an advanced appointment scheduler and other enhancements; (ii) a
module for use in the management of multiple physician practices; and (iii) an
electronic medical records module. Although the Company believes that the
29
<PAGE> 30
increase in staffing levels and the development of these initiatives are
essential to the continued success of The Medical Manager, they are not expected
to yield any immediate revenue to the Company.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenue. The Company's total revenue for 1994 increased to $24.2 million
from $18.3 million for 1993, an increase of $5.9 million or 32.3%. The increase
was primarily due to sales postponed by customers to 1994 due to concerns in
1993 regarding the impact of proposed health care legislation. Revenue from
software license for 1994 increased to $12.2 million (50.5% of total revenue)
from $9.6 million (52.2% of total revenue) for 1993, an increase of $2.6 million
or 27.9%. Revenue from system sales for 1994 increased to $4.3 million (17.9% of
total revenue) from $3.1 million (17.0% of total revenue) for 1993, an increase
of $1.2 million or 39.4%. Revenue from maintenance and other sources for 1994
increased to $7.6 million (31.6% of total revenue) from $5.6 million (30.8% of
total revenue) for 1993, an increase of $2.0 million or 35.8%.
Cost of revenue. The total cost of revenue for 1994 increased to $8.6
million from $7.6 million in 1993, an increase of $1.0 million or 13.6%. The
reduced growth in the cost of revenue resulted in an increase in gross margin to
64.5% for 1994 from 58.6% in 1993. Cost of revenue for systems for 1994
decreased to $2.0 million from $2.1 million in 1993, a decrease of $0.1 million
or 5.8%. The decrease was primarily due to a decrease in equipment costs for
system sales. Cost of software license for 1994 increased to $2.5 million from
$1.8 million in 1993, a increase of $0.7 million or 39.3%. Cost of revenue for
maintenance and other sources for 1994 increased to $4.1 million from $3.6
million in 1993, an increase of $0.5 million or 12.0%. The increase in the cost
of software license and maintenance and other sources was primarily due to
increased revenue and was partially offset by non-recurring costs in 1993
associated with an inventory write-down in the amount of $0.3 million and a
legal settlement requiring the buy out of a non-competition agreement by the
founders of RTI in the amount of $0.4 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $6.5 million for 1994 (26.8% of total
revenue) from $4.7 million (25.7% of total revenue) for 1993, an increase of
$1.8 million or 38.3%. The increase was due primarily to an increase in RTI
owner compensation of $0.5 million.
Research and development expenses. Research and development expenses for
1994 increased to $1.5 million (6.2% of total revenue) from $1.0 million (5.7%
of total revenue) for 1993, an increase of $0.5 million or 44.4%. The increase
was due to an approximate 60% increase in R&D personnel hired to support the
development of a new version of The Medical Manager incorporating additional
core and office management applications, which was released in June 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain selected unaudited combined
statements of cash flow information on an historical basis, excluding the
effects of pro forma adjustments, for the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
1993 1994 1995 1995 1996
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operations............ $ 5.0 $ 7.0 $ 9.2 $ 7.9 $ 6.2
Net cash used in investing activities...... (0.7) (0.2) (2.3) (1.9) (1.3)
Net cash used in financing activities...... (4.3) (5.5) (6.8) (3.9) (3.4)
----- ----- ----- ----- -----
Net increase in cash and cash
equivalents......................... $ 0.0 $ 1.3 $ 0.1 $ 2.1 $ 1.5
===== ===== ===== ===== =====
</TABLE>
On a combined basis, for the period from 1993 through the nine months ended
September 30, 1996, the Founding Companies generated $27.4 million in net cash
from operating activities. Substantially all of the net cash generated by
operating activities resulted from net income plus depreciation and
amortization, with little change in non-cash working capital. During this same
period, cash used in investing activities totaled
30
<PAGE> 31
$4.5 million and was primarily used for the acquisition of dealer operations and
net purchases of investments. Cash used in financing activities during this
period consisted primarily of S corporation distributions to PPI's stockholder
and SPI's stockholder.
On the closing of this Offering, the Company intends to repay certain
outstanding indebtedness and other obligations of the Founding Companies
(aggregating $8.2 million as of September 30, 1996). In addition, prior to the
consummation of the Mergers, PPI and SPI will make distributions to their
stockholders in respect of their estimated S corporation AAA Account as of the
date of closing. These distributions relating to the AAA Account (approximately
$4.9 million as of September 30, 1996) are expected to be funded primarily
through cash and investments provided by operating activities. See "Certain
Transactions."
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs and planned capital
expenditures for property and equipment. On a combined basis, the Founding
Companies made capital expenditures of $2.0 million and $1.1 million during 1995
and the nine months ended September 30, 1996, respectively.
The Company intends to focus on the continued consolidation and
rationalization of The Medical Manager dealer network. As such, the Company's
dealer acquisition strategy will target dealerships with strong presences in key
markets and demonstrated expertise with The Medical Manager product line. The
timing, size or success of any acquisition effort and the associated potential
capital commitments are unpredictable. The Company expects to fund future
acquisitions through a combination of working capital, cash flow from operations
and issuances of additional equity.
The Company has negotiated a line of credit of approximately $30 million
with Barnett Bank of Tampa to be used for working capital and other general
corporate purposes, including future acquisitions, prior to the consummation of
this Offering. The Company intends to have the line of credit executed and
effective upon the consummation of this Offering. There can be no assurance that
any line of credit will be obtained or that, if obtained, it will be on terms
that are favorable to the Company. See "Risk Factors -- Risks Related to
Acquisition Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
IMPACT OF INFLATION
Due to the relatively low levels of inflation experienced in recent years,
inflation did not have a significant effect on the results of operations of the
combined Founding Companies for the periods presented.
31
<PAGE> 32
BUSINESS
The Company is a leading provider of comprehensive physician practice
management systems to independent physicians, physician groups, MSOs, IPAs,
managed care organizations and other providers of health care services in the
United States. The Company develops, markets and supports The Medical Manager
practice management system, which addresses the financial and administrative,
clinical and practice management needs of physicians. The Company's system has
been implemented in a wide variety of practice settings, from small physician
groups to multi-provider IPAs and MSOs, and enables physicians and their
administrative staffs to efficiently manage their practices while delivering
quality patient care in a constantly changing health care environment. Since the
development of The Medical Manager in 1982, the Company's installed base has
grown to over 22,500 client sites, representing more than 80 practice
specialities, making it the most widely installed physician practice management
system in the United States.
The Company has entered into agreements to acquire, simultaneously with the
consummation of this Offering, the five Founding Companies. These five entities
include: (i) PPI, the developer of The Medical Manager practice management
system; (ii) SPI, the "master" distributor for The Medical Manager, which
coordinates the sales, support and training activities of approximately 180
independent dealers and implements national marketing strategies; (iii) NMS, a
national dealer for The Medical Manager; (iv) RTI, a regional dealer serving the
Northeastern region of the United States; and (v) SMI, a regional dealer serving
the Midwestern region of the United States. The vertical integration of these
five entities will bring together the research and development, sales and
support efforts for The Medical Manager in one entity covering the entire United
States. Although the five Founding Companies have not previously operated as a
single entity, they have successfully worked together for many years. PPI has
been expanding and improving The Medical Manager system since developing it in
1982, SPI has been the master distributor of The Medical Manager since 1982 and
NMS, RTI and SMI have been selling and supporting The Medical Manager as
independent dealers since 1994, 1988 and 1987, respectively.
INDUSTRY OVERVIEW
Over the past decade, health care costs in the United States have risen
faster than the overall rate of inflation. According to the U.S. Health Care
Financing Administration, health care expenditures have increased from less than
$250 billion, or approximately 9% of U.S. gross domestic product, in 1980 to
almost $1 trillion, or approximately 14% of U.S. gross domestic product, in
1994. This increase has resulted in broad pressures to reduce costs without
sacrificing the quality of care and has caused significant changes in the health
care industry. While reimbursement for health care has historically been based
on a fee-for-service model of payment, managed care organizations and other
payors are increasingly utilizing alternative reimbursement models that shift
the financial risk of delivering health care from payors to health care
providers, including discounted fee schedules, single payment based on
diagnosis, capitation and other risk sharing arrangements.
The ongoing pressure to contain health care costs and the growing
administrative burdens placed on medical practices have caused physicians to
join together in group practices to share administrative costs and achieve
economies of scale. In addition, other providers and payors are buying and/or
managing physician practices and transforming them into integrated delivery
systems. The Company believes the movement toward group practices has
accelerated the trend toward automation as group practices require the greater
efficiency and productivity of more powerful practice management systems. This
general increase in the size and complexity of medical practices has created a
greater need for analysis of data and production of timely management
information reports that allow physicians, other providers of medical care and
payors to reach informed conclusions regarding the quality and appropriateness
of various procedures and practices.
The expansion in the number of managed care and third-party payor
organizations, as well as additional governmental regulation and the change in
reimbursement models, have greatly increased the complexity of pricing
practices, billing procedures and reimbursement policies impacting medical
practices. Practice management systems help providers reduce the costs and
improve the quality of delivering health care services by automating patient
care information systems and administrative processes, ensuring timely access to
32
<PAGE> 33
relevant information, streamlining the storage and retrieval of information, and
efficiently matching patient needs with available resources. While early systems
concentrated principally on patient billing and collection activities, systems
are now available that record and store clinical information, automate the
processing of insurance and third-party payor claims and integrate the
operations of physician practices with larger health care organizations such as
hospitals, HMOs and management service organizations.
BUSINESS STRATEGY
The Company's strategy is to integrate its research and development,
marketing, sales and support resources and to build upon its leadership position
as the provider of the most widely utilized physician practice management
system. Key elements of this strategy include:
Capitalizing on New Corporate Structure. As a result of the Mergers,
the Company expects to achieve significant benefits through a national
market presence, centralized client support and the implementation of a
national retail pricing structure. While the Founding Companies have worked
together successfully for many years, the consummation of this Offering and
the completion of the Mergers will create a vertically integrated entity
that will have greater financial strength and stability than the individual
Founding Companies and that will compete more effectively on national,
regional and local levels. In addition, the Company expects to achieve
significant cost savings as a result of the consolidation of many of the
administrative functions currently handled separately by each of the
Founding Companies. The Mergers will also allow the Company to further
develop its Enterprise Business Group, a national accounts group that
assists regional dealers in marketing to, and addressing the support needs
of, larger provider organizations such as MSOs, IPAs, and managed care
organizations. The Company plans to establish local and regional resource
centers, supported by centralized corporate and regional operations,
including help desks, EDI departments and advanced technical and
programming personnel. The Company expects this structure to result in
greater overall consistency and a higher level of client support.
Consolidating and Rationalizing the Distribution Network. The Company
intends to consolidate and rationalize The Medical Manager distribution
network. Prior to the 1990s, when independent physician practices were most
prevalent, the local focus of The Medical Manager independent dealer
network effectively addressed the practice management needs of the market.
However, due to the numerous trends in the health care industry toward
improved efficiency and cost containment, physicians have been forced to
consolidate into larger practice organizations. To meet the needs of these
larger groups, this Company believes it is necessary to adopt and implement
a product distribution strategy that includes the acquisition of dealers in
major medical communities and large metropolitan markets. These dealers
should enable the Company to market more effectively to larger customers
while assisting the remaining independent dealers in conducting their
marketing activities. The Company also intends to further standardize the
sales and support practices of the independent dealers in order to ensure
that The Medical Manager is sold and supported on a consistent and
effective basis. See "-- Distribution Network."
Increasing Penetration of Management Service Organizations and Other
Large Physician Groups. The Company seeks to increase its sales of
enterprise-wide systems, products and services to MSOs and large physician
groups. As trends in the health care marketplace continue to drive
physician affiliations, the Company believes there is significant
opportunity to increase its share of this rapidly growing segment of the
practice management market. In order to capitalize on these opportunities,
the Company has established the Enterprise Business Group to coordinate
large group sales and support in conjunction with local and regional
dealers. In addition, the Company has enhanced the functionality of The
Medical Manager to deliver increasingly comprehensive physician practice
management services in enterprise-wide settings. The Company believes that
through these efforts it can significantly increase its share of this
market segment.
33
<PAGE> 34
Cross-Selling Products and Services to Existing Client Base. The
Company intends to aggressively cross-sell additional products and services
to its existing client base. A majority of the Company's existing clients
do not currently use The Medical Manager's entire suite of products and
services. Because of its substantial installed base of over 22,500 sites,
as well as the modular, integrated product design of The Medical Manager,
the Company intends to work with the sales offices to target many of its
customers as candidates for cross-selling opportunities, including system
upgrades, additional software application modules, services such as
hardware and software maintenance, system and process planning, project
management, custom programming and EDI capabilities.
Continuing Development of New Products, Product Enhancements and
Services. The Company intends to continue its leadership role in the
development and introduction of new products, product enhancements and
services for the physician practice marketplace. To do so, the Company
intends to continue to commit significant financial and human resources to
its research and development efforts. A key focus of the Company's research
and development efforts is the further enhancement of The Medical Manager's
ability to operate within a variety of integrated delivery environments.
The Company's strategic development initiatives include advanced systems,
such as a version of The Medical Manager incorporating relational
databases, a graphical user interface and enhanced client-server
applications. The Company develops new products, product enhancements and
services with input from its physician-clients. For 1995 and the first nine
months of 1996, the Company's pro forma expenses for research and
development were $2.1 million and $2.4 million, respectively, representing
5.8% and 8.1% of the Company's pro forma revenue for those periods.
PRODUCTS
The Medical Manager is an integrated practice management system
encompassing patient care, clinical, financial and management applications. Due
to its scalable design, The Medical Manager is a cost-effective solution in a
stand-alone or enterprise-wide environment. The Medical Manager is designed to
operate on a wide range of hardware platforms, from Intel-based computer systems
for small and medium sized practices, to RISC-based systems, such as the IBM
RS/6000 and Hewlett-Packard 9000, for larger practices. Its modular, fully
integrated product portfolio allows clients to add incremental capabilities to
existing information systems while preserving and minimizing the need for
capital investments. The latest version of The Medical Manager software,
currently in Beta testing, is year 2000 enabled.
The pricing of The Medical Manager system is a function of the number of
modules purchased, the number of users per site, the number of practices, the
operating system and the complexity of the installation. Hardware support and
services are priced separately from software products and are typically
coordinated by the dealer.
The Medical Manager system provides to physician practices a broad range of
patient care and practice management features, including:
CORE APPLICATION
The Medical Manager Core Application includes base financial, clinical and
practice management functions.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
The Medical Manager Provides accounts receivable, insurance billing, basic
appointment scheduling and recalls, clinical history,
financial history, referral of physician information,
encounter form tracking, e-mail, office notes, hospital
rounds and over 150 standard reports.
</TABLE>
34
<PAGE> 35
OFFICE MANAGEMENT
The Medical Manager Office Management application automates the essential
administrative tasks of a physician practice.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Automated Collections Maintains notes, promise to pay dates, budget payments, next
action to be taken indicators and prints collection letters;
automates "tickler" system to alert the user when an account
needs attention.
Chart and X-Ray Locator Tracks the location of a patient's medical and X-ray charts.
Advanced Billing Handles sophisticated billing needs, including the necessary
collapsing and sorting of charge items into revenue codes
for UB92 billing purposes; also used for the specialized
reporting needs for Workers' Compensation First Report of
Injury.
Custom Report Writer Provides access to all data elements of The Medical Manager;
allows for the creation of user defined custom reports.
Multiple Resource Scheduling Includes multi-resource display, search and posting of
scheduled appointments; coordinates the utilization of exam
rooms and equipment and schedules of teams of physicians,
nurses, therapists and others whose services are needed
within a specific time sequence of one another.
Patient Flow Tracking Allows patient encounters to be tracked from the time the
patient makes the appointment, through encounters in the
waiting room, examination rooms, labs and other areas;
reports on time and resource utilization.
</TABLE>
DEVELOPMENT TOOLS
Development Tools allow data to be accessed and manipulated, adding
flexibility to the system and allowing for customization to meet specialized
needs.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Data Merge A proprietary 4GL type language that allows the Company,
dealers and other qualified programmers to customize
functions and features of The Medical Manager without
changing source code; also supports the exchange of data
between The Medical Manager and hospital, lab, pharmacy and
other medical management systems.
</TABLE>
ELECTRONIC CONNECTIVITY
Electronic Connectivity supports the electronic submission of claims to
payors, and allows for the open exchange of information between various medical
institutions as well as the transfer of administrative transactions to support
managed care.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Hospital Information Link A Data Merge tool that allows hospital interfaces to be
written to local hospital requirements.
HL7 Connectivity Engine Allows users to provide real time demographic and encounter
information to hospitals and other organizations (referred
to as "Remotes") and queries the Remote's master patient
index in order to retrieve data on existing patients; also
allows the Remote to automatically advise the user site of
patient admissions and discharges, changes to
inpatient/outpatient status and changes to patient
demographic information.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Electronic Data Interchange An interface that provides state of the art connectivity for
immediate access to various insurance providers, third-party
connectivity networks and other outside facilities; features
include pre-authorization status, benefit eligibility,
referral verification and rosters, as well as credit card
and check approval.
Electronic Claims Supports direct electronic submission of claims to Medicare,
Medicaid, commercial carriers and clearinghouses; expedites
insurance payment turnaround time; verifies claims for
accuracy and reports on submitted claims that have been
accepted or rejected; provides a complete audit trail and
reports to ensure that claims have been processed properly;
supports NSF and ANSI national standards.
Electronic Remittance Used in combination with the Electronic Claims Module to
electronically download Explanation of Benefits ("EOBs")
from Medicare or other claim centers and to post directly
into patients' accounts, thereby saving a substantial amount
of data entry time and preventing keying errors.
</TABLE>
MANAGED CARE APPLICATIONS
Managed Care applications allow physicians to contain costs and deliver a
higher quality of care in the capitated environments.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Managed Care In addition to the managed care features offered in the base
system, supports the full functions required to track
incoming as well as outgoing referrals to facilities and
specialists; maintains membership eligibility lists,
capitation payment posting, contract management (including
number of visits, allowable time period, procedures and
diagnosis treatment plan) and reporting.
Claims Adjudication Fully integrated with the Managed Care module, provides full
risk management capabilities, including the processing of
received claims, comparing the claim against authorized
services to determine amounts due, generating checks for
payments and producing an EOB; also provides advanced
features in the form of claims repricing, bundling of
services, and provider credentialing.
</TABLE>
CLINICAL APPLICATIONS
The Medical Manager Clinical application developments provide
fully-integrated components of a patient's medical record that contain the
functionality and knowledge bases required in today's practices.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Quality Care Guidelines Automates the process of tracking both the curative and
preventative services the practice has specified that it
wishes to perform; provides reports on physician compliance
with recommended care guidelines that are based on the
patient's age, sex, diagnoses and other key health factors
and are automatically printed with the patient's encounter
form. The guidelines are derived from U.S. Preventative
Healthcare Guidelines or other clinical knowledge bases and
reflect the practice's own suggested intervals of exams,
tests, injections and other procedures specific to the
individual patient.
Laboratory Interface Electronically downloads test requests and patient
demographics to a laboratory, and electronically transfers
results directly into the patient's file in The Medical
Manager.
</TABLE>
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<PAGE> 37
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Prescription Writer Provides a full set of tools for managing both the clinical
and administrative aspects of the prescription process;
provides for extensive interaction checking, patient
information printouts and prescription history on the drugs
being prescribed; administratively reduces physician and
staff time spent preparing and issuing prescriptions.
Pharmacy Interface Offers a direct electronic link to transfer prescriptions
and handle authorization requests between the Prescription
Writer module and the pharmacy.
Voice Dictation Through The Medical Manager's link with Kurzweil Applied
Intelligence software, enables the physician to dictate,
edit and print patient charts and reports; pulls and stores
patient and physician information from the patient file into
the chart via a single, spoken command.
View Patient Chart Brings a snapshot of the patient's medical records to a
single screen and then gives the user instant access to
almost any desired level of underlying detail; allows the
screen to be used for valuable side-by-side analysis of
chart data.
Medical Records Designed to provide maximum flexibility and speed in
creating, storing and retrieving whatever medical
information the practice wishes to maintain on each patient,
fully integrated with the product's clinical history, this
application addresses the four fundamental issues concerning
medical records: creation and maintenance of medical
records, simultaneous access to patient records, remote
access and data for analysis. Includes patient encounter
knowledge base and generates automated progress notes.
</TABLE>
MSO ENTERPRISE SYSTEM
The MSO Enterprise system addresses the needs of the MSO market by
providing enterprise-wide solutions for the management of integrated provider
networks.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
MSO Enterprise Manager Provides the MSO or multi-practice environment with central
administration of multiple practices, enterprise-wide
roll-up reports, a master patient index for automatic
synchronization of demographic data-updates and remote
access across multiple systems.
</TABLE>
DIALYSIS VERTICAL MARKET OPTION
The Medical Manager Dialysis Vertical Market Option expedites the
repetitive process of posting dialysis patients' weekly treatments.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------- ------------------------------------------------------------
<S> <C>
Dialysis Calendar Posting Using a calendar posting screen, automates and reduces the
repetitive, recurring posting dictated by dialysis
treatment.
</TABLE>
CLIENT SERVICES
The Company's Client Services Division provides a wide range of services to
the entire client base to ensure customer satisfaction and maximize the utility
of The Medical Manager system. These services include both fundamental and
value-added services as described below:
Implementation Services. These services include planning, design and
installation of software, hardware and network solutions for stand-alone
practices to enterprise-wide environments. To ensure customer satisfaction,
the Company utilizes a team approach involving technical and professional
staff members who have a broad array of technical and business expertise.
This team approach includes
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<PAGE> 38
project engineering, business redesign and practice staff re-education. A
client relationship manager, part of the team from the outset, works with
the client throughout the life of the contract.
Support Services. A critical element in assuring proper use of and
satisfaction with the Company's products involves ongoing support services
provided to the end-users. The Company provides to its clients continuing
software and hardware support under agreements that typically have a one
year term. These agreements provide for general support via help desks,
error corrections to software, remote diagnostics and on-site hardware and
software technicians. Support services are provided during normal business
hours and can be expanded to include seven days a week, 24 hour coverage.
As of November 15, 1996, the Company had 165 full-time employees devoted to
providing support services to its customer base.
Value-Added Services. The Company advises its enterprise-wide clients
on how best to bring together disparate physician practices into an
integrated health care delivery network. The Company works in partnership
with its client's clinical and administrative management in the areas of
patient and workflow redesign, job function review and re-education,
standardization consultation, project engineering, timeline and resource
management and ongoing relationship management. The Company and many of its
independent dealers maintain substantial resources capable of providing
custom programming solutions for a broad range of client requests. Many of
these solutions may be generated at the regional and local levels using the
Company's Data Merge language, which allows modification to be made without
changing source code.
Training and Continuing Education. The Company believes initial and
continuing education are key components in ensuring customer satisfaction
and retention and, accordingly, has devoted significant resources to its
Educational Services Division. Because the Medical Manager has been in use
for 14 years, a substantial amount of experience and expertise has been
gained by the Company's training staff in optimizing methodology and
curriculum to achieve the best results. As of November 15, 1996, the
Company had 13 full-time employees in its Education Services Division.
Training methods include classroom and computer-based training, on-site
visits for system setup and review and video training tapes available on
selected modules. The Company also assists its clients in developing their
own training staff, materials and guidelines. Continuing education
programs, a quarterly newsletter and user group conferences are sponsored
by the Company, providing the user with valuable information as well as an
opportunity for the Company to demonstrate new enhancements and features of
the product. The Company makes available to clients extensive user
documentation and reference manuals including, among others, installation
guides, advanced system manuals, a custom report writer manual and an MSO
implementation workbook.
SALES AND MARKETING
The Company sells its products and services nationally through a direct
sales organization consisting of 57 sales personnel, as well as through its
independent dealer network of approximately 180 dealers. This distribution
effort is responsible for sales to new clients, ranging in size from solo
practitioners to enterprise-wide clients, and follow-on sales of upgrades and
enhancements to existing clients. To enhance the effectiveness of its selling
effort, the Company provides its sales force and independent dealer network with
(i) comprehensive training in the Company's products and services; (ii)
marketing materials; and (iii) on-going support.
Small and medium-sized sales, routinely handled by the direct sales force
and independent dealers, generally involve a sales cycle of 30 to 60 days.
Larger sales, managed by the Enterprise Business Group, typically involve a
Request For Proposal process which lengthens the sales cycle to 60 to 90 days or
longer. Hardware and software maintenance agreements are generally renewed on an
annual basis. Standard payment terms are 50% due upon system order with the
balance due upon completion of system installation.
To address the more complex needs of larger potential clients, the Company
has formed the Enterprise Business Group. The Group coordinates the Company's
sales effort for large clients (such as MSOs, IPAs and managed care
organizations) and assists in the implementation of systems and the maintenance
of ongoing
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<PAGE> 39
client relationships. Many of the independent dealers are experienced in selling
to and supporting enterprise wide clients. The Company intends to continue to
utilize the Enterprise Business Group to assist local and regional dealers in
these efforts. At the enterprise-wide client level, relationship managers work
with the client throughout the contract term to keep informed of customer
expectations and help ensure customer satisfaction.
The Company generates sales leads through referrals from customers and
management consultants, responses to requests for proposals, strategic alliances
with complementary companies, the Company's Internet web sites and associated
links, industry seminars, trade shows, direct telephone and mail campaigns and
advertisements in trade journals.
In order to capitalize on opportunities to cross-sell its products and
services to existing clients, the Company maintains contacts with its clients at
the local, regional and national levels through electronic mail links on its
Internet web sites, monthly and quarterly newsletters, technical updates,
product release bulletins, user meetings, training seminars, industry
conferences and market-specific seminars, such as its MSO User Conference. The
Company also works with certain of its client base on the selection,
implementation, use and benefits derived from the product and publishes these as
Client Profiles, providing both the client and the Company with market exposure
and the opportunity to share successes.
An educational license of The Medical Manager physician practice management
system has been utilized to teach office automation within the medical field for
more than eight years. The system has been installed in vocational schools,
junior colleges and universities nationwide. Delmar Publishers Inc., one of the
leading educational textbook publishers in the country, markets a student
textbook and instructor's manual for courses that teach computer skills in the
medical field, using The Medical Manager. Since 1988, more than 400 site
licenses of the educational version have been sold.
DISTRIBUTION NETWORK
Prior to the 1990s, when independent physician practices were most
prevalent, the local focus of independent dealers effectively addressed the
practice management needs of the market. However, due to the numerous trends in
the health care industry focusing attention on the delivery of high quality and
cost effective care (as well as the need to demonstrate such quality and
effectiveness), individual physicians and small group practices have been forced
to pool their resources in order to compete effectively. As a result, large
physician organizations have become much more prevalent in the medical
marketplace. To keep pace with the increasingly sophisticated practice
management needs of these larger groups, the independent dealers for The Medical
Manager have been consolidating in order to build the necessary technical,
service and support resources.
The Company believes that a fundamental and unique strength of The Medical
Manager is its nationwide dealer network, which currently includes approximately
180 dealer organizations. As a result of the many years of selling and
supporting The Medical Manager product line, the personnel in the Company's
dealer network represent a valuable resource. The Company believes that the
continued consolidation and rationalization of the dealers for The Medical
Manager is a necessary response to changes in the physician marketplace. The
Company's strategy for its dealer network includes the acquisition of dealers in
strategic markets as well as the rationalization of the remaining independent
dealers in order to ensure that The Medical Manager is sold and supported on a
consistent and effective basis throughout the dealer network.
Dealer Acquisitions. The Company believes that it must have representation
in all major medical communities and metropolitan markets throughout the
country. As a result, the Company's dealer acquisition strategy will focus on
acquiring dealerships that have both a strong presence in key markets and
demonstrated expertise with The Medical Manager product line.
Rationalization of Independent Dealers. The Company intends to continue to
use its existing network of independent dealers as an integral part of its
distribution network for The Medical Manager. The Company will work with its
independent dealers to institute a program to standardize hardware
configurations, client training programs and service levels developed by the
Company. The Company will also provide services to
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<PAGE> 40
the independent dealers, many of which are unable to provide such resources as
independent entities. Such services include: (i) dealer training; (ii) help
desks; (iii) advanced technical services, such as custom programming services;
and (iv) sales support for large systems sales from the Enterprise Business
Group.
RESEARCH AND DEVELOPMENT
The Company seeks to meet the needs of its clients by continuing to develop
new products and enhancements of existing products. Accordingly, the Company
believes that continued leadership in the practice management systems industry
will require significant additional commitments of resources to research and
development. The Company maintains its research and development campus in
Alachua, Florida, where development of The Medical Manager began over 14 years
ago. As of November 15, 1996, the Company had 50 employees engaged primarily in
its research and development efforts. Pro forma research and development
expenses for 1995 and the first nine months of 1996 were $2.1 million and $2.4
million, respectively, and represented 5.8% and 8.1% of pro forma revenue.
The Company's research and development activities involve Company personnel
as well as physicians, physician groups practice staff and leading health care
institutions. A key goal of current research and development efforts involves
adapting The Medical Manager system to operate more effectively within
integrated delivery environments. To achieve this goal, the Company is pursuing
a strategic development initiative directed toward the development of advanced
health care information systems that include a relational database, graphical
user interfaces and enhanced client-server applications. The Company's current
research and development efforts continue the tradition of The Medical Manager
of being a consistent leader in product innovation, as indicated by the
following:
- In 1982, The Medical Manager was first installed.
- In 1985, The Medical Manager released its electronic media claims module.
- In 1987, The Medical Manager became the first practice management system
to perform electronic claims submission in all 50 states.
- In 1988, The Medical Manager released its Report Writer Module.
- In 1990, The Medical Manager released its Data Merge Language module
allowing unlimited customization within The Medical Manager without
changing the source code.
- In January 1991, The Medical Manager released its Electronic Remittance
module.
- In June 1991, The Medical Manager became the first practice management
system to incorporate EDI with electronic interchange partners.
- In 1992, The Medical Manager became the first practice management system
to introduce electronic interfaces to laboratory systems.
- In 1994, The Medical Manager announced its Managed Care Module.
- In January 1995, The Medical Manager released its Quality Care Guidelines
module.
- In October 1995, The Medical Manager released an integrated Claims
Adjudication System.
- In November 1995, The Medical Manager announced its MSO Enterprise
Manager.
- In April 1996, The Medical Manager announced its prototype HL7
Connectivity Engine.
Current focus areas for new product development and enhancement include the
following:
ENTERPRISE SYSTEM
The Company intends to develop an increasing number of automation tools to
support the growing number of integrated health care delivery systems across the
nation. Developments within The Medical Manager's MSO Enterprise System are
expected to include enterprise appointment and resource scheduling
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<PAGE> 41
and enterprise communications. In addition, further developments in The Medical
Manager's connectivity engines should continue to promote the open exchange of
information between medical institutions.
MANAGED CARE
Physicians realize that sophisticated health care automation systems are
required to support managed care, compete for capitated contracts and contain
healthcare costs while providing effective, high quality care. Development
efforts within the Managed Care module are expected to result in a product that
provides referral outcome reporting that can perform outcome analysis across
multiple practices within the provider network. As managed care matures, new
markets will be created that require the support of automation. Development
efforts within the Managed Care module will be designed to support the evolving
subcapitation market by allowing primary care groups to receive the total
capitation from a payor and allocate the capitation payment among contracted
specialists for services they have provided.
CLINICAL APPLICATIONS
The Company recognizes that improvements in the technology that supports
the gathering, storing, retrieving and reporting of clinical data and the
creation of a sophisticated computerized patient record system are critical to
the enhancement and improvement of health care delivery across the nation. As a
result, the Company is engaged in efforts to rapidly develop fully-integrated
components of a computerized patient record containing functionality and
knowledge bases that support the way physicians provide health care services.
Research and analysis of various input technologies and devices continue with
the goal of providing physicians with usable tools that will allow them to
effectively gather and use clinical data at the point-of-care.
GRAPHICAL USER INTERFACE
The Company's graphical user interface is currently under development. The
Company's development efforts are intended to produce a product that will
support users opting to install technology to support a Windows environment, as
well as the Company's current installed base, which has a sizeable investment in
hardware that supports character based applications.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secret, copyright and
trademark laws, license agreements, nondisclosure and other contractual
provisions and technical measures to establish and protect its proprietary
rights in its products. The Company distributes its products under software
license agreements that grant clients a nonexclusive, nontransferable license to
the Company's products and contain terms and conditions prohibiting the
unauthorized reproduction or transfer of the Company's products. In addition,
the Company attempts to protect its trade secrets and other proprietary
information through agreements with employees and consultants. Substantially all
current employees involved in product development have signed an assignment of
inventions agreement. There can be no assurance that the legal protections
afforded to the Company or the precautions taken by the Company will be adequate
to prevent misappropriation of the Company's technology. In addition, these
protections do not prevent independent third-party development of functionally
equivalent or superior technologies, products or services. Any infringement or
misappropriation of the Company's proprietary software could disadvantage the
Company in its efforts to attract and retain new clients in a highly competitive
market and could cause the Company to lose revenues or incur substantial
litigation expense. The Company believes that, due to the rapid pace of
innovation within the software industry, factors such as the technological and
creative skills of its personnel and ongoing reliable product maintenance and
support are more important in establishing and maintaining a leadership position
within the industry than are the various legal protections afforded to its
technology.
GOVERNMENT REGULATION
The FDA has jurisdiction under the FDC Act to regulate computer products
and software as medical devices if they are intended for use in the diagnosis,
cure, mitigation, treatment or prevention of disease in humans. The FDA has
issued a draft policy statement relating to picture archiving and communications
systems that requires manufacturers of medical image storage devices and related
software to submit to the
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<PAGE> 42
FDA premarket notification applications and otherwise comply with the
requirements of the FDC Act applicable to medical devices. Recently, the FDA
initiated agency rulemaking to exempt certain medical image management devices
from premarket notification procedures. There can be no assurance that such
rulemaking will be adopted, and if so, that the rulemaking will apply to the
Company's product.
The Company marketed The Medical Manager with a medical image management
capability until recently, when it decided to cease offering this feature after
considering the draft policy statement and other regulatory factors. The Company
believes that The Medical Manager, when marketed without a medical image
management capability, would not be subject to FDA regulation requiring
registration, listing, premarket notification or approval and adherence with
device good manufacturing practices or medical device reporting requirements.
The FDA is currently reviewing its policy for the regulation of computer
software and there is a risk that The Medical Manager could in the future become
subject to some or all of the above requirements, which could have a material
adverse effect on the Company's results of operations, financial condition or
business.
In addition, prior to the decision to remove its medical image management
capability, a small number of The Medical Manager systems possessing a medical
image capability were sold. While there can be no assurance that the FDA will
not take enforcement action with respect to these prior sales, the Company
believes that such action is unlikely due to the nature of the product and the
small number of units sold with a medical image capability. Enforcement action
can consist of warning letters, refusal to approve or clear products, revocation
of approvals or clearances previously granted, civil penalties, product
seizures, injunctions, recalls, operating restrictions and criminal
prosecutions. Any enforcement action by the FDA could have a material adverse
effect on the Company's results of operations, financial condition or business.
COMPETITION
The market for physician practice management systems and services is highly
competitive. The Company believes that the principal competitive factors in this
market include the functionality and price of the practice management system,
the support provided to system users, ongoing research and development efforts
and the national presence and financial stability of the seller. The industry is
fragmented and includes numerous competitors. The Company believes its principal
competitive advantages are the product's substantial installed client base, open
system design and advanced features and capabilities, as well as the Company's
focus on customer support and training programs and its network of dealers. The
Company's principal competitors include other physician practice management
system companies, local software companies and other companies that provide
information systems to health care providers. Certain of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. In addition, as the market for the Company's
products develops, additional competitors may enter the market and competition
may intensify.
EMPLOYEES
At December 31, 1996, the Company employed 355 full-time and five part-time
employees. No employees are covered by any collective bargaining agreements. The
Company considers its relationships with its employees to be good.
FACILITIES
The Company's principal corporate offices are located at 3001 North Rocky
Point Drive East, Tampa, Florida. The Company's research and support facilities
are located in Alachua, Florida. The Company also maintains national sales and
support offices in Mountain View, California, and has 17 additional offices in
various regions of the country.
The Company leases all of its properties (an aggregate of 107,413 square
feet) with remaining terms between one and five years. The Company believes that
its facilities are adequate for its current needs and that suitable additional
space will be available as required. See "Certain Transactions" for information
regarding the Company's obligations under its lease agreements.
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LEGAL PROCEEDINGS
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's current directors, executive officers and those persons who will
become directors and executive officers in connection with this Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Michael A. Singer......................... 49 Chairman of the Board; Chief Executive Officer(1)
John H. Kang.............................. 33 President; Director
Richard W. Mehrlich....................... 49 Executive Vice President -- Sales and Marketing;
Director(1)
Lee A. Robbins............................ 55 Vice President and Chief Financial Officer(2)
Wayne Burks............................... 49 Director(3)
Ricardo A. Salas.......................... 32 Director(3)
Frederick B. Karl, Jr..................... 42 Vice President, General Counsel and Secretary(3)
Thomas P. Liddell......................... 34 Vice President -- Midwest Region(1)
Henry W. Holbrook......................... 42 Vice President, Sales -- Northeast Region(1)
</TABLE>
- ---------------
(1) Appointment will become effective upon the consummation of this Offering.
(2) Appointment will become effective upon the resignation of Mr. Burks as Chief
Financial Officer.
(3) Mr. Burks currently is Vice President, Treasurer and Chief Financial Officer
and Mr. Salas currently is Vice President and Secretary of the Company. Mr.
Burks will resign as Vice President, Treasurer and Chief Financial Officer
upon the consummation of this Offering, Mr. Salas will resign as Vice
President and Secretary of the Company upon the consummation of this
Offering and Messrs. Burks and Salas will resign as directors upon the
consummation of this Offering. Mr. Karl will become Vice President, General
Counsel and Secretary upon the consummation of this Offering.
Michael A. Singer will serve as Chairman of the Board and Chief Executive
Officer of the Company, effective upon the consummation of this Offering. Mr.
Singer is the founder of PPI and the principal inventor of The Medical Manager
software program. From PPI's inception in 1981, he has been the sole
shareholder, a director and the President and Chief Executive Officer. Mr.
Singer received a B.A. in Business Administration from the University of Florida
in 1969, and a Masters degree in Economics from the University of Florida in
1971.
John H. Kang has been President and a director of the Company since July
1996. He is the founder of NMS and has served as its President since its
inception in 1994. In 1987, Mr. Kang founded J. Holdsworth Capital Ltd., a
private investment firm, and is currently its President. He has been a director
of Amorphous Technologies International, a company engaged in the research and
development and manufacture of metal alloy, since May 1995. Mr. Kang also has
been a director of Nutcracker Snacks, Inc., a manufacturer of snack foods, since
December 1988. From June 1988 to September 1996, Mr. Kang was the Chairman and a
director of Clayton Group, Inc., a distributor of waterworks materials. Mr. Kang
received an A.B. in Economics from Harvard College in 1985.
Richard W. Mehrlich will serve as Executive Vice President -- Sales and
Marketing and will be a director of the Company, effective upon the consummation
of this Offering. Mr. Mehrlich is the founder and a director of SPI, and has
been President and Chief Executive Officer of SPI since its inception in 1980.
Mr. Mehrlich's previous sales and marketing experience includes serving as
Director of Marketing for Dynabyte Corporation, a microcomputer hardware
manufacturer, and as a regional sales representative for Texas Instruments,
Component Sales Division. Mr. Mehrlich received a degree in Electrical
Engineering from the Milwaukee School of Engineering in 1970.
Lee A. Robbins has been Vice President of the Company since November 1996.
From July 1995 through November 1996, Mr. Robbins served as Vice President and
Chief Financial Officer of American Ophthalmic Incorporated, a physician
practice management company. From 1985 to June 1995, he was Vice
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President and Chief Financial Officer of Puritan-Bennett Corporation, a
respiratory equipment company. Before entering the health care management
industry in 1985, Mr. Robbins held a number of financial positions with Armco
Inc., a Fortune 500 company based in Middletown, Ohio. Mr. Robbins received a
B.S. in Accounting from the University of Cincinnati and an M.B.A. from Xavier
University.
Wayne Burks has been Vice President, Treasurer and Chief Financial Officer
and a director of the Company since July 1996. He has served as Vice President
and Chief Financial Officer of NMS since 1995. Previously, Mr. Burks was a
partner with Coopers & Lybrand L.L.P. from 1981. Mr. Burks received a B.S. in
Accounting and Business Administration from Troy State University, Alabama in
1969. He is a member of the American and Florida Institute of Certified Public
Accountants.
Ricardo A. Salas has been Vice President, Secretary and a director of the
Company since July 1996. He has served as a Vice President of NMS since its
inception in 1994. Since 1987, Mr. Salas has been a Vice President of J.
Holdsworth Capital Ltd., a private investment firm. He also has been a director
of Amorphous Technologies International, a company engaged in the research and
development and manufacture of metal alloy, since May 1995. Mr. Salas has been a
director of Nutcracker Snacks, Inc., a manufacturer of snack foods, since
December 1988. From June 1988 to September 1996, Mr. Salas was a director of
Clayton Group, Inc., a distributor of waterworks materials. Mr. Salas received
an A.B. in Economics from Harvard College in 1986.
Frederick B. Karl, Jr. will serve as Vice President, General Counsel and
Secretary of the Company, effective upon the consummation of this Offering. Mr.
Karl has been the General Counsel of PPI since 1988, and also has served as a
Vice President of PPI since 1990. He provided legal services to PPI from 1984
through 1988 while he was in private practice. Mr. Karl received a B.A. from
Florida State University in 1977 and a J.D. from the University of Florida
College of Law in 1981.
Thomas P. Liddell will serve as Vice President -- Midwest Region, effective
upon the consummation of this Offering. Mr. Liddell founded SMI in 1987 and is
presently responsible for its Marketing, Finance and Administration. Prior to
1987, he was employed by Holy Cross Health System, where he developed software
systems to support national group purchasing and coordinated Hospital ADT and
Clinical Systems selection. Mr. Liddell received a B.S. from Indiana University
in 1985.
Henry W. Holbrook will serve as Vice President, Sales -- Northeast Region
of the Company, effective upon the consummation of this Offering. Mr. Holbrook
is a co-founder, President and Director of Sales and Marketing of RTI, and has
been with RTI since its inception in 1988. Prior to founding RTI, he was Sales
Manager and then Branch Manager of the Hartford, Connecticut office of Contel
Business Systems, Inc. from 1978 to 1988. Mr. Holbrook received a B.S. from
Thomas College in 1978.
BOARD OF DIRECTORS
Board Classification. Effective upon the consummation of this Offering,
the Board of Directors will be divided into three classes, with directors
serving staggered three-year terms, expiring at the annual meeting of
stockholders in 1997, 1998 and 1999, respectively. At each annual meeting of
stockholders, one class of directors will be elected for a full term of three
years to succeed that class of directors whose terms are expiring.
Board Committees. The Board of Directors has established an Audit
Committee and a Compensation Committee, effective upon the consummation of this
Offering. The Audit Committee and the Compensation Committee are expected to
consist solely of outside directors.
Director Compensation. Directors who are also employees of the Company or
one of its subsidiaries will not receive additional compensation for serving as
directors. Under the compensation policy to become effective upon the
consummation of this Offering, non-employee directors will receive an annual
retainer of $2,000 and fees for attending each meeting of the Board and any
Board committee of $1,000. Such cash fees may, at the election of the director,
be paid instead in the form of shares of Common Stock or be deferred in the form
of "deferred shares" under the Company's 1996 Non-Employee Directors' Stock
Plan. In addition,
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under such plan, each non-employee director will automatically receive an option
to acquire a specified number of shares of Common Stock (currently 10,000
shares) upon such person's initial election as a director, and, subject to a
limited exception, an annual option to acquire a specified number of shares
(currently 5,000 shares) at each annual meeting of the Company's stockholders
thereafter at which such director is re-elected or remains a director. See
"-- 1996 Non-Employee Directors' Stock Plan." Directors also will be reimbursed
for out-of-pocket expenses incurred in attending meetings of the Board of
Directors or committees thereof, in their capacity as directors. The Board will
periodically review and may revise the compensation policies for non-employee
directors.
Officers. All officers serve at the discretion of the Board of Directors.
The Company intends to have seven members on its Board of Directors.
Accordingly, the Company expects that, within 30 days after the date of this
Prospectus, the Board will vote to increase the size of the Board and to add
four additional directors, three of whom will not be either current or former
employees of the Company, and one of whom will be designated by Mr. Singer
pursuant to the contractual right given to him by MMC in connection with the
Mergers. See "Certain Transactions."
EXECUTIVE COMPENSATION
The Company was incorporated in July 1996, has conducted no operations and
generated no revenue to date and has not paid any of its executive officers
compensation since its formation.
Each of Messrs. Singer, Kang, Mehrlich, Karl, Holbrook and Liddell will
enter into an employment agreement with the Company providing for an annual base
salary of $150,000 and a bonus to be determined annually pursuant to an
incentive bonus plan to be established by the Company. Each employment agreement
will be effective as of the consummation of this Offering for a term of five
years. Effective as of the expiration of such initial five-year term and as of
each anniversary date thereof, the term shall be extended automatically for an
additional 12-month period on the same terms and conditions existing at the time
of renewal unless, not later than two months prior to each such respective date,
the Company shall have given notice to the employee that the term shall not be
so extended. Each of these agreements will provide that, in the event of a
termination of employment by the Company without cause (other than upon the
death or disability of the employee) or by the employee for good reason
(including a notice of termination by such employee following a change of
control of the Company, as defined in the agreement, or the non-renewal of the
employment agreement by the Company), the employee shall be entitled to
severance payments equal to the employee's base salary as in effect immediately
prior to such termination over the longer of the then-remaining term or 24
months (the "Severance Period"). The employee will also be entitled to coverage
under the group medical care, disability and life insurance benefit plans or
arrangements in which the employee is participating at the time of termination,
for the continuation of the Severance Period, provided the employee does not
have comparable substitute coverage from another employer. Each employment
agreement will contain a covenant not to compete with the Company during the
period of employment, as well as during the Severance Period, without the prior
approval of the Board. In November 1996, Mr. Robbins entered into an employment
agreement with the Company, effective immediately. The terms of his employment
agreement are otherwise as described in this paragraph.
1996 LONG-TERM INCENTIVE PLAN
As of September 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Long-Term Incentive Plan (the "Plan"). The maximum
number of shares of Common Stock that may be subject to outstanding awards may
not exceed the greater of 2,000,000 shares or 10% of the aggregate number of
shares of Common Stock outstanding. Awards may be settled in cash, shares, other
awards or other property, as determined by the Committee. The number of shares
reserved or deliverable under the Plan and the annual per-participant limit is
subject to adjustment in the event of stock splits, stock dividends and other
extraordinary corporate events.
The purpose of the Plan is to provide executive officers (including
directors who also serve as executive officers), key employees, consultants and
other service providers with additional incentives by enabling such persons to
increase their ownership interests in the Company. Individual awards under the
Plan may take the
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<PAGE> 47
form of one or more of: (i) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs");
(iii) restricted or deferred stock; (iv) dividend equivalents; (v) bonus shares
and awards in lieu of Company obligations to pay cash compensation; and (vi)
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
Plan), certain conditions and restrictions relating to an award with respect to
the exercisability or settlement of such award will be accelerated.
The Compensation Committee will administer the Plan and generally select
the individuals who will receive awards and the terms and conditions of those
awards (including exercise prices, vesting and forfeiture conditions,
performance conditions and periods during which awards will remain outstanding).
The number of shares deliverable upon exercise of ISOs 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. Shares of Common Stock that are
attributable to awards that have expired, terminated or been canceled or
forfeited or otherwise terminate without delivery of shares are available for
issuance or use in connection with future awards. The Plan also provides that no
participant may be granted in any calendar year awards settleable by delivery of
more than 250,000 shares, and limits payments under cash-settled awards in any
calendar year to an amount equal to the fair market value of that number of
shares.
The Company generally will be entitled to a tax deduction equal to the
amount of compensation realized by a participant through awards under the Plan,
except (i) no deduction is permitted in connection with ISOs if the participant
holds the shares acquired upon exercise for the required holding periods; and
(ii) deductions for some awards could be limited under the $1 million
deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to awards granted under a plan during a
grace period of up to three years following this Offering, and should not apply
to certain options, SARs and performance-based awards granted thereafter if the
Company complies with certain requirements under Section 162(m).
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
In connection with this Offering, NQSOs to purchase a total of 1,530,000
shares of Common Stock of the Company will be granted as follows: 140,000 shares
to Mr. Karl, 100,000 shares to Mr. Robbins, 25,000 shares to Mr. Liddell, 70,000
shares to Mr. Holbrook and 1,195,000 shares to the employees of the Company and
the Founding Companies. Each of the foregoing options will have an exercise
price equal to the initial public offering price per share in this Offering.
These options will vest as to 25% each on the date that is six months, 18
months, 30 months and 42 months after the consummation of this Offering, and
generally will expire on the earlier of 10 years after the date of grant or
three months after termination of employment. If termination is for cause, all
options will terminate immediately. In addition, under the employment agreements
described above, if termination is without cause or if the employee leaves for
good reason, all unvested options will become immediately vested and exercisable
and remain exercisable for the longer of three months or the duration of the
severance periods provided thereunder.
1996 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders as of September 1996, provides for the automatic grant to
each non-employee director of 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 following
this Offering; 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. The number of shares to be subject to initial or annual options granted
after the first annual meeting of stockholders following this Offering may be
altered by the Board of Directors. A total of 250,000 shares are reserved for
issuance under the Directors' Plan. The
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<PAGE> 48
number of shares reserved, as well as the number to be subject to automatically
granted options, will be adjusted in the event of stock splits, stocks dividends
and other extraordinary corporate events.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant. Options
will expire at the earlier of 10 years after the date of grant or one year after
termination of service as a director. Options will become exercisable one year
after the date of grant, subject to acceleration by the Board of Directors, and
will be forfeited upon termination of service as a director for reasons other
than death or disability unless the director served for at least 11 months after
the date of grant or the option was otherwise exercisable at the date of
termination. In addition, the Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees, shares or credits
representing "deferred shares" to be settled at future dates, as elected by the
director. The number of shares or deferred shares received will be equal to the
number of shares which, at the date the fees would otherwise be payable, will
have an aggregate fair market value equal to the amount of such fees. Each
"deferred share" will be settled by delivery of a share of Common Stock at such
time as may have been elected by the director prior to the deferral.
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<PAGE> 49
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Simultaneously with the closing of this Offering, MMC will acquire by
merger all of the issued and outstanding stock of the five Founding Companies,
at which time each Founding Company will become a wholly-owned subsidiary of the
Company. The aggregate consideration to be paid by MMC in the Mergers is
approximately $175.7 million, consisting of approximately $46.9 million in cash
and 11,705,470 shares of Common Stock. The factors considered by the Company in
determining the consideration to be paid included, among others, the historical
operating results, the net worth, the amount and type of indebtedness and the
future prospects of the Founding Companies. Immediately prior to the Mergers,
certain of the Founding Companies will make distributions of approximately $4.9
million, representing S corporation earnings previously taxed to their
respective stockholders. Also, prior to the Mergers, SMI distributed to its
stockholders approximately $283,000 in net book value of assets.
The closing of each Merger is subject to a minimum price requirement for
the Common Stock sold in this Offering and to certain other conditions. These
conditions include, among others, the accuracy on the closing date of the
representations and warranties made by the Founding Companies, their principal
stockholders and by the Company; the performance of each of their respective
covenants included in the merger agreements; and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
the Company. In addition, the stockholders of NMS are obligated on or prior to
the consummation of this Offering, (i) to cause a capital contribution of $23.7
million to be made to NMS; (ii) to pay down all indebtedness (estimated to be
$2.5 million as of the closing of this Offering) of NMS (other than trade
payables); and (iii) to pay to NMS $1.5 million, representing the net purchase
price for the Division of Medix acquired by NMS anticipated to be remaining as
of the closing of this Offering, for an estimated total capital contribution as
of the closing of this Offering of $27.7 million. Such stockholders intend to
meet these obligations by causing NMS to sell shares of its Common Stock to EDS
and through the cancellation of shares of Common Stock of the Company to be
received by them pursuant to the merger agreement among MMC, its acquisition
subsidiary, NMS and such stockholders with a value per share of $11.00. See "The
Company -- Summary of the Terms of the Mergers."
There can be no assurance that the conditions of the Mergers will be
satisfied or waived or that the merger agreements will not be terminated prior
to consummation. If any of the Mergers is terminated for any reason, the Company
likely will not consummate this Offering on the terms described herein.
Pursuant to the agreements to be entered into in connection with the
Mergers, the stockholders of the Founding Companies have agreed not to compete
with the Company for five years, commencing on the date of consummation of this
Offering.
The aggregate consideration paid by MMC for each of the Founding Companies
is as follows: PPI: $105.1 million, consisting of $35.0 million to be paid in
cash and 6,370,000 shares of Common Stock; SPI: $33.7 million, consisting of
$9.3 million to be paid in cash and 2,210,000 shares of Common Stock; NMS: $28.5
million, consisting of 2,595,645 shares of Common Stock; RTI: $5.6 million,
consisting of $1.8 million to be paid in cash and 350,000 shares of Common
Stock; and SMI: $2.8 million, consisting of $0.8 million to be paid in cash and
179,825 shares of Common Stock.
In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain executive officers, directors and holders of
more than 5% of the outstanding shares of Common Stock of the Company will
receive, directly or indirectly, cash and shares of Common Stock of the Company
as follows: Mr. Singer -- $35.0 million and 6,370,000 shares of Common Stock;
Mr. Kang -- 490,621 shares of Common Stock; Mr. Mehrlich -- $9.3 million and
2,210,000 shares of Common Stock; Mr. Burks -- 68,518 shares of Common Stock;
Mr. Salas -- 490,621 shares of Common Stock; Mr. Thomas Liddell -- $0.4 million
and 89,913 shares of Common Stock; and Mr. Holbrook -- $0.9 million and 175,000
shares of Common Stock. See "The Company -- Summary of the Terms of the
Mergers."
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In connection with the Mergers, the Company has agreed that for so long as
Mr. Singer beneficially owns at least 10% of the outstanding Common Stock of
MMC, Mr. Singer shall have the right to designate two individuals to serve as
directors on the Board of Directors if the Board consists of six or more members
and one individual to serve as a director if the Board consists or five or fewer
members.
CERTAIN INDEBTEDNESS
Certain of the Founding Companies have incurred indebtedness that has been
personally guaranteed by their respective stockholders. At September 30, 1996,
the aggregate amount of indebtedness of these Founding Companies that was
subject to personal guarantees was approximately $2.7 million. The Company
intends to repay substantially all of such indebtedness in connection with the
consummation of the Mergers and to use its best efforts to have the personal
guarantees of the balance of this indebtedness released within 120 days after
the closing of this Offering and, in the event that any guarantee cannot be
released, to repay the balance of such indebtedness. The Company will also repay
all of the indebtedness owed to Messrs. Kang, Salas and Burks, which aggregated
$1.1 million as of September 30, 1996 and is estimated to be approximately $1.0
million as of the consummation of the Mergers.
In addition, Messrs. Singer and Kang have each made an interest-free loan
of $50,000 to the Company to be used for working capital purposes. Such loans
will be repaid out of the proceeds of this Offering.
REAL ESTATE AND OTHER TRANSACTIONS
PPI leases property in Alachua, Florida that is owned by a company
controlled by Mr. Singer and a member of his family. PPI is responsible for all
real estate taxes, insurance and maintenance relating to the property. The term
of the lease is through March 31, 1999 and provides for two one year extensions
in favor of PPI. The lease commenced on April 1, 1996 and provides for annual
rentals of approximately $320,000. The Company believes that the rent for such
property does not exceed the fair market rental thereof.
Certain property owned by SMI with a net book value of $283,000 as of
September 30, 1996 has been distributed to an entity controlled by the
stockholders of SMI and will be leased to the Company. The lease is for a term
of five years with three renewal options for five years each and provides for
annual rent of approximately $83,160. SMI is responsible for all real estate
taxes, insurance and maintenance. The Company believes that the rent for such
property does not exceed the fair market rental thereof.
Mr. Mehrlich owns a 90% interest in Professional Management Systems, Inc.
("PMSI"), an independent dealer for The Medical Manager system in the greater
Chicago, Illinois area. He acquired the interest in February 1996. SPI
recognized revenue, primarily from software license, from PMSI totaling
approximately $243,000, $190,000 and $154,000 for 1995 and for the nine months
ended September 30, 1995 and 1996, respectively.
COMPANY POLICY
In the future, the Company intends that any transactions with executive
officers, directors and holders of more than 5% of the Common Stock (including
any transactions with respect to PMSI) will be approved by a majority of the
Board of Directors, including a majority of the disinterested members of the
Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company, after giving effect to the Mergers
and this Offering, by (i) each person known to beneficially own more than 5% of
the outstanding shares of Common Stock; (ii) each of the Company's directors and
persons who have consented to be named as directors ("named directors"); (iii)
each named executive officer; and (iv) all executive officers, directors and
named directors as a group. All persons listed have an address in care of the
Company's principal executive offices and have sole voting and investment power
with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF
OWNERSHIP
NUMBER OF SHARES AFTER
BENEFICIALLY OWNED OFFERING
NAME ------------------ ----------
<S> <C> <C>
Michael A. Singer........................................... 6,370,000 36.0%
John H. Kang................................................ 490,621 2.8
Richard W. Mehrlich......................................... 2,210,000 12.5
Electronic Data Systems Corporation......................... 1,221,896 6.9
5400 Legacy Drive
Plano, Texas 75024-3105
Henry W. Holbrook(1)........................................ 175,000 1.0
Thomas P. Liddell(2)........................................ 89,913 *
Frederick B. Karl, Jr.(3)................................... -- *
Lee A. Robbins(4)........................................... -- *
All executive officers, directors and persons to be named as
directors as a group (7 persons).......................... 9,335,534 52.7%
</TABLE>
- ---------------
(1) Does not include 70,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(2) Does not include 25,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(3) Does not include 140,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(4) Does not include 100,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
* less than 1.0%
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 500,000 shares of undesignated
preferred stock, par value $0.01 per share (the "Preferred Stock"). After giving
effect to the Mergers and the completion of this Offering, the Company will have
outstanding 17,705,470 shares of Common Stock (18,605,470 shares if the
Underwriters' over-allotment option is exercised in full) and no shares of
Preferred Stock designated or issued.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-laws, copies of which have been filed as exhibits to the
Registration Statement. The following is qualified in its entirety by reference
thereto.
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COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters voted upon by stockholders, including the
election of directors. The Certificate of Incorporation does not provide for
cumulative voting, and, accordingly, the holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to the rights of any then outstanding
shares of Preferred Stock, the holders of the Common Stock are entitled to such
dividends as may be declared in the discretion of the Board of Directors out of
funds legally available therefor. Holders of Common Stock are entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of shares of Common Stock have no
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible into
any other securities of the Company. All outstanding shares of Common Stock are,
and the shares of Common Stock to be issued pursuant to this Offering will be
upon payment therefor, fully paid and nonassessable.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "MMGR," subject to notice of issuance.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 ("Section 203") of the Delaware General Corporation
Law ("DGCL"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of Directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66% of
the corporation's outstanding voting stock at an annual or
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<PAGE> 53
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined as any person who is (i) the
owner of 15% or more of the outstanding voting stock of the corporation or (ii)
an affiliate or associate of the corporation and who was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
The Company's stockholders, by adopting an amendment to the Certificate of
Incorporation, may elect not to be governed by Section 203, which election would
be effective 12 months after such adoption. The provisions of Section 203 could
delay or frustrate a change in control of the Company, deny stockholders the
receipt of a premium on their Common Stock and have an adverse effect on the
Common Stock. The provisions also could discourage, impede or prevent a merger
or tender offer, even if such event would be favorable to the interests of
stockholders.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Limitation on Liability. Pursuant to the Company's Certificate of
Incorporation and as permitted by Section 102(b)(7) of the DGCL, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases that are illegal under Delaware law or for any
transaction in which a director has derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Certificate of
Incorporation provides for mandatory indemnification of directors and officers
of the Company against any expense, liability and loss to which they become
subject, or which they may incur as a result of having been a director or
officer of the Company. In addition, the Company must advance or reimburse
directors and officers for expenses incurred by them in connection with certain
claims.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-laws of the Company contain
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors.
These provisions also are intended to help ensure that the Board of Directors,
if confronted by an unsolicited proposal from a third party which has acquired a
block of stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interest of the stockholders.
The following is a summary of such provisions included in the Certificate
of Incorporation and By-laws of the Company. The Board of Directors has no
current plans to formulate or effect additional measures that could have an
antitakeover effect.
Classified Board of Directors. The Certificate of Incorporation provides
for a Board of Directors divided into three classes of directors serving
staggered three-year terms. The classification of directors has the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors in a relatively short period of time. At least two annual meetings
of stockholders, instead of one, generally will be required to effect a change
in a majority of the Board of Directors. Such a delay may help ensure that the
Board of Directors and the stockholders, if confronted with an unsolicited
proposal by a stockholder attempting to force a stock repurchase at a premium
above market, a proxy contest or an extraordinary corporate transaction, will
have sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders. Directors, if any, elected by holders of preferred stock voting as
a class, will not be classified as aforesaid. Moreover, under Delaware law, in
the case of a corporation having a classified board, stockholders may remove a
director only for cause. This provision will preclude a stockholder from
removing incumbent directors without cause.
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<PAGE> 54
Advance Notice Requirements for Director Nominees. The By-laws establish
an advance notice procedure with regard to the nomination of candidates for
election as directors at any meeting of stockholders called for the election of
directors. The procedure provides that a notice relating to the nomination of
directors must be timely given in writing to the Secretary of the Company prior
to the meeting. To be timely, notice relating to the nomination of directors
must be delivered not less than 90 days prior to any annual meeting or 10 days
following notice to the stockholder of any special meeting called for the
election of directors.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must be accompanied by each proposed
nominee's written consent and contain the name, address and principal occupation
of each proposed nominee and other information that may be required under the
proxy rules of the Commission. Such notice must also contain the total number of
shares of capital stock of the Company that will be voted for each of the
proposed nominees, the name and address of the notifying stockholder and the
number of shares of capital stock of the Company owned by the notifying
stockholder.
The presiding officer of a meeting of stockholders may determine that a
person is not nominated in accordance with the nomination procedure, in which
case such person's nomination will be disregarded. Nothing in the nomination
procedure will preclude discussion by any stockholder of any nomination properly
made or brought before any meeting called for the election of directors in
accordance with the above-mentioned procedures.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Mergers and completion of this Offering, the
Company will have outstanding 17,705,470 shares of Common Stock. The 6,000,000
shares sold in this Offering (plus any additional shares sold upon exercise of
the Underwriters' over-allotment option) will be freely tradable without
restriction unless acquired by affiliates of the Company. None of the remaining
11,705,470 outstanding shares of Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of the acquisition of restricted shares of
Common Stock from the Company or from any affiliate of the Company, the acquiror
or subsequent holder thereof may sell, within any three-month period commencing
90 days after the effective date of the Registration Statement of which this
Prospectus forms a part, a number of shares that does not exceed the greater of
1% of the then outstanding shares of the Common Stock, or the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the proposed sale is sent
to the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the later of
the date of the acquisition of restricted shares of Common Stock from the
Company or any affiliate of the Company, a person who is not deemed to have been
an affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
The Company and its executive officers, directors and certain stockholders
who will beneficially own 11,116,569 shares in the aggregate upon the
consummation of this Offering have agreed not to sell or otherwise dispose of
any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, except that the Company may issue Common Stock in
connection with acquisitions or in connection with the Plan and the Directors'
Plan (collectively, the "Plans"). See "Underwriting." In addition, the
stockholders of the Founding
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<PAGE> 55
Companies and the Company's executive officers, certain directors and certain
stockholders have agreed with the Company that they will not sell any of their
shares for a period of two years after the closing of this Offering. If the
two-year "holding" period for restricted securities under Rule 144 described
above is reduced by the Commission, this two-year restriction on sales of Common
Stock will be correspondingly reduced.
In connection with the Mergers, the Company has agreed to provide certain
registration rights with respect to the Common Stock issued to the stockholders
of the Founding Companies and EDS. The registration rights provide for a single
demand registration right, exercisable by the holders of a majority of the
shares of Common Stock subject to the registration rights, pursuant to which the
Company will file a registration statement under the Securities Act to register
the sale of shares by those requesting stockholders and any other holders of
Common Stock subject to the registration rights who desire to sell pursuant to
such registration statement. The demand request may not be made until the
expiration of two years after the closing of this Offering. Subject to certain
conditions and limitations, the registration rights also provide the holders of
Common Stock subject to the registration rights with the right to participate in
registrations by the Company of its equity securities in underwritten offerings,
subject to certain exceptions. In addition, Mr. Singer has been granted an
additional separate demand registration right with respect to the shares of
Common Stock received by him in connection with the Mergers, exercisable
commencing two years after the closing of this Offering.
In the case of each of the registration rights described above, the Company
is generally required to pay the costs associated with such an offering other
than underwriting discounts and commissions attributable to the shares sold on
behalf of the selling stockholders.
Within 90 days after the closing of this Offering, the Company intends to
register 5,000,000 shares of its Common Stock under the Securities Act for use
by the Company in connection with future acquisitions. Upon such registration,
these shares will generally be freely tradable after their issuance unless
acquired by parties to the transaction or affiliates thereof, other than the
issuer, in which case they may be sold pursuant to Rule 145 under the Securities
Act. Rule 145 permits, in part, such persons to resell immediately securities
acquired in transactions covered under the Rule, provided such securities are
resold in accordance with the public information requirements, volume
limitations and manner of sale requirements of Rule 144. If a period of two
years has elapsed since the date such securities were acquired in such
transaction and if the issuer meets the public information requirements of Rule
144, Rule 145 permits a person who is not an affiliate of the issuer to freely
resell such securities. In some instances, the Company may contractually
restrict the sale of shares issued in connection with future acquisitions. The
registration rights described above do not apply to the registration statement
relating to these 5,000,000 shares.
In addition to the shares described above, the greater of 2,000,000 shares
of Common Stock or 10% of the aggregate number of shares of Common Stock
outstanding have been reserved for issuance upon exercise of options that may be
granted under the Plan, and 250,000 shares of Common Stock have been reserved
for issuance upon exercise of options that may be granted under the Directors'
Plan. The Company intends to file one or more registration statements on Form
S-8 under the Securities Act with respect to such shares of Common Stock. Shares
of Common Stock covered by such registration statements will be freely tradable
by holders who are not affiliates of the Company and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of the Company.
Prior to this Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of the
Company to raise equity capital in the future.
55
<PAGE> 56
UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement, the underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation and Dean Witter Reynolds
Inc. are acting as representatives (collectively, the "Representatives"), have
severally agreed to purchase from the Company an aggregate of 6,000,000 shares
of Common Stock. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 2,208,000
Dean Witter Reynolds Inc.................................... 2,208,000
Alex. Brown & Sons Incorporated............................. 72,000
Cowen & Company............................................. 72,000
Deutsche Morgan Grenfell Inc................................ 72,000
Goldman, Sachs & Co......................................... 72,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 72,000
Morgan Stanley & Co. Incorporated........................... 72,000
NatWest Securities Limited.................................. 72,000
Oppenheimer & Co., Inc...................................... 72,000
Salomon Brothers Inc........................................ 72,000
Smith Barney Inc............................................ 72,000
UBS Securities LLC.......................................... 72,000
William Blair & Company, LLC................................ 36,000
J.W. Charles Securities, Inc................................ 36,000
Equitable Securities Corporation............................ 36,000
Fahnestock & Co. Inc........................................ 36,000
First of Michigan Corporation............................... 36,000
Furman Selz LLC............................................. 36,000
Interstate/Johnson Lane Corporation......................... 36,000
McDonald & Company Securities, Inc.......................... 36,000
Morgan Keegan & Company, Inc................................ 36,000
Ohio Company................................................ 36,000
Ormes Capital Markets, Inc.................................. 36,000
Pennsylvania Merchant Group Ltd............................. 36,000
Raymond James & Associates, Inc............................. 36,000
Rodman & Renshaw, Inc....................................... 36,000
Roney & Co.................................................. 36,000
Ryan, Beck & Co............................................. 36,000
Scott & Stringfellow, Inc................................... 36,000
Sutro & Co. Incorporated.................................... 36,000
Tucker Anthony Incorporated................................. 36,000
Vector Securities International, Inc........................ 36,000
Volpe Welty & Company....................................... 36,000
Wessels, Arnold & Henderson................................. 36,000
---------
Total............................................. 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock offered hereby (other than the shares of the
Common Stock covered by the over-allotment option described below) if any are
taken.
Prior to this Offering, there has been no established trading market for
the Common Stock. The initial price to the public for the Common Stock offered
hereby has been determined by negotiations between the Company and the
Representatives. The factors considered in determining the initial price to the
public included the history of and the prospects for the industry in which the
Company competes, the past and present operations of the Company, the historical
results of operations of the Company, the prospects for
56
<PAGE> 57
future earnings of the Company, the recent market prices of securities of
generally comparable companies, and the general condition of the securities
markets at the time of this Offering.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain liabilities, including liabilities
under the Securities Act.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public initially at the price to the public set
forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not to exceed $0.45
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $0.10 per share to any other Underwriter and certain other
dealers. After this Offering, the prices and concessions and reallowances to
dealers may be changed by the Underwriters. The Common Stock is offered subject
to receipt and acceptance by the Underwriters and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 900,000
additional shares of Common Stock at the initial public offering price less
underwriting discounts and commissions, solely to cover over-allotments. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
such Underwriter's name in the preceding table bears to the total number of
shares offered.
Subject to certain exceptions, the Company and certain of its directors,
executive officers, and holders of more than 5% of the Company's Common Stock
who are expected to be the holders of 11,116,589 shares of Common Stock upon the
consummation of this Offering have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
or exchangeable into any shares of Common Stock prior to the expiration of 180
days from the date of this Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. See "Shares Eligible for
Future Sale."
The Underwriters do not intend to confirm sales of shares of Common Stock
to accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
New York, New York. Certain legal matters related to this Offering will be
passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The audited historical financial statements as indicated in the index on
pages F-1 and F-2 of this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of that
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C., a Registration
Statement on Form S-1 with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information pertaining to the Company and the shares of Common Stock offered
hereby, reference is made to such Registration Statement, including the
exhibits, financial statements and schedules filed therewith. Statements
contained in this Prospectus as to the contents of any contract or any other
document are not necessarily complete, and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
57
<PAGE> 58
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically.
The address of such Internet web site is http://www.sec.gov.
58
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation..................................... F-3
Pro Forma Combined Balance Sheet as of September 30, 1996
(unaudited)............................................ F-4
Pro Forma Combined Statements of Operations for the Year
Ended December 31, 1995 (unaudited).................... F-5
Pro Forma Combined Statements of Operations for the Nine
Months Ended September 30, 1995 (unaudited)............ F-6
Pro Forma Combined Statements of Operations for the Nine
Months Ended September 30, 1996 (unaudited)............ F-7
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-8
Historical Financial Statements
Medical Manager Corporation
Report of Independent Accountants...................... F-14
Balance Sheet.......................................... F-15
Notes to Balance Sheet................................. F-16
Personalized Programming, Inc.
Report of Independent Accountants...................... F-18
Balance Sheets......................................... F-19
Statements of Operations............................... F-20
Statements of Changes in Stockholder's Equity.......... F-21
Statements of Cash Flows............................... F-22
Notes to Financial Statements.......................... F-23
Systems Plus, Inc.
Report of Independent Accountants...................... F-27
Combined Balance Sheets................................ F-28
Combined Statements of Operations...................... F-29
Combined Statements of Changes in Stockholder's
Equity................................................ F-30
Combined Statements of Cash Flows...................... F-31
Notes to Combined Financial Statements................. F-32
RTI Business Systems, Inc.
Report of Independent Accountants...................... F-37
Balance Sheets......................................... F-38
Statements of Operations and Accumulated Deficit....... F-39
Statements of Cash Flows............................... F-40
Notes to Financial Statements.......................... F-41
National Medical Systems, Inc.
Report of Independent Accountants...................... F-46
Consolidated Balance Sheets............................ F-47
Consolidated Statements of Operations.................. F-48
Consolidated Statements of Changes in Stockholder's
Deficit............................................... F-49
Consolidated Statements of Cash Flows.................. F-50
Notes to Consolidated Financial Statements............. F-51
</TABLE>
F-1
<PAGE> 60
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Systems Management, Inc.
Report of Independent Accountants...................... F-58
Balance Sheets......................................... F-59
Statements of Operations............................... F-60
Statements of Changes in Stockholders' Equity.......... F-61
Statements of Cash Flows............................... F-62
Notes to Financial Statements.......................... F-63
GBP With Excellence, Inc.
Report of Independent Accountants...................... F-67
Balance Sheet.......................................... F-68
Statements of Operations and Accumulated Deficit....... F-69
Statements of Cash Flows............................... F-70
Notes to Financial Statements.......................... F-71
Medical Manager Division
Report of Independent Accountants...................... F-73
Financial Position..................................... F-74
Statements of Operations............................... F-75
Statements of Cash Flows............................... F-76
Notes to Financial Statements.......................... F-77
</TABLE>
F-2
<PAGE> 61
MEDICAL MANAGER CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisition by Medical Manager Corporation ("MMC") of substantially all
of the net assets of (a) Personalized Programming, Inc. ("PPI"), Systems Plus,
Inc. ("SPI"), RTI Business Systems, Inc. ("RTI"), National Medical Systems, Inc.
("NMS") and Systems Management, Inc. ("SMI") (together, the "Founding
Companies"). MMC and the Founding Companies are hereinafter referred to as the
"Company." These acquisitions (the "Mergers") will occur simultaneously with the
closing of MMC's initial public offering (this "Offering") and will be accounted
for as a combination of the Founding Companies at historical cost for accounting
purposes. PPI, one of the Founding Companies, has been identified as the
acquiror for financial statement presentation purposes. In addition, NMS
acquired the Medical Manager Division of Medix, Inc. on December 31, 1996. The
unaudited pro forma combined financial statements also give effect to a capital
contribution required to be made by the stockholders of NMS and to the issuance
of Common Stock by MMC to the stockholders of the Founding Companies upon the
consummation of the Mergers. These statements are based on historical financial
statements of the Founding Companies included elsewhere in this Prospectus and
the estimates and assumptions set forth below and in the notes to the Unaudited
Pro Forma Combined Financial Statements of the Company.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and this Offering as if they had occurred on September 30, 1996. The unaudited
pro forma combined statements of operations give effect to these transactions as
if they had occurred at the beginning of each period presented.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein do not purport to
represent what the Company's financial position or results of operations would
have actually been had such events occurred at the beginning of the periods
presented, as assumed, or to project the Company's financial position or results
of operations for any future period or the future results of the Founding
Companies. The unaudited pro forma combined financial statements should be read
in conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. Also see "Risk Factors" included elsewhere herein.
F-3
<PAGE> 62
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED BALANCE SHEET(1)
SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PPI SPI RTI NMS SMI ELIMINATIONS TOTAL ADJUSTMENT PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........ $2,977 $ 0 $ 84 $ 10 $ 455 $ 3,526 $ 828 $ 4,354
Investments...................... 202 0 0 0 0 202 (202) 0
Accounts receivable.............. 1,324 1,262 174 934 248 $(702) 3,240 382 3,622
Inventory........................ 109 82 164 122 189 666 192 858
Prepaid expenses and other
current assets................. 132 198 16 56 15 417 315 732
Deferred income taxes............ 0 0 262 0 0 262 0 262
------ ------ ------- ------- ------ ----- ------- ------- -------
Total current assets....... 4,744 1,542 700 1,122 907 (702) 8,313 1,515 9,828
PROPERTY AND EQUIPMENT, net........ 444 599 533 356 147 2,079 103 2,182
GOODWILL AND OTHER INTANGIBLES,
net.............................. 0 0 0 2,693 99 2,792 2,810 5,602
OTHER ASSETS....................... 0 986 0 520 0 1,506 (1,282) 224
------ ------ ------- ------- ------ ----- ------- ------- -------
Total assets............... $5,188 $3,127 $ 1,233 $ 4,691 $1,153 $(702) $14,690 $ 3,146 $17,836
====== ====== ======= ======= ====== ===== ======= ======= =======
CURRENT LIABILITIES
Current maturities of long-term
obligations.................... $ 0 $ 625 $ 514 $ 1,322 $ 104 $ 2,565 $(2,565) $ 0
Accounts payable and accrued
liabilities.................... 575 1,365 566 774 192 $(702) 2,770 0 2,770
Customer deposits and deferred
maintenance revenue............ 1,112 190 630 729 505 3,166 602 3,768
Income taxes payable............. 0 16 147 0 0 163 0 163
------ ------ ------- ------- ------ ----- ------- ------- -------
Total current
liabilities.............. 1,687 2,196 1,857 2,825 801 (702) 8,664 (1,963) 6,701
LONG-TERM OBLIGATIONS, net of
current maturities............... 0 0 140 729 230 1,099 (1,099) 0
SUBORDINATED NOTES PAYABLE......... 0 0 0 1,065 0 1,065 (1,065) 0
------ ------ ------- ------- ------ ----- ------- ------- -------
Total liabilities.......... 1,687 2,196 1,997 4,619 1,031 (702) 10,828 (4,127) 6,701
------ ------ ------- ------- ------ ----- ------- ------- -------
REDEEMABLE PREFERRED STOCK......... 0 0 0 500 0 500 (500) 0
STOCKHOLDERS' EQUITY
Common stock..................... 0 28 102 69 16 215 (98) 117
Additional paid-in capital....... 8 0 0 790 0 798 10,220 11,018
Retained earnings (deficit)...... 3,493 903 (866) (1,287) 106 2,349 (2,349) 0
------ ------ ------- ------- ------ ----- ------- ------- -------
Total stockholders'
equity................... 3,501 931 (764) (428) 122 3,362 7,773 11,135
------ ------ ------- ------- ------ ----- ------- ------- -------
Total liabilities and
stockholders' equity..... $5,188 $3,127 $ 1,233 $ 4,691 $1,153 $(702) $14,690 $ 3,146 $17,836
====== ====== ======= ======= ====== ===== ======= ======= =======
<CAPTION>
POST-MERGER AS
ADJUSTMENTS ADJUSTED
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........ $12,116 $16,470
Investments...................... 0
Accounts receivable.............. 3,622
Inventory........................ 858
Prepaid expenses and other
current assets................. 732
Deferred income taxes............ 262
------- -------
Total current assets....... 12,116 21,944
PROPERTY AND EQUIPMENT, net........ 2,182
GOODWILL AND OTHER INTANGIBLES,
net.............................. 5,602
OTHER ASSETS....................... 224
------- -------
Total assets............... $12,116 $29,952
======= =======
CURRENT LIABILITIES
Current maturities of long-term
obligations.................... $ 0
Accounts payable and accrued
liabilities.................... 2,770
Customer deposits and deferred
maintenance revenue............ 3,768
Income taxes payable............. 163
------- -------
Total current
liabilities.............. 6,701
LONG-TERM OBLIGATIONS, net of
current maturities............... 0
SUBORDINATED NOTES PAYABLE......... 0
------- -------
Total liabilities.......... 6,701
------- -------
REDEEMABLE PREFERRED STOCK......... 0
STOCKHOLDERS' EQUITY
Common stock..................... $ 60 177
Additional paid-in capital....... 12,056 23,074
Retained earnings (deficit)...... 0
------- -------
Total stockholders'
equity................... 12,116 23,251
------- -------
Total liabilities and
stockholders' equity..... $12,116 $29,952
======= =======
</TABLE>
- ---------------
(1) Pro forma amounts for Medical Manager Corporation have not been included as
such amounts are insignificant.
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 63
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(1)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI SPI RTI NMS(2) SMI ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems.......................... $ 1,018 $ 766 $2,712 $3,588 $1,094 $ 0 $ 9,178
Software license................. 7,529 12,503 0 0 0 (6,713) 13,319
Maintenance and other............ 2,473 1,910 2,241 5,568 1,623 0 13,815
------- ------- ------ ----- ------ ------- -------
Total revenue............. 11,020 15,179 4,953 9,156 2,717 (6,713) 36,312
------- ------- ------ ----- ------ ------- -------
Cost of revenue
Systems.......................... 704 441 1,486 2,764 517 (1,363) 4,549
Software license................. 651 6,978 0 0 0 (5,350) 2,279
Maintenance and other............ 227 1,682 1,215 3,300 1,714 0 8,138
------- ------- ------ ----- ------ ------- -------
Total costs of revenue.... 1,582 9,101 2,701 6,064 2,231 (6,713) 14,966
------- ------- ------ ----- ------ ------- -------
Gross margin.............. 9,438 6,078 2,252 3,092 486 $ 0 21,346
------- ------- ------ ----- ------ ------- -------
Operating expenses
Selling, general and
administrative................. 1,351 3,345 2,269 2,132 426 9,523
Research and development......... 2,024 0 0 0 0 2,024
Depreciation and amortization.... 226 102 58 493 32 911
------- ------- ------ ----- ------ ------- -------
Total operating expenses.. 3,601 3,447 2,327 2,625 458 12,458
------- ------- ------ ----- ------ ------- -------
Income (loss) from
operations.............. 5,837 2,631 (75) 467 28 8,888
Other income (expense)
Interest expense................. 0 (37) (33) (109) (23) (202)
Interest income.................. 136 88 0 0 0 224
Other............................ (27) 169 3 0 0 145
------- ------- ------ ----- ------ ------- -------
Income (loss) before income taxes.. 5,946 2,851 (105) 358 5 9,055
Income taxes....................... 0 53 0 0 0 53
------- ------- ------ ----- ------ ------- -------
Net income (loss)......... $ 5,946 $ 2,798 $ (105) $ 358 $ 5 $ 9,002
======= ======= ====== ====== ====== ======= =======
Pro Forma income per share................................................................................
Shares used in computing pro forma income per share.......................................................
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
(I) (J) (K) (L) (M) PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems.......................... $ 9,178
Software license................. 13,319
Maintenance and other............ 13,815
------- ------- ------- ------- ------- -------
Total revenue............. 36,312
------- ------- ------- ------- ------- -------
Cost of revenue
Systems.......................... $ (47) $ 35 4,537
Software license................. (27) 11 2,263
Maintenance and other............ (51) 41 8,128
------- ------- ------- ------- ------- -------
Total costs of revenue.... (125) 87 14,928
------- ------- ------- ------- ------- -------
Gross margin.............. 125 (87) 21,384
------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative................. (557) 39 9,005
Research and development......... 99 2,123
Depreciation and amortization.... (99) 812
------- ------- ------- ------- ------- -------
Total operating expenses.. (557) 39 11,940
------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. 682 (126) 9,444
Other income (expense)
Interest expense................. 19 $ 183 0
Interest income.................. $ (224) 0
Other............................ (169) (24)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes.. 682 (107) 183 (393) 9,420
Income taxes....................... $ 3,574 3,627
------- ------- ------- ------- ------- -------
Net income (loss)......... $ 682 $ (107) $ 183 $ (393) $(3,574) $ 5,793
======= ======= ======= ======= ======= =======
Pro Forma income per share.......................................................... $ 0.33
=======
Shares used in computing pro forma income per share................................. 17,705(n)
=======
</TABLE>
- ------------------
(1) Pro forma amounts for Medical Manager Corporation have not been included as
such amounts are insignificant.
(2) NMS is presented on a pro forma basis to include acquisitions of GBP and
Medix as if each had occurred on January 1, 1995. See Note 6.
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 64
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI SPI RTI NMS(2) SMI ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems...................... $ 751 $ 139 $1,617 $2,849 $ 523 $ 0 $ 5,879
Software license............. 5,771 9,350 0 0 0 (5,275) 9,846
Maintenance and other........ 1,825 1,465 1,736 3,946 1,215 (68) 10,119
------ ------ ------ ------ ------ ------- -------
Total revenue......... 8,347 10,954 3,353 6,795 1,738 (5,343) 25,844
------ ------ ------ ------ ------ ------- -------
Cost of revenue
Systems...................... 487 136 1,010 2,083 282 (1,426) 2,572
Software license............. 600 5,174 0 0 0 (3,917) 1,857
Maintenance and other........ 191 1,386 1,083 2,294 1,179 0 6,133
------ ------ ------ ------ ------ ------- -------
Total costs of
revenue............. 1,278 6,696 2,093 4,377 1,461 (5,343) 10,562
------ ------ ------ ------ ------ ------- -------
Gross margin.......... 7,069 4,258 1,260 2,418 277 15,282
------ ------ ------ ------ ------ ------- -------
Operating expenses
Selling, general and
administrative............. 908 2,357 1,313 1,542 323 6,443
Research and development..... 1,484 0 0 0 0 1,484
Depreciation and
amortization............... 140 77 44 297 27 585
------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 2,532 2,434 1,357 1,839 350 8,512
------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations.......... 4,537 1,824 (97) 579 (73) 6,770
Other income (expense)
Interest expense............. 0 (31) (24) (41) (8) (104)
Interest income.............. 143 63 206
Other........................ 0 176 176
------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes........................ 4,680 2,032 (121) 538 (81) 7,048
Income taxes................... 0 60 0 0 0 60
------ ------ ------ ------ ------ ------- -------
Net income (loss)..... $4,680 $1,972 $ (121) $ 538 $ (81) $ 6,988
====== ====== ====== ====== ====== ======= =======
Pro forma income per share..........................................................................
Shares used in computing pro forma income per share.................................................
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
(I) (J) (K) (L) (M) PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems...................... $ 5,879
Software license............. 9,846
Maintenance and other........ 10,119
------- ------- ------- ------- ------- -------
Total revenue......... 25,844
------- ------- ------- ------- ------- -------
Cost of revenue
Systems...................... $ (3) $ 26 2,595
Software license............. (19) 7 1,845
Maintenance and other........ (16) 33 6,150
------- ------- ------- ------- ------- -------
Total costs of
revenue............. (38) 66 10,590
------- ------- ------- ------- ------- -------
Gross margin.......... 38 (66) 15,254
------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative............. (254) 32 6,221
Research and development..... 74 1,558
Depreciation and
amortization............... 585
------- ------- ------- ------- ------- -------
Total operating
expenses............ (254) 106 8,364
------- ------- ------- ------- ------- -------
Income (loss) from
operations.......... 292 (172) 6,890
Other income (expense)
Interest expense............. $ 104 0
Interest income.............. $ (206) 0
Other........................ (176) 0
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 292 (172) 104 (382) 6,890
Income taxes................... $ 2,593 2,653
------- ------- ------- ------- ------- -------
Net income (loss)..... $ 292 $ (172) $ 104 $ (382) $(2,593) $ 4,237
======= ======= ======= ======= ======= =======
Pro forma income per share...................................................... $ 0.24
=======
Shares used in computing pro forma income per share............................. 17,705(n)
=======
</TABLE>
- ---------------
(1) Pro forma amounts for Medical Manager Corporation have not been included as
such amounts are insignificant.
(2) NMS is presented on a pro forma basis to include the acquisitions of GBP and
Medix as if each had occurred on January 1, 1995. See Note 6.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE> 65
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI SPI RTI NMS(2) SMI ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems...................... $ 566 $ 827 $1,804 $2,708 $1,502 $ 0 $ 7,407
Software license............. 6,055 10,132 0 0 0 (5,628) 10,559
Maintenance and other........ 1,866 1,244 2,575 4,621 1,445 (18) 11,733
------ ------ ------ ------ ------ ------- -------
Total revenue......... 8,487 12,203 4,379 7,329 2,947 (5,646) 29,699
------ ------ ------ ------ ------ ------- -------
Cost of revenue
Systems...................... 553 648 1,252 1,891 1,192 (1,291) 4,245
Software license............. 381 5,551 0 0 0 (4,355) 1,577
Maintenance and other........ 322 1,228 1,521 2,675 1,044 0 6,790
------ ------ ------ ------ ------ ------- -------
Total costs of
revenue............. 1,256 7,427 2,773 4,566 2,236 (5,646) 12,612
------ ------ ------ ------ ------ ------- -------
Gross margin........ 7,231 4,776 1,606 2,763 711 17,087
------ ------ ------ ------ ------ ------- -------
Operating expenses
Selling, general and
administrative............. 1,041 2,921 1,741 1,650 377 7,730
Research and development..... 1,935 0 0 410 0 2,345
Depreciation and
amortization .............. 189 117 68 450 47 871
------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 3,165 3,038 1,809 2,510 424 10,946
------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations........ 4,066 1,738 (203) 253 287 6,141
Other income (expense)
Interest expense............. 0 (12) (34) (130) (16) (192)
Interest income.............. 83 48 0 0 131
Other........................ 0 240 0 0 240
------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes........................ 4,149 2,014 (237) 123 271 6,320
Income taxes................... 0 36 0 0 0 36
------ ------ ------ ------ ------ ------- -------
Net income(loss)...... $4,149 $1,978 $ (237) $ 123 $ 271 $ 6,284
====== ====== ====== ====== ====== ======= =======
Pro forma income per share..........................................................................
Shares used in computing pro forma income per share.................................................
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
(I) (J) (K) (L) (M) PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems...................... $ 7,407
Software license............. 10,559
Maintenance and other........ 11,733
------- ------- ------- ------- ------- -------
Total revenue......... 29,699
------- ------- ------- ------- ------- -------
Cost of revenue
Systems...................... $ (29) $ 31 4,247
Software license............. (34) 4 1,547
Maintenance and other........ (42) 25 6,773
------- ------- ------- ------- ------- -------
Total costs of
revenue............. (105) 60 12,567
------- ------- ------- ------- ------- -------
Gross margin........ 105 (60) 17,132
------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative............. (638) 22 7,114
Research and development..... 50 2,395
Depreciation and
amortization .............. 871
------- ------- ------- ------- ------- -------
Total operating
expenses............ (638) 72 10,380
------- ------- ------- ------- ------- -------
Income (loss) from
operations........ 743 (132) 6,752
Other income (expense)
Interest expense............. $ 192 0
Interest income.............. $ (131) 0
Other........................ (240) 0
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 743 (132) 192 (371) 6,752
Income taxes................... $ 2,564 2,600
------- ------- ------- ------- ------- -------
Net income(loss)...... $ 743 $ (132) $ 192 $ (371) $(2,564) $ 4,152
======= ======= ======= ======= ======= =======
Pro forma income per share...................................................... $ 0.23
=======
Shares used in computing pro forma income per share............................. 17,705(n)
=======
</TABLE>
- ---------------
(1) Pro forma amounts for Medical Manager Corporation have not been included as
such amounts are insignificant.
(2) NMS is presented on a pro forma basis to include the acquisition of Medix as
if it had occurred on January 1, 1996. See Note 6.
See accompanying notes to unaudited pro forma combined financial statements.
F-7
<PAGE> 66
MEDICAL MANAGER CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. MEDICAL MANAGER CORPORATION BACKGROUND:
Medical Manager Corporation ("MMC") was formed to bring together the
research, development, service and support and sales and marketing efforts for
The Medical Manager, a comprehensive physician practice management system, in
one entity serving the United States. MMC has conducted no operations to date
and will acquire the Founding Companies simultaneously with the consummation of
this Offering.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations of all the Founding Companies and were derived from the
respective financial statements where indicated. All Founding Companies have a
December 31 year-end or they have been converted to a December 31 year-end. The
audited historical financial statements included elsewhere in this Prospectus
have been included in accordance with Securities and Exchange Commission (the
"SEC") Staff Accounting Bulletin No. 80. Eliminations are for intercompany
transactions.
3. ACQUISITION OF FOUNDING COMPANIES;
Concurrent with the closing of this Offering, MMC will acquire
substantially all of the net assets of the Founding Companies. The Mergers will
be accounted for as a combination of the Founding Companies at historical cost
for accounting purposes, with PPI being treated as the acquiror.
The following table sets forth for each Founding Company the consideration
(in thousands) to be paid to its common stockholders (i) in cash; and (ii) in
shares of common stock of MMC:
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
FAIR VALUE
CASH SHARES OF SHARES
------- ------ ----------
<S> <C> <C> <C>
PPI....................................................... $35,062 6,370 $ 70,070
SPI....................................................... 9,350 2,210 24,310
RTI....................................................... 1,753 350 3,850
NMS....................................................... -- 2,596 28,556
SMI....................................................... 779 180 1,980
------- ------ --------
Total........................................... $46,944 11,706 $128,766
======= ====== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records additional capital contribution by NMS.
(b) Records the distribution of PPI's Accumulated Adjustment Account.
(c) Records the distribution of SPI's Accumulated Adjustment Account.
(d) Records the purchase of Medix by NMS.
(e) Records the conversion of NMS preferred stock and notes payable to
common stock and exercise of warrants for NMS.
(f) Records the repayment of debt obligations and other pro forma
adjustments.
(g) Records the proceeds from the issuance of 6,000,000 shares of MMC
Common Stock, net of estimated offering costs of $6,940,000 (based on the
initial public offering price of $11.00 per share). Offering costs primarily
consist of underwriting discounts and commissions, legal fees, accounting fees
and printing expenses.
The holders of 10.5 million shares of Common Stock issued in partial
payment of the Mergers have agreed not to offer, sell or otherwise dispose of
any of those shares for a period of two years after this Offering (or for such
shorter period as the SEC may prescribe as the holding period for restricted
securities under Rule 144(d)).
F-8
<PAGE> 67
MEDICAL MANAGER CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS: -- (CONTINUED)
(h) Records the cash portion to be paid to the stockholders of the Founding
Companies in connection with the Mergers.
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(i) Adjusts compensation expense to the level the stockholders of certain
of the Founding Companies have agreed to receive subsequent to the Mergers.
(j) Adjusts for the effects of assets distributed to and the costs of
certain building leases executed by MMC with the stockholders of PPI and SMI.
(k) Records change in interest expense for pro forma adjustments to debt.
(l) Records pro forma change in interest and dividend income and realized
gains (losses) on investments for pro forma adjustments to cash and investments.
(m) Records the incremental provision for federal and state income taxes
relating to the compensation differential, S corporation income and other pro
forma adjustments.
(n) The number of shares estimated to be outstanding on completion of this
Offering includes the following:
<TABLE>
<S> <C>
Outstanding................................................. 3
Issued at Initial Public Offering........................... 6,000,000
Issued to acquire Founding Companies........................ 11,705,467
Shares assumed issued from Long-Term Incentive Plan......... 1,530,000
Shares assumed repurchased from proceeds from shares assumed
issued from Long-Term Incentive Plan...................... (1,530,000)
----------
Shares estimated to be outstanding.......................... 17,705,470
==========
</TABLE>
6. NMS AND AFFILIATES PRO FORMA COMBINED STATEMENTS OF OPERATIONS:
The following statements set forth the pro forma combination of NMS's
operations with those of Medix in 1995 and 1996 and GBP in 1995. Pro forma
adjustments for NMS and GBP relate to contractual salary amounts. Pro forma
adjustments for Medix relate to adjustments of expenses for payroll, occupancy
costs, administrative and other operating costs as provided for by NMS's
management services agreement with Medix's parent company.
F-9
<PAGE> 68
MEDICAL MANAGER CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize the unaudited pro forma combined balance
sheet adjustments:
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET
ADJUSTMENTS (A) (B) (C) (D) (E) (F) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 11,875 $ (2,977) $ $ $ 91 $(8,161) $ 828
Investments.................................... (202) (202)
Accounts receivable............................ 382 382
Inventory...................................... 192 192
Prepaid expenses and other current assets...... 315 315
Property and equipment, net.................... 103 103
Goodwill and other intangibles................. 2,810 2,810
Other assets................................... (782) (500) (1,282)
Current maturities of long term
obligations.................................. (821) (111) (2,700) 6,197 2,565
Customer deposits and deferred maintenance..... (602) (602)
Long-term obligations.......................... 200 899 1,099
Subordinated notes payable..................... 1,065 1,065
Redeemable preferred stock..................... 500 500
Common stock................................... (9) (13) 120 98
Additional paid-in capital..................... (11,866) 8 (778) 2,416 (10,220)
Retained earnings.............................. 3,992 893 (2,536) 2,349
-------- -------- ----- ------- ----- ------- --------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ===== ------- ----- ------- --------
</TABLE>
<TABLE>
<CAPTION>
POST-MERGER BALANCE SHEET
ADJUSTMENTS (G) (H) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 59,060 $(46,944) $ 12,116
Investments.................................... 0
Accounts receivable............................ 0
Inventory...................................... 0
Prepaid expenses and other current assets...... 0
Property and equipment, net.................... 0
Goodwill and other intangibles................. 0
Other assets................................... 0
Current maturities of long term debt........... 0
Customer deposits and deferred
maintenance.................................. 0
Long-term debt, net of current maturities...... 0
Subordinated notes payable..................... 0
Redeemable preferred stock..................... 0
Common stock................................... (60) (60)
Additional paid-in capital..................... (59,000) 46,944 (12,056)
Marketable securities valuation................ 0
Retained earnings.............................. 0
-------- -------- ----- ------- ----- ------- --------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ===== ======= ===== ======= ========
</TABLE>
F-10
<PAGE> 69
NMS AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NMS MEDIX GBP
----------------------------------- ----------------------------------- ----------
PRO PRO
FORMA PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA HISTORICAL
---------- ----------- ------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems......................... $1,516 $1,516 $ 520 $ 520 $1,552
Maintenance and other........... 615 615 3,944 3,944 1,009
------ ------ ------ ------ ------
Total revenue............. 2,131 2,131 4,464 4,464 2,561
------ ------ ------ ------ ------
Cost of revenue
Systems......................... 1,129 1,129 361 361 1,274
Maintenance and other........... 596 596 2,829 $ (686) 2,143 561
------ ------ ------ ------ ------ ------
Total costs of revenue.... 1,725 1,725 3,190 686 2,504 1,835
------ ------ ------ ------ ------ ------
Gross margin.............. 406 406 1,274 686 1,960 726
------ ------ ------ ------ ------ ------
Operating expenses
Selling, general and
administrative................ 395 $ 300 695 1,189 (453) 736 752
Depreciation and amortization... 197 197 90 113 203 22
------ ------ ------ ------ ------ ------ ------
Total operating
expenses................ 592 300 892 1,279 (340) 939 774
------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations.............. (186) (300) (486) (5) 1,026 1,021 (48)
Other income (expense)
Interest expense................ (28) (28) (60) 60 (31)
Interest income................. 15 (15)
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................... (214) (300) (514) (50) 1,071 1,021 (79)
Income taxes (benefit)............ (10) 10 0 0
------ ------ ------ ------ ------ ------ ------
Net income (loss)......... $ (214) $ (300) $ (514) $ (40) $1,061 $1,021 $ (79)
====== ====== ====== ====== ====== ====== ======
<CAPTION>
GBP
---------------------
PRO
FORMA PRO
ADJUSTMENTS FORMA TOTAL
----------- ------ ------
<S> <C> <C> <C>
Revenue
Systems......................... $1,552 $3,588
Maintenance and other........... 1,009 5,568
------ ------
Total revenue............. 2,561 9,156
------ ------
Cost of revenue
Systems......................... 1,274 2,764
Maintenance and other........... 561 3,300
------ ------
Total costs of revenue.... 1,835 6,064
------ ------
Gross margin.............. 726 3,092
------ ------
Operating expenses
Selling, general and
administrative................ $(51) 701 2,132
Depreciation and amortization... 71 93 493
---- ------ ------
Total operating
expenses................ 20 794 2,625
---- ------ ------
Income (loss) from
operations.............. (20) (68) 467
Other income (expense)
Interest expense................ (50) (81) (109)
Interest income.................
------ ------
Income (loss) before income
taxes........................... (149) 358
Income taxes (benefit)............ 0 0
---- ------ ------
Net income (loss)......... $(70) $ (149) $ 358
==== ====== ======
</TABLE>
F-11
<PAGE> 70
NMS AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NMS MEDIX GBP
--------------------------------- --------------------------------- ----------
PRO FORMA PRO PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA HISTORICAL
---------- ----------- ------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems............................... $1,112 $1,112 $ 472 $ 472 $1,265
Maintenance and other................. 479 479 2,925 2,925 542
------ ------ ------ ------ ------
Total revenue................. 1,591 1,591 3,397 3,397 1,807
------ ------ ------ ------ ------
Cost of revenue
Systems............................... 828 828 368 $ (16) 352 903
Maintenance and other................. 429 429 2,080 (581) 1,499 366
------ ------ ------ ------ ------
Total costs of revenue........ 1,257 1,257 2,448 (597) 1,851 1,269
------ ------ ------ ------ ------
Gross margin.................. 334 334 949 597 1,546 538
------ ------ ------ ----- ------ ------
Operating expenses
Selling, general and administrative... 250 $ 225 475 862 (357) 505 612
Depreciation and amortization......... 134 134 56 92 148 15
------ ----- ------ ------ ----- ------ ------
Total operating expenses...... 384 225 609 918 (265) 653 627
------ ----- ------ ------ ----- ------ ------
Income (loss) from
operations.................. (50) (225) (275) 31 862 893 (89)
Other income (expense)
Interest expense...................... (19) (19) (58) 58 (22)
Interest income....................... 13 (13)
------ ----- ------ ------ ----- ------ ------
Income (loss) before income taxes....... (69) (225) (294) (14) 907 893 (111)
Income taxes (benefit).................. 0 (3) 3
------ ----- ------ ------ ----- ------ ------
Net income (loss)............. $ (69) $(225) $ (294) $ (11) $ 904 $ 893 $ (111)
====== ===== ====== ====== ===== ====== ======
<CAPTION>
GBP
--------------------
PRO FORMA PRO
ADJUSTMENTS FORMA TOTAL
----------- ------ ------
<S> <C> <C> <C>
Revenue
Systems............................... $1,265 $2,849
Maintenance and other................. 542 3,946
------ ------
Total revenue................. 1,807 6,795
------ ------
Cost of revenue
Systems............................... 903 2,083
Maintenance and other................. 366 2,294
------ ------
Total costs of revenue........ 1,269 4,377
------ ------
Gross margin.................. 538 2,418
------ ------
Operating expenses
Selling, general and administrative... $(50) 562 1,542
Depreciation and amortization......... 15 297
---- ------ ------
Total operating expenses...... (50) 577 1,839
---- ------ ------
Income (loss) from
operations.................. 50 (39) 579
Other income (expense)
Interest expense...................... (22) (41)
Interest income.......................
---- ------ ------
Income (loss) before income taxes....... 50 (61) 538
Income taxes (benefit)..................
---- ------ ------
Net income (loss)............. $ 50 $ (61) $ 538
==== ====== ======
</TABLE>
- ------------------
F-12
<PAGE> 71
NMS AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MEDIX
---------------------------------
PRO
NMS FORMA PRO
HISTORICAL HISTORICAL ADJUSTMENTS FORMA TOTAL
---------- ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue
Systems........................................ $2,430 $ 278 $ 278 $2,708
Maintenance and other.......................... 1,670 2,951 2,951 4,621
------ ------ ------ ------
Total revenue.......................... 4,100 3,229 3,229 7,329
------ ------ ------ ------
Cost of revenue
Systems........................................ 1,731 195 $ (35) 160 1,891
Maintenance and other.......................... 1,212 1,934 (471) 1,463 2,675
------ ------ ----- ------ ------
Total costs of revenue................. 2,943 2,129 (506) 1,623 4,566
------ ------ ----- ------ ------
Gross margin........................... 1,157 1,100 506 1,606 2,763
------ ------ ----- ------ ------
Operating expenses
Selling, general and administrative............ 1,069 899 (318) 581 1,650
Research and development....................... 410 0 0 0 410
Depreciation and amortization.................. 294 65 91 156 450
------ ------ ----- ------ ------
Total operating expenses............... 1,773 964 (227) 737 2,510
------ ------ ----- ------ ------
Income (loss) from operations.......... (616) 136 733 869 253
Other income (expense)
Interest expense............................... (130) (41) 41 (130)
Interest income................................ 11 (11)
------ ------ ----- ------ ------
Income (loss) before income taxes................ (746) 106 763 869 123
Income taxes..................................... 37 (37)
------ ------ ----- ------ ------
Net income (loss)...................... $ (746) $ 69 $ 800 $ 869 $ 123
====== ====== ===== ====== ======
</TABLE>
F-13
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Medical Manager Corporation
We have audited the accompanying balance sheet of Medical Manager
Corporation as of September 30, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Medical Manager Corporation as of
September 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 4 to the balance sheet, the Company was formed
in July 1996 and has entered into definitive agreements for the acquisition of
substantially all the net assets of Personalized Programming, Inc., Systems
Plus, Inc. and Systems Plus Distribution, Inc., RTI Business Systems, Inc.,
National Medical Systems, Inc. and Systems Management, Inc. in connection with
an initial public offering of its common stock.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
January 16, 1997
F-14
<PAGE> 73
MEDICAL MANAGER CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100
====
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and Contingencies (Note 4)......................
STOCKHOLDERS' EQUITY
Preferred Stock, 500,000 shares authorized, none issued and
outstanding...............................................
Common Stock, $0.01 par value, 50,000,000 shares authorized,
3 issued and outstanding..................................
Additional paid in capital.................................. 100
----
$100
====
</TABLE>
See accompanying notes to balance sheet.
F-15
<PAGE> 74
MEDICAL MANAGER CORPORATION
NOTES TO BALANCE SHEET
1. ORGANIZATION AND OPERATIONS:
Medical Manager Corporation ("MMC") was formed in July 1996 to bring
together the research and development, sales, marketing and support resources
for The Medical Manager, a leading physician practice management system for
independent physicians, physician groups, MSO's, IPA's, management care
organizations and other providers of health care services in the United States.
MMC intends to acquire five companies (the "Founding Companies"), including the
developer of The Medical Manager, the master distributor of The Medical Manager
and three of the national dealers for The Medical Manager (the "Mergers");
complete an initial public offering (the "Offering") of its common stock and,
subsequent to the Offering, continue to acquire, through mergers or purchase,
other dealers to expand its national and regional operations. MMC plans to file
a registration statement on Form S-1 in September 1996 for the sale of its
common stock.
MMC's primary asset at September 30, 1996 was cash. MMC has not conducted
any operations, and all activities to date relating to the Mergers and the
Offering have been conducted by National Medical Systems, Inc. ("NMS"), one of
the companies to be acquired in the Mergers. Cash of $100 results from the
initial capitalization of MMC. There is no assurance that the Acquisitions
discussed below will be completed and that MMC will be able to generate future
operating revenue. MMC is dependent upon the Offering to fund the Mergers and
future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income Taxes. Income taxes are provided under the liability method
considering the tax effects of transactions reported in the financial statements
that are different from the tax returns. Deferred tax assets or liabilities
represent the future tax consequences of those differences, which will either be
taxable or deductible when the underlying assets or liabilities are recovered or
settled. MMC provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized.
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 periods. Actual results could differ from those estimates; however,
management does not believe these differences would have a material effect on
operating results.
New Accounting Pronouncements. Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," is effective for years beginning after December 15, 1995. This
statement requires that long-lived assets and certain intangibles to be held and
used by MMC be reviewed for impairments. This pronouncement is not expected to
have a material impact on the financial position of MMC.
SFAS No. 123, "Accounting for Stock-Based Compensation," will be effective
for MMC. SFAS No. 123 permits, but does not require, a fair-value based method
of accounting for employee stock option plans which results in compensation
expense recognition when stock options are granted. As permitted by SFAS No.
123, MMC will provide pro forma disclosure of net income and earnings per share,
as applicable, in the notes to future consolidated financial statements.
3. STOCK OPTIONS:
MMC has approved the 1996 Incentive Plan (the "Plan"), which provides for
the granting or awarding of stock options and stock appreciation rights to
non-employee directors, officers and other key employees (including officers of
the Founding Companies). The number of shares authorized and reserved for
issuance under the Plan is limited to the greater of 2,000,000 shares or 10% of
the number of shares of Common Stock
F-16
<PAGE> 75
3. STOCK OPTIONS: -- (CONTINUED)
outstanding at the time of the grant. The options will have an exercise price
equal to the initial public offering price and will vest as to 25% each on the
date that is six months, 18 months, 30 months and 42 months after the
consummation of the Offering, and will expire on the earlier of 10 years after
the date of the grant or three months after termination of employment.
Additionally, 250,000 shares of Common Stock have been reserved for issuance
upon exercise of options that may be granted under MMC's 1996 Non-Employee
Directors' Stock Plan.
4. COMMITMENTS AND CONTINGENCIES:
As discussed in Note 1, MMC has entered into definitive agreements with the
Founding Companies providing for the acquisition by MMC of Personalized
Programming, Inc. ("PPI"), Systems Plus, Inc. and Systems Plus Distribution,
Inc. ("SPI"), RTI Business Systems, Inc. ("RTI"), National Medical Systems, Inc.
("NMS") and Systems Management, Inc. ("SMI"). The Mergers will be accounted for
as a net book value purchase of the Founding Companies at historical cost for
accounting purposes, with PPI being treated as the acquiror.
The following table sets forth for each Founding Company the consideration
to be paid to its common stockholders (i) in cash and (ii) in shares of common
stock of MMC (in thousands):
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
FAIR VALUE
CASH SHARES OF SHARES
------- ------- ----------
<S> <C> <C> <C>
PPI.................................................. $35,062 6,370 $ 70,070
SPI.................................................. 9,350 2,210 24,310
RTI.................................................. 1,753 350 3,850
NMS.................................................. -- 2,596 28,556
SMI.................................................. 779 180 1,980
------- ------- --------
$46,944 11,706 $128,766
======= ======= ========
</TABLE>
5. SUBSEQUENT EVENTS:
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-17
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Personalized Programming, Inc.
We have audited the accompanying balance sheets of Personalized
Programming, Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the
related statements of operations, changes in stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1995 and for the
six months ended June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Personalized Programming,
Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the six months ended June 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the financial statements, in July 1996 the
Company and its stockholder entered into a definitive agreement with Medical
Manager Corporation (MMC) providing for the merger of the Company with a
subsidiary of MMC.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
August 23, 1996, except for certain
information in Note 8 for which the
date is January 7, 1997
F-18
<PAGE> 77
PERSONALIZED PROGRAMMING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $1,308,844 $1,166,679 $2,609,824 $2,977,039
Investments................................. 255,962 355,414 507,421 202,488
Accounts receivable......................... 1,272,374 1,383,849 1,395,878 1,323,792
Inventory................................... 0 0 0 109,127
Prepaid expenses and other current assets... 61,194 71,039 79,506 132,051
---------- ---------- ---------- ----------
Total current assets................ 2,898,374 2,976,981 4,592,629 4,744,497
PROPERTY AND EQUIPMENT, net................... 1,817,798 2,842,315 370,252 444,343
---------- ---------- ---------- ----------
Total assets........................ $4,716,172 $5,819,296 $4,962,881 $5,188,840
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.... $ 337,106 $ 474,783 $ 486,944 $ 575,388
Customer deposits and deferred maintenance
revenue.................................. 551,793 581,357 1,107,110 1,111,983
---------- ---------- ---------- ----------
Total current liabilities........... 888,899 1,056,140 1,594,054 1,687,371
---------- ---------- ---------- ----------
Commitments and contingencies (Notes 5 and 8)
STOCKHOLDER'S EQUITY
Common stock $0.10 par value, 1,000 shares
authorized, issued and outstanding....... 100 100 100 100
Additional paid-in capital.................. 8,035 8,035 8,035 8,035
Unrealized gain (loss) on investments....... (95,014) 2,085 2,085 0
Retained earnings........................... 3,914,152 4,752,936 3,358,607 3,493,334
---------- ---------- ---------- ----------
Total stockholder's equity.......... 3,827,273 4,763,156 3,368,827 3,501,469
---------- ---------- ---------- ----------
Total liabilities and stockholder's
equity............................ $4,716,172 $5,819,296 $4,962,881 $5,188,840
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 78
PERSONALIZED PROGRAMMING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- JUNE 30, ------------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems......................... $ 693,964 $1,013,675 $ 1,017,993 $ 406,971 $ 750,739 $ 566,011
Software license................ 4,840,055 6,327,994 7,528,997 4,058,340 5,771,264 6,055,033
Maintenance and other........... 1,355,726 2,275,515 2,472,704 1,308,373 1,825,222 1,865,514
---------- ---------- ----------- ---------- ---------- ----------
Total revenue................ 6,889,745 9,617,184 11,019,694 5,773,684 8,347,225 8,486,558
---------- ---------- ----------- ---------- ---------- ----------
Cost of revenue
Systems......................... 571,735 751,643 703,755 385,229 487,160 553,233
Software license................ 63,675 380,877 650,460 286,062 600,158 380,855
Maintenance and other........... 174,820 235,012 227,435 260,164 190,584 321,683
---------- ---------- ----------- ---------- ---------- ----------
Total costs of revenue....... 810,230 1,367,532 1,581,650 931,455 1,277,902 1,255,771
---------- ---------- ----------- ---------- ---------- ----------
Gross margin............ 6,079,515 8,249,652 9,438,044 4,842,229 7,069,323 7,230,787
---------- ---------- ----------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative............... 982,373 1,184,097 1,350,427 646,855 907,917 1,040,812
Research and development........ 1,039,971 1,501,605 2,024,252 1,223,679 1,484,176 1,934,956
Depreciation and amortization... 104,475 196,547 226,167 132,888 139,636 189,477
---------- ---------- ----------- ---------- ---------- ----------
Total operating expenses..... 2,126,819 2,882,249 3,600,846 2,003,422 2,531,729 3,165,245
---------- ---------- ----------- ---------- ---------- ----------
Income from
operations............ 3,952,696 5,367,403 5,837,198 2,838,807 4,537,594 4,065,542
Other income (expense)
Interest and dividend income.... 91,612 69,950 136,020 33,161 142,843 83,593
Other........................... 81,382 (15,097) (27,550) 20,966
---------- ---------- ----------- ---------- ---------- ----------
Net income.............. $4,125,690 $5,422,256 $ 5,945,668 $2,892,934 $4,680,437 $4,149,135
========== ========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 79
PERSONALIZED PROGRAMMING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED
--------------- PAID IN GAIN (LOSS) RETAINED
SHARES AMOUNT CAPITAL ON INVESTMENT EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993.......... 1,000 $100 $8,035 $(49,775) $ 2,520,860 $ 2,479,220
Net income..................... 4,125,690 4,125,690
Dividends...................... (3,985,000) (3,985,000)
Change in unrealized (loss) on
investments................. (37,850) (37,850)
----- ---- ------ -------- ----------- -----------
Balance December 31, 1993........ 1,000 100 8,035 (87,625) 2,661,550 2,582,060
Net income..................... 5,422,256 5,422,256
Dividends...................... (4,169,654) (4,169,654)
Change in unrealized (loss) on
investments................. (7,389) (7,389)
----- ---- ------ -------- ----------- -----------
Balance December 31, 1994........ 1,000 100 8,035 (95,014) 3,914,152 3,827,273
Net income..................... 5,945,668 5,945,668
Dividends...................... (5,106,884) (5,106,884)
Change in unrealized (loss) on
investments................. 97,099 97,099
----- ---- ------ -------- ----------- -----------
Balance December 31, 1995........ 1,000 100 8,035 2,085 4,752,936 4,763,156
Net income..................... 2,892,934 2,892,934
Dividends...................... (4,287,263) (4,287,263)
----- ---- ------ -------- ----------- -----------
Balance June 30, 1996............ 1,000 100 8,035 2,085 3,358,607 3,368,827
Net income..................... 1,256,201 1,256,201
Dividends...................... (1,121,474) (1,121,474)
Change in unrealized gain on
investments................. (2,085) (2,085)
----- ---- ------ -------- ----------- -----------
Balance September 30, 1996
(unaudited).................... 1,000 $100 $8,035 $ 0 $ 3,493,334 $ 3,501,469
===== ==== ====== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 80
PERSONALIZED PROGRAMMING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED SEPTEMBER 30,
------------------------------------------ JUNE 30, -------------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 4,125,690 $ 5,422,256 $ 5,945,668 $2,892,934 $ 4,680,437 $ 4,149,135
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 104,475 196,547 226,167 132,888 139,636 189,477
Gain on sale of property and
equipment............................ 0 0 0 (3,309) 0 (3,309)
Realized (gains) losses on marketable
securities........................... 0 39,183 3,082 26 (62,813) 26
Changes in assets and liabilities
Accounts receivable.................... 873,687 (635,245) (111,475) (12,030) (314,147) 60,057
Prepaid expenses and other current
assets............................... (36,757) 62,710 (9,845) (8,466) (22,500) (61,014)
Accounts payable and accrued
liabilities.......................... (59,347) 101,965 137,677 12,161 330,267 (8,522)
Customer deposits and deferred
maintenance revenue.................. 112,218 115,813 29,564 323,265 371,745 328,140
Income taxes payable................... (10,729) 0 0 0 --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities....................... 5,109,237 5,303,229 6,220,838 3,337,469 5,122,625 4,653,990
----------- ----------- ----------- ----------- ----------- -----------
Cash flow from investing activities:
Purchases of investments................. (6,232,076) (150,433) (247,595) (49,812) (147,305) (50,543)
Proceeds from the sale of investments.... 6,204,571 190,489 242,160 100,264 133,919 100,264
Purchases of property and equipment...... (969,767) (210,644) (1,250,684) (124,851) (1,070,207) (255,531)
Proceeds on sale of property and
equipment.............................. 8,900 0 0 25,690 0 25,690
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (988,372) (170,588) (1,256,119) (48,709) (1,083,593) (180,120)
----------- ----------- ----------- ----------- ----------- -----------
Cash flow from financing activities:
Dividends................................ (3,985,000) (4,169,654) (5,106,884) (1,845,615) (2,512,387) (2,663,510)
----------- ----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities....................... (3,985,000) (4,169,654) (5,106,884) (1,845,615) (2,512,387) (2,663,510)
----------- ----------- ----------- ----------- ----------- -----------
Net change in cash and cash
equivalents...................... 135,865 962,987 (142,165) 1,443,145 1,526,645 1,810,360
Cash and cash equivalents:
Beginning of period...................... 209,992 345,857 1,308,844 1,166,679 1,308,844 1,166,679
----------- ----------- ----------- ----------- ----------- -----------
End of period............................ $ 345,857 $ 1,308,844 $ 1,166,679 $2,609,824 $ 2,835,489 $ 2,977,039
=========== =========== =========== =========== =========== ===========
Non-cash dividends......................... $ 0 $ 0 $ 0 $2,441,648 $ 0 $ 2,747,312
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 81
PERSONALIZED PROGRAMMING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Personalized Programming, Inc. is the developer of The Medical Manager
physician practice management system that is sold through a master distributor
and by direct sales to certain other dealers to clients throughout the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1995 and 1996 and for the nine months then ended are unaudited.
All adjustments and accruals (consisting only of normal recurring adjustments)
have been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Revenue Recognition. Revenue from software license is recognized upon sale
and shipment. Revenue from the sale of systems is recognized when the system has
been installed and the related client training has been completed. Amounts
billed in advance of installation and pending completion of remaining
significant obligations 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 sales for systems, software license and maintenance and other based upon
revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. With the exception of approximately $749,000, $708,000,
$728,000 and $702,000 in receivables from a significant customer at December 31,
1994 and 1995, June 30, 1996 and (unaudited) September 30, 1996, respectively
(See Note 8), the Company's credit concentrations are 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.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
Investments. The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, which requires fair value accounting for debt and equity
securities. The Company classifies its investments as available for sale, which
requires that they be recorded at fair market value with gross unrealized
holding gains and losses treated as a separate component of stockholder's
equity.
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.
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 accelerated methods
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.
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
F-23
<PAGE> 82
PERSONALIZED PROGRAMMING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
Income Taxes. The Company has elected S corporation status, as defined by
the Internal Revenue Code, whereby the Company is not subject to taxation for
federal purposes. Instead, the taxable income of the S corporation is included
in the individual income tax return of the Company's single stockholder for
federal income tax purposes. Accordingly, a provision for income taxes has not
been reflected in the financial statements. The Company's S corporation status
will terminate with the effective date of the Merger discussed in Note 8.
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.
New Accounting Pronouncements. SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed Of, is effective
for years beginning after December 15, 1995. This Statement requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. This pronouncement is not expected to have a material
impact on the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1996 presentations.
3. INVESTMENTS:
Investments held consisted of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
------------------ FAIR MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Marketable equity securities.................. $202,488 $ $ $202,488
======== ======= ======== ========
JUNE 30, 1996
-------------------------------------------
Marketable equity securities.................. $505,336 $18,105 $ 16,020 $507,421
======== ======= ======== ========
DECEMBER 31, 1995
-------------------------------------------
Marketable equity securities.................. $253,120 $17,824 $ 15,530 $255,414
Fixed income securities....................... 100,209 209 100,000
-------- ------- -------- --------
$353,329 $17,824 $ 15,739 $355,414
======== ======= ======== ========
DECEMBER 31, 1994
-------------------------------------------
Marketable equity securities.................. $350,976 $10,687 $105,701 $255,962
======== ======= ======== ========
</TABLE>
F-24
<PAGE> 83
PERSONALIZED PROGRAMMING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and improvements................... $ 760,467 $ 856,748
Building................................ 857,896 1,784,932
Furniture and equipment................. 326,959 446,234 $466,386 $ 527,845
Computers............................... 270,809 374,800 440,287 509,511
Leasehold improvements.................. 42,359 46,460 19,810 19,810
---------- ---------- -------- ----------
2,258,490 3,509,174 926,483 1,057,166
Less accumulated depreciation and
amortization.......................... (440,692) (666,859) 556,231 (612,823)
---------- ---------- -------- ----------
$1,817,798 $2,842,315 $370,252 $ 444,343
========== ========== ======== ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under an operating lease from an
entity owned by the Company's stockholder. Such facilities were distributed to
the stockholder in March 1996 at their fair value. The lease provides for two
one year renewals. Future minimum rental commitments under the noncancelable
operating lease are approximately as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30:
<S> <C>
1997................................................. $320,000
1998................................................. 320,000
1999................................................. 160,000
--------
Total...................................... $800,000
========
</TABLE>
Rent expense for the nine months ended September 30, 1996 was approximately
$170,000.
6. RETIREMENT PLANS:
The Company has a non-contributory profit sharing plan covering
substantially all full-time employees. Contributions are made at the discretion
of the Board of Directors. Total expense amounted to approximately $186,400,
$246,300 and $265,700 for 1993, 1994 and 1995 and (unaudited) $199,300 for the
nine months ended September 30, 1995, respectively. There was no contribution
for the nine months ended September 30, 1996.
7. SIGNIFICANT CUSTOMER:
Revenue from one customer comprised 52%, 48%, 47%, 47%, 47% and 49% of the
Company's revenue for 1993, 1994 and 1995 for the six months ended June 30, 1996
and for the (unaudited) nine months ended September 30, 1995 and 1996,
respectively.
8. SUBSEQUENT EVENTS:
In July 1996, the Company and its stockholder entered into a definitive
agreement with Medical Manager Corporation ("MMC") providing for the Merger of
the Company with a subsidiary of MMC. All outstanding shares of the Company's
common stock will be exchanged for cash and shares of MMC's common stock
concurrent with the consummation of the initial public offering of the common
stock of MMC.
F-25
<PAGE> 84
PERSONALIZED PROGRAMMING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS: -- (CONTINUED)
In connection with the Merger, the Company will elect to terminate its S
corporation status and will be required to effect the asset and liability method
of accounting for deferred income taxes. Under this method, deferred tax assets
and liabilities are established based on the differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse. Had the
Company elected to terminate its S Corporation status immediately prior to
September 30, 1996, the Company would have been required to establish a deferred
tax asset of approximately $325,000 related primarily to the use of different
methods of accounting for deferred revenue for tax and financial reporting
purposes. Also, the Company will dividend certain assets to the stockholder,
consisting primarily of cash and investments, in an amount equal to the balance
in the Company's S corporation Accumulated Adjustment Account. Had the estimated
balance of the Accumulated Adjustment Account of $4,000,000 at September 30,
1996 been distributed and recorded as of that date, the effect on the
accompanying balance sheet would be a decrease of $3,180,000 in assets, an
increase of $820,000 in notes payable and a decrease of $4,000,000 in
stockholder's equity.
Revenue from other companies which have also entered into definitive
agreements with MMC totaled approximately $3,617,000, $4,741,000, $5,568,000,
$3,044,000, $4,507,000 and $4,722,000 for 1993, 1994 and 1995 for the six months
ended June 30, 1996 and for the (unaudited) nine months ended September 30, 1995
and 1996, respectively. Such amounts include the significant customer discussed
in Note 2.
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-26
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Systems Plus, Inc. and Systems Plus Distribution, Inc.
We have audited the accompanying combined balance sheets of Systems Plus,
Inc. and Systems Plus Distribution, Inc. as of December 31, 1994 and 1995 and
June 30, 1996 and the related combined statements of operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Systems
Plus, Inc. and Systems Plus Distribution, Inc. as of December 31, 1994 and 1995
and June 30, 1996 and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the combined financial statements, in July 1996
the Companies and their stockholder entered into a definitive agreement with
Medical Manager Corporation (MMC) providing for the merger of the Companies with
subsidiaries of MMC.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
August 28, 1996, except for certain
information in Note 10 for which the
date is January 7, 1997
F-27
<PAGE> 86
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $ 286,389 $ 597,606 $ 285,603 $ 0
Investments................................. 1,184,628 1,793,420 50,000 0
Accounts receivable......................... 1,394,759 1,479,740 1,462,861 1,262,046
Inventory................................... 125,000 199,439 114,000 82,000
Prepaid expenses and other current assets... 235,450 198,930 145,027 197,456
---------- ---------- ---------- ----------
Total current assets................ 3,226,226 4,269,135 2,057,491 1,541,502
PROPERTY AND EQUIPMENT, net................... 237,375 421,238 623,829 598,830
OTHER ASSETS.................................. 498,679 422,312 797,333 986,019
---------- ---------- ---------- ----------
Total assets........................ $3,962,280 $5,112,685 $3,478,653 $3,126,351
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable............................... $ 536,354 $ 504,159 $ 0 $ 625,000
Accounts payable and accrued liabilities.... 860,256 947,063 1,029,014 1,364,751
Customer deposits and deferred maintenance
revenue.................................. 42,811 117,677 172,357 189,836
Income taxes payable........................ 31,624 5,450 3,014 15,948
---------- ---------- ---------- ----------
Total current liabilities........... 1,471,045 1,574,349 1,204,385 2,195,535
---------- ---------- ---------- ----------
Commitments and contingencies (Notes 7 and 10)
STOCKHOLDER'S EQUITY
Common stock................................ 28,000 28,000 28,000 28,000
Unrealized loss on investments.............. (220,585) (8,341) 0 0
Retained earnings........................... 2,683,820 3,518,677 2,246,268 902,816
---------- ---------- ---------- ----------
Total stockholder's equity.......... 2,491,235 3,538,336 2,274,268 930,816
---------- ---------- ---------- ----------
Total liabilities and stockholder's
equity............................ $3,962,280 $5,112,685 $3,478,653 $3,126,351
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE> 87
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- JUNE 30, -------------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems.................... $ 159,143 $ 300,253 $ 766,037 $ 668,425 $ 139,547 $ 827,462
Software license........... 8,944,307 11,518,566 12,502,491 6,586,715 9,349,804 10,131,760
Maintenance and other...... 1,732,276 1,681,941 1,910,430 982,041 1,464,708 1,243,634
----------- ----------- ----------- ----------- ----------- -----------
Total revenue...... 10,835,726 13,500,760 15,178,958 8,237,181 10,954,059 12,202,856
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenue
Systems.................... 290,239 209,521 440,588 451,684 135,673 648,366
Software license........... 5,371,347 6,832,020 6,977,948 3,719,590 5,174,094 5,551,150
Maintenance and other...... 1,450,877 1,277,082 1,682,022 827,503 1,386,544 1,227,743
----------- ----------- ----------- ----------- ----------- -----------
Total costs of
revenue.......... 7,112,463 8,318,623 9,100,558 4,998,777 6,696,311 7,427,259
----------- ----------- ----------- ----------- ----------- -----------
Gross margin..... 3,723,263 5,182,137 6,078,400 3,238,404 4,257,748 4,775,597
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses
Selling, general and
administrative.......... 2,471,567 3,022,941 3,345,004 1,972,701 2,356,887 2,920,452
Depreciation and
amortization............ 89,486 76,015 102,309 75,782 76,732 117,253
----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses......... 2,561,053 3,098,956 3,447,313 2,048,483 2,433,619 3,037,705
----------- ----------- ----------- ----------- ----------- -----------
Income from
operations.... 1,162,210 2,083,181 2,631,087 1,189,921 1,824,129 1,737,892
Other income (expense)
Interest expense........... (25,572) (44,969) (37,385) (10,765) (30,870) (12,259)
Interest and dividend
income.................. 17,780 54,031 88,457 46,646 62,674 48,209
Gain (loss) on investments
and other............... 187,536 (16,731) 169,498 239,925 176,406 240,340
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes... 1,341,954 2,075,512 2,851,657 1,465,727 2,032,339 2,014,182
Income taxes................. 34,955 50,125 53,300 17,405 60,798 35,772
----------- ----------- ----------- ----------- ----------- -----------
Net income....... $ 1,306,999 $ 2,025,387 $ 2,798,357 $ 1,448,322 $ 1,971,541 $ 1,978,410
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 88
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON UNREALIZED
STOCK GAIN (LOSS) RETAINED
AMOUNT ON INVESTMENTS EARNINGS TOTAL
<S> <C> <C> <C> <C>
Balance January 1, 1993........................ $28,000 $ (59,474) $ 962,434 $ 930,960
Net income................................... 1,306,999 1,306,999
Dividends.................................... (640,000) (640,000)
Change in unrealized loss on investments..... 20,232 20,232
------- --------- ----------- -----------
Balance December 31, 1993...................... 28,000 (39,242) 1,629,433 1,618,191
Net income................................... 2,025,387 2,025,387
Dividends.................................... (971,000) (971,000)
Change in unrealized loss on investments..... (181,343) (181,343)
------- --------- ----------- -----------
Balance December 31, 1994...................... 28,000 (220,585) 2,683,820 2,491,235
Net income................................... 2,798,357 2,798,357
Dividends.................................... (1,963,500) (1,963,500)
Change in unrealized loss on investments..... 212,244 212,244
------- --------- ----------- -----------
Balance December 31, 1995...................... 28,000 (8,341) 3,518,677 3,538,336
Net income................................... 1,448,322 1,448,322
Dividends.................................... (2,720,731) (2,720,731)
Change in unrealized gain on investments..... 8,341 8,341
------- --------- ----------- -----------
Balance June 30, 1996.......................... 28,000 0 2,246,268 2,274,268
Net income................................... 530,088 530,088
Dividends.................................... (1,873,540) (1,873,540)
------- --------- ----------- -----------
Balance September 30, 1996 (unaudited)......... $28,000 $ 0 $ 902,816 $ 930,816
======= ========= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE> 89
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------- JUNE 30, ---------------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ 1,306,999 $ 2,025,387 $ 2,798,357 $ 1,448,322 $ 1,971,541 $ 1,978,410
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 89,486 76,015 102,309 75,782 76,732 117,253
(Gain) loss on sale of property
and equipment................. 2,200 994 (1,374) 0 (1,374) (415)
Realized gains on investments... (326,745) (208,406) (541,416) (448,158) (383,641) (448,158)
Realized losses on
investments................... 137,009 224,143 373,292 208,233 200,468 208,233
Changes in assets and liabilities:
Accounts receivable............. (122,215) (529,520) 19,033 97,561 269,780 299,769
Inventory....................... (48,879) 99,109 (74,439) 85,439 (45,000) 117,439
Prepaid expenses and other
current
assets........................ 165,496 (183,069) 8,873 (400,764) (4,783) (644,308)
Accounts payable and accrued
liabilities................... (1,790,912) 110,661 86,807 81,951 258,085 84,949
Customer deposits and deferred
maintenance revenue........... 29,266 (2,677) 74,866 54,680 395,852 72,159
Income taxes payable............ (11,603) 23,023 (26,174) (2,436) (1,676) 10,498
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided by (used
in) operating
activities............... (569,898) 1,635,660 2,820,134 1,200,610 2,735,984 1,795,829
----------- ----------- ------------ ------------ ----------- -----------
Cash flow from investing activities:
Purchases of investments.......... (5,837,730) (6,800,249) (11,268,708) (8,694,966) (7,625,731) (8,694,966)
Proceeds from the sale of
investments..................... 6,485,016 6,836,814 11,027,950 9,945,924 7,628,644 9,945,924
Purchases of property and
equipment....................... (45,795) (100,817) (306,894) (278,373) (186,330) (296,840)
Proceeds on sale of property and
equipment....................... 0 0 22,096 0 22,096 2,410
Proceeds from investment
margin accounts................. 6,573,612 7,516,828 10,614,724 9,840,665 7,197,015 9,841,701
Payments on investment
margin accounts................. (6,845,885) (7,242,266) (10,634,585) (10,345,860) (7,445,197) (10,345,860)
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided by (used
in) investing
activities............... 329,218 210,310 (545,417) 467,390 (409,503) 452,369
----------- ----------- ------------ ------------ ----------- -----------
Cash flow from financing activities:
Proceeds from short-term
obligations..................... 1,393,000 1,962,000 0 790,000 0 1,465,000
Payment on short-term
obligations..................... (1,368,000) (1,987,000) 0 (790,000) 0 (840,000)
Cash overdraft.................... 563,581 (563,581) 0 0 0 332,739
Dividends......................... (640,000) (971,000) (1,963,500) (1,980,003) (1,793,500) (3,803,543)
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in financing
activities............... (51,419) (1,559,581) (1,963,500) (1,980,003) (1,793,500) (2,845,804)
Net change in cash and cash
equivalents.............. (292,099) 286,389 311,217 (312,003) 532,981 (597,606)
Cash and cash equivalents:
Beginning of period............... 292,099 0 286,389 597,606 286,389 597,606
----------- ----------- ------------ ------------ ----------- -----------
End of period..................... $ 0 $ 286,389 $ 597,606 $ 285,603 $ 819,370 $ 0
=========== =========== ============ ============ =========== ===========
Non-cash dividends.................. $ 0 $ 0 $ 0 $ 740,728 $ 0 $ 790,728
=========== =========== ============ ============ =========== ===========
Cash paid during the period for
Interest.......................... $ 25,072 $ 44,315 $ 37,465
=========== =========== ============
Income taxes...................... $ 63,097 $ 10,563 $ 85,574
=========== =========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE> 90
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Systems Plus, Inc. and its combined affiliate (the "Company") is the master
distributor for The Medical Manager physician practice management system that is
sold to an independent dealers' network throughout the United States. The
Company purchases substantially all of its software from Personalized
Programming, Inc. ("PPI"), the developer of The Medical Manager, under a license
and master distributor agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1995 and 1996 and for the nine months then ended are unaudited.
All adjustments and accruals (consisting only of normal recurring adjustments)
have been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Principles of Combination. The financial statements include the accounts
of Systems Plus, Inc. ("SPI") and its sister company, Systems Plus Distribution,
Inc. ("SPDI"), which is affiliated through common ownership and management. All
material intercompany accounts and transactions have been eliminated.
Revenue Recognition. Revenue from software license is recognized upon sale
and shipment. Revenue from the sale of systems is recognized when the system has
been installed and the related client training has been completed. Amounts
billed in advance of installation and pending completion of remaining
significant obligations 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 sales for systems, software license and maintenance and other based upon
revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's credit concentrations are limited due to the
wide variety of customers in the health care industry and geographic areas into
which the Company's systems and services are sold.
Cash and Cash Equivalents. For purposes of the statement of cash flows the
Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
Investments. The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, which requires fair value accounting for debt and equity
securities. The Company classifies its investments as available for sale, which
requires that they be recorded at fair market value with gross unrealized
holding gains and losses treated as a separate component of stockholder's
equity.
Inventory. Inventory primarily consists of purchased software packages,
peripheral computer equipment and replacement parts. Inventory cost is accounted
for on the first-in, first-out basis and reported at the lower of cost or
market.
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 on the straight line and
accelerated methods 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-32
<PAGE> 91
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes. SPI has elected to be taxed as an S corporation and SPDI is
taxed as a C corporation under the provisions of the Internal Revenue Code of
1986. SPI is not subject to taxation at the federal level. Instead, the taxable
income of SPI is included in the individual income tax return of that company's
single stockholder for federal income tax purposes. The provision for income
taxes in the combined statements of operations represents SPDI's provision for
federal income taxes and the provision for state income taxes for both SPI and
SPDI. The Company utilizes the asset and liability method of accounting for
deferred federal and state income taxes for SPDI taxed as a regular corporation
and to account for state income taxes for SPI taxed as an S corporation for
Federal tax purposes, but taxed as a regular corporation for certain state
income tax purposes. Under this method, deferred tax assets and liabilities are
established based on the differences between financial statement and income tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Other assets are comprised
primarily of federal income tax deposits for fiscal year S corporation purposes.
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized.
SPI's S corporation election will terminate with the effective date of the
Merger discussed in Note 10.
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.
New Accounting Pronouncements. SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed Of, is effective
for years beginning after December 15, 1995. This Statement requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. This pronouncement is not expected to have a material
impact on the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1996 presentations.
3. INVESTMENTS:
Investments held consisted of the following:
<TABLE>
<CAPTION>
FAIR MARKET
COST GAINS LOSSES VALUE
GROSS UNREALIZED
------------------
JUNE 30, 1996
------------------
<S> <C> <C> <C> <C>
Marketable equity securities................ $ 50,000 $ -- $ -- $ 50,000
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------
<S> <C> <C> <C> <C>
Marketable equity securities................ $1,801,761 $19,629 $ 27,970 $1,793,420
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C> <C> <C> <C>
Marketable equity securities................ $1,405,213 $ 3,038 $223,623 $1,184,628
========== ======= ======== ==========
</TABLE>
During the nine months ended September 30, 1996, investments of $790,728
were distributed to the stockholder at their fair value as a non-cash dividend.
F-33
<PAGE> 92
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment................ $ 314,168 $ 497,877 $ 613,411 $ 613,411
Computers.............................. 335,632 435,700 527,694 543,501
Leasehold improvements................. 0 0 70,845 70,845
--------- ---------- ---------- ----------
649,800 933,577 1,211,950 1,227,757
Less accumulated depreciation and
amortization......................... (412,425) (512,339) (588,121) (628,927)
--------- ---------- ---------- ----------
$ 237,375 $ 421,238 $ 623,829 $ 598,830
========= ========== ========== ==========
</TABLE>
5. NOTES PAYABLE:
Notes payable at December 31, 1995 and 1994 consisted of the margin account
borrowings collateralized by investments, with interest generally at prime rate.
The Company has a $750,000 revolving line of credit that was available at
September 30, 1996. The line of credit agreement provides for interest at prime
plus 1/2% and is collateralized by receivables, inventory, fixed assets,
general intangibles and personally guaranteed by the stockholder. There was
$625,000 outstanding under the line at September 30, 1996.
The carrying value approximates fair market value due to the short-term
nature of the debt.
6. INCOME TAXES:
Income taxes consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- JUNE 30, ---------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Current
Federal............................ $ 6,000
State.............................. $34,955 $50,125 47,300 $17,405 $60,798 $35,772
------- ------- ------- ------- ------- -------
$34,955 $50,125 $53,300 $17,405 $60,798 $35,772
======= ======= ======= ======= ======= =======
</TABLE>
F-34
<PAGE> 93
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
The following table summarizes the principal differences between income
taxes at the federal statutory rate and the effective income tax amounts
reflected in the financial statements:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- JUNE 30, ----------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statutory tax................ $ 456,000 $ 706,000 $ 970,000 $ 498,000 $ 691,000 $ 685,000
State income tax, net of
federal benefit............ 34,955 50,125 47,300 17,405 60,798 35,772
Effect of graduated rate
brackets................... (6,000)
Effect of S corporation
income not subject to
federal income tax......... (456,000) (706,000) (958,000) (498,000) (691,000) (685,000)
--------- --------- --------- --------- --------- ---------
$ 34,955 $ 50,125 $ 53,300 $ 17,405 $ 60,798 $ 35,772
========= ========= ========= ========= ========= =========
</TABLE>
The Company was examined by the California Franchise Tax Board for tax
years ended in 1992 through 1995. The Company has reviewed various matters that
are under consideration and believes that it has adequately provided for any
liability that may result from this examination. In the opinion of management,
any liability that may arise from prior periods as a result of the examination
will not have a material effect on the Company's financial position or results
of operations.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating leases having
remaining terms ranging from one to five years. Future minimum rental
commitments under noncancelable operating leases are approximately as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30:
<S> <C>
1997................................................... $201,000
1998................................................... 131,000
1999................................................... 117,000
2000................................................... 117,000
2001................................................... 39,000
--------
Total........................................ $605,000
========
</TABLE>
Rent expense was approximately $141,000, $133,000, $112,000, $134,000,
$101,000 and $204,000 for 1993, 1994 and 1995, for the six months ended June 30,
1996 and for the (unaudited) nine months ended September 30, 1995 and 1996,
respectively.
8. STOCKHOLDER'S EQUITY:
The common stock ownership of the companies are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
AND 1995,
JUNE 30, 1996 AND
SEPTEMBER 30, 1996
-------------------------
SHARES SHARES
AUTHORIZED OUTSTANDING
<S> <C> <C>
Systems Plus, Inc. .................................. 1,000,000 500,000
Systems Plus Distribution, Inc. ..................... 1,000,000 50,000
</TABLE>
F-35
<PAGE> 94
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS:
The Company's stockholder acquired a controlling interest in a Medical
Manager dealer in the greater Chicago, Illinois area in February 1996. Revenue,
primarily from software license, from this dealer was approximately $243,000,
$131,000, $190,000 and $154,000 for 1995, for the six months ended June 30, 1996
and for the (unaudited) nine months ended September 30, 1995 and 1996,
respectively.
10. SUBSEQUENT EVENTS:
In July 1996, the Company and its stockholder entered into a definitive
agreement with Medical Manager Corporation ("MMC") providing for the Merger of
the Company with subsidiaries of MMC. All outstanding shares of the Company's
common stock will be exchanged for cash and shares of MMC's common stock
concurrent with the consummation of the initial public offering of the common
stock of MMC.
In connection with the Merger, SPI will elect to terminate its S
corporation status and will be required to effect the asset and liability method
of accounting for deferred income taxes. Under this method, deferred tax assets
and liabilities are established based on the differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse. Had SPI
elected to terminate its S corporation status immediately prior to September 30,
1996, the Company would have been required to establish a deferred tax liability
of approximately $40,000 related primarily to the use of the cash method of
accounting for income tax purposes. Also, the Company will dividend certain
assets to the stockholder, consisting primarily of cash, investments and other
assets, in an amount equal to the balance in the Company's S corporation
Accumulated Adjustment Account. Had the estimated balance of the Accumulated
Adjustment Account at September 30, 1996 of $893,000 been distributed and
recorded as of that date, the effect on the accompanying balance sheet would be
an increase of $893,000 in notes payable and a decrease of $893,000 in
stockholder's equity.
Revenue from four other companies which have also entered into definitive
merger agreements with MMC totaled approximately $616,000, $891,000, $1,145,000,
$574,000, $836,000 and $924,000 for 1993, 1994 and 1995 for the six months ended
June 30, 1996 and for the (unaudited) nine months ended September 30, 1995 and
1996, respectively.
Purchases of software from Personalized Programming, Inc., which has also
entered into a definitive merger agreement with MMC, totaled approximately
$3,617,000, $4,681,000, $5,350,000, $2,837,000, $3,917,000 and $4,355,000 for
1993, 1994 and 1995 for the six months ended June 30, 1996 and for the
(unaudited) nine months ended September 30, 1995 and 1996, respectively.
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-36
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
RTI Business Systems, Inc.
We have audited the accompanying balance sheets of RTI Business Systems,
Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the related
statements of operations and accumulated deficit and cash flows for each of the
three years in the period ended December 31, 1995 and for the six months ended
June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RTI Business Systems, Inc.
as of December 31, 1994 and 1995 and June 30, 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the six months ended June 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the financial statements, in July 1996 the
Company and its stockholders entered into a definitive agreement with Medical
Manager Corporation (MMC) providing for the merger of the Company with a
subsidiary of MMC.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
August 28, 1996, except for certain
information in Note 8 for which the
date is January 7, 1997
F-37
<PAGE> 96
RTI BUSINESS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $ 25,349 $ 28,851 $ 5,473 $ 83,712
Accounts receivable......................... 236,802 347,725 283,744 173,871
Inventory................................... 0 29,274 32,384 163,681
Prepaid expenses and other current assets... 26,453 20,437 9,177 16,500
Deferred income taxes....................... 108,982 212,456 262,456 262,456
--------- ---------- ---------- ----------
Total current assets................ 397,586 638,743 593,234 700,220
PROPERTY AND EQUIPMENT, net................... 143,895 335,951 494,207 533,023
--------- ---------- ---------- ----------
Total assets........................ $ 541,481 $ 974,694 $1,087,441 $1,233,243
========= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term
obligations.............................. $ 156,934 $ 282,460 $ 467,146 $ 513,891
Accounts payable and accrued liabilities.... 391,619 355,947 399,032 565,965
Customer deposits and deferred maintenance
revenue.................................. 307,464 530,066 379,541 630,294
Income taxes payable........................ 103,608 233,097 200,626 146,904
--------- ---------- ---------- ----------
Total current liabilities........... 959,625 1,401,570 1,446,345 1,857,054
LONG-TERM OBLIGATIONS, net of current
maturities.................................. 3,895 99,950 130,664 140,045
--------- ---------- ---------- ----------
Total liabilities................... 963,520 1,501,520 1,577,009 1,997,099
--------- ---------- ---------- ----------
Commitments and Contingencies (Notes 6 and 8)
STOCKHOLDERS' DEFICIT
Common stock, no par value, 200 shares
authorized, issued and outstanding....... 102,000 102,000 102,000 102,000
Accumulated deficit......................... (524,039) (628,826) (591,568) (865,856)
--------- ---------- ---------- ----------
Total stockholders' deficit......... (422,039) (526,826) (489,568) (763,856)
--------- ---------- ---------- ----------
Total liabilities and stockholders'
deficit........................... $ 541,481 $ 974,694 $1,087,441 $1,233,243
========= ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 97
RTI BUSINESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ ---------- -----------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems................. $1,645,102 $2,242,200 $2,712,211 $1,301,127 $1,617,456 $1,803,593
Maintenance and other... 1,401,533 2,085,244 2,241,440 1,731,903 1,735,875 2,574,904
---------- ---------- ---------- ---------- ---------- ----------
Total revenue... 3,046,635 4,327,444 4,953,651 3,033,030 3,353,331 4,378,497
---------- ---------- ---------- ---------- ---------- ----------
Cost of revenue
Systems................. 1,372,675 1,334,929 1,486,156 603,239 1,009,354 1,251,550
Maintenance and other... 1,169,441 1,241,483 1,214,985 1,162,229 1,083,252 1,521,235
---------- ---------- ---------- ---------- ---------- ----------
Total costs of
revenue....... 2,542,116 2,576,412 2,701,142 1,765,468 2,092,606 2,772,785
---------- ---------- ---------- ---------- ---------- ----------
Gross
margin... 504,519 1,751,032 2,252,509 1,267,562 1,260,725 1,605,712
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative....... 925,189 1,710,987 2,268,533 1,164,657 1,313,132 1,740,565
Depreciation and
amortization......... 55,434 46,777 58,057 45,724 43,585 68,054
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 980,623 1,757,764 2,326,590 1,210,381 1,356,717 1,808,619
---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
from
operations.... (476,104) (6,732) (74,081) 57,181 (95,992) (202,907)
Other income (expense)
Interest expense........ (32,928) (19,988) (33,326) (19,923) (23,859) (34,123)
Other................... 0 (27,746) 2,620 0 0
---------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)........ (509,032) (54,466) (104,787) 37,258 (119,851) (237,030)
---------- ---------- ---------- ---------- ---------- ----------
Retained earnings
(accumulated deficit):
Beginning of period..... 39,459 (469,573) (524,039) (628,826) (524,039) (628,826)
---------- ---------- ---------- ---------- ---------- ----------
End of period........... $ (469,573) $ (524,039) $ (628,826) $ (591,568) $ (643,890) $ (865,856)
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 98
RTI BUSINESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- JUNE 30, ------------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $(509,032) $ (54,466) $(104,787) $ 37,258 $(119,851) $(237,030)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... 55,434 46,777 58,057 45,724 43,585 68,054
Deferred income taxes.......... (51,642) (57,340) (103,474) (50,000) (77,606) (50,000)
Loss on sale of property and
equipment.................... 0 27,746 13,110 0 13,110 0
Changes in assets and
liabilities:
Accounts receivable............ 66,795 (160,167) (110,923) 63,981 (193,474) 173,854
Inventory...................... 121,998 0 (29,274) (3,110) (10,069) (134,407)
Prepaid expenses and other
current assets............... 12,170 (16,009) 6,016 11,260 10,333 3,936
Accounts payable and accrued
liabilities.................. 16,864 245,366 (35,672) 43,085 48,811 210,018
Customer deposits and deferred
maintenance revenue.......... 517,699 (97,275) 222,602 (150,525) 172,086 100,228
Income taxes payable........... 50,000 53,152 129,489 (32,471) 66,760 (86,193)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
in) operating
activities.............. 280,286 (12,216) 45,144 (34,798) (46,315) 48,460
--------- --------- --------- --------- --------- ---------
Cash flow from investing
activities:
Purchases of property and
equipment...................... (51,055) (73,540) (226,023) (203,980) (116,781) (243,680)
Proceeds on sale of property and
equipment...................... 0 50,963 0 0 0 0
--------- --------- --------- --------- --------- ---------
Net cash used in investing
activities.............. (51,055) (22,577) (226,023) (203,980) (116,781) (243,680)
--------- --------- --------- --------- --------- ---------
Cash flow from financing
activities:
Proceeds from issuance of
long-term obligations.......... 100,000 200,000 365,000 238,845 215,000 288,847
Payment on short-term and
long-term obligations.......... (421,333) (189,169) (180,619) (23,445) (25,829) (38,766)
Capital contributions............ 100,000 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
in) financing
activities.............. (221,333) 10,831 184,381 215,400 189,171 250,081
--------- --------- --------- --------- --------- ---------
Net change in cash and cash
equivalents...................... 7,898 (23,962) 3,502 (23,378) 26,075 54,861
Cash and cash equivalents:
Beginning of period.............. 41,413 49,311 25,349 28,851 25,349 28,851
--------- --------- --------- --------- --------- ---------
End of period.................... $ 49,311 $ 25,349 $ 28,851 $ 5,473 $ 51,424 $ 83,712
========= ========= ========= ========= ========= =========
Cash paid during the period for
Interest......................... $ 32,928 $ 19,988 $ 33,326
========= ========= =========
Income taxes..................... $ 456 $ 731 $ 10,846
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 99
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
RTI Business Systems, Inc. (the "Company") is an independent dealer for The
Medical Manager physician practice management system that is sold to clients
primarily in the upstate New York and New England areas of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1995 and 1996 and for the nine months then ended are unaudited.
All adjustments and accruals (consisting only of normal recurring adjustments)
have been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Revenue Recognition. Revenue from the sale of systems is recognized when
the system has been installed and the related client training has been
completed. Amounts billed in advance of installation and pending completion of
remaining significant obligations 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 sales for systems and maintenance and other based
upon revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's credit concentrations are 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.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
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 on accelerated methods over the
estimated useful lives of the assets.
Income Taxes. Income taxes are provided under the liability method
considering the tax effects of transactions reported in the financial statements
that are different from the tax returns. The deferred tax assets and liabilities
represent the future tax consequences of those differences, which will either be
taxable or deductible when the underlying assets or liabilities are recovered or
settled.
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.
New Accounting Pronouncements. 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, is effective for years beginning after
December 15, 1995. This Statement requires that long-lived assets and certain
intangibles to be held and used by the Company be reviewed for impairment. This
pronouncement is not expected to have a material impact on the financial
statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1996 presentations.
F-41
<PAGE> 100
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment..... $ 113,028 $ 252,978 $ 254,906 $ 276,626
Computers................... 0 0 155,586 169,831
Vehicles.................... 203,960 290,903 337,369 345,125
--------- --------- --------- ---------
316,988 543,881 747,861 791,582
Less accumulated
depreciation.............. (173,093) (207,930) (253,654) (258,559)
--------- --------- --------- ---------
$ 143,895 $ 335,951 $ 494,207 $ 533,023
========= ========= ========= =========
</TABLE>
4. LONG TERM OBLIGATIONS:
Long term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Term note payable, bearing interest at
prime plus 1% (9 1/4% at September
30, 1996), with monthly payments of
$2,085 plus interest through October
1999, collateralized by accounts
receivable, inventory and equipment
and guaranteed by stockholders. The
note contains certain financial
restrictions and covenants as
defined.............................. $ 95,830 $ 80,905 $ 74,650
Term notes payable, bearing interest at
prime plus 1%, with various monthly
payments totaling approximately
$3,350 plus interest due through
August 2001, collateralized by
accounts receivable, inventory and
property and equipment and guaranteed
by stockholders...................... $ 25,829 36,580 166,905 179,286
Revolving line of credit, interest
payable monthly at prime plus 3/4%
(9% at September 30, 1996), principal
due on demand, maturity date of
October, 1996, collateralized by
accounts receivable, inventory and
equipment and guaranteed by
stockholders......................... 135,000 250,000 350,000 400,000
-------- -------- --------- --------
Total........................ 160,829 382,410 597,810 653,936
Less portion due within one
year....................... 156,934 282,460 (467,146) 513,891
-------- -------- --------- --------
Long term obligations, net of
current maturities......... $ 3,895 $ 99,950 $ 130,664 $140,045
======== ======== ========= ========
</TABLE>
F-42
<PAGE> 101
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG TERM OBLIGATIONS: -- (CONTINUED)
Annual maturities of long-term debt for the four years subsequent to
September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $40,992
1999........................................................ 40,992
2000........................................................ 39,684
2001........................................................ 18,377
</TABLE>
The carrying value approximates fair market value due to the short-term
nature of the debt.
5. INCOME TAXES:
Income taxes consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- JUNE 30, -------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Current
Federal................ $ 46,623 $ 51,115 $ 92,261 $ 45,000 $ 85,461 $ 45,000
State.................. 5,019 6,225 11,213 5,000 11,606 5,000
-------- -------- --------- -------- -------- --------
51,642 57,340 103,474 50,000 97,067 50,000
-------- -------- --------- -------- -------- --------
Deferred
Federal................ (46,623) (51,115) (92,261) (45,000) (85,461) (45,000)
State.................. (5,019) (6,225) (11,213) (5,000) (11,606) (5,000)
-------- -------- --------- -------- -------- --------
(51,642) (57,340) (103,474) (50,000) (97,067) (50,000)
-------- -------- --------- -------- -------- --------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ========= ======== ======== ========
</TABLE>
The significant components of the net deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Bad debts................................ $ 17,000 $ 21,000 $ 14,000 $ 14,000
Deferred revenue......................... 125,000 230,000 226,000 321,000
Inventory valuations..................... 64,000 34,000
Loss carryforwards....................... 71,000 80,000
Other.................................... 20,982 41,456 456 456
--------- --------- -------- ---------
226,982 326,456 311,456 415,456
Valuation allowance...................... (118,000) (114,000) (49,000) (153,000)
--------- --------- -------- ---------
Net deferred tax asset................... $ 108,982 $ 212,456 $262,456 $ 262,456
========= ========= ======== =========
</TABLE>
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. At September 30, 1996,
the Company established a valuation allowance of $153,000. This results in an
increase in the valuation allowance from December 31, 1995 of $39,000.
F-43
<PAGE> 102
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: -- (CONTINUED)
The following table summarizes the principal differences between income
taxes at the federal statutory rate and the effective income tax amounts
reflected in the financial statements:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- JUNE 30, -------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Statutory tax (benefit).......... $(173,000) $ (19,000) $ (36,000) $ 13,000 $(41,000) $(82,000)
State taxes, net of federal
benefit........................ (20,000) (2,000) (4,000) 1,000 (5,000) (9,000)
Effect of graduated tax
brackets....................... (1,000) (6,000) (11,000) -- --
Tax contingency.................. 50,000 50,000 50,000 50,000 50,000 50,000
Change in valuation allowance.... 142,000 (24,000) (4,000) (65,000) (4,000) 39,000
Other............................ 2,000 1,000 5,000 1,000 0 2,000
--------- --------- --------- -------- -------- --------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ======== ======== ========
</TABLE>
At September 30, 1996, the Company had an estimated net operating loss
carryforward of approximately $211,000, the use of which is limited to the
Company's future taxable income. The estimated net operating loss will expire in
the year 2012.
The Company is currently under examination by the Internal Revenue Service
for tax years ended in 1993 and 1994. The Company has reviewed various matters
that are under consideration and believes that is has adequately provided for
any liability that may result from this examination. In the opinion of
management, any liability that may arise from prior periods as a result of the
examination will not have a material effect on the Company's financial position
or results of operations.
6. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating leases. Future
minimum rental commitments under the noncancelable operating leases are
approximately as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30:
<S> <C>
1997.............................................. $ 335,000
1998.............................................. 251,000
1999.............................................. 223,000
2000.............................................. 246,000
2001.............................................. 236,000
----------
Total................................... $1,291,000
==========
</TABLE>
Rent expense was approximately $139,000, $240,000, $187,000, $107,000
$124,000 and $163,000 for 1993, 1994 and 1995 for the six months ended June 30,
1996 and for the (unaudited) nine months ended September 30, 1995 and 1996
respectively.
7. RETIREMENT PLANS:
The Company has a non-contributory profit sharing plan covering
substantially all full-time employees effective January 1995. The Company
contributes a matching 25% of the first six percent of employee contributions.
Contributions are made at the discretion of the Board of Directors. Total
expense amounted to approximately $19,000 for 1995, $10,000 for the six months
ended June 30, 1996 and $14,000 and $18,000 for the (unaudited) nine months
ended September 30, 1995 and 1996, respectively.
F-44
<PAGE> 103
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS:
In July 1996, the Company and its stockholders entered into a definitive
agreement with Medical Manager Corporation ("MMC") providing for the Merger of
the Company with a subsidiary of MMC. All outstanding shares of the Company's
common stock will be exchanged for cash and shares of MMC's common stock
concurrent with the consummation of the initial public offering of the common
stock of MMC.
Purchases of software from one of the other companies which have also
entered into definitive merger agreements with MMC totaled approximately
$265,000, $275,000, $371,000, $190,000, $228,000 and $314,000 for 1993, 1994 and
1995 for the six months ended June 30, 1996 and for the (unaudited) nine months
ended September 30, 1995 and 1996 respectively.
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-45
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
National Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of National
Medical Systems, Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for the four months ended December 31, 1994, the year ended
December 31, 1995 and the six months ended June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
National Medical Systems, Inc. as of December 31, 1994 and 1995 and June 30,
1996 and the consolidated results of its operations and its cash flows for the
four months ended December 31, 1994, the year ended December 31, 1995 and the
six months ended June 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the financial statements, in July 1996 the
Company and its stockholders entered into a definitive agreement with Medical
Manager Corporation (MMC) providing for the merger of the Company with a
subsidiary of MMC.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
September 10, 1996, except for certain
information in Note 11 for which
the dates are December 26, 1996 and
January 7, 1997
F-46
<PAGE> 105
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................... $ 0 $ 0 $ 78,948 $ 9,568
Accounts receivable........................... 66,271 223,446 983,069 933,878
Inventory..................................... 51,280 73,925 49,568 122,061
Prepaid expenses and other current assets..... 182 12,000 0 56,001
---------- ---------- ---------- ----------
Total current assets.................. 117,733 309,371 1,111,585 1,121,508
PROPERTY AND EQUIPMENT, net..................... 85,615 199,797 368,653 355,969
GOODWILL AND OTHER INTANGIBLES, net............. 211,609 80,201 2,753,593 2,693,303
OTHER ASSETS.................................... 3,586 5,184 11,084 520,028
---------- ---------- ---------- ----------
Total................................. $ 418,543 $ 594,553 $4,244,915 $4,690,808
========== ========== ========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations... $ 74,930 $ 261,580 $1,274,701 $1,322,528
Accounts payable and accrued liabilities...... 113,174 184,214 729,219 773,909
Customer deposits and deferred maintenance
revenue.................................... 220,627 338,075 875,857 729,031
---------- ---------- ---------- ----------
Total current liabilities............. 408,731 783,869 2,879,777 2,825,468
LONG-TERM OBLIGATIONS, net of current
maturities.................................... 76,860 40,768 800,660 729,220
SUBORDINATED NOTES PAYABLE...................... 0 0 292,500 1,065,018
---------- ---------- ---------- ----------
Total liabilities..................... 485,591 824,637 3,972,937 4,619,706
---------- ---------- ---------- ----------
Redeemable preferred stock...................... 0 0 500,000 500,000
---------- ---------- ---------- ----------
Commitments and contingencies (Notes 10 and
11)...........................................
STOCKHOLDERS' DEFICIT
Common stock, $0.01 par value, 25,000,000
shares authorized.......................... 56,570 62,566 68,566 68,566
Additional paid-in capital.................... 203,430 248,503 790,003 790,003
Accumulated deficit........................... (327,048) (541,153) (1,086,591) (1,287,467)
---------- ---------- ---------- ----------
Total stockholders' deficit........... (67,048) (230,084) (228,022) (428,898)
---------- ---------- ---------- ----------
Total................................. $ 418,543 $ 594,553 $4,244,915 $4,690,808
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 106
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, JUNE 30, -------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Systems........................ $ 155,771 $1,516,022 $1,489,054 $ 1,112,299 $2,429,572
Maintenance and other.......... 85,337 614,487 959,823 478,851 1,670,485
--------- ---------- ---------- ----------- ----------
Total revenue.......... 241,108 2,130,509 2,448,877 1,591,150 4,100,057
--------- ---------- ---------- ----------- ----------
Cost of revenue
Systems........................ 147,490 1,129,059 1,189,960 828,212 1,730,825
Maintenance and other.......... 155,655 595,692 664,426 429,071 1,212,510
--------- ---------- ---------- ----------- ----------
Total costs of
revenue.............. 303,145 1,724,751 1,854,386 1,257,283 2,943,335
--------- ---------- ---------- ----------- ----------
Gross margin (loss).... (62,037) 405,758 594,491 333,867 1,156,722
--------- ---------- ---------- ----------- ----------
Operating expenses
Selling, general and
administrative.............. 201,254 395,523 613,874 249,714 1,068,842
Research and development....... 0 0 262,855 0 409,425
Depreciation and
amortization................ 60,113 196,838 189,854 134,425 294,243
--------- ---------- ---------- ----------- ----------
Total operating
expenses............. 261,367 592,361 1,066,583 384,139 1,772,510
--------- ---------- ---------- ----------- ----------
Loss from operations... (323,404) (186,603) (472,092) (50,272) (615,788)
Other expense
Interest expense............... (3,644) (27,502) (73,346) (18,468) (130,526)
--------- ---------- ---------- ----------- ----------
Net loss............... $(327,048) $ (214,105) $ (545,438) $ (68,740) $ (746,314)
========= ========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 107
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Formation of company..................... 5,657,000 $56,570 $203,430 $ 260,000
Net loss................................. $ (327,048) (327,048)
--------- ------- -------- ----------- ---------
Balance December 31, 1994................ 5,657,000 56,570 203,430 (327,048) (67,048)
Capital contributions.................... 45,000 45,000
Stock issued for compensation............ 599,642 5,997 73 6,069
Net loss................................. (214,105) (214,105)
--------- ------- -------- ----------- ---------
Balance December 31, 1995................ 6,256,642 62,566 248,503 (541,153) (230,084)
Stock issued for acquisition............. 600,000 6,000 54,000 60,000
Warrants issued.......................... 20,000 20,000
Capital contributions.................... 467,500 467,500
Net loss................................. (545,438) (545,438)
--------- ------- -------- ----------- ---------
Balance June 30, 1996.................... 6,856,642 68,566 790,003 (1,086,591) (228,022)
Net loss................................. (200,876) (200,876)
--------- ------- -------- ----------- ---------
Balance September 30, 1996 (unaudited)... 6,856,642 $68,566 $790,003 $(1,287,467) $(428,898)
========= ======= ======== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 108
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, JUNE 30, -----------------------
1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(327,048) $(214,105) $ (545,438) $ (68,740) $ (746,314)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 60,113 196,838 189,854 134,425 294,243
Stock issued for compensation.......... 0 6,069 0
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................... (66,271) (157,175) (446,895) (224,825) (365,815)
Inventory.............................. (51,280) (22,645) 43,723 (120,402) (28,769)
Prepaid expenses and other assets...... (3,768) (13,416) 16,804 (1,443) (47,579)
Accounts payable and accrued
liabilities.......................... 113,174 71,040 22,254 174,382 (21,221)
Customer deposits and deferred
maintenance revenue.................. 220,627 117,448 283,582 46,743 195,768
--------- --------- ----------- --------- -----------
Net cash provided by (used in)
operating activities............ (54,453) (15,946) (436,116) (59,860) (719,687)
--------- --------- ----------- --------- -----------
Cash flow from investing activities:
Purchases of property and equipment...... (32,670) (152,183) (78,552) (131,419) (102,594)
Payments for acquisitions made, net of
assets acquired........................ (150,000) 0 (569,434) (575,778)
Payment of deposit for acquisition....... 0 0 0 0 (500,000)
--------- --------- ----------- --------- -----------
Net cash used in investing
activities...................... (182,670) (152,183) (647,986) (131,419) (1,178,372)
--------- --------- ----------- --------- -----------
Cash flow from financing activities:
Proceeds from issuance of long-term
obligations............................ 0 200,000 392,299 196,471 575,425
Proceeds from issuance of subordinated
long-term obligations.................. 0 0 292,500 1,357,518
Payment on short-term and long-term
obligations............................ (22,877) (76,871) (509,249) (50,192) (1,012,816)
Proceeds from issuance of redeemable
preferred stock........................ 0 0 500,000 500,000
Capital contributions.................... 260,000 45,000 487,500 45,000 487,500
--------- --------- ----------- --------- -----------
Net cash provided by financing
activities...................... 237,123 168,129 1,163,050 191,280 1,907,627
--------- --------- ----------- --------- -----------
Net change in cash and cash
equivalents..................... 0 0 78,948 0 9,568
Cash and cash equivalents:
Beginning of period...................... 0 0 0 0 0
--------- --------- ----------- --------- -----------
End of period............................ $ 0 $ 0 $ 78,948 $ 0 $ 9,568
========= ========= =========== ========= ===========
Cash paid for interest:.................... $ 3,645 $ 27,502
========= =========
Details of acquisitions:
Fair value of assets..................... $ 150,000 0 $ 3,190,537 $ 0 $ 3,196,881
Liabilities assumed...................... 0 0 (1,457,354) 0 (1,457,354)
Less common stock and debt issued........ 0 0 (1,129,139) 0 (1,129,139)
--------- --------- ----------- --------- -----------
Cash paid................................ 150,000 0 604,044 0 610,388
Less cash acquired....................... 0 0 (34,610) 0 (34,610)
--------- --------- ----------- --------- -----------
Net cash paid for acquisitions........... $ 150,000 0 $ (569,434) $ 0 $ 575,778
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 109
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
National Medical Systems, Inc. ("NMS") and Preferred System Solutions, Inc.
(collectively, the "Company") are independent dealers for The Medical Manager
physician practice management system that is sold to clients in the Southeast,
Midwest and Southwest parts of the United States. NMS commenced operations in
September 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1996 and 1995 and for the nine months then ended are unaudited.
All adjustments and accruals (consisting only of normal recurring adjustments)
have been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Principles of Consolidation. The financial statements include the accounts
of NMS and its wholly owned subsidiary, Preferred System Solutions, Inc., since
its acquisition in March 1996. All material intercompany accounts and
transactions have been eliminated.
Revenue Recognition. Revenue from the sale of systems is recognized when
the system has been installed and the related client training has been
completed. Amounts billed in advance of installation and pending completion of
remaining significant obligations 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 sales for systems and maintenance and other based
upon revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's credit concentrations are 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.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
Inventory. Inventory primarily consists of computers, peripheral equipment
and replacement parts. Inventory cost is accounted for on the first-in,
first-out basis and reported at the lower of cost or market.
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 accelerated methods
over the estimated useful lives of the assets.
Goodwill and Other Intangibles. Goodwill and other intangibles consist of
covenants not to compete and goodwill arising from business acquisitions. These
intangible assets are being amortized over periods ranging from two to 20 years.
Research and Development. Software development costs are included in
research and development and are expensed as incurred. Statement of Financial
Accounting Standards ("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.
F-51
<PAGE> 110
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Income Taxes. Income taxes are provided under the liability method
considering the tax effects of transactions reported in the financial statements
that are different from the tax return. The deferred tax assets and liabilities
represent the future tax consequences of those differences, which will be either
taxable or deductible when the underlying assets or liabilities are recovered or
settled. Deferred tax assets are reduced by a valuation allowance for the
estimated amounts of tax benefits not likely to be realized.
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.
New Accounting Pronouncements. SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed Of, is effective
for years beginning after December 15, 1995. This Statement requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. This pronouncement is not expected to have a material
impact on the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1996 presentations.
3. ACQUISITIONS:
During the nine months ended September 30, 1996, the Company made two
acquisitions set forth below, each of which has been accounted for as a
purchase. The consolidated financial statements include the operating results of
each business from the date of acquisition.
The Company acquired substantially all of the business assets of GBP With
Excellence, Inc., a Medical Manager independent dealer in central Florida. Total
consideration was $2,321,000, of which approximately $1,825,000 has been
assigned to excess of purchase price over net assets of the business acquired as
goodwill, which is being amortized on a straight-line basis over 20 years.
On the basis of the pro forma consolidation of the results of operations as
if the acquisition had taken place at the beginning of 1995 rather than in
January 1996, consolidated net sales would have been $4,692,000 for 1995 and the
consolidated pro forma net loss would have been approximately $293,000. Such pro
forma amounts are not necessarily indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of 1995.
The Company also acquired Preferred System Solutions, Inc., a Medical
Manager independent dealer in Oklahoma and Kansas. Total consideration was
$50,000 and 600,000 shares of the Company's common stock valued at $60,000 by
independent appraisal for purposes of accounting for the transaction. The excess
of the purchase price over the net liabilities assumed was approximately
$718,000 and has been recorded as goodwill, which is being amortized on a
straight-line basis over 20 years. Pro forma results of operations have not been
presented because the effects of this acquisition were not significant.
F-52
<PAGE> 111
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment.............. $ 35,074 $ 88,282 $128,477 $ 94,799
Computers............................ 66,937 191,813 372,019 544,653
-------- -------- -------- ---------
102,011 280,095 500,496 639,452
Less accumulated depreciation........ (16,397) (80,298) 131,843 (283,483)
-------- -------- -------- ---------
$ 85,615 $199,797 $368,653 $ 355,969
======== ======== ======== =========
</TABLE>
Depreciation expense was approximately $16,400, $65,700, $35,500 and
$85,500 for 1994 and 1995 and for the nine months ended September 30, 1995 and
1996 (unaudited), respectively.
5. LONG TERM OBLIGATIONS:
Long term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Revolving line of credit, $500,000 available
principal, monthly interest at prime plus 1%,
(9 1/4% at September 30, 1996) principal due on
demand, collateralized by accounts receivable
and other assets, guaranteed by two of the
Company's stockholders.......................... $ 308,014 $ 491,140
Revolving line of credit, monthly interest at
prime plus 2% (10 1/4% at September 30, 1996),
principal due on demand, collateralized by
accounts receivable and other assets, guaranteed
by two of the Company's stockholders............ 196,597 30,270
Note payable, interest at prime plus 1% (9 1/4% at
September 30, 1996), collateralized by certain
assets, guaranteed by two of the Company's
stockholders, $1,800 monthly interest and
principal payments through 2000................. 66,676 63,212
Notes payable due on demand, interest at 12%
annually unsecured, $200,000 convertible into
320,000 shares of common stock of the Company,
interest payable monthly........................ $200,000 300,000 300,000
Note payable, monthly payments of $4,057 with
interest at 9%, balloon payment of $202,070 due
1998, unsecured, guaranteed by two of the
Company's stockholders.......................... 0 247,814 241,169
Note payable, monthly interest at 8%, principal
due in two equal annual installments, guaranteed
by two of the Company's stockholders, $5,100
monthly interest and principal payment.......... 0 613,046 599,141
Note payable, annual interest at 8%, due $40,000
in 1997 and $40,000 in 1998, unsecured.......... 0 80,000 80,000
</TABLE>
F-53
<PAGE> 112
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG TERM OBLIGATIONS: -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Note payable to stockholder, due on demand,
monthly interest at prime plus 1/2% (8 3/4% at
September 30, 1996), unsecured.................. 0 50,000 50,000
Non-compete agreements due in various monthly
amounts through 1998............................ $ 92,290 36,916 109,229 100,000
Various installments notes, payable monthly,
interest at 8%-10%, collateralized by certain
assets.......................................... 59,500 65,432 103,985 96,816
-------- -------- ---------- ----------
Total................................... 151,790 302,348 2,075,361 2,051,748
Less portion due within one year........ 74,930 261,580 1,274,701 1,322,528
-------- -------- ---------- ----------
Long term obligations, net of current
maturities............................ $ 76,860 $ 40,768 $ 800,660 $ 729,220
======== ======== ========== ==========
</TABLE>
Annual maturities of long-term obligations for the four years subsequent to
September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................... $718,719
1999................................................... 6,073
2000................................................... 3,507
2001................................................... 921
</TABLE>
The carrying value approximates fair market value due to the short-term
nature of the debt.
6. SUBORDINATED NOTES PAYABLE:
Subordinated notes payable as of September 30, 1996 totaling $1,065,018,
with interest at 8%, are due in February 1998.
In conjunction with the issuance of the subordinated notes payable, the
Company also issued warrants to acquire 560,000 shares of the Company's common
stock for $.10 per share and supplemental warrants to acquire up to an
additional 560,000 shares, exercisable if the subordinated notes were not repaid
by a certain date. The warrants were valued at $20,000.
Included above are primary and supplemental warrants to purchase 700,000
shares of NMS common stock issued in January 1996 to two of the Company's
principal stockholders in conjunction with the issuance of subordinated
promissory notes totaling $467,500. These promissory notes were subsequently
contributed as additional paid in capital by the stockholders with the warrants
remaining in effect.
Warrants to acquire an aggregate of 910,000 shares remain outstanding.
7. REDEEMABLE PREFERRED STOCK:
During the nine months ended September 30, 1996 the Company issued 100,000
shares of convertible redeemable preferred stock with a par value of $1.00 for
$500,000. The preferred stock carries a dividend rate of 8% from and after
January 1, 1997. The holders may request the Company to redeem the stock at the
stated value on or after January 1, 1997. The preferred stock is convertible
into common stock of the Company on a one for one share basis. In the event of a
change in control of the Company prior to January 1, 1997, the holders of the
preferred stock have the right to request the preferred be redeemed or be
converted into 85,000 shares of common stock of any entity which controls the
Company.
F-54
<PAGE> 113
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY:
In January 1996, the Company's Articles of Incorporation were amended to
increase the authorized common stock of the Company from 10,000 shares to
25,000,000 shares. In addition, a 5,657 for 1 split of the Company's common
stock was effected, increasing the number of issued and outstanding shares of
common stock to 6,256,642. All share information has been restated to give
retroactive effect to the stock split for all periods presented.
9. INCOME TAXES:
The tax effected amounts of temporary differences consisted of the
following:
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, JUNE 30, ----------------------
1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Deferred tax assets
Deferred revenue......... $ 57,350 $ 48,840 $ 126,540 $ 50,690 $ 126,540
Inventory................ 21,460 21,460 21,460
Bad debts................ 1,577 22,200 21,090 11,937 21,090
Valuation allowance...... (58,927) (92,500) (169,090) (62,627) (169,090)
-------- --------- --------- -------- ---------
Total current
deferred tax
asset............. $ 0 $ 0 $ 0 $ 0 $ 0
======== ========= ========= ======== =========
Non-current
Deferred tax asset
Net operating loss....... $ 40,700 $ 55,870 $ 155,770 $ 42,205 $ 227,150
Other assets............. 16,923 47,360 65,490 36,718 65,490
Valuation allowance...... (57,623) (103,230) (221,260) (78,923) (292,640)
-------- --------- --------- -------- ---------
Total non-current
deferred
tax asset......... $ 0 $ 0 $ 0 $ 0 $ 0
======== ========= ========= ======== =========
</TABLE>
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. At September 30, 1996,
the Company established a valuation allowance of $461,730. The result is an
increase in the valuation allowance from December 31, 1995 of $266,000.
The following table summarizes the principal differences between income tax
benefits at the Federal statutory rate and the effective income tax amounts
reflected in the financial statements.
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, JUNE 30, -----------------------
1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory tax benefit....... $(111,196) $ (72,796) $(185,300) $(23,000) $(254,000)
State taxes................. (9,811) (6,423) (16,350) (2,000) (22,000)
Permanent differences....... 925 1,203
Other....................... 3,533 (1,164) 7,030 0 10,000
Changes in valuation
allowance................. 116,550 79,180 194,620 25,000 266,000
--------- --------- --------- -------- ---------
$ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ======== =========
</TABLE>
F-55
<PAGE> 114
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
As of September 30, 1996 and December 31, 1995, the Company had net
operating losses of approximately $620,000 and $151,000, respectively. These
amounts expire between the years 2009 and 2011.
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and certain furniture and
equipment under operating leases having terms ranging from one to five years.
The leases contain up to two five year renewals.
Future minimum rental commitments under noncancelable operating leases are
approximately as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30:
<S> <C>
1997.............................................. $173,000
1998.............................................. 138,000
1999.............................................. 96,000
2000.............................................. 36,000
2001.............................................. 7,000
--------
Total........................................ $450,000
========
</TABLE>
Rent expense was approximately $22,000, $82,000, $70,000, $82,000 and
$140,000 for 1994 and 1995 for the six months ended June 30, 1996 and for the
(unaudited) nine months ended September 30, 1995 and 1996 respectively.
11. SUBSEQUENT EVENTS:
In July 1996, the Company and certain of its stockholders entered into a
definitive agreement with Medical Manager Corporation ("MMC") providing for the
Merger of the Company with a subsidiary of MMC. All outstanding shares of the
Company's common stock will be exchanged for shares of MMC's common stock
concurrent with the consummation of the initial public offering (IPO) of the
common stock of MMC.
The stockholders of the Company are obligated, on or prior to the
consummation of the IPO (i) to cause a capital contribution of $23.7 million to
be made to the Company; (ii) to pay down certain indebtedness (approximately
$2.4 million) of the Company; (iii) and to pay to the Company $3.2 million
representing the aggregate purchase price for the division of Medix discussed
below, for an estimated total capital contribution as of September 30, 1996 of
$29.3 million. In the event that all or part of the capital contribution is not
invested in the Company, the common stock of MMC to be received by the Company's
stockholders pursuant to the merger will be reduced.
The stockholders of the Company intend to meet a portion of the capital
contribution by causing the Company to sell shares of its common stock to
Electronic Data Systems Corporation ("EDS"). On December 26, 1996, EDS agreed to
purchase a number of shares of common stock of NMS that, upon the consummation
of the merger of NMS into a subsidiary of MMC, will result in the acquisition by
EDS of shares of common stock of MMC for an aggregate price of $12,500,000 and a
price per share equal to 93% of the price per share to the public in the IPO
discussed above. The agreement with EDS also provides for EDS to receive
preferential treatment in the creation of an electronic data interchange
relationship for certain sectors of MMC's clients and conditions relating to
EDS's obligation to purchase shares of common stock of the Company. The Company
has agreed to pay a 5% placement fee to an unrelated party for the placement of
the $12,500,000.
Purchases of software from two of the other companies which have also
entered into definitive merger agreements with MMC totaled approximately
$60,000, $400,000, $399,000, $152,000 and $592,000 for 1994,
F-56
<PAGE> 115
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS: -- (CONTINUED)
1995, for the six months ended June 30, 1996 and for the (unaudited) nine months
ended September 30, 1995 and 1996, respectively.
The Company has entered into a Management Services Agreement and Option
Agreement (the "Agreements") effective as of September 1, 1996, for the Medical
Manager Division (the "Division") of Medix, Inc., a wholly, owned subsidiary of
Blue Cross and Blue Shield of New Jersey, Inc. The Agreements provide for the
Company to manage the Division, which is an independent dealer of a private
label physician practice management system licensed from the developer of The
Medical Manager, until December 31, 1996 or the date of its purchase by NMS, if
earlier. The Agreements provided for NMS to acquire the Division by December 31,
1996 for $3,200,000. In connection with the Agreements, the Company made a
nonrefundable payment of $500,000 that was applied against the purchase price.
The $500,000 payment is included in other assets at September 30, 1996. The
closing occurred on December 31, 1996, at which time NMS issued to Medix a note
for approximately $2.1 million, representing the balance of the purchase price
after giving effect to a deposit made by NMS and management fees owed to the
Company by Medix. NMS was given a credit of approximately $80,000 on such $2.1
million note representing the cash in Medix's bank accounts relating to the
Division of the time of such closing. In addition, all cash collections of Medix
accounts receivable relating to the Division subsequent to December 31, 1996
will be deposited in a Medix bank account and applied against the amount owed by
the Company on such note.
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-57
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Systems Management, Inc.
We have audited the accompanying balance sheets of Systems Management, Inc.
as of December 31, 1994 and 1995 and June 30, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995 and for the six months ended June
30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Systems Management, Inc. as
of December 31, 1994 and 1995 and June 30, 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the six months ended June 30, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 7 to the financial statements, in July 1996 the
Company and its stockholders entered into a definitive agreement with Medical
Manager Corporation (MMC) providing for the merger of the Company with a
subsidiary of MMC.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
August 30, 1996, except for certain
information in Note 7 for which
the date is January 7, 1997
F-58
<PAGE> 117
SYSTEMS MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $178,911 $ 187,609 $ 297,251 $ 455,390
Accounts receivable......................... 167,214 276,366 288,978 248,077
Inventory................................... 109,018 183,835 149,864 188,526
Prepaid expenses and other current assets... 4,361 29,122 0 15,000
-------- ---------- ---------- ----------
Total current assets................ 459,504 676,932 736,093 906,993
PROPERTY AND EQUIPMENT, net................... 272,139 419,101 434,946 146,782
GOODWILL...................................... 0 0 100,000 98,750
-------- ---------- ---------- ----------
Total assets........................ $731,643 $1,096,033 $1,271,039 $1,152,525
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term
obligations.............................. $ 22,885 $ 50,118 $ 106,201 $ 104,040
Accounts payable and accrued liabilities.... 177,645 223,349 183,911 191,938
Customer deposits and deferred maintenance
revenue.................................. 157,213 424,656 434,957 504,963
-------- ---------- ---------- ----------
Total current liabilities........... 357,743 698,123 725,069 800,941
LONG-TERM OBLIGATIONS, net of current
maturities.................................. 154,310 212,767 233,922 229,941
-------- ---------- ---------- ----------
Total liabilities................... 512,053 910,890 958,991 1,030,882
-------- ---------- ---------- ----------
Commitments and contingencies (Notes 6 and 7)
STOCKHOLDERS' EQUITY
Common stock, no par value, 100 shares
authorized............................... 15,485 15,485 15,485 15,485
Retained earnings........................... 204,105 169,658 296,563 106,158
-------- ---------- ---------- ----------
Total stockholders' equity.......... 219,590 185,143 312,048 121,643
-------- ---------- ---------- ----------
Total liabilities and stockholders'
equity............................ $731,643 $1,096,033 $1,271,039 $1,152,525
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 118
SYSTEMS MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ JUNE 30, -----------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems.......................... $ 610,179 $ 621,258 $1,094,127 $ 945,910 $ 523,295 $1,502,339
Maintenance and other............ 1,134,307 1,507,640 1,622,742 969,414 1,214,912 1,445,130
---------- ---------- ---------- ---------- ---------- ----------
Total revenue............ 1,744,486 2,128,898 2,716,869 1,915,324 1,738,207 2,947,469
---------- ---------- ---------- ---------- ---------- ----------
Cost of revenue
Systems.......................... 493,611 497,560 516,997 696,767 282,367 1,192,576
Maintenance and other............ 836,634 1,158,147 1,714,203 774,225 1,179,031 1,043,893
---------- ---------- ---------- ---------- ---------- ----------
Total costs of revenue... 1,330,245 1,655,707 2,231,200 1,470,992 1,461,398 2,236,469
---------- ---------- ---------- ---------- ---------- ----------
Gross margin........... 414,241 473,191 485,669 444,332 276,809 711,000
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative................ 313,510 371,037 425,509 236,548 323,455 377,104
Depreciation and amortization.... 25,229 26,217 31,828 34,640 26,864 46,890
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 338,739 397,254 457,337 271,188 350,319 423,994
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.......... 75,502 75,937 28,332 173,144 73,510 287,006
Interest expense................... (4,134) (6,426) (23,279) (10,039) (23,279) (16,174)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 71,368 $ 69,511 $ 5,053 $ 163,105 $ (81,040) $ 270,832
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE> 119
SYSTEMS MANAGEMENT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK
------- RETAINED
AMOUNT EARNINGS TOTAL
<S> <C> <C> <C>
Balance January 1, 1993..................................... $15,485 $ 98,719 $ 114,204
Net income................................................ 71,368 71,368
Dividends................................................. (13,523) (13,523)
------- --------- ---------
Balance December 31, 1993................................... 15,485 156,564 172,049
Net income................................................ 69,511 69,511
Dividends................................................. (21,970) (21,970)
------- --------- ---------
Balance December 31, 1994................................... 15,485 204,105 219,590
Net income................................................ 5,053 5,053
Dividends................................................. (39,500) (39,500)
------- --------- ---------
Balance December 31, 1995................................... 15,485 169,658 185,143
Net income................................................ 163,105 163,105
Dividends................................................. (36,200) (36,200)
------- --------- ---------
Balance June 30, 1996....................................... 15,485 296,563 312,048
Net income................................................ 107,727 107,727
Dividends................................................. (298,132) (298,132)
------- --------- ---------
Balance September 30, 1996 (unaudited)...................... $15,485 $ 106,158 $ 121,643
======= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE> 120
SYSTEMS MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX
MONTHS NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- JUNE 30, ---------------------
1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 71,368 $ 69,511 $ 5,053 $163,105 $ (81,040) $ 270,832
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 25,229 26,217 31,828 34,640 26,864 46,890
Changes in assets and liabilities, net
of effects from acquisition:
Accounts receivable.................. 20,333 (52,123) (109,152) (12,612) (42,876) 28,289
Inventory............................ 88,461 (54,341) (74,817) 33,971 (100,239) (4,691)
Prepaid expenses and other assets.... 4,407 1,187 (24,761) 29,122 149 14,122
Accounts payable and accrued
liabilities........................ 19,069 70,527 45,704 (39,438) 1,856 (31,411)
Customer deposits and deferred
maintenance
revenue............................ (81,333) 29,403 267,443 10,301 292,161 80,307
-------- --------- --------- -------- --------- ---------
Net cash provided by operating
activities.................... 147,534 90,381 141,298 219,089 96,875 404,338
-------- --------- --------- -------- --------- ---------
Cash flow from investing activities:
Purchases of property and equipment.... (34,035) (33,486) (80,995) (80,485) (178,382) (155,853)
-------- --------- --------- -------- --------- ---------
Net cash used in investing
activities.................... (34,035) (33,486) (80,995) (80,485) (178,382) (155,853)
-------- --------- --------- -------- --------- ---------
Cash flow from financing activities:
Proceeds from issuance of long-term
obligations.......................... 24,532 26,000 85,000 57,735 0 96,600
Payment on short-term and long-term
obligations.......................... (52,914) (61,106) (97,105) (50,497) 87,302 (25,504)
Dividends.............................. (13,523) (21,970) (39,500) (36,200) (22,000) (51,800)
-------- --------- --------- -------- --------- ---------
Net cash provided by (used in)
financing activities.......... (41,905) (57,076) (51,605) (28,962) 65,302 19,296
-------- --------- --------- -------- --------- ---------
Net change in cash and cash
equivalents............................ 71,594 (181) 8,698 109,642 (16,205) 267,781
Cash and cash equivalents:
Beginning of period.................... 107,498 179,092 178,911 187,609 178,911 187,609
-------- --------- --------- -------- --------- ---------
End of period.......................... $179,092 $ 178,911 $ 187,609 $297,251 $ 162,706 $ 455,390
======== ========= ========= ======== ========= =========
Cash paid for interest:.................. $ 4,134 $ 6,425 $ 23,280
======== ========= =========
Non-cash dividends....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 282,532
======== ========= ========= ======== ========= =========
Details of acquisitions:
Fair value of assets................... $ 11,500 $ 165,500 $ 97,795 $100,000 $ 97,795 $ 100,000
Less debt issued....................... (11,500) (165,500) (97,795) (70,000) (97,795) (70,000)
-------- --------- --------- -------- --------- ---------
Net cash paid for acquisitions......... $ 0 $ 0 $ 0 $ 30,000 $ 0 $ 30,000
======== ========= ========= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE> 121
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Systems Management, Inc. (the "Company") is an independent dealer for The
Medical Manager physician practice management system that is sold to clients
primarily in northern Indiana, Ohio and adjacent areas of the Midwestern United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1996 and 1995 and for the nine months then ended are unaudited.
All adjustments and accruals (consisting only of normal recurring adjustments)
have been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Revenue Recognition. Revenue from the sale of systems is recognized when
the system has been installed and the related client training has been
completed. Amounts billed in advance of installation and pending completion of
remaining significant obligations 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 sales for systems and maintenance and other based
upon revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's credit concentrations are 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.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
Inventory. Inventory primarily consists of computers, peripheral equipment
and replacement parts. Inventory cost is accounted for on the first-in,
first-out basis and reported at the lower of cost or market.
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 on the straight-line method over
the estimated useful lives of the assets.
Income Taxes. The Company has elected S corporation status, as defined by
the Internal Revenue Code, whereby the Company is not subject to taxation for
federal purposes. Instead, the taxable income of the S corporation is included
in the individual income tax return of the Company's single stockholder for
federal income tax purposes. Accordingly, a provision for income taxes has not
been reflected in the financial statements. The Company's S corporation status
will terminate with the effective date of the Merger discussed in Note 7.
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.
New Accounting Pronouncements. 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, is effective
F-63
<PAGE> 122
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
for years beginning after December 15, 1995. This Statement requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. This pronouncement is not expected to have a material
impact on the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1996 presentations.
3. ACQUISITION:
On June 28, 1996, the Company acquired certain assets from an independent
dealer for The Medical Manager physician practice management system. Pro forma
results of operations have not been presented because the effects of this
acquisition were not significant. The acquisition has been accounted for as a
purchase with the excess of the purchase price over the fair value of the assets
acquired, approximately $100,000, accounted for as goodwill. The goodwill is
being amortized on the straight-line basis over 20 years.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and improvements..................... $ 41,265 $ 41,265 $ 41,265 $ 1,686
Building.................................. 151,152 249,844 250,944 0
Furniture and equipment................... 75,741 119,660 169,045 174,414
Vehicles.................................. 65,568 101,338 101,338 101,338
-------- -------- --------- ---------
333,726 512,107 562,592 277,438
Less accumulated depreciation............. (61,587) (93,006) (127,646) (130,656)
-------- -------- --------- ---------
$272,139 $419,101 $ 434,946 $ 146,782
======== ======== ========= =========
</TABLE>
F-64
<PAGE> 123
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG TERM OBLIGATIONS:
Long term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Revolving lines of credit, interest monthly at
prime plus 1/2% (8 3/4% at September 30, 1996),
due on demand, scheduled maturity of June 1997,
collateralized by substantially all of the
Company's assets, $93,400 available at September
30, 1996. ....................................... $ 13,039 $ 29,194 $ 47,600 $ 56,600
Mortgage note payable, bearing interest at the
bank's base rate plus 1% (9 1/4% at September 30,
1996), with monthly principal and interest
payments of $2,057 (adjusted periodically)
through December 1999, with a balloon payment,
including all unpaid principal and interest, due
December 1999. Collateralized by all of the
Company's assets. ............................... 143,500 195,386 192,793 191,187
Various notes payable, bearing interest at rates
ranging from 6.42% to 11.50%, with various
monthly payments of $391, with maturity dates
through 2000; collateralized by certain Company
vehicles. ....................................... 20,656 38,305 29,730 26,194
Promissory note payable, unsecured, bearing
interest at 9% due monthly. Principal reductions
of $10,000, $30,000 and $30,000 are due in
September 1996, January 1997 and January 1998,
respectively;.................................... 0 0 70,000 60,000
-------- -------- -------- --------
Total.................................... 177,195 262,885 340,123 333,981
Less portion due within one year......... 22,885 50,118 106,201 104,040
-------- -------- -------- --------
Long term obligations, net of current
maturities............................. $154,310 $212,767 $233,922 $229,941
======== ======== ======== ========
</TABLE>
Annual maturities of long-term obligations for the three years subsequent
to September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 61,331
1999.............................................. 19,841
2000.............................................. 148,769
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
In conjunction with the Merger discussed in Note 7, the Company distributed
land and a building with a net book value of approximately $283,000 as of
September 30, 1996 to the stockholders as a non-cash dividend and entered into
an operating lease for use of the facilities. The lease contains three options
for renewal for a period of five years each beginning in November 1996 for an
annual rate of $83,160.
Rent expense was approximately $40,000, $44,000, $9,000, $4,000, $6,000 and
$11,000 for 1993, 1994, 1995, for the six months ended June 30, 1996 and for the
(unaudited) nine months ended September 30, 1995 and 1996 respectively.
F-65
<PAGE> 124
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENTS:
In July 1996, the Company and its stockholders entered into a definitive
agreement with Medical Manager Corporation ("MMC") providing for the Merger of
the Company with a subsidiary of MMC. All outstanding shares of the Company's
common stock will be exchanged for cash and shares of MMC's common stock
concurrent with the consummation of the initial public offering of the common
stock of MMC. In addition, in connection with the merger, the Company will elect
to terminate its S corporation status and will be required to effect the asset
and liability method of accounting for deferred income taxes. Under this method,
deferred tax assets and liabilities are established based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Had the Company elected to terminate its S corporation status
immediately prior to September 30, 1996, the Company would have been required to
establish a deferred tax asset of approximately $90,000 related primarily to the
use of different methods of accounting for deferred revenue for tax and
financial reporting purposes.
Purchases of software from one of the other companies which have also
entered into definitive merger agreements with MMC totaled approximately
$87,000, $169,000, $230,000, $164,000, $192,000 and $224,000 for 1993, 1994 and
1995 for the six months ended June 30, 1996 and for the (unaudited) nine months
ended September 30, 1995 and 1996 respectively.
In the course of MMC's consolidation efforts, MMC undertook preliminary
discussions with certain dealers of The Medical Manager practice management
system to determine their suitability to be acquired by MMC in connection with
the proposed transactions. On January 7, 1997, two affiliated dealers, Computer
Clinic, Inc. and Command Solutions, Inc. (collectively, "CCI"), and CCI's
President filed suit in the Supreme Court of the State of New York, Westchester
County against MMC, each of the Founding Companies and certain principals
thereof alleging in five separate causes of action, among other things, breach
of contract, fraud, misrepresentation, tortious interference and
anti-competitive and predatory practices arising out of the decision not to
include CCI as one of the Founding Companies. In connection with three of the
five causes of action brought by CCI, CCI seeks damages in excess of $11.0
million for each such cause of action. CCI seeks damages in excess of $12.0
million in connection with the fourth cause of action and damages in an amount
to be determined at trial in connection with the fifth cause of action. MMC has
agreed to indemnify all of the other defendants for any liability, obligation or
claim arising out of this action, including the costs of defending against this
action and any settlement costs incurred in connection therewith. MMC, the
Founding Companies and such principals intend to defend vigorously against this
action.
F-66
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
GBP With Excellence, Inc.
and
National Medical Systems, Inc.
We have audited the accompanying balance sheet of GBP With Excellence, Inc.
as of December 31, 1995 and the related statements of operations and accumulated
deficit and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GBP With Excellence, Inc. as
of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, on January 29, 1996,
substantially all of the assets of GBP With Excellence, Inc. were sold to
National Medical Systems, Inc., pursuant to an asset purchase agreement dated
January 12, 1996.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
September 10, 1996
F-67
<PAGE> 126
GBP WITH EXCELLENCE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 24,381
Accounts receivable....................................... 60,328
Inventory................................................. 6,096
Prepaid expenses and other current assets................. 2,298
-----------
Total current assets.............................. 93,103
PROPERTY AND EQUIPMENT, net................................. 19,417
OTHER ASSETS................................................ 6,160
-----------
Total assets...................................... $ 118,680
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations............... $ 353,403
Accounts payable and accrued liabilities.................. 214,763
Customer deposits and deferred maintenance revenue........ 305,286
-----------
Total current liabilities......................... 873,452
LONG-TERM OBLIGATIONS, net of current maturities............ 29,147
-----------
Total liabilities................................. 902,599
-----------
Commitments and contingencies (Note 5)
STOCKHOLDERS' DEFICIT
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1,000
Additional paid-in capital................................ 233,433
Accumulated deficit....................................... (1,018,352)
-----------
Total stockholders' deficit....................... (783,919)
-----------
Total liabilities and stockholders' deficit....... $ 118,680
===========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 127
GBP WITH EXCELLENCE, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1995
(UNAUDITED)
<S> <C> <C>
Revenue
Systems.................................................. $ 1,551,807 $ 1,265,307
Maintenance and other.................................... 1,009,026 542,274
----------- -----------
Total revenues........................................ 2,560,833 1,807,581
----------- -----------
Cost of revenue
Systems.................................................. 1,274,165 903,300
Maintenance and other.................................... 560,852 366,150
----------- -----------
Total costs of revenue................................ 1,835,017 1,269,450
----------- -----------
Gross margin..................................... 725,816 538,131
----------- -----------
Operating expenses
Selling, general and administrative...................... 752,114 611,839
Depreciation expense..................................... 21,957 15,300
----------- -----------
Total operating expenses.............................. 774,071 627,139
----------- -----------
Loss from operations............................. (48,255) (89,008)
Interest expense........................................... (31,259) (21,692)
----------- -----------
Net loss................................................... (79,514) (110,700)
Accumulated deficit
Beginning of period...................................... (938,838) (938,838)
----------- -----------
End of period............................................ $(1,018,352) $(1,049,538)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 128
GBP WITH EXCELLENCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1995
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (79,514) $(110,700)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 21,957 15,300
Changes in assets and liabilities
Accounts receivable................................... 121,567 120,965
Inventory............................................. 75,295 61,960
Prepaid expenses and other current assets............. (2,091) 2,177
Accounts payable and accrued liabilities.............. (14,014) (49,410)
Customer deposits and deferred maintenance revenue.... (253,303) (184,468)
--------- ---------
Net cash used in operating activities.................... (130,103) (144,176)
Cash flow from investing activities:
Purchases of property and equipment...................... (6,178) (37,148)
--------- ---------
Net cash used in investing activities.................... (6,178) (37,148)
Cash flow from financing activities:
Proceeds from issuance of long-term obligations.......... 87,715 135,652
Payment on short-term and long-term obligations.......... (60,813) (82,895)
--------- ---------
Net cash provided by financing activities................ 26,902 52,757
--------- ---------
Net change in cash and cash equivalents.................... (109,379) (128,567)
Cash and cash equivalents:
Beginning of period...................................... 133,760 133,760
--------- ---------
End of period............................................ $ 24,381 $ 5,193
========= =========
Cash paid for interest................................... $ 31,259
=========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE> 129
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
GBP With Excellence, Inc. (the "Company") was an independent dealer for The
Medical Manager physician practice management system that is sold to clients
primarily in Central Florida. In January 1996, substantially all of the
Company's operating assets were sold to National Medical Systems, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Company as
of September 30, 1995, and for the nine months then ended, are unaudited. All
adjustments and accruals (consisting only of normal recurring adjustments) have
been recorded that, in the opinion of management, are necessary for a fair
presentation. Results of operations for the interim period are not necessarily
indicative of the results for the full year.
Revenue Recognition. Revenue from the sale of systems is recognized when
the system has been installed and the related client training has been
completed. Amounts billed in advance of installation and pending completion of
remaining significant obligations 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 sales for systems and maintenance and other based
upon revenue, which basis management believes to be reasonable.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's credit concentrations are limited due to the
wide variety of customers and the geographic areas into which the Company's
systems and services are sold.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid investments with maturity dates of three
months or less when purchased to be cash equivalents.
Inventory. Inventory primarily consists of computers, peripheral equipment
and replacement parts. Inventory cost is accounted for on the first-in,
first-out basis and reported at the lower of cost or market.
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 on accelerated methods over the
estimated useful lives of the assets.
Income Taxes. The Company has elected S corporation status, as defined by
the Internal Revenue Code of 1986, whereby the Company is not subject to
taxation for federal purposes. Instead, the taxable income or loss of the S
corporation is included in the individual income tax returns of the Company's
stockholders for federal income tax purposes.
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.
F-71
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Furniture and equipment..................................... $ 92,302
Computers................................................... 57,040
---------
149,342
Less accumulated depreciation..................... (129,925)
---------
$ 19,417
=========
</TABLE>
4. NOTES PAYABLE:
Notes payable consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Revolving line of credit, $100,000 available principal,
monthly interest at prime plus 1% (9 1/4% at December 31,
1995), principal due on demand, collateralized by accounts
receivable and other assets, guaranteed by the Company's
stockholders.............................................. $ 65,716
Note payable, monthly payments of $4,057 with interest at
9%, balloon payment of $202,070 due 1998, unsecured....... 260,666
Note payable, monthly payments of $507 with interest at 9%,
balloon payment of $25,259 due 1998, unsecured............ 32,584
Note payable, monthly payments of $997 with interest at 10%,
due 1996, unsecured....................................... 5,814
Note payable, monthly payments of $1,015 with interest at
10%, due 1997, unsecured.................................. 17,770
--------
Total............................................. 382,550
Less portion due within one year.................. 353,403
--------
Long term obligations, net of current
maturities...................................... $ 29,147
========
</TABLE>
The carrying value approximates fair market value due to the short-term
nature of the debt.
5. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating leases. Future
minimum rental commitments under noncancelable operating leases were
approximately as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996................................................... $ 43,000
1997................................................... 44,000
1998................................................... 15,000
--------
Total............................................. $102,000
========
</TABLE>
Rent expense was approximately $51,000 and $38,000 for 1995 and for the
nine months ended September 30, 1995 (unaudited).
F-72
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Medix, Inc.
and
National Medical Systems, Inc.
We have audited the accompanying statements of financial position of
Medical Manager Division of Medix, Inc. as of December 31, 1994 and 1995 and
June 30, 1996 and the related statements of operations and cash flows for each
of the two years in the period ended December 31, 1995 and for the six months
ended June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Manager Division of
Medix, Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective September 1,
1996, Medical Manager Division's management was taken over by National Medical
Systems, Inc., pursuant to a management services agreement and option to
purchase agreement, both dated September 1, 1996.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
September 1, 1996
F-73
<PAGE> 132
MEDICAL MANAGER DIVISION
FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996 SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Accounts receivable....... $ 781,707 $ 417,584 $292,692 $382,100
Inventory................. 251,102 210,929 186,432 191,786
Prepaid expenses and other
current assets......... 0 341,670 317,675 314,650
---------- ---------- -------- --------
Total current
assets.......... 1,032,809 970,183 796,799 888,536
PROPERTY AND EQUIPMENT,
net....................... 183,178 152,804 128,672 102,682
---------- ---------- -------- --------
Total assets...... $1,215,987 $1,122,987 $925,471 $991,218
========== ========== ======== ========
LIABILITIES AND DIVISIONAL
EQUITY
CURRENT LIABILITIES
Customer deposits and
deferred maintenance
revenue................ $ 488,618 $ 657,984 $790,833 $601,886
---------- ---------- -------- --------
Total
liabilities..... 488,618 657,984 790,833 601,886
---------- ---------- -------- --------
Commitments and
contingencies (Note 5)
DIVISIONAL EQUITY
Divisional equity......... 727,369 465,003 134,638 389,332
---------- ---------- -------- --------
Total divisional
equity.......... 727,369 465,003 134,638 389,332
---------- ---------- -------- --------
Total liabilities
and divisional
equity.......... $1,215,987 $1,122,987 $925,471 $991,218
========== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE> 133
MEDICAL MANAGER DIVISION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------ 1996 ------------------------
1994 1995 ---------- 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Systems.................... $2,405,039 $ 519,959 $ 223,126 $ 472,455 $ 278,121
Maintenance and other...... 3,463,369 3,943,654 1,884,515 2,924,426 2,950,479
---------- ---------- ---------- ---------- ----------
Total revenues.......... 5,868,408 4,463,613 2,107,641 3,396,881 3,228,600
---------- ---------- ---------- ---------- ----------
Cost of revenue
Systems.................... 1,602,664 360,676 161,868 367,471 194,789
Maintenance and other...... 2,728,861 2,828,966 1,441,218 2,080,117 1,934,033
---------- ---------- ---------- ---------- ----------
Total costs of
revenue............... 4,331,525 3,189,642 1,603,086 2,447,588 2,128,822
---------- ---------- ---------- ---------- ----------
Gross margin.......... 1,536,883 1,273,971 504,555 949,293 1,099,778
---------- ---------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative.......... 1,235,313 1,188,753 673,956 862,102 898,899
Depreciation and
amortization............ 99,394 90,192 44,701 56,378 64,760
---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 1,334,707 1,278,945 718,657 918,480 963,659
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations......... 202,176 (4,974) (214,102) 30,813 136,119
Other income (expense)
Interest expense........... (58,818) (59,720) (29,273) (57,796) (40,437)
Interest income............ 26,167 15,154 10,546 12,723 10,779
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... 169,525 (49,540) (232,829) (14,260) 106,461
Income taxes (benefit)....... 59,334 (9,908) (46,566) (2,852) 37,261
---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 110,191 $ (39,632) $ (186,263) $ (11,408) $ 69,200
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE> 134
MEDICAL MANAGER DIVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SIX MONTHS SEPTEMBER 30,
------------------------- ENDED -------------------------
1994 1995 JUNE 30, 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $ 110,191 $ (39,632) $(186,263) $ (11,408) $ 69,200
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.... 99,394 90,192 44,701 56,378 64,760
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable.............. (31,483) 364,123 124,892 363,518 35,484
Inventory........................ (36,371) 40,173 24,497 (7,255) 19,143
Prepaid expenses and other
current assets................. 87,575 (341,670) 23,995 (344,775) 27,020
Customer deposits and deferred
maintenance revenue............ 101,406 169,366 132,849 228,758 (56,098)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities..................... 330,712 282,552 164,671 285,216 159,509
Cash flow from investing activities:
Purchases of property and
equipment...................... (128,325) (59,818) (20,569) (40,302) (14,638)
--------- --------- --------- --------- ---------
Net cash used in investing
activities..................... (128,325) (59,818) (20,569) (40,302) (14,638)
Cash flow from financing activities:
Net remittances to Medix, Inc.... (202,387) (222,734) (144,102) (244,914) (144,871)
--------- --------- --------- --------- ---------
Net cash used in financing
activities..................... (202,387) (222,734) (144,102) (244,914) (144,871)
--------- --------- --------- --------- ---------
Net change in cash and cash
equivalents......................... $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Medical Manager Division (the "Division"), a wholly-owned division of
Medix, Inc. ("Medix"), whose parent is Blue Cross and Blue Shield of New Jersey,
Inc. (BCBSNJ), markets and supports "The System by Medix," a private label
physician practice management system, to clients primarily in New Jersey and New
York. The system is licensed from Personalized Programming, Inc., the developer
of the system.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Effective September 1, 1996, Medix
entered into a management services agreement and an option agreement with
National Medical Systems, Inc. ("NMS") that provides for NMS to manage the
Division pending its sale to NMS.
BCBSNJ provides certain services to, and incurs certain costs on behalf of,
its subsidiaries and divisions. These costs, which include office space,
employee benefit and executive compensation programs, retirement savings and
health plans, treasury, accounting, data processing, legal, administrative and
business insurance, are allocated to BCBSNJ's subsidiaries, including Medix and
ultimately to the Division, on a pro-rata basis based on applicable allocation
statistics that include square footage occupied, number of employees and data
processing usage. Liabilities related to the benefit plans described above are
not fully reflected in the statement of financial position. Interest income and
expense are also allocated. As such, these financial statements are not
necessarily indicative of the financial position or the results of operations
had the Division been operated as an unaffiliated company. However, management
believes that with respect to expenses, the amounts reflected in the statements
of operation are not less than the amounts the Division would have incurred had
the Division been an unaffiliated company in those periods, and the allocation
process is reasonable.
These financial statements present the results of operations for the years
ended December 31, 1994 and 1995 and for the six months ended June 30, 1996 and
for the (unaudited) nine months ended September 30, 1995 and 1996 and the
financial position at December 31, 1994 and 1995 and June 30, 1996 and
(unaudited) September 30, 1996. The effects of the pending purchase by NMS,
including purchase accounting by the acquiror, have not been reflected in these
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information. The financial statements of the Division as
of September 30, 1995 and 1996, and for the nine months then ended, are
unaudited. All adjustments and accruals (consisting only of normal recurring
adjustments) have been recorded, which, in the opinion of management, are
necessary for a fair presentation. Results of operations for the interim periods
are not necessarily indicative of the results for the full year.
Revenue Recognition. Revenue from the sale of systems is recognized when
the system has been installed and the related client training has been
completed. Amounts billed in advance of installation and pending completion of
remaining significant obligations 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 sales for systems and maintenance and other based
upon revenue which management believes to be a reasonable basis.
Concentration of Credit Risk. Financial instruments that potentially
subject the Division to concentrations of credit risk consist principally of
accounts receivable. The Division's credit concentrations are limited due to the
wide variety of customers and the geographic areas into which the Division's
systems and services are sold.
Cash and Cash Equivalents. For purposes of the statement of cash flows,
the Division considers all highly liquid investments with maturity dates of
three months or less when purchased to be cash equivalents.
F-77
<PAGE> 136
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Inventory. Inventory primarily consists of computers, peripheral equipment
and replacement parts. Inventory cost is accounted for on the first-in,
first-out basis and reported at the lower of cost or market.
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 on accelerated methods over the
estimated useful lives of the assets.
Income Taxes. The Division participates in the consolidated federal income
tax return of BCBSNJ. Under terms of an agreement between Medix and BCBSNJ,
income tax provisions are allocated at 35% of income before income taxes and
income tax benefits at 20% of loss before income taxes for financial reporting
purposes. The Division's current income taxes payable or receivable are included
in divisional equity in the accompanying statements of financial position.
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.
New Accounting Pronouncements. Statements of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be Disposed Of, is effective for years beginning
after December 15, 1995. This Statement requires that long-lived assets and
certain intangibles to be held and used by the Company be reviewed for
impairment. This pronouncement is not expected to have a material impact on the
financial statements of the Company.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Property and equipment consisted of the
following:
Furniture and equipment.......................... $1,105,744 $ 679,500 $ 683,999 $ 683,999
Less accumulated depreciation............... (922,566) (526,696) (555,327) (581,317)
---------- --------- --------- ---------
$ 183,178 $ 152,804 $ 128,672 $ 102,682
========== ========= ========= =========
</TABLE>
F-78
<PAGE> 137
NOTES TO FINANCIAL STATEMENTS
4. DIVISIONAL EQUITY:
Divisional equity reflects the historical activity between the Division and
Medix. An analysis of the changes in divisional equity is as follows:
<TABLE>
<S> <C>
Balance January 1, 1994..................................... $ 819,565
Net income.................................................. 110,191
Net remittances to Medix.................................... (202,387)
---------
Balance December 31, 1994................................... 727,369
Net loss.................................................... (39,632)
Net remittances to Medix.................................... (222,734)
---------
Balance December 31, 1995................................... 465,003
Net loss.................................................... (186,263)
Net remittances to Medix.................................... (144,102)
---------
Balance June 30, 1996....................................... 134,638
---------
Net income.................................................. 255,463
Net remittances to Medix.................................... (769)
Balance September 30, 1996 (unaudited)...................... $ 389,332
=========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Medix leases its office facilities, including those utilized by the
Division, from BCBSNJ under the terms of an operating lease that expires in
December 1998. In conjunction with the purchase by NMS, operations of the
Division will be moved to another location. The Division will not be responsible
for obligations under the existing lease after the relocation.
Rent expense allocated to the Division totaled $145,000, $155,000, $78,000,
$100,000 and $89,000 for 1994 and 1995, for the six months ended June 30, 1996
and the (unaudited) nine months ended September 30, 1995 and 1996, respectively.
F-79
<PAGE> 138
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
The Company........................... 7
Risk Factors.......................... 11
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 44
Certain Transactions.................. 49
Principal Stockholders................ 51
Description of Capital Stock.......... 51
Shares Eligible For Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 57
Index to Financial Statements......... F-1
</TABLE>
------------------------
Until February 24, 1997 (25 days from the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
6,000,000 SHARES
MEDICAL MANAGER CORPORATION LOGO
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEAN WITTER REYNOLDS INC.
January 30, 1997
- ------------------------------------------------------
- ------------------------------------------------------
