<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDICAL MANAGER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 59-3396629
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3001 NORTH ROCKY POINT DRIVE -- SUITE 100
TAMPA, FLORIDA 33607
(813) 287-2990
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
JOHN H. KANG
PRESIDENT
MEDICAL MANAGER CORPORATION
3001 NORTH ROCKY POINT DRIVE -- SUITE 100
TAMPA, FLORIDA 33607
(813) 287-2990
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
Frederick B. Karl, Jr., Esq. Christopher T. Jensen, Esq.
Medical Manager Corporation Morgan, Lewis & Bockius LLP
15151 N.W. 99th Street 101 Park Avenue
Alachua, Florida 32615 New York, New York 10178
(212) 309-6000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value........ 5,000,000 shares $9.125 $45,625,000 $13,826.00
=======================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and the low prices of the
Common Stock on the Nasdaq National Market on April 14, 1997.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION
APRIL 15, 1997
5,000,000 SHARES
MEDICAL MANAGER CORPORATION LOGO
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.
This Prospectus covers 5,000,000 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by Medical Manager
Corporation (the "Company") from time to time in connection with the merger with
or acquisition by the Company of other businesses or assets. It is expected that
the terms of acquisitions involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to market prices current either at the time a merger or
acquisition are agreed upon or at or about the time of delivery of shares. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
person receiving any such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
The Company currently has 17,705,470 shares of its Common Stock listed on
the Nasdaq National Market, of which 6,000,000 are registered and available for
unrestricted trading in the public markets unless owned by affiliates of the
Company. Application will be made to list the shares of Common Stock offered
hereby on the Nasdaq National Market. On April 14, 1997, the closing price of
the Common Stock on the Nasdaq National Market was $9.25 per share as published
in The Wall Street Journal on April 15, 1997.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at 3001 North Rocky Point Drive, Suite 100, Tampa, Florida 33607.
THE DATE OF THIS PROSPECTUS IS APRIL , 1997.
<PAGE> 3
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.
---------------------
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> 4
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 its initial public offering
of Common Stock (the "Offering"), Medical Manager Corporation ("MMC") acquired,
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 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 have been adjusted to give effect to
all of the Mergers.
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 23,600 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 entered into agreements to acquire, simultaneously with the
consummation of the Offering, the five Founding Companies. These five entities
include: (i) Medical Manager Research & Development, Inc. (formerly 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) Medical Manager Southeast, Inc. (formerly National
Medical Systems, Inc.) ("NMS"), a national dealer for The Medical Manager; (iv)
Medical Manager RTI, Inc. (formerly RTI Business Systems, Inc.) ("RTI"), a
regional dealer serving the Northeastern region of the United States; and (v)
Medical Manager Systems Management, Inc. (formerly Systems Management, Inc.)
("SMI"), a regional dealer serving the Midwestern region of the United States.
The vertical integration of these five entities has brought together the
research and development, sales, marketing and support resources for The Medical
Manager in one entity covering the entire United States.
3
<PAGE> 5
Although the five Founding Companies had not previously operated as a
single entity before the Mergers, 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.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
4
<PAGE> 6
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
MMC acquired the Founding Companies simultaneously with and as a condition
to the consummation of the 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 the 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
YEAR ENDED
DECEMBER 31,
1996
(IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue................................................... $41,957
Cost of revenue........................................... 17,658
-------
Gross profit.............................................. 24,299
Selling, general and administrative expenses(2)........... 10,364
Research and development expenses......................... 3,374
Depreciation and amortization............................. 1,169
-------
Income before income taxes................................ 9,392
Income taxes.............................................. 3,616
-------
Net income................................................ $ 5,776
=======
Net income per share...................................... $ 0.33
=======
Pro forma weighted average shares outstanding............. 17,705
=======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------
PRO FORMA(1) AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,931 $17,047
Working capital........................................... 2,937 15,053
Total assets.............................................. 19,550 31,666
Stockholders' equity...................................... 11,542 23,658
</TABLE>
- ---------------
(1) The pro forma combined statements of operations and the pro forma balance
sheet assume that the Mergers were closed on January 1, 1996 and as of
December 31, 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 statement of operations includes the effect of a
$790,000 reduction in salary and benefits to the owners and employees of
two of the Founding Companies. Additionally, the pro forma combined
statement includes 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 approximately $59.1 million
of the net proceeds of the Offering.
5
<PAGE> 7
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. 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>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
MMC/PPI: (1)
Revenue................................................... $ 9,617 $11,020 $11,956
Gross profit.............................................. 8,250 9,438 10,124
Selling, general and administrative expenses.............. 1,184 1,350 1,763
Research and development expenses......................... 1,502 2,024 2,648
SPI:
Revenue................................................... $13,501 $15,179 $16,404
Gross profit.............................................. 5,182 6,078 6,649
Selling, general and administrative expenses.............. 3,023 3,345 3,980
RTI:
Revenue................................................... $ 4,327 $ 4,954 $ 6,367
Gross profit.............................................. 1,751 2,253 2,353
Selling, general and administrative expenses.............. 1,711 2,269 2,323
NMS(2):
Revenue................................................... $ 241 $ 2,131 $ 6,737
Gross profit (loss)....................................... (62) 406 2,389
Selling, general and administrative expenses.............. 201 396 1,700
Research and development expenses......................... -- -- 676
SMI:
Revenue................................................... $ 2,129 $ 2,717 $ 4,186
Gross profit.............................................. 473 486 1,024
Selling, general and administrative expenses.............. 371 426 446
</TABLE>
- ---------------
(1) Information relating to PPI is presented as if MMC and PPI were combined on
July 10, 1996, the date of MMC's formation. Such information for 1996 is
audited.
(2) Information relating to 1994 is for the four months ended December 31, 1994.
6
<PAGE> 8
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
the Offering, MMC acquired in the Mergers the five Founding Companies, which
became separate, wholly-owned subsidiaries of MMC.
FOUNDING COMPANIES
PERSONALIZED PROGRAMMING, INC.
Personalized Programming, Inc. was founded in 1981 and is the developer of
The Medical Manager practice management system. In March 1997, Personalized
Programming, Inc. changed its name to Medical Manager Research & Development,
Inc. (hereinafter referred to as "PPI"). 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 has signed a five-year employment agreement with the Company
to be Chairman of the Board and Chief Executive Officer of the Company and to
continue as President and Chief Executive Officer of PPI.
SYSTEMS PLUS, INC.
Systems Plus, Inc. was founded in 1980 and is principally responsible for
sales and marketing of The Medical Manager (hereinafter referred to as "SPI").
Systems Plus, Inc. intends to change its name to Medical Manager Sales &
Marketing, Inc. 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 has signed a five-year employment agreement with the
Company to be Executive Vice President of Sales and Marketing of the Company and
to continue as President and Chief Executive Officer of SPI.
NATIONAL MEDICAL SYSTEMS, INC.
National Medical Systems, Inc. was founded in 1994 and is a national dealer
for The Medical Manager system. In March 1997, National Medical Systems, Inc.
changed its name to Medical Manager Southeast, Inc. (hereinafter referred to as
"NMS"). 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. John H. Kang, the President of NMS,
has been employed by NMS for two years and has signed a five-year employment
agreement with the Company to be President of the Company and to continue as
President of NMS.
RTI BUSINESS SYSTEMS, INC.
RTI Business Systems, Inc. was founded in 1988 and is a regional dealer for
The Medical Manager system in the Northeastern region of the United States. In
March 1997, RTI Business Systems, Inc. changed
7
<PAGE> 9
its name to Medical Manager RTI, Inc. (hereinafter referred to as "RTI"). 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 has signed a
five-year employment agreement with the Company to be Vice President --
Northeast Region of the Company and to continue as President and Director of
Sales and Marketing of RTI.
SYSTEMS MANAGEMENT, INC.
Systems Management, Inc. was founded in 1987 and is a regional dealer for
The Medical Manager system in the Midwestern region of the United States. In
April 1997, Systems Management, Inc. changed its name to Medical Manager Systems
Management, Inc. (hereinafter referred to as "SMI"). Its headquarters are in
South Bend, Indiana. Thomas P. Liddell, a founder of SMI, has been employed by
SMI since its inception and has signed a five-year employment agreement with the
Company to be Vice President -- Midwest Region of the Company and to continue as
President of SMI.
SUMMARY OF THE TERMS OF THE MERGERS
Discussions regarding the Mergers and the 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.
In connection with the Merger of NMS into a subsidiary of the Company, the
stockholders of NMS sold 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
purchased shares of common stock of NMS that, upon consummation of the Merger of
NMS into a subsidiary of the Company, resulted in the acquisition by EDS of
1,221,896 shares of Common Stock of the Company for an aggregate price of
$12,500,000 at a price per share equal to 93% of the initial public offering
price of $11.00. EDS is entitled to the same registration rights with respect to
the shares of Common Stock of the Company received in the Merger of NMS into a
subsidiary of the Company as were afforded to the other stockholders of NMS
under the merger agreement entered into among them, NMS, MMC and its acquisition
subsidiary. EDS is also 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 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 agreed
that the foregoing relationship will not be to the financial or competitive
detriment of the Company. The Company also 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 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 the Merger.
8
<PAGE> 10
The following table sets forth the aggregate cash and shares of Common
Stock paid by MMC to the stockholders of each of the Founding Companies and
their respective percentage ownership of the Common Stock outstanding.
<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>
For additional information regarding the Mergers, including payments made
to principals of the Founding Companies who became 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
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.
9
<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 conducted no significant operations and
generated no revenue prior to the closing of the Offering. MMC entered into
agreements to acquire the Founding Companies simultaneously with the closing of
the Offering. Prior to the closing of the Offering, the Founding Companies
operated 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 by June 1, 1997. There can be no assurance that the
Company will be able to obtain any or all the financing it will need on terms it
10
<PAGE> 12
deems acceptable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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
11
<PAGE> 13
adverse effect on the Company's results of operations, financial condition or
business. See "Business -- Research and Development" and " -- Competition."
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 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 has entered into
an employment agreement, which includes 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."
12
<PAGE> 14
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 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
The Company's directors, executive officers and holders of more than 5% of
the Common Stock beneficially own approximately 59.6% of the outstanding shares
of Common Stock. 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."
13
<PAGE> 15
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. The 6,000,000 shares sold in the Offering are freely tradable
unless held by affiliates of the Company. Simultaneously with the closing of the
Offering, the stockholders of the Founding Companies received, 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 received these shares other than EDS
have agreed with MMC not to sell, transfer or otherwise dispose of any of these
shares for one year following consummation of the Offering. However, the
stockholders who received these shares also have certain demand and piggyback
registration rights with respect to these shares. The 5,000,000 shares of Common
Stock offered hereby shall, upon registration thereof, be freely tradable after
issuance, unless acquired by parties in connection with an acquisition by the
Company 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 this registration statement. See "Shares Eligible for Future
Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
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.
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."
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market since
January 30, 1997. On April 14, 1997, the last sale price of the Common Stock was
$9.25 per share, as published in The Wall Street Journal on April 15, 1997. At
April 14, 1997, there were approximately 51 stockholders of record of the Common
Stock. The following table sets forth the range of high and low sale prices for
the Common Stock for the period from January 30, 1997, the date of commencement
of the Offering, through March 31, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
January 30, 1997 through March 31, 1997..................... 11 1/2 8 3/4
</TABLE>
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.
15
<PAGE> 17
SELECTED FINANCIAL DATA
MMC acquired the Founding Companies simultaneously with the consummation of
the Offering on February 4, 1997. 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, 1995 and 1996 and for the
years ended December 31, 1993, 1994, 1995 and 1996 have been derived from the
audited financial statements of PPI. The following selected historical financial
data of PPI at December 31, 1992 and 1993 and for the year ended December 31,
1992 have been derived from the 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. As described in
Note 1 of the Notes to the Combined Financial Statements, results of PPI are
presented below as if MMC and PPI were combined from July 10, 1996, the date of
MMC's formation. 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 the Offering. See the Unaudited Pro Forma Financial Combined Statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PPI STATEMENT OF OPERATIONS DATA:
Revenue........................................ $8,377 $6,890 $9,617 $11,020 $11,956
Cost of revenue................................ 1,187 810 1,367 1,582 1,832
------ ------ ------ ------- -------
Gross profit................................... 7,190 6,080 8,250 9,438 10,124
Selling, general and administrative expenses... 745 982 1,184 1,350 1,763
Research and development expenses.............. 878 1,040 1,502 2,024 2,648
Depreciation and amortization.................. 21 105 197 226 266
------ ------ ------ ------- -------
Income from operations......................... 5,546 3,953 5,367 5,838 5,447
Other income................................... 110 173 55 108 104
------ ------ ------ ------- -------
Income before income taxes..................... 5,656 4,126 5,422 5,946 5,551
Income taxes................................... 0 0 0 0 0
------ ------ ------ ------- -------
Net income..................................... $5,656 $4,126 $5,422 $ 5,946 $ 5,551
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PPI BALANCE SHEET DATA:
Working capital................................ $1,527 $778 $2,009 $ 1,921 $ 2,164
Total assets................................... 3,097 3,253 4,716 5,819 4,530
Stockholder's equity........................... 2,479 2,582 3,827 4,763 2,713
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue................................................... $41,957
Cost of revenue........................................... 17,658
-------
Gross profit.............................................. 24,299
Selling, general and administrative expenses(2)........... 10,364
Research and development expenses......................... 3,374
Depreciation and amortization............................. 1,169
-------
Income before income taxes................................ 9,392
Income taxes.............................................. 3,616
-------
Net income................................................ $ 5,776
=======
Net income per share...................................... $ 0.33
=======
Pro forma weighted average shares outstanding............. 17,705
=======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------
PRO FORMA(1) AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,931 $17,047
Working capital........................................... 2,937 15,053
Total assets.............................................. 19,550 31,666
Stockholders' equity...................................... 11,542 23,658
</TABLE>
- ---------------
(1) The pro forma combined statements of operations and the pro forma balance
sheet assume that the Mergers were closed on January 1, 1996 and as of
December 31, 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 statement of operations includes the effect of a
$790,000 reduction in salary and benefits to the owners and employees of
two of the Founding Companies. Additionally, the pro forma combined
statement includes 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 approximately $59.1
million of the net proceeds of the Offering.
17
<PAGE> 19
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. 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>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
MMC/PPI: (1)
Revenue................................................... $ 9,617 $11,020 $11,956
Gross profit.............................................. 8,250 9,438 10,124
Selling, general and administrative expenses.............. 1,184 1,350 1,763
Research and development expenses......................... 1,502 2,024 2,648
SPI:
Revenue................................................... $13,501 $15,179 $16,404
Gross profit.............................................. 5,182 6,078 6,649
Selling, general and administrative expenses.............. 3,023 3,345 3,980
RTI:
Revenue................................................... $ 4,327 $ 4,954 $ 6,367
Gross profit.............................................. 1,751 2,253 2,353
Selling, general and administrative expenses.............. 1,711 2,269 2,323
NMS(2):
Revenue................................................... $ 241 $ 2,131 $ 6,737
Gross profit (loss)....................................... (62) 406 2,389
Selling, general and administrative expenses.............. 201 396 1,700
Research and development expenses......................... -- -- 676
SMI:
Revenue................................................... $ 2,129 $ 2,717 $ 4,186
Gross profit.............................................. 473 486 1,024
Selling, general and administrative expenses.............. 371 426 446
</TABLE>
- ---------------
(1) Information relating to PPI is presented as if MMC and PPI were combined on
July 10, 1996, the date of MMC's formation. Such information for 1996 is
audited.
(2) Information relating to 1994 is for the four months ended December 31, 1994.
18
<PAGE> 20
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 23,600 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.
19
<PAGE> 21
The Company acquired, simultaneously with the consummation of the Offering,
the five Founding Companies: PPI, SPI, NMS, RTI and SMI. The Founding Companies
were 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 agreed to reductions in their compensation and benefits pursuant to
employment agreements entered into in connection with the Mergers.
MMC, which conducted no operations prior to the closing of the Offering,
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 -- PPI
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 years presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
REVENUE:
Systems..................................... $1,014 10.5% $ 1,018 9.2% $ 1,191 10.0%
Software license............................ 6,328 65.8 7,529 68.3 8,292 69.3
Maintenance and other....................... 2,275 23.7 2,473 22.5 2,473 20.7
------ ----- ------- ----- ------- -----
Total revenue............................ 9,617 100.0 11,020 100.0 11,956 100.0
------ ----- ------- ----- ------- -----
COST OF REVENUE:
Systems..................................... 752 7.8 704 6.4 843 7.0
Software license............................ 381 4.0 651 5.9 624 5.2
Maintenance and other....................... 235 2.4 227 2.1 365 3.1
------ ----- ------- ----- ------- -----
Total cost of revenue.................... 1,368 14.2 1,582 14.4 1,832 15.3
------ ----- ------- ----- ------- -----
Gross margin........................ 8,249 85.8 9,438 85.6 10,124 84.7
------ ----- ------- ----- ------- -----
OPERATING EXPENSES:
Selling, general and administrative......... 1,184 12.3 1,351 12.3 1,763 14.7
Research and development.................... 1,502 15.6 2,024 18.4 2,648 22.1
Depreciation and amortization............... 196 2.0 226 2.0 266 2.2
------ ----- ------- ----- ------- -----
Total operating expenses................. 2,882 29.9 3,601 32.7 4,677 39.1
------ ----- ------- ----- ------- -----
Income from operations.............. 5,367 55.9 5,837 52.9 5,447 45.6
OTHER INCOME (EXPENSE):
Interest income............................. 70 0.6 136 1.2 108 0.9
Other....................................... (15) (0.1) (27) (0.2) (4) (0.0)
------ ----- ------- ----- ------- -----
Net income.......................... $5,422 56.4% $ 5,946 53.9% $ 5,551 46.4%
====== ===== ======= ===== ======= =====
</TABLE>
20
<PAGE> 22
YEAR ENDED DECEMBER 31, 1996 AND 1995
Revenue. PPI's total revenue for 1996 increased to $12.0 million from
$11.0 million for 1995, an increase of $0.9 million or 8.2%. Revenue from
systems for 1996 increased to $1.2 million (10.0% of total revenue) from $1.0
million (9.2% of total revenue) for 1995, a increase of $0.2 million or 20.0%.
The increase was due primarily due to a change in sales personnel. Revenue from
software license for 1996 increased to $8.3 million (69.3% of total revenue)
from $7.5 million (68.3% of total revenue) for 1995, an increase of $0.8 million
or 10.7%. 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 1996 was
essentially unchanged from the prior year at approximately $2.5 million (20.7%
of total revenue in 1996 compared to 22.5% in 1995).
Cost of revenue. The total cost of revenue for 1996 increased to $1.8
million from $1.6 million in 1995. The slight growth in cost of revenue resulted
in a modest decrease in gross margin to 84.7% for 1996 from 85.6% for 1995. Cost
of revenue for systems for 1996 increased to $0.8 million from $0.7 million for
1995, an increase of $0.1 million or 14.3%. The increase was primarily
attributable to an increase in equipment costs. Cost of revenue for software
license for 1996 decreased to $0.6 million from $0.7 million for 1995, a
decrease of $0.1 million or 14.3%. The decrease was primarily due to reduced
software royalties to SPI. Cost of revenue for maintenance and other sources for
1996 increased to $0.4 million from $0.2 million for 1995, an increase of $0.2
million or 100.0%. The increase was primarily due to higher 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 1996 increased to $1.8 million (14.8% of total
revenue) from $1.4 million (12.3% of total revenue) for 1995, an increase of
$0.4 million or 30.5%. 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 1996 increased to $2.6 million (22.1% of total revenue) from $2.0
million (18.4% of total revenue) for 1995, an increase of $0.6 million or 30.0%.
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 1996 decreased to $104,560 from $108,470
for 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 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 (22.5% of total revenue) from $2.3
million (23.7% of total revenue) for 1994, an increase of $0.2 million or 8.7%.
21
<PAGE> 23
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.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from PPI's statements
of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
(IN MILLIONS)
<S> <C> <C> <C>
Net cash provided by operations............................. $ 5.3 $ 6.2 $ 5.7
Net cash used in investing activities....................... (0.2) (1.2) (0.3)
Net cash used in financing activities....................... (4.1) (5.1) (4.8)
----- ----- -----
Net increase (decrease) in cash and cash equivalents........ $ 1.0 $(0.1) $ 0.6
===== ===== =====
</TABLE>
PPI has historically funded its operations with cash flows 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. Cash used in investing activities was primarily used for the
acquisition of additional office facilities and computer and other equipment.
Cash used in financing activities consisted primarily of S corporation
distributions to PPI's stockholder. In addition, prior to the consummation of
the Mergers, PPI issued notes of approximately $2.4 million to its stockholder
in respect of its estimated S corporation Accumulated Adjustment Account (the
"AAA Account") (after 1997 distributions of approximately $1.6 million) as of
February 4, 1997, the date of the closing.
As of December 31, 1996, PPI had a working capital surplus of $2.2 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 at least the next 12 months.
RESULTS OF OPERATIONS -- THE COMBINED FOUNDING COMPANIES
The Combined Founding Companies' Statement of Operations data for the years
ended December 31, 1994, 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
22
<PAGE> 24
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. Such data will
not be comparable to and may not be indicative of the Company's post-combination
results of operations.
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>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Systems................................. $ 4,333 17.9% $ 7,106 24.3% $10,875 28.6%
Software license........................ 12,215 50.5 13,319 45.5 14,349 37.8
Maintenance and other................... 7,636 31.6 8,862 30.2 12,781 33.6
------- ----- ------- ----- ------- -----
Total revenue........................ 24,184 100.0 29,287 100.0 38,005 100.0
------- ----- ------- ----- ------- -----
COST OF REVENUE:
Systems................................. 1,990 8.2 2,914 10.0 6,066 16.0
Software license........................ 2,532 10.5 2,278 7.8 2,080 5.5
Maintenance and other................... 4,067 16.8 5,434 18.5 7,320 19.2
------- ----- ------- ----- ------- -----
Total cost of revenue................ 8,589 35.5 10,626 36.3 15,466 40.7
------- ----- ------- ----- ------- -----
Gross margin.................... 15,595 64.5 18,661 63.7 22,539 59.3
------- ----- ------- ----- ------- -----
OPERATING EXPENSES:
Selling, general and administrative..... 6,490 26.8 7,785 26.6 10,212 26.9
Research and development................ 1,502 6.2 2,024 6.9 3,324 8.7
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. The Company's total revenue for 1996 increased to $38.0 million
from $29.3 million for 1995, an increase of $8.7 million or 29.7%. Revenue from
systems for 1996 increased to $10.9 million (28.6% of total revenue) from $7.1
million (24.3% of total revenue) for 1995, an increase of $3.8 million or 53.5%.
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 1996
increased to $14.3 million (37.8% of total revenue) from $13.3 million (45.5% of
total revenue) for 1995, an increase of $1.0 million or 7.5%. The increase was
due primarily to increased sales to MSOs. Revenue from maintenance and other
sources for 1996 increased to $12.8 million (33.6% of total revenue) from $8.9
million (30.2% of total revenue) for 1995, an increase of $3.9 million or 43.8%.
The increase was primarily a result of sales of additional maintenance contracts
due to continued growth in the Company's installed base, the acquisition of GBP
and maintenance and service agreement income of approximately $0.5 million in
NMS from its management of the Medical Manager Division of Blue Cross and Blue
Shield of New Jersey, Inc. for the four month period ended December 31, 1996.
Cost of revenue. The total cost of revenue for 1996 increased to $15.5
million from $10.6 million in 1995, an increase of $4.9 million or 46.2%. The
growth in cost of revenue resulted in a decline in gross margin to 59.3% for
1996 from 63.7% for 1995. Cost of revenue for systems for 1996 increased to $6.1
million from $2.9 million for 1995, an increase of $3.2 million or 110.3%. The
increase was due principally to the inclusion of GBP in the Company's results
for 1996. The Company believes that sales by GBP carried a gross profit margin
which was significantly lower than the Company's combined 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 1996 decreased to $2.1 million from $2.3 million in 1995, a decrease
of $0.2 million or 8.7%. The decrease was primarily due to greater allocation of
overhead 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 1996 increased to
$7.3 million from
23
<PAGE> 25
$5.4 million for 1995, an increase of $1.9 million or 35.2%. The increase was
due principally to cost inefficiencies associated with the integration of GBP
into the Company's distribution network.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10.2 million for 1996 (26.9% of total
revenue) from $7.8 million (26.6% of total revenue) for 1995, an increase of
$2.4 million or 31.2%. The increase was due primarily to an increase of $0.4
million of additional owners' compensation at RTI, $0.4 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 1996 increased to $3.3 million (8.7% of
total revenue) from $2.0 million (6.9% of total revenue) for 1995, an increase
of $1.3 million or 64.2%. 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
24
<PAGE> 26
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.
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>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
(IN MILLIONS)
<S> <C> <C> <C>
Net cash provided by operations............................. $ 7.0 $ 9.2 $ 9.6
Net cash used in investing activities....................... (0.2) (2.3) (1.7)
Net cash used in financing activities....................... (5.5) (6.8) (6.6)
----- ----- -----
Net increase in cash and cash equivalents.............. $ 1.3 $ 0.1 $ 1.3
===== ===== =====
</TABLE>
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. Cash used in investing activities totaled 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 the Offering, the Company repaid certain outstanding
indebtedness and other obligations of the Founding Companies (aggregating
approximately $5.5 million). In addition, during 1997 and prior to the
consummation of the Mergers, each of PPI and SPI made cash distributions and
issued notes to its sole stockholder in respect of its estimated S corporation
AAA Account as of the date of closing. Such cash distributions aggregated
approximately $1.6 million and such notes aggregated approximately $3.9 million
for PPI and SPI. These distributions relating to the AAA Account were funded
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 $1.3 million during 1995
and 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 is negotiating a line of credit of $30 million with Barnett
Bank of Tampa to be used for working capital and other general corporate
purposes, including future acquisitions.
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.
25
<PAGE> 27
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 23,600 client sites, representing more than 80 practice
specialities, making it the most widely installed physician practice management
system in the United States.
The Company acquired, simultaneously with the consummation of the 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 brings
together the research and development, sales and support efforts for The Medical
Manager in one entity covering the entire United States. Although prior to the
closing of the Offering the five Founding Companies did not operate 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
26
<PAGE> 28
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 the Offering and
the Mergers created a vertically integrated entity that has greater
financial strength and stability than the individual Founding Companies and
that competes 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
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, the 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.
27
<PAGE> 29
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 23,600 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 1996, the
Company's pro forma expenses for research and development were $2.1 million
and $3.4 million, respectively, representing 5.8% and 8.0% 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>
28
<PAGE> 30
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>
29
<PAGE> 31
<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>
30
<PAGE> 32
<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
31
<PAGE> 33
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 April 11, 1997, the Company had 189 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 April 11, 1997, the Company
had 17 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 78 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
32
<PAGE> 34
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
33
<PAGE> 35
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 April 11, 1997, the Company had 66 employees engaged primarily in its
research and development efforts.
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 May 1995, the Medical Manager released its dialysis posting system.
- 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.
- In March 1997, the Medical Manager announced its case management system
and released its chemotherapy management system.
34
<PAGE> 36
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 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
35
<PAGE> 37
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 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 April 11, 1997, the Company employed 385 full-time and eight part-time
employees. No employees are covered by any collective bargaining agreements. The
Company considers its relationships with its employees to be good.
36
<PAGE> 38
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.
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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to Supreme Court of the State of New York, Westchester County, which
motion was subsequently granted by the Court. 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, its subsidiaries and such
principals intend to defend vigorously against this action.
RECENT DEVELOPMENTS
Subsequent to the consummation of the Offering, MMC executed definitive
agreements to acquire the following Medical Manager dealers (the "Proposed
Acquisitions"): (i) Adaptive Health Systems of Washington based in Federal Way,
Washington; (ii) LSM Computing, Inc. based in Somerville, New Jersey; (iii)
Specialized Systems, Inc. based in Van Nuys, California; and (iv) UNICO, Inc.
based in Evansville, Indiana. The proposed Acquisitions are expected to be
accounted for using the pooling-of-interests method of accounting. The aggregate
consideration payable for the Proposed Acquisitions consists of approximately
994,136 shares of Common Stock. The closings of the Proposed Acquisitions are
subject to various conditions, including completion of the Company's due
diligence investigation, and such acquisitions are expected to close in April or
May 1997.
37
<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of March 31, 1997
concerning each of the Company's current directors, executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Michael A. Singer......................... 49 Chairman of the Board; Chief Executive Officer
John H. Kang.............................. 33 President; Director
Richard W. Mehrlich....................... 49 Executive Vice President -- Sales and Marketing;
Director
Lee A. Robbins............................ 55 Vice President and Chief Financial Officer
Frederick B. Karl, Jr..................... 42 Vice President, General Counsel and Secretary
Thomas P. Liddell......................... 34 Vice President -- Midwest Region
Henry W. Holbrook......................... 42 Vice President, Sales -- Northeast Region
</TABLE>
Michael A. Singer has been Chairman of the Board and Chief Executive
Officer of the Company since the consummation of the 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 has been Executive Vice President -- Sales and
Marketing and a director of the Company since the consummation of the 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
and Chief Financial Officer since the consummation of the Offering. 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 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.
Frederick B. Karl, Jr. has been Vice President, General Counsel and
Secretary of the Company since the consummation of the 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 has been Vice President -- Midwest Region of the Company
since the consummation of the 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
38
<PAGE> 40
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 has been Vice President, Sales -- Northeast Region of the
Company since the consummation of the 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. The Board of Directors is 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. Mr. Singer has contractual rights to designate up to two directors of
the Company. See "Certain Transactions."
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, 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, 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.
EXECUTIVE COMPENSATION
The Company was incorporated in July 1996, conducted no significant
operations and generated no revenue prior to the closing of the Offering and did
not pay any of its executive officers compensation during 1996, except for Mr.
Robbins, whose employment commenced on November 25, 1996.
Each of Messrs. Singer, Kang, Mehrlich, Karl, Holbrook, Robbins and Liddell
has entered 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 is 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
provides 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
39
<PAGE> 41
employer. Each employment agreement contains 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.
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 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 the 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 the Offering, NQSOs to purchase a total of 1,536,900
shares of Common Stock of the Company were 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 1,201,900 shares to employees of and a consultant to
the Company and the Founding Companies. Each of the foregoing options has an
exercise price of $11.00 per share. These options will vest as to 25% each on
the date that is six months, 18 months, 30 months and 42 months after February
4, 1997, 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
40
<PAGE> 42
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
the 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 the Offering may be
altered by the Board of Directors. A total of 250,000 shares are reserved for
issuance under the Directors' Plan. The 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.
41
<PAGE> 43
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Simultaneously with the closing of the Offering, MMC acquired by merger all
of the issued and outstanding stock of the five Founding Companies, at which
time each Founding Company became a wholly-owned subsidiary of the Company. The
aggregate consideration paid by MMC in the Mergers was 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 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. Certain of the Founding Companies have made distributions or
issued notes totaling approximately $5.5 million, representing S corporation
earnings previously taxed to their respective stockholders.
Pursuant to the agreements entered into in connection with the Mergers, the
stockholders of the Founding Companies agreed not to compete with the Company
for five years, commencing February 4, 1997.
The aggregate consideration paid by MMC for each of the Founding Companies
was as follows: PPI: $105.1 million, consisting of $35.0 million paid in cash
and 6,370,000 shares of Common Stock; SPI: $33.7 million, consisting of $9.3
million 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 paid in cash and 350,000 shares of Common Stock; and SMI: $2.8
million, consisting of $0.8 million 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 received,
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. 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."
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
Prior to the Offering, certain of the Founding Companies incurred
indebtedness that was personally guaranteed by their respective stockholders. At
February 1, 1997, the aggregate amount of indebtedness of these Founding
Companies that was subject to personal guarantees was approximately $5.5
million. The Company repaid substantially all of such indebtedness immediately
prior to the consummation of the Mergers and intends to use its best efforts to
have the personal guarantees of the balance of this indebtedness released within
120 days thereafter. The Company also repaid all of the indebtedness owed to Mr.
Kang, which aggregated approximately $400,000 immediately prior to the
consummation of the Mergers.
In addition, Messrs. Singer and Kang each made an interest-free loan of
$50,000 to MMC to be used for working capital purposes. Such loans were repaid
out of the proceeds of the 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.
42
<PAGE> 44
Certain property owned by SMI with a net book value of $283,000 was
distributed to an entity controlled by the stockholders of SMI and is 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 and $255,000 for 1995 and 1996, respectively.
COMPANY POLICY
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.
43
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1997
regarding the beneficial ownership of the Common Stock of the Company 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; (iii) each executive
officer; and (iv) all executive officers and directors as a group. All persons
listed have an address in care of the Company's principal executive offices,
except as otherwise indicated, and have sole voting and investment power with
respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
NUMBER PERCENT
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 and 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"). Without
giving effect to the issuance of shares as contemplated by this Prospectus, the
Company has outstanding 17,705,470 shares of Common Stock 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. The following is qualified in its entirety by
reference thereto.
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
44
<PAGE> 46
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 Prospectus will be
upon payment therefor, fully paid and nonassessable.
The Common Stock trades on the Nasdaq National Market under the symbol
"MMGR".
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
The Company is 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 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
45
<PAGE> 47
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.
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
46
<PAGE> 48
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
The Company has outstanding 17,705,470 shares of Common Stock. The
5,000,000 shares sold in the Offering are 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 Commission
has amended Rule 144 to reduce the two year and three year holding periods
described above to one year and two years, respectively. Such amendment will
become effective on April 29, 1997.
The Company and its executive officers, directors and certain stockholders
who beneficially owned 11,116,569 shares in the aggregate as of February 4, 1997
have agreed not to sell or otherwise dispose of any shares of Common Stock for a
period ending on August 28, 1997 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"). In addition, the stockholders
of the Founding 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 the
Offering. However, since the two-year "holding" period for restricted securities
under Rule 144 described above has been reduced by the Commission to a one-year
"holding" period, this two-year restriction on sales of Common Stock will be
correspondingly reduced and will expire on February 4, 1998.
In connection with the Mergers, the Company 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
47
<PAGE> 49
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 the 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 the 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.
The 5,000,000 shares of its Common Stock being offered by this Prospectus
will, upon registration thereof, 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, as currently in effect, permits a person who is not an affiliate
of the issuer to freely resell such securities. However, the Commission has
amended Rule 145 to reduce the two-year holding period to one year. Such
amendment will become effective on April 29, 1997. 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 of which this Prospectus is a part.
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.
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.
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.
EXPERTS
The audited historical financial statements as indicated in the index on
page F-1 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.
48
<PAGE> 50
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can 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 Northwest Atrium 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.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the 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 with respect to the Company and such Common Stock, reference is made
to such Registration Statement and exhibits. A copy of the Registration
Statement on file with the Commission may be obtained from the Commission's
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission and through the Commission's Internet Web site.
The Company's Common Stock is listed on the Nasdaq National Market. Proxy
Statements and other information concerning the Company can also be inspected at
the offices of the Nasdaq National Market, 1735 K Street, Washington, D.C.
20006.
49
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation..................................... F-2
Pro Forma Combined Balance Sheet as of December 31, 1996
(unaudited)............................................ F-3
Pro Forma Combined Statements of Operations for the Year
Ended December 31, 1996 (unaudited).................... F-4
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-5
Historical Financial Statements
Medical Manager Corporation and Personalized Programming,
Inc.
Report of Independent Accountants...................... F-8
Combined Balance Sheets................................ F-9
Combined Statements of Operations...................... F-10
Combined Statements of Changes in Stockholders'
Equity................................................ F-11
Combined Statements of Cash Flows...................... F-12
Notes to Combined Financial Statements................. F-13
Systems Plus, Inc.
Report of Independent Accountants...................... F-17
Combined Balance Sheets................................ F-18
Combined Statements of Operations...................... F-19
Combined Statements of Changes in Stockholder's Equity
(Deficit)............................................. F-20
Combined Statements of Cash Flows...................... F-21
Notes to Combined Financial Statements................. F-22
RTI Business Systems, Inc.
Report of Independent Accountants...................... F-27
Balance Sheets......................................... F-28
Statements of Operations and Accumulated Deficit....... F-29
Statements of Cash Flows............................... F-30
Notes to Financial Statements.......................... F-31
National Medical Systems, Inc.
Report of Independent Accountants...................... F-36
Consolidated Balance Sheets............................ F-37
Consolidated Statements of Operations.................. F-38
Consolidated Statements of Changes in Stockholder's
Equity (Deficit)...................................... F-39
Consolidated Statements of Cash Flows.................. F-40
Notes to Consolidated Financial Statements............. F-41
Systems Management, Inc.
Report of Independent Accountants...................... F-48
Balance Sheets......................................... F-49
Statements of Operations............................... F-50
Statements of Changes in Stockholders' Equity.......... F-51
Statements of Cash Flows............................... F-52
Notes to Financial Statements.......................... F-53
</TABLE>
F-1
<PAGE> 52
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") occurred simultaneously with the
closing of MMC's initial public offering (the "Offering") and were accounted for
as a combination of the Founding Companies at historical cost for accounting
purposes. PPI, one of the Founding Companies, is identified as the acquiror for
financial statement presentation purposes. The unaudited pro forma combined
financial statements also give effect to a capital contribution 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 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 the Offering as if they had occurred on December 31, 1996. The unaudited pro
forma combined statements of operations give effect to these transactions as if
they had occurred on January 1, 1996.
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 years 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 Report. Also see "Risk Factors" included elsewhere
herein.
F-2
<PAGE> 53
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED BALANCE SHEET(1)
DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MMC/PPI SPI RTI NMS SMI ELIMINATIONS TOTAL ADJUSTMENT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........ $1,765 0 $ 248 $ 124 $ 448 $ 2,585 $ 2,346
Investments...................... 202 0 0 0 0 202 (202)
Accounts receivable.............. 1,779 $1,647 178 901 225 $(870) 3,860 0
Inventory........................ 0 65 46 400 305 816 0
Prepaid expenses and other
current assets................. 118 522 79 10 0 729 0
Deferred income taxes............ 0 0 112 0 0 112 0
------ ------ ------- ------- ------ ----- ------- -------
Total current assets....... 3,864 2,234 663 1,435 978 (870) 8,304 2,144
PROPERTY AND EQUIPMENT, net........ 505 636 587 501 121 2,350 0
GOODWILL AND OTHER INTANGIBLES,
net.............................. 0 0 0 6,046 98 6,144 0
OTHER ASSETS....................... 161 1,013 25 143 48 1,390 (782)
------ ------ ------- ------- ------ ----- ------- -------
Total assets............... $4,530 $$3,883 $ 1,275 $ 8,125 $1,245 $(870) $18,188 $ 1,362
====== ====== ======= ======= ====== ===== ======= =======
CURRENT LIABILITIES
Current maturities of long-term
obligations.................... 0 $ 275 $ 456 $ 1,085 $ 92 $ 1,908 $(1,908)
Accounts payable and accrued
liabilities.................... 760 1,646 668 1,148 260 $(870) 3,612 0
Customer deposits and deferred
maintenance revenue............ 940 342 701 1,209 575 3,767 0
Income taxes payable............. 0 17 115 0 0 132 0
------ ------ ------- ------- ------ ----- ------- -------
Total current
liabilities.............. 1,700 2,280 1,940 3,442 927 (870) 9,419 (1,908)
LONG-TERM OBLIGATIONS, net of
current maturities............... 0 0 134 2,823 225 3,182 (3,182)
SUBORDINATED NOTES PAYABLE......... 0 0 0 1,015 0 1,015 (1,015)
DUE TO RELATED PARTIES............. 117 0 0 380 0 497 0
------ ------ ------- ------- ------ ----- ------- -------
Total liabilities.......... 1,817 2,280 2,074 7,660 1,152 (870) 14,113 (6,105)
------ ------ ------- ------- ------ ----- ------- -------
REDEEMABLE PREFERRED STOCK......... 0 0 0 500 0 500 (500)
------ ------ ------- ------- ------ ----- ------- -------
STOCKHOLDERS' EQUITY
Common stock..................... 64 28 102 72 16 282 (165)
Additional paid-in capital....... 0 0 0 987 0 987 10,438
Retained earnings (deficit)...... 2,649 1,575 (901) (1,094) 77 2,306 (2,306)
------ ------ ------- ------- ------ ----- ------- -------
Total stockholders'
equity................... 2,713 1,603 (799) (35) 93 3,575 7,967
------ ------ ------- ------- ------ ----- ------- -------
Total liabilities and
stockholders' equity..... $4,530 $3,883 $ 1,275 $ 8,125 $1,245 $(870) $18,188 $ 1,362
====== ====== ======= ======= ====== ===== ======= =======
<CAPTION>
POST-MERGER AS
PRO FORMA ADJUSTMENTS ADJUSTED
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........ $ 4,931 $12,116 $17,047
Investments...................... 0 0
Accounts receivable.............. 3,860 3,860
Inventory........................ 816 816
Prepaid expenses and other
current assets................. 729 729
Deferred income taxes............ 112 112
------- ------- -------
Total current assets....... 10,448 12,116 22,564
PROPERTY AND EQUIPMENT, net........ 2,350 2,350
GOODWILL AND OTHER INTANGIBLES,
net.............................. 6,144 6,144
OTHER ASSETS....................... 608 608
------- ------- -------
Total assets............... $19,550 $12,116 $31,666
======= ======= =======
CURRENT LIABILITIES
Current maturities of long-term
obligations.................... $ 0 $ 0
Accounts payable and accrued
liabilities.................... 3,612 3,612
Customer deposits and deferred
maintenance revenue............ 3,767 3,767
Income taxes payable............. 132 132
------- ------- -------
Total current
liabilities.............. 7,511 7,511
LONG-TERM OBLIGATIONS, net of
current maturities............... 0 0
SUBORDINATED NOTES PAYABLE......... 0 0
DUE TO RELATED PARTIES............. 497 497
------- ------- -------
Total liabilities.......... 8,008 8,008
------- ------- -------
REDEEMABLE PREFERRED STOCK......... 0 0
------- ------- -------
STOCKHOLDERS' EQUITY
Common stock..................... 117 $ 60 177
Additional paid-in capital....... 11,425 12,056 23,481
Retained earnings (deficit)...... 0 0
------- ------- -------
Total stockholders'
equity................... 11,542 12,116 23,658
------- ------- -------
Total liabilities and
stockholders' equity..... $19,550 $12,116 $31,666
======= ======= =======
</TABLE>
- ---------------
(1) Pro forma amounts for PPI are presented as if MMC and PPI were combined
from July 10, 1996, the date of MMC's formation.
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE> 54
MEDICAL MANAGER AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS(1)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MMC/PPI SPI RTI NMS(2) SMI ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems................... $1,191 $ 915 $2,765 $4,251 $2,130 $11,252
Software license.......... 8,292 13,654 0 0 0 $(7,596) 14,350
Maintenance and other..... 2,473 1,835 3,602 6,438 2,056 (49) 16,355
------- ------ ------ ------ ------ ------- -------
Total revenue...... 11,956 16,404 6,367 10,689 4,186 (7,645) 41,957
------- ------ ------ ------ ------ ------- -------
Cost of revenue
Systems................... 843 753 1,703 3,025 1,772 (1,832) 6,264
Software license.......... 624 7,269 0 0 0 (5,813) 2,080
Maintenance and other..... 365 1,733 2,311 3,586 1,390 0 9,385
------- ------ ------ ------ ------ ------- -------
Total costs of
revenue.......... 1,832 9,755 4,014 6,611 3,162 (7,645) 17,729
------- ------ ------ ------ ------ ------- -------
Gross margin..... 10,124 6,649 2,353 4,078 1,024 24,228
------- ------ ------ ------ ------ ------- -------
Operating expenses
Selling, general and
administrative.......... 1,763 3,980 2,323 2,470 446 10,982
Research and
development............. 2,648 0 0 676 0 3,324
Depreciation and
amortization ........... 266 160 102 567 74 1,169
------- ------ ------ ------ ------ ------- -------
Total operating
expenses......... 4,677 4,140 2,425 3,713 520 15,475
------- ------ ------ ------ ------ ------- -------
Income (loss)
from
operations..... 5,447 2,509 (72) 365 504 8,753
Other income (expense)
Interest expense.......... 0 (24) (50) (178) (24) (276)
Interest income........... 108 49 0 0 0 157
Other..................... (4) 240 0 0 0 236
------- ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes..................... 5,551 2,774 (122) 187 480 8,870
Income taxes................ 0 (53) (150) 0 0 (203)
------- ------ ------ ------ ------ ------- -------
Net income(loss)... $5,551 $2,721 $ (272) $ 187 $ 480 $ 8,667
======= ====== ====== ====== ====== ======= =======
Pro forma income per share........................................................................
Shares used in computing pro forma income per share...............................................
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
(H) (I) (J) (K) (L) PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Revenue
Systems................... $11,252
Software license.......... 14,350
Maintenance and other..... 16,355
------- ------- ------- ------- ------- -------
Total revenue...... 41,957
------- ------- ------- ------- ------- -------
Cost of revenue
Systems................... $ (43) $ 41 6,262
Software license.......... (38) 4 2,046
Maintenance and other..... (66) 31 9,350
------- ------- ------- ------- ------- -------
Total costs of
revenue.......... (147) 76 17,658
------- ------- ------- ------- ------- -------
Gross margin..... 147 (76) 24,299
------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative.......... (643) 25 10,364
Research and
development............. 50 3,374
Depreciation and
amortization ........... 1,169
------- ------- ------- ------- ------- -------
Total operating
expenses......... (643) 75 14,907
------- ------- ------- ------- ------- -------
Income (loss)
from
operations..... 790 (151) 9,392
Other income (expense)
Interest expense.......... $ 276 0
Interest income........... $ (157) 0
Other..................... (236) 0
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes..................... 790 (151) 276 (393) 9,392
Income taxes................ $(3,413) 3,616
------- ------- ------- ------- ------- -------
Net income(loss)... $ 790 $ (151) $ 276 $ (393) $(3,413) $ 5,776
======= ======= ======= ======= ======= =======
Pro forma income per share................................................... $ 0.33
=======
Shares used in computing pro forma income per share.......................... 17,705(m)
=======
</TABLE>
- ---------------
(1) Pro forma amounts for PPI are presented as if MMC and PPI were combined on
July 10, 1996, the date of MMC's formation.
(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-4
<PAGE> 55
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 conducted no operations prior to the
consummation of the Offering, at which time it acquired the Founding Companies.
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.
Eliminations are for intercompany transactions.
3. ACQUISITION OF FOUNDING COMPANIES:
Concurrent with the closing of the Offering, MMC acquired substantially all
of the net assets of the Founding Companies. The Mergers were 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) 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 conversion of NMS preferred stock and notes payable to
common stock and exercise of warrants for NMS.
(e) Records the repayment of debt obligations and other pro forma
adjustments.
(f) Records the proceeds from the issuance of 6,000,000 shares of MMC
Common Stock, net of approximate 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 the Offering (or for such
shorter period as the SEC may prescribe as the holding period for restricted
securities under Rule 144(d)).
(g) Records the cash portion paid to the stockholders of the Founding
Companies in connection with the Mergers.
F-5
<PAGE> 56
MEDICAL MANAGER CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(h) Adjusts compensation expense to the level the stockholders of certain
of the Founding Companies have agreed to receive subsequent to the Mergers.
(i) 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.
(j) Records change in interest expense for pro forma adjustments to debt.
(k) Records pro forma change in interest and dividend income and realized
gains (losses) on investments for pro forma adjustments to cash and investments.
(l) Records the incremental provision for federal and state income taxes
relating to the compensation differential, S corporation income and other pro
forma adjustments.
(m) The number of shares outstanding on completion of the 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>
The following tables summarize the unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET
ADJUSTMENTS (A) (B) (C) (D) (E) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........ $ 11,875 $ (1,765) $ $ 91 $(7,855) $ 2,346
Investments...................... (202) (202)
Other assets..................... (782) (782)
Current maturities of long term
obligations.................... (1,373) (577) 3,858 1,908
Long-term obligations............ 200 2,982 3,182
Subordinated notes payable....... 1,015 1,015
Redeemable preferred stock....... 500 500
Common stock..................... (9) (13) 187 165
Additional paid-in capital....... (11,866) -- (778) 2,206 (10,438)
Retained earnings................ 3,340 1,359 (2,393) 2,306
-------- -------- ----- ----- ------- --------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ===== ===== ======= ========
</TABLE>
<TABLE>
<CAPTION>
POST-MERGER BALANCE SHEET
ADJUSTMENTS (F) (G) TOTAL
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 59,060 $(46,944) $ 12,116
Common stock........................................... (60) (60)
Additional paid-in capital............................. (59,000) 46,944 (12,056)
-------- -------- --------
$ 0 $ 0 $ 0
======== ======== ========
</TABLE>
6. NMS AND AFFILIATES PRO FORMA COMBINED STATEMENTS OF OPERATIONS:
The following statement sets forth the pro forma combination of NMS's
operations with those of Medix in 1996. Pro forma adjustments for NMS 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-6
<PAGE> 57
NMS AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NMS MEDIX
--------------------------------- ------------------------------------------
MANAGEMENT PRO
FEE PRO FORMA PRO
HISTORICAL ADJUSTMENT FORMA HISTORICAL ADJUSTMENTS FORMA TOTAL
---------- ---------- ------- ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Systems........................ $3,873 $ 3,873 $ 378 $ 378 $4,251
Maintenance and other.......... 2,864 $(515) 2,349 4,089 4,089 6,438
------ ----- ------- ------ ----- ------ ------
Total revenue.......... 6,737 (515) 6,222 4,467 0 4,467 10,689
------ ----- ------- ------ ----- ------ ------
Cost of revenue
Systems........................ 2,827 2,827 233 $ (35) 198 3,025
Maintenance and other.......... 1,521 1,521 2,536 (471) 2,065 3,586
------ ----- ------- ------ ----- ------ ------
Total costs of
revenue.............. 4,348 4,348 2,769 (506) 2,263 6,611
------ ----- ------- ------ ----- ------ ------
Gross margin........... 2,389 (515) 1,874 1,698 506 2,204 4,078
------ ----- ------- ------ ----- ------ ------
Operating expenses
Selling, general and
administrative.............. 1,700 1,700 1,088 (318) 770 2,470
Research and development....... 676 676 0 0 0 676
Depreciation and
amortization................ 387 387 89 91 180 567
------ ----- ------- ------ ----- ------ ------
Total operating
expenses............. 2,763 2,763 1,177 (227) 950 3,713
------ ----- ------- ------ ----- ------ ------
Income (loss) from
operations........... (374) (515) (889) 521 733 1,254 365
------ ----- ------- ------ ----- ------ ------
Other income (expense)
Interest expense............... (178) (178) (41) 41 0 (178)
Interest income................ 0 0 11 (11) 0 0
------ ----- ------- ------ ----- ------ ------
Income (loss) before income
taxes.......................... (552) (515) (1,067) 491 763 1,254 187
Income taxes..................... 0 0 (37) 37 0 0
------ ----- ------- ------ ----- ------ ------
Net income (loss)...... $ (552) $(515) $(1,067) $ 454 $ 800 $1,254 $ 187
====== ===== ======= ====== ===== ====== ======
</TABLE>
F-7
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Medical Manager Corporation and
Personalized Programming, Inc.
We have audited the accompanying combined balance sheets of Medical Manager
Corporation and Personalized Programming, Inc. as of December 31, 1996 and 1995
and the related combined statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 Medical
Manager Corporation and Personalized Programming, Inc. as of December 31, 1996
and 1995 and the combined results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the financial statements, on February 4, 1997,
Personalized Programming, Inc. merged with a subsidiary of Medical Manager
Corporation.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 14, 1997, except for
certain information in Note 8
for which the date is April 6, 1997
F-8
<PAGE> 59
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $1,764,946 $1,166,679
Investments............................................... 202,488 355,414
Accounts receivable....................................... 1,779,142 1,383,849
Prepaid expenses and other current assets................. 117,755 71,039
---------- ----------
Total current assets.............................. 3,864,331 2,976,981
PROPERTY AND EQUIPMENT, net................................. 504,734 2,842,315
OTHER ASSETS................................................ 161,103 0
---------- ----------
Total assets...................................... $4,530,168 $5,819,296
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................. $ 759,658 $ 474,783
Customer deposits and deferred maintenance revenue........ 939,964 581,357
---------- ----------
Total current liabilities......................... 1,699,622 1,056,140
---------- ----------
DUE TO RELATED PARTIES...................................... 117,326 0
---------- ----------
Total liabilities................................. 1,816,948 1,056,140
---------- ----------
Commitments and contingencies (Notes 5 and 8)
STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized, none issued
and outstanding
Common stock $0.01 par value, 50,000,000 shares
authorized............................................. 63,700 63,700
Unrealized gain on investments............................ 0 2,085
Retained earnings......................................... 2,649,520 4,697,371
---------- ----------
Total stockholders' equity........................ 2,713,220 4,763,156
---------- ----------
Total liabilities and stockholders' equity........ $4,530,168 $5,819,296
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE> 60
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Revenue
Systems................................................... $ 1,190,922 $ 1,017,993 $ 1,013,675
Software license.......................................... 8,291,805 7,528,997 6,327,994
Maintenance and other..................................... 2,472,909 2,472,704 2,275,515
----------- ----------- -----------
Total revenue.......................................... 11,955,636 11,019,694 9,617,184
----------- ----------- -----------
Cost of revenue
Systems................................................... 843,149 703,755 751,643
Software license.......................................... 623,536 650,460 380,877
Maintenance and other..................................... 364,828 227,435 235,012
----------- ----------- -----------
Total costs of revenue................................. 1,831,513 1,581,650 1,367,532
----------- ----------- -----------
Gross margin...................................... 10,124,123 9,438,044 8,249,652
----------- ----------- -----------
Operating expenses
Selling, general and administrative....................... 1,762,918 1,350,427 1,184,097
Research and development.................................. 2,648,265 2,024,252 1,501,605
Depreciation and amortization............................. 266,403 226,167 196,547
----------- ----------- -----------
Total operating expenses............................... 4,677,586 3,600,846 2,882,249
----------- ----------- -----------
Income from operations............................ 5,446,537 5,837,198 5,367,403
Other income (expense)
Interest and dividend income.............................. 108,394 136,020 69,950
Other..................................................... (3,834) (27,550) (15,097)
----------- ----------- -----------
Net income........................................ $ 5,551,097 $ 5,945,668 $ 5,422,256
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-10
<PAGE> 61
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------- GAIN (LOSS) RETAINED
SHARES AMOUNT ON INVESTMENT EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance January 1, 1994............... 6,370,000 $63,700 $(87,625) $ 2,605,985 $ 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............. 6,370,000 63,700 (95,014) 3,858,587 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............. 6,370,000 63,700 2,085 4,697,371 4,763,156
Net income.......................... 5,551,097 5,551,097
Dividends........................... (7,598,948) (7,598,948)
Change in unrealized gain on
investment....................... (2,085) (2,085)
Issuance of common stock............ 3
--------- ------- -------- ----------- -----------
Balance December 31, 1996............. 6,370,003 $63,700 $ 0 $ 2,649,520 $ 2,713,220
========= ======= ======== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-11
<PAGE> 62
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 5,551,097 $ 5,945,668 $ 5,422,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 266,403 226,167 196,547
Gain on sale of property and equipment............. (3,309) 0 0
Realized (gains) losses on marketable securities... 26 3,082 39,183
Changes in assets and liabilities
Accounts receivable................................ (395,293) (111,475) (635,245)
Prepaid expenses and other current assets.......... (207,819) (9,845) 62,710
Accounts payable and accrued liabilities........... 284,875 137,677 101,965
Customer deposits and deferred maintenance
revenue.......................................... 156,119 29,564 115,813
Due to related parties............................. 17,326 0 0
----------- ----------- -----------
Net cash provided by operating activities..... 5,669,425 6,220,838 5,303,229
----------- ----------- -----------
Cash flow from investing activities:
Purchases of investments.............................. (50,543) (247,595) (150,433)
Proceeds from the sale of investments................. 100,264 242,160 190,489
Purchases of property and equipment................... (357,029) (1,250,684) (210,644)
Proceeds on sale of property and equipment............ 25,690 0 0
----------- ----------- -----------
Net cash used in investing activities......... (281,618) (1,256,119) (170,588)
----------- ----------- -----------
Cash flow from financing activities:
Loans from related parties............................ 100,000 0 0
Dividends............................................. (4,889,540) (5,106,884) (4,169,654)
----------- ----------- -----------
Net cash used in financing activities......... (4,789,540) (5,106,884) (4,169,654)
----------- ----------- -----------
Net change in cash and cash equivalents....... 598,267 (142,165) 962,987
Cash and cash equivalents:
Beginning of period................................... 1,166,679 1,308,844 345,857
----------- ----------- -----------
End of period......................................... $ 1,764,946 $ 1,166,679 $ 1,308,844
=========== =========== ===========
Non-cash dividends...................................... $ 2,709,408 $ 0 $ 0
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-12
<PAGE> 63
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Medical Manager Corporation ("MMC") was founded on July 10, 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. Personalized
Programming, Inc. ("PPI") 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:
Basis of Presentation. The accompanying financial statements of PPI have
been presented on a combined basis with those of MMC from July 10, 1996
(collectively the "Company"). As discussed in Note 8, following the close of
business on February 4, 1997, PPI merged into a subsidiary of MMC upon
consummation of the initial public offering of the common stock of MMC. PPI is
identified as the accounting acquiror. The accompanying combined statements of
changes in stockholders' equity of the Company have been adjusted retroactively
to show the effect of the recapitalization as if it had occurred on January 1,
1994.
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 $870,000 and $708,000
in receivables from a significant customer at December 31, 1996 and 1995,
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.
Other Assets. Other assets include approximately $161,000 in costs
incurred in connection with the initial public offering of common stock of MMC
that have been deferred as of December 31, 1996. These
F-13
<PAGE> 64
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
costs will be offset against additional paid-in capital upon the consummation of
the Company's merger into a subsidiary of Medical Manager Corporation. See Note
8.
Research and Development. Software development costs are included in
research and development and are expensed as incurred. SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then amortized
over the estimated product life. To date, the period between achieving
technological feasibility and the general availability of such software has been
short and software development costs qualifying for capitalization have been
insignificant.
Income Taxes. PPI has elected S corporation status, as defined by the
Internal Revenue Code, whereby PPI 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 PPI's single stockholder for federal income tax
purposes. Accordingly, a provision for income taxes has not been reflected in
the financial statements. PPI's S corporation status terminated on February 4,
1997, 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 did not 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>
DECEMBER 31, 1996
Marketable equity securities.................. $202,488 $ $ $202,488
======== ======= ======== ========
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
======== ======= ======== ========
</TABLE>
F-14
<PAGE> 65
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
<S> <C> <C>
Land and improvements..................................... $ 856,748
Building.................................................. 1,784,932
Furniture and equipment................................... $ 480,739 446,234
Computers................................................. 648,910 374,800
Leasehold improvements.................................... 20,815 46,460
---------- ----------
1,150,464 3,509,174
Less accumulated depreciation and amortization............ (645,730) (666,859)
---------- ----------
$ 504,734 $2,842,315
========== ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under an operating lease from an
entity owned by PPI'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>
YEAR ENDING DECEMBER 31:
<S> <C>
1997................................................. $320,000
1998................................................. 320,000
1999................................................. 80,000
--------
Total...................................... $720,000
========
</TABLE>
Rent expense for the year ended December 31, 1996 was approximately
$250,000.
6. RETIREMENT PLANS:
PPI 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 $265,700 and $246,300 for
1995 and 1994, respectively. There was no contribution for 1996.
7. SIGNIFICANT CUSTOMER:
Revenue from one customer comprised approximately 49% of PPI's revenue for
1996, 1995 and 1994, respectively.
8. SUBSEQUENT EVENTS:
Following the close of business on February 4, 1997, PPI merged into a
subsidiary of MMC. All outstanding shares of PPI's common stock were exchanged
for cash and shares of MMC's common stock upon the consummation of the initial
public offering of the common stock of MMC.
F-15
<PAGE> 66
MEDICAL MANAGER CORPORATION AND PERSONALIZED PROGRAMMING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS: -- (CONTINUED)
In connection with the Merger, PPI's S corporation status was terminated
and in future periods 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 PPI
elected to terminate its S corporation status immediately prior to December 31,
1996, PPI would have been required to establish a deferred tax asset of
approximately $375,000 related primarily to the use of different methods of
accounting for deferred revenue for tax and financial reporting purposes. Also,
PPI will dividend certain assets to the stockholder, consisting primarily of
cash and investments, in an amount equal to the remaining balance in PPI's S
corporation Accumulated Adjustment Account. Had the estimated balance of the
Accumulated Adjustment Account (AAA) of $3,340,000 at December 31, 1996 been
distributed and recorded as of that date, the effect on the accompanying
combined balance sheet would be a decrease of $1,967,000 in assets, an increase
of $1,373,000 in notes payable and a decrease of $3,340,000 in stockholder's
equity. The Company entered into a Note payable agreement with the stockholder
in February, 1997 for approximately $2,400,000 related to the AAA balance at the
merger date. The note is payable on demand at an interest rate of 5.8%.
Revenue from other companies which have also entered into definitive
agreements with MMC totaled approximately $6,342,000, $5,568,000 and $4,741,000
for 1996, 1995 and 1994, respectively. Such amounts include the significant
customer discussed in Notes 2 and 7.
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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to the Supreme Court of the State of New York, Westchester County,
which motion was subsequently granted by the Court. 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, its subsidiaries and
such principals intend to defend vigorously against this action.
Subsequent to the consummation of the Offering, MMC executed definitive
agreements to acquire the following Medical Manager dealers (the "Proposed
Acquisitions"): (i) Adaptive Health Systems of Washington based in Federal Way,
Washington; (ii) LSM Computing, Inc. based in Somerville, New Jersey; (iii)
Specialized Systems, Inc. based in Van Nuys, California; and (iv) UNICO, Inc.
based in Evansville, Indiana. The Proposed Acquisitions are expected to be
accounted for using the pooling-of-interests method of accounting. The aggregate
consideration payable for the Proposed Acquisitions consists of approximately
994,136 shares of Common Stock. The closings of the Proposed Acquisitions are
subject to various conditions, including completion of the Company's due
diligence investigation, and such acquisitions are expected to close in April or
May 1997.
F-16
<PAGE> 67
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, June
30, 1996 and February 4, 1997 and the related combined statements of operations,
changes in stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1995, for the six months ended June 30,
1996 and for the period from July 1, 1996 through February 4, 1997. 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,
June 30, 1996 and February 4, 1997 and the combined results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, for the six months ended June 30, 1996 and for the period from July 1,
1996 through February 4, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the combined financial statements, on February
4, 1997, System Plus, Inc. and Systems Plus Distribution, Inc. merged with a
subsidiary of Medical Manager Corporation.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
March 7, 1997
F-17
<PAGE> 68
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 286,389 $ 597,606 $ 285,603 $ 31,523
Investments.................................. 1,184,628 1,793,420 50,000 0
Accounts receivable.......................... 1,394,759 1,479,740 1,462,861 997,333
Inventory.................................... 125,000 199,439 114,000 79,825
Prepaid expenses and other current assets.... 235,450 198,930 75,971 43,967
---------- ---------- ---------- ----------
Total current assets................. 3,226,226 4,269,135 1,988,435 1,152,648
PROPERTY AND EQUIPMENT, net.................... 237,375 421,238 623,829 649,867
OTHER ASSETS................................... 498,679 422,312 866,389 1,400,818
---------- ---------- ---------- ----------
Total assets......................... $3,962,280 $5,112,685 $3,478,653 $3,203,333
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable................................ $ 536,354 $ 504,159 $ 0 $1,456,027
Accounts payable and accrued liabilities..... 860,256 947,063 1,029,014 1,232,461
Customer deposits and deferred maintenance
revenue................................... 42,811 117,677 172,357 223,138
Income taxes payable......................... 31,624 5,450 3,014 19,169
---------- ---------- ---------- ----------
Total current liabilities............ 1,471,045 1,574,349 1,204,385 2,930,795
---------- ---------- ---------- ----------
DUE TO AFFILIATED COMPANIES.................... 0 0 0 750,000
---------- ---------- ---------- ----------
Total liabilities.................... 1,471,045 1,574,349 1,204,385 3,680,795
---------- ---------- ---------- ----------
Commitments and contingencies (Notes 7 and 10)
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock................................. 28,000 28,000 28,000 28,000
Unrealized loss on investments............... (220,585) (8,341) 0 0
Retained earnings (Accumulated deficit)...... 2,683,820 3,518,677 2,246,268 (505,462)
---------- ---------- ---------- ----------
Total stockholder's equity
(deficit).......................... 2,491,235 3,538,336 2,274,268 (477,462)
---------- ---------- ---------- ----------
Total liabilities and stockholder's
equity (deficit)................... $3,962,280 $5,112,685 $3,478,653 $3,203,333
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-18
<PAGE> 69
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED DECEMBER 31, ENDED THROUGH
--------------------------------------- JUNE 30, FEBRUARY 4,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Revenue
Systems................................ $ 159,143 $ 300,253 $ 766,037 $ 668,425 $ 459,525
Software license....................... 8,944,307 11,518,566 12,502,491 6,586,715 8,198,171
Maintenance and other.................. 1,732,276 1,681,941 1,910,430 982,041 972,602
----------- ----------- ----------- ----------- -----------
Total revenue.................. 10,835,726 13,500,760 15,178,958 8,237,181 9,630,298
----------- ----------- ----------- ----------- -----------
Cost of revenue
Systems................................ 290,239 209,521 440,588 451,684 386,274
Software license....................... 5,371,347 6,832,020 6,977,948 3,719,590 4,336,125
Maintenance and other.................. 1,450,877 1,277,082 1,682,022 827,503 839,438
----------- ----------- ----------- ----------- -----------
Total costs of revenue......... 7,112,463 8,318,623 9,100,558 4,998,777 5,561,837
----------- ----------- ----------- ----------- -----------
Gross margin................. 3,723,263 5,182,137 6,078,400 3,238,404 4,068,461
----------- ----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative.... 2,471,567 3,022,941 3,345,004 1,972,701 2,426,822
Depreciation and amortization.......... 89,486 76,015 102,309 75,782 99,740
----------- ----------- ----------- ----------- -----------
Total operating expenses....... 2,561,053 3,098,956 3,447,313 2,048,483 2,526,562
----------- ----------- ----------- ----------- -----------
Income from
operations................ 1,162,210 2,083,181 2,631,087 1,189,921 1,541,899
Other income (expense)
Interest expense....................... (25,572) (44,969) (37,385) (10,765) (17,373)
Interest and dividend income........... 17,780 54,031 88,457 46,646 2,174
Gain (loss) on investments and other... 187,536 (16,731) 169,498 239,925 415
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 1,341,954 2,075,512 2,851,657 1,465,727 1,527,115
Income taxes............................. 34,955 50,125 53,300 17,405 55,485
----------- ----------- ----------- ----------- -----------
Net income................... $ 1,306,999 $ 2,025,387 $ 2,798,357 $ 1,448,322 $ 1,471,630
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-19
<PAGE> 70
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON UNREALIZED EARNINGS
STOCK GAIN (LOSS) (ACCUMULATED
AMOUNT ON INVESTMENTS DEFICIT) 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................................... 1,471,630 1,471,630
Dividends.................................... (4,223,360) (4,223,360)
------- --------- ----------- -----------
Balance February 4, 1997....................... $28,000 $ 0 $ (505,462) $ (477,462)
======= ========= =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-20
<PAGE> 71
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED DECEMBER 31, ENDED THROUGH
---------------------------------------- JUNE 30, FEBRUARY 4,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,306,999 $ 2,025,387 $ 2,798,357 $ 1,448,322 $ 1,471,630
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 89,486 76,015 102,309 75,782 99,740
(Gain) loss on sale of property and
equipment................................... 2,200 994 (1,374) 0 (415)
Realized gains on investments................. (326,745) (208,406) (541,416) (448,158) 0
Realized losses on investments................ 137,009 224,143 373,292 208,233 0
Changes in assets and liabilities:
Accounts receivable........................... (122,215) (529,520) 19,033 97,561 468,168
Inventory..................................... (48,879) 99,109 (74,439) 85,439 34,175
Prepaid expenses and other assets............. 165,496 (183,069) 8,873 (400,764) (505,065)
Accounts payable and accrued liabilities...... (1,790,912) 110,661 86,807 81,951 203,447
Customer deposits and deferred maintenance
revenue..................................... 29,266 (2,677) 74,866 54,680 50,781
Income taxes payable.......................... (11,603) 23,023 (26,174) (2,436) 16,155
----------- ----------- ------------ ------------ -----------
Net cash provided by (used in) operating
activities............................. (569,898) 1,635,660 2,820,134 1,200,610 1,838,616
----------- ----------- ------------ ------------ -----------
Cash flow from investing activities:
Purchases of investments........................ (5,837,730) (6,800,249) (11,268,708) (8,694,966) 0
Proceeds from the sale of investments........... 6,485,016 6,836,814 11,027,950 9,945,924 0
Purchases of property and equipment............. (45,795) (100,817) (306,894) (278,373) (127,773)
Proceeds on sale of property and
equipment..................................... 0 0 22,096 0 2,410
Proceeds from investment
margin accounts............................... 6,573,612 7,516,828 10,614,724 9,840,665 0
Payments on investment
margin accounts............................... (6,845,885) (7,242,266) (10,634,585) (10,345,860) 0
----------- ----------- ------------ ------------ -----------
Net cash provided by (used in) investing
activities............................. 329,218 210,310 (545,417) 467,390 (125,363)
----------- ----------- ------------ ------------ -----------
Cash flow from financing activities:
Proceeds from short-term obligations............ 1,393,000 1,962,000 0 790,000 2,220,000
Payment on short-term obligations............... (1,368,000) (1,987,000) 0 (790,000) (2,220,000)
Increase in due to affiliated companies......... 0 0 0 0 750,000
Cash overdraft.................................. 563,581 (563,581) 0 0 0
Dividends....................................... (640,000) (971,000) (1,963,500) (1,980,003) (2,717,333)
----------- ----------- ------------ ------------ -----------
Net cash used in financing activities.... (51,419) (1,559,581) (1,963,500) (1,980,003) (1,967,333)
----------- ----------- ------------ ------------ -----------
Net change in cash and cash
equivalents............................ (292,099) 286,389 311,217 (312,003) (254,080)
Cash and cash equivalents:
Beginning of period............................. 292,099 0 286,389 597,606 285,603
----------- ----------- ------------ ------------ -----------
End of period................................... $ 0 $ 286,389 $ 597,606 $ 285,603 $ 31,523
=========== =========== ============ ============ ===========
Non-cash dividends................................ $ 0 $ 0 $ 0 $ 740,728 $ 1,506,027
=========== =========== ============ ============ ===========
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-21
<PAGE> 72
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:
Basis of Presentation. The financial statements of the Company as of
February 4, 1997 and for the period from July 1, 1996 through February 4, 1997
are presented prior to its merger into a subsidiary of Medical Manager
Corporation ("MMC"), which merger occurred following the close of business on
February 4, 1997.
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-22
<PAGE> 73
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Other Assets. Other assets include approximately $227,000 in costs
incurred in connection with the initial public offering of common stock of MMC
that have been deferred as of February 4, 1997. These costs will be offset
against additional paid-in capital upon the consummation of the Company's merger
into a subsidiary of Medical Manager Corporation. See Note 10.
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 terminated on February 4, 1997, 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 did not have a material impact on
the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1997 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>
F-23
<PAGE> 74
SYSTEMS PLUS, INC. AND SYSTEMS PLUS DISTRIBUTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS: -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C> <C> <C> <C>
Marketable equity securities................ $1,405,213 $ 3,038 $223,623 $1,184,628
========== ======= ======== ==========
</TABLE>
Investments of $740,728 and $50,000 were distributed to the stockholder at
their fair value as non-cash dividends during the six months ended June 30, 1996
and the period from July 1, 1996 through February 4, 1997, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Furniture and equipment................. $ 314,168 $ 497,877 $ 613,411 $ 661,076
Computers............................... 335,632 435,700 527,694 586,765
Leasehold improvements.................. 0 0 70,845 89,222
--------- ---------- ---------- ----------
649,800 933,577 1,211,950 1,337,063
Less accumulated depreciation and
amortization.......................... (412,425) (512,339) (588,121) (687,196)
--------- ---------- ---------- ----------
$ 237,375 $ 421,238 $ 623,829 $ 649,867
========= ========== ========== ==========
</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 at February 4, 1997.
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 $750,000 available under the
line at February 4, 1997.
At February 4, 1997, notes payable of $1,456,027 were due to the Company's
stockholder. The note provides for interest at 8% and is due on demand. The note
represents the amount due SPI's stockholder for its undistributed Accumulated
Adjustment Account as of February 4, 1997. See Note 10.
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 PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
--------------------------- JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Current
Federal................................. $ 6,000
State................................... $34,955 $50,125 47,300 $17,405 $55,485
------- ------- ------- ------- -------
$34,955 $50,125 $53,300 $17,405 $55,485
======= ======= ======= ======= =======
</TABLE>
F-24
<PAGE> 75
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 PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
--------------------------------- JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Statutory tax....................... $ 456,000 $ 706,000 $ 970,000 $ 498,000 $ 519,000
State income tax, net of federal
benefit........................... 34,955 50,125 47,300 17,405 55,485
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) (519,000)
--------- --------- --------- --------- ---------
$ 34,955 $ 50,125 $ 53,300 $ 17,405 $ 55,485
========= ========= ========= ========= =========
</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 FEBRUARY 4:
<S> <C>
1998................................................... $187,000
1999................................................... 117,000
2000................................................... 117,000
2001................................................... 117,000
--------
Total........................................ $538,000
========
</TABLE>
Rent expense was approximately $141,000, $133,000, $112,000, $134,000, and
$166,000 for 1993, 1994 and 1995, for the six months ended June 30, 1996 and for
the period from July 1, 1996 through February 4, 1997, 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
FEBRUARY 4, 1997
-------------------------
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-25
<PAGE> 76
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, and $132,000 for 1995, for the six months ended June 30, 1996 and for
the period from July 1, 1996 through February 4, 1997, respectively.
10. SUBSEQUENT EVENTS:
Following the close of business on February 4, 1997, the Company merged
into a subsidiary of Medical Manager Corporation ("MMC"). All outstanding shares
of the Company's common stock were exchanged for cash and shares of MMC's common
stock upon the consummation of the initial public offering of the common stock
of MMC. The Company received $750,000 in advances from one of the companies
merging with MMC. The funds were used for the repayment of debt.
In connection with the Merger, SPI's S corporation status terminated and in
future periods 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. Also, the Company
issued notes for $1,456,027 to SPI's stockholder for the estimated balance in
SPI's S corporation Accumulated Adjustment Account as of February 4, 1997.
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, and $858,000 for 1993, 1994 and 1995, for the six months ended June
30, 1996 and for the period from July 1, 1996 through February 4, 1997.
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, and $3,490,000 for 1993, 1994
and 1995, for the six months ended June 30, 1996 and for the period from July 1,
1996 through February 4, 1997.
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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to the Supreme Court of the State of New York, Westchester County,
which motion was subsequently granted by the Court. 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, its subsidiaries and
such principals intend to defend vigorously against this action.
F-26
<PAGE> 77
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, June 30, 1996 and February 4, 1997 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, for the six
months ended June 30, 1996 and for the period from July 1, 1996 through February
4, 1997. 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, June 30, 1996 and February 4, 1997 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, for the six months ended June 30, 1996 and for
the period from July 1, 1996 through February 4, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the financial statements, on February 4, 1997,
the Company merged with a subsidiary of Medical Manager Corporation.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 28, 1997
F-27
<PAGE> 78
RTI BUSINESS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 25,349 $ 28,851 $ 5,473 $ 72,600
Accounts receivable................... 236,802 347,725 283,744 252,636
Inventory............................. 0 29,274 32,384 115,014
Prepaid expenses and other current
assets............................. 26,453 20,437 9,177 47,557
Deferred income taxes................. 108,982 212,456 262,456 112,456
--------- ---------- ---------- -----------
Total current assets.......... 397,586 638,743 593,234 600,263
PROPERTY AND EQUIPMENT, net............. 143,895 335,951 494,207 590,462
OTHER ASSETS............................ 0 0 0 82,281
--------- ---------- ---------- -----------
Total assets.................. $ 541,481 $ 974,694 $1,087,441 $ 1,273,006
========= ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term
obligations........................ $ 156,934 $ 282,460 $ 467,146 $ 0
Accounts payable and accrued
liabilities........................ 391,619 355,947 399,032 841,195
Customer deposits and deferred
maintenance revenue................ 307,464 530,066 379,541 868,185
Income taxes payable.................. 103,608 233,097 200,626 114,446
--------- ---------- ---------- -----------
Total current liabilities..... 959,625 1,401,570 1,446,345 1,823,826
LONG-TERM OBLIGATIONS, net of current
maturities............................ 3,895 99,950 130,664 0
DUE TO AFFILIATED COMPANIES............. 0 0 0 585,657
--------- ---------- ---------- -----------
Total liabilities............. 963,520 1,501,520 1,577,009 2,409,483
--------- ---------- ---------- -----------
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) (1,238,477)
--------- ---------- ---------- -----------
Total stockholders' deficit... (422,039) (526,826) (489,568) (1,136,477)
--------- ---------- ---------- -----------
Total liabilities and
stockholders' deficit....... $ 541,481 $ 974,694 $1,087,441 $ 1,273,006
========= ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 79
RTI BUSINESS SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
------------------------------------ JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Revenue
Systems......................... $1,645,102 $2,242,200 $2,712,211 $1,301,127 $ 1,566,435
Maintenance and other........... 1,401,533 2,085,244 2,241,440 1,731,903 2,129,188
---------- ---------- ---------- ---------- -----------
Total revenue........... 3,046,635 4,327,444 4,953,651 3,033,030 3,695,623
---------- ---------- ---------- ---------- -----------
Cost of revenue
Systems......................... 1,372,675 1,334,929 1,486,156 603,239 1,203,827
Maintenance and other........... 1,169,441 1,241,483 1,214,985 1,162,229 1,417,145
---------- ---------- ---------- ---------- -----------
Total costs of
revenue............... 2,542,116 2,576,412 2,701,142 1,765,468 2,620,972
---------- ---------- ---------- ---------- -----------
Gross margin....... 504,519 1,751,032 2,252,509 1,267,562 1,074,651
---------- ---------- ---------- ---------- -----------
Operating expenses
Selling, general and
administrative............... 925,189 1,710,987 2,268,533 1,164,657 1,465,734
Depreciation and amortization... 55,434 46,777 58,057 45,724 67,008
---------- ---------- ---------- ---------- -----------
Total operating expenses..... 980,623 1,757,764 2,326,590 1,210,381 1,532,742
---------- ---------- ---------- ---------- -----------
Income (loss) from
operations............ (476,104) (6,732) (74,081) 57,181 (458,091)
Other income (expense)
Interest expense................ (32,928) (19,988) (33,326) (19,923) (38,818)
Other........................... 0 (27,746) 2,620 0 0
---------- ---------- ---------- ---------- -----------
Income before income taxes........ (509,032) (54,466) (104,787) 37,258 (496,909)
Income taxes...................... 0 0 0 0 (150,000)
---------- ---------- ---------- ---------- -----------
Net income (loss)....... (509,032) (54,466) (104,787) 37,258 (646,909)
Retained earnings (accumulated
deficit):
Beginning of period............. 39,459 (469,573) (524,039) (628,826) (591,568)
---------- ---------- ---------- ---------- -----------
End of period................... $ (469,573) $ (524,039) $ (628,826) $ (591,568) $(1,238,477)
========== ========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 80
RTI BUSINESS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
--------------------------------- JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(509,032) $ (54,466) $(104,787) $ 37,258 $(646,909)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 55,434 46,777 58,057 45,724 67,008
Deferred income taxes................... (51,642) (57,340) (103,474) (50,000) 150,000
Loss on sale of property and
equipment............................. 0 27,746 13,110 0 0
Changes in assets and liabilities:
Accounts receivable..................... 66,795 (160,167) (110,923) 63,981 31,108
Inventory............................... 121,998 0 (29,274) (3,110) (82,630)
Prepaid expenses and other current
assets................................ 12,170 (16,009) 6,016 11,260 (38,380)
Other assets............................ 0 0 0 0 (82,281)
Accounts payable and accrued
liabilities........................... 16,864 245,366 (35,672) 43,085 442,163
Customer deposits and deferred
maintenance revenue................... 517,699 (97,275) 222,602 (150,525) 488,644
Income taxes payable.................... 50,000 53,152 129,489 (32,471) (86,180)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities............. 280,286 (12,216) 45,144 (34,798) 242,543
--------- --------- --------- --------- ---------
Cash flow from investing activities:
Purchases of property and equipment....... (51,055) (73,540) (226,023) (203,980) (163,263)
Proceeds on sale of property and
equipment............................... 0 50,963 0 0
--------- --------- --------- --------- ---------
Net cash used in investing
activities....................... (51,055) (22,577) (226,023) (203,980) (163,263)
--------- --------- --------- --------- ---------
Cash flow from financing activities:
Proceeds from issuance of long-term
obligations............................. 100,000 200,000 365,000 238,845 50,000
Payment on short-term and long-term
obligations............................. (421,333) (189,169) (180,619) (23,445) (647,810)
Increase in due to affiliated companies... 0 0 0 0 585,657
Capital contributions..................... 100,000 0 0 0 0
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............. (221,333) 10,831 184,381 215,400 (12,153)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents..... 7,898 (23,962) 3,502 (23,378) 67,127
Cash and cash equivalents:
Beginning of period....................... 41,413 49,311 25,349 28,851 5,473
--------- --------- --------- --------- ---------
End of period............................. $ 49,311 $ 25,349 $ 28,851 $ 5,473 $ 72,600
========= ========= ========= ========= =========
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-30
<PAGE> 81
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
RTI Business Systems, Inc. (the "Company") is a 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:
Basis of Presentation. The financial statements of the Company as of
February 4, 1997 and for the period from July 1, 1996 through February 4, 1997
are presented prior to its merger into a subsidiary of Medical Manager
Corporation ("MMC"), which merger occurred following the close of business on
February 4, 1997.
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.
Other Assets. Other assets include approximately $82,000 in costs incurred
in connection with the initial public offering of common stock of MMC that have
been deferred as of February 4, 1997. These costs will be offset against
additional paid-in capital upon the consummation of the Company's merger into a
subsidiary of Medical Manager Corporation. See Note 8.
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
F-31
<PAGE> 82
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
intangibles to be held and used by the Company be reviewed for impairment. This
pronouncement did not have a material impact on the financial statements of the
Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1997 presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Furniture and equipment....... $ 113,028 $ 252,978 $ 254,906 $ 337,379
Computers..................... 0 0 155,586 211,195
Vehicles...................... 203,960 290,903 337,369 345,125
--------- --------- --------- ---------
316,988 543,881 747,861 893,699
Less accumulated
depreciation................ (173,093) (207,930) (253,654) (303,237)
--------- --------- --------- ---------
$ 143,895 $ 335,951 $ 494,207 $ 590,462
========= ========= ========= =========
</TABLE>
4. LONG TERM OBLIGATIONS:
Long term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
<S> <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
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
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
-------- -------- ---------
Total.................................... 160,829 382,410 597,810
Less portion due within one year......... 156,934 282,460 (467,146)
-------- -------- ---------
Long term obligations, net of current
maturities............................. $ 3,895 $ 99,950 $ 130,664
======== ======== =========
</TABLE>
F-32
<PAGE> 83
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG TERM OBLIGATIONS: -- (CONTINUED)
The carrying value approximates fair market value due to the short-term
nature of the debt. See Note 8.
5. INCOME TAXES:
Income taxes consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
------------------------------- JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Current
Federal..................... $ 46,623 $ 51,115 $ 92,261 $ 45,000 0
State....................... 5,019 6,225 11,213 5,000 0
-------- -------- --------- -------- --------
51,642 57,340 103,474 50,000 0
-------- -------- --------- -------- --------
Deferred
Federal..................... (46,623) (51,115) (92,261) (45,000) $125,000
State....................... (5,019) (6,225) (11,213) (5,000) 25,000
-------- -------- --------- -------- --------
(51,642) (57,340) (103,474) (50,000) 150,000
-------- -------- --------- -------- --------
$ 0 $ 0 $ 0 $ 0 $150,000
======== ======== ========= ======== ========
</TABLE>
The significant components of the net deferred tax asset consisted of the
following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, JULY 1, 1996
--------------------- JUNE 30, THROUGH
1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C>
Bad debts............................... $ 17,000 $ 21,000 $ 14,000 $ 5,000
Deferred revenue........................ 125,000 230,000 226,000 262,000
Inventory valuations.................... 64,000 34,000
Loss carryforwards...................... 71,000 232,000
Other................................... 20,982 41,456 456 456
--------- --------- -------- ---------
226,982 326,456 311,456 499,456
Valuation allowance..................... (118,000) (114,000) (49,000) (387,000)
--------- --------- -------- ---------
Net deferred tax asset.................. $ 108,982 $ 212,456 $262,456 $ 112,456
========= ========= ======== =========
</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 February 4, 1997, the
Company established a valuation allowance of $387,000. This results in an
increase in the valuation allowance from June 30, 1996 of $338,000.
F-33
<PAGE> 84
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 PERIOD FROM
YEARS ENDED DECEMBER 31, ENDED JULY 1, 1996
--------------------------------- JUNE 30, THROUGH
1993 1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C> <C>
Statutory tax (benefit)............... $(173,000) $ (19,000) $ (36,000) $ 13,000 $(168,000)
State taxes, net of federal benefit... (20,000) (2,000) (4,000) 1,000 (20,000)
Effect of graduated tax brackets...... (1,000) (6,000) (11,000)
Tax contingency....................... 50,000 50,000 50,000 50,000
Change in valuation allowance......... 142,000 (24,000) (4,000) (65,000) 338,000
Other................................. 2,000 1,000 5,000 1,000 0
--------- --------- --------- -------- ---------
$ 0 $ 0 $ 0 $ 0 $ 150,000
========= ========= ========= ======== =========
</TABLE>
At February 4, 1997, the Company had an estimated net operating loss
carryforward of approximately $600,000, the use of which is limited to the
Company's future taxable income. The estimated net operating loss will expire in
the year 2012.
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 FEBRUARY 4:
<S> <C>
1998.............................................. $ 320,000
1999.............................................. 225,000
2000.............................................. 225,000
2001.............................................. 246,000
2002.............................................. 154,000
----------
Total................................... $1,170,000
==========
</TABLE>
Rent expense was approximately $139,000, $240,000, $187,000, $107,000, and
$190,000 for 1993, 1994 and 1995, for the six months ended June 30, 1996 and for
the period from July 1, 1996 through February 4, 1997, 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 $17,000 for the period from July 1, 1996 through
February 4, 1997, respectively.
8. SUBSEQUENT EVENTS:
Following the close of business on February 4, 1997, the Company merged
into a subsidiary of Medical Manager Corporation ("MMC"). All outstanding shares
of the Company's common stock were exchanged for cash and shares of MMC's common
stock upon the consummation of the initial public offering of the common stock
of MMC. The Company received $585,657 in advances from one of the other
companies merging with MMC. The funds were used for the repayment of debt.
F-34
<PAGE> 85
RTI BUSINESS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS: -- (CONTINUED)
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 and $233,000 for 1993, 1994 and 1995, for
the six months ended June 30, 1996 and for the period from July 1, 1996 through
February 4, 1997.
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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to the Supreme Court of the State of New York, Westchester County,
which motion was subsequently granted by the Court. 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, its subsidiaries and
such principals intend to defend vigorously against this action.
F-35
<PAGE> 86
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, June 30, 1996 and
February 4, 1997 and the related consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows for the four months ended
December 31, 1994, the year ended December 31, 1995, the six months ended June
30, 1996 and for the period from July 1, 1996 through February 4, 1997. 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, June 30, 1996
and February 4, 1997 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, the six months ended June 30, 1996 and for the period from July 1, 1996
through February 4, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the financial statements on February 4, 1997,
the Company merged with a subsidiary of Medical Manager Corporation.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 28, 1997
F-36
<PAGE> 87
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 0 $ 0 $ 78,948 $ 2,218,781
Accounts receivable.......................... 66,271 223,446 983,069 989,644
Inventory.................................... 51,280 73,925 49,568 410,270
Prepaid expenses and other current assets.... 182 12,000 0 31,644
---------- ---------- ---------- -----------
Total current assets................. 117,733 309,371 1,111,585 3,650,339
PROPERTY AND EQUIPMENT, net.................... 85,615 199,797 368,653 493,510
GOODWILL AND OTHER INTANGIBLES, net............ 211,609 80,201 2,753,593 6,141,498
DUE FROM RELATED PARTIES....................... 0 0 0 6,693,314
OTHER ASSETS................................... 3,586 5,184 11,084 202,013
---------- ---------- ---------- -----------
Total................................ $ 418,543 $ 594,553 $4,244,915 $17,180,674
========== ========== ========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term
obligations............................... $ 74,930 $ 261,580 $1,274,701 $ 158,500
Accounts payable and accrued liabilities..... 113,174 184,214 729,219 2,207,052
Customer deposits and deferred maintenance
revenue................................... 220,627 338,075 875,857 1,870,667
---------- ---------- ---------- -----------
Total current liabilities............ 408,731 783,869 2,879,777 4,236,219
LONG-TERM OBLIGATIONS, net of current
maturities................................... 76,860 40,768 800,660 0
DUE TO RELATED PARTIES......................... 0 0 0 1,030,000
SUBORDINATED NOTES PAYABLE..................... 0 0 292,500 0
---------- ---------- ---------- -----------
Total liabilities.................... 485,591 824,637 3,972,937 5,266,219
---------- ---------- ---------- -----------
REDEEMABLE PREFERRED STOCK..................... 0 0 500,000 0
---------- ---------- ---------- -----------
Commitments and contingencies (Notes 10 and
11)..........................................
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 25,000,000
shares authorized......................... 56,570 62,566 68,566 162,855
Additional paid-in capital................... 203,430 248,503 790,003 13,636,714
Accumulated deficit.......................... (327,048) (541,153) (1,086,591) (1,885,114)
---------- ---------- ---------- -----------
Total stockholders' equity
(deficit).......................... (67,048) (230,084) (228,022) 11,914,455
---------- ---------- ---------- -----------
Total................................ $ 418,543 $ 594,553 $4,244,915 $17,180,674
========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 88
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FOUR MONTHS SIX MONTHS JULY 1, 1996
ENDED YEAR ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Revenue
Systems................................... $ 155,771 $1,516,022 $1,489,054 $2,601,473
Maintenance and other..................... 85,337 614,487 959,823 2,458,997
--------- ---------- ---------- ----------
Total revenue..................... 241,108 2,130,509 2,448,877 5,060,470
--------- ---------- ---------- ----------
Cost of revenue
Systems................................... 147,490 1,129,059 1,189,960 1,785,368
Maintenance and other..................... 155,655 595,692 664,426 1,540,930
--------- ---------- ---------- ----------
Total costs of revenue............ 303,145 1,724,751 1,854,386 3,326,298
--------- ---------- ---------- ----------
Gross margin (loss)............... (62,037) 405,758 594,491 1,734,172
--------- ---------- ---------- ----------
Operating expenses
Selling, general and administrative....... 201,254 395,523 613,874 1,170,994
Research and development.................. 0 0 262,855 244,863
Restructuring charges..................... 0 0 0 647,500
Depreciation and amortization............. 60,113 196,838 189,854 258,245
--------- ---------- ---------- ----------
Total operating expenses.......... 261,367 592,361 1,066,583 2,321,602
--------- ---------- ---------- ----------
Loss from operations.............. (323,404) (186,603) (472,092) (587,430)
Other expense
Interest expense.......................... (3,644) (27,502) (73,346) (211,093)
--------- ---------- ---------- ----------
Net loss.......................... $(327,048) $ (214,105) $ (545,438) $ (798,523)
========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 89
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (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........................... (798,523) (798,523)
Sale of common stock............... 8,575,596 85,756 11,855,244 11,941,000
Capital contribution............... 300,000 300,000
Conversion of preferred stock...... 533,250 5,333 494,667 500,000
Conversion of notes payable........ 320,000 3,200 196,800 200,000
---------- -------- ----------- ----------- -----------
Balance February 4, 1997........... 16,285,488 $162,855 $13,636,714 $(1,885,114) $11,914,455
========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 90
NATIONAL MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS PERIOD FROM
ENDED YEAR ENDED ENDED JULY 1, 1996
DECEMBER 31, DECEMBER 31, JUNE 30, THROUGH
1994 1995 1996 FEBRUARY 4, 1997
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(327,048) $(214,105) $ (545,438) $ (798,523)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 60,113 196,838 189,854 258,245
Stock issued for compensation................. 0 6,069 0 0
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable........................... (66,271) (157,175) (446,895) 252,539
Inventory..................................... (51,280) (22,645) 43,723 (33,855)
Prepaid expenses and other assets............. (3,768) (13,416) 16,804 (210,573)
Accounts payable and accrued liabilities...... 113,174 71,040 22,254 1,477,833
Customer deposits and deferred maintenance
revenue..................................... 220,627 117,448 283,582 464,514
--------- --------- ----------- -----------
Net cash provided by (used in) operating
activities............................. (54,453) (15,946) (436,116) 1,410,180
--------- --------- ----------- -----------
Cash flow from investing activities:
Purchases of property and equipment............. (32,670) (152,183) (78,552) (102,193)
Payments for acquisitions made, net of assets
acquired...................................... (150,000) 0 (569,434) (736,479)
--------- --------- ----------- -----------
Net cash used in investing activities.... (182,670) (152,183) (647,986) (838,672)
--------- --------- ----------- -----------
Cash flow from financing activities:
Proceeds from issuance of long-term
obligations................................... 0 200,000 684,799 1,254,256
Payment on long-term obligations................ (22,877) (76,871) (509,249) (5,513,617)
Increase in due from affiliates................. 0 0 0 (6,693,314)
Proceeds from issuance of common stock.......... 12,521,000
Proceeds from issuance of redeemable preferred
stock......................................... 0 0 500,000 0
Capital contributions........................... 260,000 45,000 487,500 0
--------- --------- ----------- -----------
Net cash provided by financing
activities............................. 237,123 168,129 1,163,050 1,568,325
--------- --------- ----------- -----------
Net change in cash and cash
equivalents............................ 0 0 78,948 2,139,833
Cash and cash equivalents:
Beginning of period............................. 0 0 0 78,948
--------- --------- ----------- -----------
End of period................................... $ 0 $ 0 $ 78,948 $ 2,218,781
========= ========= =========== ===========
Cash paid for interest:........................... $ 3,645 $ 27,502
========= =========
Details of acquisitions:
Fair value of assets............................ $ 150,000 0 $ 3,190,537 $ 4,266,775
Liabilities assumed............................. 0 0 (1,457,354) (530,296)
Less common stock and debt issued............... 0 0 (1,129,139) (3,000,000)
--------- --------- ----------- -----------
Cash paid....................................... 150,000 0 604,044 736,479
Less cash acquired.............................. 0 0 (34,610) 0
--------- --------- ----------- -----------
Net cash paid for acquisitions.................. $ 150,000 0 $ 569,434 $ 736,479
========= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 91
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 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:
Basis of Presentation. The financial statements of the Company as of
February 4, 1997 and for the period from July 1, 1996 through February 4, 1997
are presented prior to its merger into a subsidiary of Medical Manager
Corporation ("MMC"), which merger occurred following the close of business on
February 4, 1997.
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.
Other Assets. Other assets include approximately $174,000 in costs
incurred in connection with the initial public offering of common stock of MMC
that have been deferred as of February 4, 1997. These costs will be offset
against additional paid-in capital upon the consummation of the Company's merger
into a subsidiary of Medical Manager Corporation. See Note 11.
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
F-41
<PAGE> 92
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
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 did not have a material impact on
the financial statements of the Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1997 presentations.
3. ACQUISITIONS:
During the six months ended June 30, 1996 and the period from July 1, 1996
through February 4, 1997, the Company made four 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 in January, 1996, 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 in March, 1996, 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.
In September, 1996, the Company acquired substantially all of the operating
assets of Schutzman Medical Systems, Inc., a Medical Manager independent dealer
in Dallas, Texas for $380,000. The purchase
F-42
<PAGE> 93
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS: -- (CONTINUED)
price was paid by an affiliated company. Pro forma results of operations have
not been presented because the results of this acquisition were not significant.
On December 31, 1996, the Company acquired the Medical Manager Division
(the "Division") of Medix, Inc., a wholly owned subsidiary of Blue Cross and
Blue Shield of New Jersey, Inc. NMS issued to Medix a note for approximately
$2.1 million, representing the balance of the $3,200,000 purchase price after
giving effect to a $500,000 deposit made by NMS and approximately $515,000 in
management fees owed to the Company by Medix. The Company was given a credit of
approximately $80,000 on such $2,100,000 million note representing the cash in
Medix's bank accounts relating to the Division of the time of such closing. In
addition, cash collections of approximately $660,000 of Medix accounts
receivable relating to the Division from January 1, 1997 through February 4,
1997 were deposited in a Medix bank account and applied against the amount owed
by the Company on such note.
On the basis of the pro forma consolidation of the results of operations as
if the acquisition had taken place at the beginning of the period from July 1,
1996 through February 4, 1997 rather than on December 31, 1996, consolidated net
sales would have been approximately $7,187,000 for the period and the
consolidated pro forma net loss would have been approximately $324,000. 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 the period from July 1, 1996 through February 4, 1997.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Furniture and equipment.............. $ 35,074 $ 88,282 $128,477 $ 219,637
Computers............................ 66,937 191,813 372,019 620,634
-------- -------- -------- ---------
102,011 280,095 500,496 840,271
Less accumulated depreciation........ (16,397) (80,298) (131,843) (346,761)
-------- -------- -------- ---------
$ 85,615 $199,797 $368,653 $ 493,510
======== ======== ======== =========
</TABLE>
Depreciation expense was approximately $16,400, $65,700, $49,000 and
$100,000 for 1994 and 1995, for the six months ended June 30, 1996 and for the
period from July 1, 1996 through February 4, 1997, respectively.
5. LONG TERM OBLIGATIONS:
Long term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Revolving line of credit, $500,000 available
principal, monthly interest at prime plus 1%,
(9 1/4% at June 30, 1996) principal due on
demand, collateralized by accounts receivable
and other assets, guaranteed by two of the
Company's stockholders.......................... $ 308,014
Revolving line of credit, monthly interest at
prime plus 2% (9 1/4% at June 30, 1996),
principal due on demand, collateralized by
accounts receivable and other assets, guaranteed
by two of the Company's stockholders............ 196,597
</TABLE>
F-43
<PAGE> 94
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG TERM OBLIGATIONS: -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Note payable, interest at prime plus 1% (9 1/4% at
June 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
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
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
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
Note payable, annual interest at 8%, due $40,000
in 1997 and $40,000 in 1998, unsecured.......... 0 80,000
Note payable to stockholder, due on demand,
monthly interest at prime plus 1/2% (8 3/4% at
June 30, 1996), unsecured....................... 0 50,000
Non-compete agreements due in various monthly
amounts through 1998............................ $ 92,290 36,916 109,229 $ 58,500
Other............................................. 59,500 65,432 103,985 100,000
-------- -------- ---------- ----------
Total................................... 151,790 302,348 2,075,361 158,500
Less portion due within one year........ 74,930 261,580 1,274,701 158,500
-------- -------- ---------- ----------
Long term obligations, net of current
maturities............................ $ 76,860 $ 40,768 $ 800,660 $ 0
======== ======== ========== ==========
</TABLE>
The carrying value approximates fair market value due to the short-term
nature of the debt.
6. SUBORDINATED NOTES PAYABLE:
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 were exercised prior to
February 4, 1997.
F-44
<PAGE> 95
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. REDEEMABLE PREFERRED STOCK:
During the six months ended June 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 was converted into
533,250 shares of common stock of the Company on February 4, 1997.
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.
In connection with the merger described in Note 11, the Company sold
7,665,596 shares of its common stock to Electronic Data Systems Corporation
("EDS"). Pursuant to a Stock Purchase Agreement among the Company, EDS and MMC
(the "Stock Purchase Agreement"), EDS purchased a number of shares of common
stock of the Company that, upon consummation of the merger, resulted in the
acquisition by EDS of 1,221,896 shares of Common Stock of MMC 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.
9. INCOME TAXES:
The tax effected amounts of temporary differences consisted of the
following:
<TABLE>
<CAPTION>
PERIOD FROM
FOUR MONTHS SIX MONTHS JULY 1, 1996
ENDED YEAR ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Current
Deferred tax assets
Deferred revenue................... $ 57,350 $ 48,840 $ 126,540 $ 282,000
Inventory.......................... 21,460 21,460 21,460
Bad debts.......................... 1,577 22,200 21,090 89,090
Valuation allowance................ (58,927) (92,500) (169,090) (392,550)
-------- --------- --------- ---------
Total current deferred tax
asset....................... $ 0 $ 0 $ 0 $ 0
======== ========= ========= =========
Non-current
Deferred tax asset
Net operating loss................. $ 40,700 $ 55,870 $ 155,770 $ 191,770
Other assets....................... 16,923 47,360 65,490 83,030
Valuation allowance................ (57,623) (103,230) (221,260) (274,800)
-------- --------- --------- ---------
Total non-current deferred
tax asset................... $ 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 February 4, 1997, the
Company established a valuation allowance of $667,350. The result is an increase
of $277,000 in the valuation allowance from June 30, 1996.
F-45
<PAGE> 96
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
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>
PERIOD FROM
FOUR MONTHS SIX MONTHS JULY 1, 1996
ENDED YEAR ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Statutory tax benefit................... $(111,196) $ (72,796) $(185,300) $(271,000)
State taxes............................. (9,811) (6,423) (16,350) (32,000)
Permanent differences................... 925 1,203 6,000
Other................................... 3,533 (1,164) 7,030 20,000
Changes in valuation allowance.......... 116,550 79,180 194,620 277,000
--------- --------- --------- ---------
$ 0 $ 0 $ 0 $ 0
========= ========= ========= =========
</TABLE>
As of February 4, 1997, the Company had net operating losses of
approximately $500,000. 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 FEBRUARY 4:
<S> <C>
1998.............................................. $ 274,000
1999.............................................. 270,000
2000.............................................. 271,000
2001.............................................. 177,000
2002.............................................. 52,000
----------
Total........................................ $1,044,000
==========
</TABLE>
Rent expense was approximately $22,000, $82,000, $70,000 and $107,000 for
1994 and 1995, for the six months ended June 30, 1996 and for the period from
July 1, 1996 through February 4, 1997, respectively.
11. SUBSEQUENT EVENTS:
Following the close of business on February 4, 1997, the Company merged
into a subsidiary of Medical Manager Corporation ("MMC"). All outstanding shares
of the Company's common stock were exchanged for shares of MMC's common stock
upon the consummation of the initial public offering (IPO) of the common stock
of MMC. Restructuring charges of $647,500, principally for severance costs for
former employees, were accrued in conjunction with the merger. Immediately prior
to the merger, the Company advanced $6,693,314 to other companies who merged
with MMC. The funds were used for repayment of debt and concentration of cash
for cash management purposes. Fees of $650,000 were paid on behalf of the
Company by one of the other companies who merged with MMC.
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 and $479,000 for 1994, 1995, for the six months
ended June 30, 1996 and for the period from July 1, 1996 through February 4,
1997, respectively.
F-46
<PAGE> 97
NATIONAL MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS: -- (CONTINUED)
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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to the Supreme Court of the State of New York, Westchester County,
which motion was subsequently granted by the Court. 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, its subsidiaries and
such principals intend to defend vigorously against this action.
F-47
<PAGE> 98
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, June 30, 1996 and February 4, 1997 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, for the six
months ended June 30, 1996 and for the period from July 1, 1996 through February
4, 1997. 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, June 30, 1996 and February 4, 1997 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, for the six months ended June 30, 1996 and for
the period from July 1, 1996 through February 4, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 7 to the financial statements, on February 4, 1997,
the Company merged with a subsidiary of Medical Manager Corporation.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
March 14, 1997
F-48
<PAGE> 99
SYSTEMS MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............. $178,911 $ 187,609 $ 297,251 $ 92,986
Accounts receivable.................... 167,214 276,366 288,978 315,794
Inventory.............................. 109,018 183,835 149,864 65,782
Prepaid expenses and other current
assets.............................. 4,361 29,122 0 140
-------- ---------- ---------- ----------
Total current assets........... 459,504 676,932 736,093 474,702
PROPERTY AND EQUIPMENT, net.............. 272,139 419,101 434,946 123,998
GOODWILL................................. 0 0 100,000 96,667
OTHER ASSETS............................. 0 0 0 48,505
-------- ---------- ---------- ----------
Total assets................... $731,643 $1,096,033 $1,271,039 $ 743,872
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term
obligations......................... $ 22,885 $ 50,118 $ 106,201 $ 53,130
Accounts payable and accrued
liabilities......................... 177,645 223,349 183,911 304,521
Customer deposits and deferred
maintenance revenue................. 157,213 424,656 434,957 31,816
-------- ---------- ---------- ----------
Total current liabilities...... 357,743 698,123 725,069 389,467
LONG-TERM OBLIGATIONS, net of current
maturities............................. 154,310 212,767 233,922 0
DUE TO AFFILIATED COMPANIES.............. 0 0 0 328,633
-------- ---------- ---------- ----------
Total liabilities.............. 512,053 910,890 958,991 718,100
-------- ---------- ---------- ----------
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 10,287
-------- ---------- ---------- ----------
Total stockholders' equity..... 219,590 185,143 312,048 25,772
-------- ---------- ---------- ----------
Total liabilities and
stockholders' equity......... $731,643 $1,096,033 $1,271,039 $ 743,872
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 100
SYSTEMS MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED DECEMBER 31, ENDED THROUGH
------------------------------------ JUNE 30, FEBRUARY 4,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Revenue
Systems..................................... $ 610,179 $ 621,258 $1,094,127 $ 945,910 $1,996,810
Maintenance and other....................... 1,134,307 1,507,640 1,622,742 969,414 1,327,794
---------- ---------- ---------- ---------- ----------
Total revenue....................... 1,744,486 2,128,898 2,716,869 1,915,324 3,324,604
---------- ---------- ---------- ---------- ----------
Cost of revenue
Systems..................................... 493,611 497,560 516,997 696,767 1,563,985
Maintenance and other....................... 836,634 1,158,147 1,714,203 774,225 704,226
---------- ---------- ---------- ---------- ----------
Total costs of revenue.............. 1,330,245 1,655,707 2,231,200 1,470,992 2,268,211
---------- ---------- ---------- ---------- ----------
Gross margin...................... 414,241 473,191 485,669 444,332 1,056,393
---------- ---------- ---------- ---------- ----------
Operating expenses
Selling, general and administrative......... 313,510 371,037 425,509 236,548 257,227
Depreciation and amortization............... 25,229 26,217 31,828 34,640 44,006
---------- ---------- ---------- ---------- ----------
Total operating expenses............ 338,739 397,254 457,337 271,188 301,233
---------- ---------- ---------- ---------- ----------
Income from operations............ 75,502 75,937 28,332 173,144 755,160
Interest expense.............................. (4,134) (6,426) (23,279) (10,039) (15,522)
---------- ---------- ---------- ---------- ----------
Net income.......................... $ 71,368 $ 69,511 $ 5,053 $ 163,105 $ 739,638
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 101
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........................................... 739,638 739,638
Dividends............................................ (1,025,914) (1,025,914)
------- ----------- -----------
Balance February 4, 1997............................... $15,485 $ 10,287 $ 25,772
======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 102
SYSTEMS MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX PERIOD FROM
MONTHS JULY 1, 1996
YEARS ENDED DECEMBER 31, ENDED THROUGH
-------------------------------- JUNE 30, FEBRUARY 4,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 71,368 $ 69,511 $ 5,053 $163,105 $ 739,638
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 25,229 26,217 31,828 34,640 44,006
Changes in assets and liabilities, net of effects
from acquisition:
Accounts receivable............................ 20,333 (52,123) (109,152) (12,612) (26,816)
Inventory...................................... 88,461 (54,341) (74,817) 33,971 84,082
Prepaid expenses and other assets.............. 4,407 1,187 (24,761) 29,122 (48,645)
Accounts payable and accrued liabilities....... 19,069 70,527 45,704 (39,438) 120,610
Customer deposits and deferred maintenance
revenue...................................... (81,333) 29,403 267,443 10,301 (403,141)
-------- --------- --------- -------- ---------
Net cash provided by operating
activities.............................. 147,534 90,381 141,298 219,089 509,734
-------- --------- --------- -------- ---------
Cash flow from investing activities:
Purchases of property and equipment.............. (34,035) (33,486) (80,995) (80,485) (18,731)
-------- --------- --------- -------- ---------
Net cash used in investing activities..... (34,035) (33,486) (80,995) (80,485) (18,731)
-------- --------- --------- -------- ---------
Cash flow from financing activities:
Proceeds from issuance of long-term
obligations.................................... 24,532 26,000 85,000 57,735 111,668
Payment on short-term and long-term
obligations.................................... (52,914) (61,106) (97,105) (50,497) (398,661)
Increase in due to affiliated companies.......... 0 0 0 0 328,633
Dividends........................................ (13,523) (21,970) (39,500) (36,200) (736,908)
-------- --------- --------- -------- ---------
Net cash provided by (used in) financing
activities.............................. (41,905) (57,076) (51,605) (28,962) (695,268)
-------- --------- --------- -------- ---------
Net change in cash and cash equivalents............ 71,594 (181) 8,698 109,642 (204,265)
Cash and cash equivalents:
Beginning of period.............................. 107,498 179,092 178,911 187,609 297,251
-------- --------- --------- -------- ---------
End of period.................................... $179,092 $ 178,911 $ 187,609 $297,251 $ 92,986
======== ========= ========= ======== =========
Cash paid for interest:............................ $ 4,134 $ 6,425 $ 23,280
======== ========= =========
Non-cash dividends................................. $ 0 $ 0 $ 0 $ 0 $ 289,006
======== ========= ========= ======== =========
Details of acquisitions:
Fair value of assets............................. $ 11,500 $ 165,500 $ 97,795 $100,000
Less debt issued................................. (11,500) (165,500) (97,795) (70,000)
-------- --------- --------- --------
Net cash paid for acquisitions................... $ 0 $ 0 $ 0 $ 30,000
======== ========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 103
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Systems Management, Inc. (the "Company") is a 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:
Basis of Presentation. The financial statements of the Company as of
February 4, 1997 and for the period from July 1, 1996 through February 4, 1997
are presented prior to its merger into a subsidiary of Medical Manager
Corporation ("MMC"), which merger occurred following the close of business on
February 4, 1997.
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.
Other Assets. Other assets include approximately $48,000 in costs incurred
in connection with the initial public offering of common stock of MMC that have
been deferred as of February 4, 1997. These costs will be offset against
additional paid-in capital upon the consummation of the Company's merger into a
subsidiary of Medical Manager Corporation. See Note 7.
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
terminated on February 4, 1997, 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
F-53
<PAGE> 104
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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 did not have a material impact on the financial statements of the
Company.
Reclassifications. Certain prior year amounts have been reclassified to
conform to 1997 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, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Land and improvements................. $ 41,265 $ 41,265 $ 41,265
Building.............................. 151,152 249,844 250,944
Furniture and equipment............... 75,741 119,660 169,045 $ 180,166
Vehicles.............................. 65,568 101,338 101,338 74,748
-------- -------- --------- ---------
333,726 512,107 562,592 254,914
Less accumulated depreciation......... (61,587) (93,006) (127,646) (130,916)
-------- -------- --------- ---------
$272,139 $419,101 $ 434,946 $ 123,998
======== ======== ========= =========
</TABLE>
F-54
<PAGE> 105
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, FEBRUARY 4,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
Revolving lines of credit, interest monthly at prime
plus 1/2% (8 3/4% at June 30, 1996), due on
demand, scheduled maturity of June 1997,
collateralized by substantially all of the
Company's assets, $93,400 available at June 30,
1996. ............................................. $ 13,039 $ 29,194 $ 47,600
Mortgage note payable, bearing interest at the bank's
base rate plus 1% (9 1/4% at June 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
Various notes payable, bearing interest at rates
ranging from 6.42% to 11.50%, with various monthly
payments; collateralized by certain Company
vehicles. ......................................... 20,656 38,305 29,730 $ 53,130
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
-------- -------- -------- --------
Total...................................... 177,195 262,885 340,123 53,130
Less portion due within one year........... 22,885 50,118 106,201 53,130
-------- -------- -------- --------
Long term obligations, net of current
maturities............................... $154,310 $212,767 $233,922 $ 0
======== ======== ======== ========
</TABLE>
The carrying value approximates fair market value due to the short-term
nature of the debt. See Note 7.
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 and $17,000
for 1993, 1994, 1995, for the six months ended June 30, 1996 and for the period
from July 1, 1996 through February 4, 1997, respectively.
7. SUBSEQUENT EVENTS:
Following the close of business on February 4, 1997, the Company merged
into a subsidiary of Medical Manager Corporation ("MMC"). All outstanding shares
of the Company's common stock were exchanged for cash and shares of MMC's common
stock upon the consummation of the initial public offering of the common stock
of MMC. The Company received $328,633 in advances from one of the other
companies that also merged with MMC. The funds were used for repayment of debt.
In addition, in connection with the merger, the Company's S corporation status
terminated and in future periods 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
F-55
<PAGE> 106
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENTS: -- (CONTINUED)
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 February 4, 1997, the Company would have
been required to establish a deferred tax asset of approximately $120,000
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 and $240,000 for 1993, 1994 and 1995, for
the six months ended June 30, 1996 and for the period from July 1, 1996 through
February 4, 1997, 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. On
February 5, 1997, the defendants removed the action to the United States
District Court for the Southern District of New York. Plaintiffs moved to remand
the action to the Supreme Court of the State of New York, Westchester County,
which motion was subsequently granted by the Court. 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, its subsidiaries and
such principals intend to defend vigorously against this action.
F-56
<PAGE> 107
======================================================
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. 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.......................... 10
Price Range of Common Stock........... 15
Dividend Policy....................... 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
Management............................ 38
Certain Transactions.................. 42
Principal Stockholders................ 44
Description of Capital Stock.......... 44
Shares Eligible For Future Sale....... 47
Legal Matters......................... 48
Experts............................... 48
Additional Information................ 49
Index to Financial Statements......... F-1
</TABLE>
======================================================
5,000,000 SHARES
MEDICAL MANAGER CORPORATION LOGO
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
April , 1997
======================================================
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with the offering
described in this Registration Statement. All of such amounts (except the SEC
Registration Fee and the Nasdaq Listing Fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 13,826
Nasdaq Listing Fee.......................................... 17,500
Blue Sky Fees and Expenses.................................. 1,000
Printing and Engraving Costs................................ 30,000
Legal Fees and Expenses..................................... 25,000
Accounting Fees and Expenses................................ 10,000
Transfer Agent and Registrar Fees and Expenses.............. 1,000
Miscellaneous............................................... 11,674
--------
Total............................................. $110,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-laws provide that the Company shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Article Seven of the Company's Certificate of Incorporation provides that
the Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the DGCL, which makes directors liable for unlawful dividends or
unlawful stock repurchases or redemptions, or (d) for transactions from which
directors derive improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued or
sold by the Company within the past three years which were not registered under
the Securities Act.
In July 1996, the Company sold one share of Common Stock to each of
John H. Kang, Ricardo A. Salas and Wayne Burks at a price of $1.00 per
share.
II-1
<PAGE> 109
Simultaneously with the completion of the Offering, the Company issued
11,470,331 shares of its Common Stock in connection with the Mergers of the five
Founding Companies.
Each of these transactions was effected without registration of the
relevant security under the Securities Act in reliance upon the exemption
provided by Section 4(2) of, and/or Regulation D under, the Securities Act for
transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S> <C>
2.1 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Personalized
Programming, Inc., PPI Acquisition I Corp. and the
Stockholder named therein (Incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form S-1 (File
No. 333-13101) of the Company)
2.2 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Systems Plus, Inc.,
Systems Plus Distribution, Inc., SPI Acquisition I Corp.,
SPDI Acquisition I Corp. and the Stockholder named therein
(Incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
2.3 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, National Medical
Systems, Inc., NMS Acquisition I Corp. and the Stockholders
named therein (Incorporated by reference to Exhibit 2.3 to
the Registration Statement on Form S-1 (File No. 333-13101)
of the Company)
2.4 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, RTI Business Systems,
Inc., RTI Acquisition I Corp. and the Stockholders named
therein (Incorporated by reference to Exhibit 2.4 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
2.5 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Systems Management,
Inc., SMI Acquisition I Corp. and the Stockholders named
therein (Incorporated by reference to Exhibit 2.5 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
3.1 -- Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)
3.2 -- By-laws of the Company (Incorporated by reference to Exhibit
3.2 to Amendment No. 1 to the Registration Statement on Form
S-1 (File No. 333-13101) of the Company)
4 -- Form of certificate evidencing ownership of Common Stock of
the Company (Incorporated by reference to Exhibit to
Amendment No. 4 to the Registration Statement on Form S-1
(File No. 333-13101) of the Company)
5 -- Opinion of Morgan, Lewis & Bockius LLP
10.1 -- 1996 Long-Term Incentive Plan of the Company (Incorporated
by reference to Exhibit 10.1 to Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
10.2 -- 1996 Non-Employee Directors' Stock Plan of the Company
(Incorporated by reference to Exhibit 10.2 to Amendment No.
2 to the Registration Statement on Form S-1 (File No.
333-13101) of the Company)
</TABLE>
II-2
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S> <C>
10.3 -- Employment Agreement between the Company and Michael A.
Singer (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.4 -- Employment Agreement between the Company and Richard W.
Mehrlich (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.5 -- Employment Agreement between the Company and John H. Kang
(Incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K filed April 10, 1997)
10.6 -- Employment Agreement between the Company and Frederick B.
Karl, Jr. (Incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.7 -- Employment Agreement, dated as of November 25, 1996, between
the Company and Lee A. Robbins (Incorporated by reference to
Exhibit 10.7 to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-13101) of the Company)
10.8 -- Employment Agreement between the Company and Henry W.
Holbrook (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.9 -- Employment Agreement between the Company and Thomas P.
Liddell (Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.10 -- Lease between PPI Holding Company, Inc. and Personalized
Programming, Inc., dated March 12, 1996, as amended,
(Incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
10.11 -- Lease between Liddell, L.L.C. and Systems Management, Inc.
(Incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K filed April 10, 1997)
10.12 -- Master License Agreement between Personalized Programming,
Inc. and Systems Plus, Inc. dated November 15, 1982,
together with eight addenda thereto (Incorporated by
reference to Exhibit 10.12 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)
10.13 -- Management Services Agreement and Option Agreement, dated as
of September 1, 1996, between Medix, Inc. and National
Medical Systems, Inc. (Incorporated by reference to Exhibit
10.13 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)
10.14 -- Stock Purchase Agreement, dated as of December 26, 1996, by
and among the Company, National Medical Systems, Inc. and
Electronic Data Systems Corporation (Incorporated by
reference to Exhibit 10.14 to Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)
21 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21 to the Company's Annual Report on
Form 10-K filed April 10, 1997)
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5)
24 -- Powers of Attorney (included on signature page)
</TABLE>
II-3
<PAGE> 111
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-4
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, Florida, on the
15th day of April, 1997.
MEDICAL MANAGER CORPORATION
By: /s/ JOHN H. KANG
------------------------------------
John H. Kang
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John H. Kang and Frederick B. Karl, Jr., and each
of them, with full power to act without the other, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments thereto,
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments thereto and to file the same, with exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL A. SINGER Chairman of the Board and Chief April 15, 1997
- ----------------------------------------------------- Executive Officer (Principal
Michael A. Singer Executive Officer)
/s/ LEE A. ROBBINS Vice President, Chief Financial April 15, 1997
- ----------------------------------------------------- Officer (Principal Financial
Lee A. Robbins and Accounting Officer)
/s/ JOHN H. KANG President; Director April 15, 1997
- -----------------------------------------------------
John H. Kang
/s/ RICHARD W. MEHRLICH Executive Vice April 15, 1997
- ----------------------------------------------------- President -- Sales and
Richard W. Mehrlich Marketing; Director
</TABLE>
II-5
<PAGE> 113
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
2.1 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Personalized
Programming, Inc., PPI Acquisition I Corp. and the
Stockholder named therein (Incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form S-1 (File
No. 333-13101) of the Company)..............................
2.2 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Systems Plus, Inc.,
Systems Plus Distribution, Inc., SPI Acquisition I Corp.,
SPDI Acquisition I Corp. and the Stockholder named therein
(Incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
2.3 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, National Medical
Systems, Inc., NMS Acquisition I Corp. and the Stockholders
named therein (Incorporated by reference to Exhibit 2.3 to
the Registration Statement on Form S-1 (File No. 333-13101)
of the Company).............................................
2.4 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, RTI Business Systems,
Inc., RTI Acquisition I Corp. and the Stockholders named
therein (Incorporated by reference to Exhibit 2.4 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
2.5 -- Agreement and Plan of Reorganization, dated as of September
30, 1996, by and among the Company, Systems Management,
Inc., SMI Acquisition I Corp. and the Stockholders named
therein (Incorporated by reference to Exhibit 2.5 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
3.1 -- Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)...............
3.2 -- By-laws of the Company (Incorporated by reference to Exhibit
3.2 to Amendment No. 1 to the Registration Statement on Form
S-1 (File No. 333-13101) of the Company)....................
4 -- Form of certificate evidencing ownership of Common Stock of
the Company (Incorporated by reference to Exhibit to
Amendment No. 4 to the Registration Statement on Form S-1
(File No. 333-13101) of the Company)........................
5 -- Opinion of Morgan, Lewis & Bockius LLP......................
10.1 -- 1996 Long-Term Incentive Plan of the Company (Incorporated
by reference to Exhibit 10.1 to Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
10.2 -- 1996 Non-Employee Directors' Stock Plan of the Company
(Incorporated by reference to Exhibit 10.2 to Amendment No.
2 to the Registration Statement on Form S-1 (File No.
333-13101) of the Company)..................................
10.3 -- Employment Agreement between the Company and Michael A.
Singer (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K filed April 10,
1997).......................................................
10.4 -- Employment Agreement between the Company and Richard W.
Mehrlich (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K filed April 10,
1997).......................................................
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
10.5 -- Employment Agreement between the Company and John H. Kang
(Incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K filed April 10, 1997)............
10.6 -- Employment Agreement between the Company and Frederick B.
Karl, Jr. (Incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K filed April 10,
1997).......................................................
10.7 -- Employment Agreement, dated as of November 25, 1996, between
the Company and Lee A. Robbins (Incorporated by reference to
Exhibit 10.7 to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-13101) of the
Company)....................................................
10.8 -- Employment Agreement between the Company and Henry W.
Holbrook (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K filed April 10,
1997).......................................................
10.9 -- Employment Agreement between the Company and Thomas P.
Liddell (Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K filed April 10,
1997).......................................................
10.10 -- Lease between PPI Holding Company, Inc. and Personalized
Programming, Inc., dated March 12, 1996, as amended,
(Incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
10.11 -- Lease between Liddell, L.L.C. and Systems Management, Inc.
(Incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K filed April 10, 1997)............
10.12 -- Master License Agreement between Personalized Programming,
Inc. and Systems Plus, Inc. dated November 15, 1982,
together with eight addenda thereto (Incorporated by
reference to Exhibit 10.12 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)...............
10.13 -- Management Services Agreement and Option Agreement, dated as
of September 1, 1996, between Medix, Inc. and National
Medical Systems, Inc. (Incorporated by reference to Exhibit
10.13 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-13101) of the Company)...............
10.14 -- Stock Purchase Agreement, dated as of December 26, 1996, by
and among the Company, National Medical Systems, Inc. and
Electronic Data Systems Corporation (Incorporated by
reference to Exhibit 10.14 to Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-13101) of
the Company)................................................
21 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21 to the Company's Annual Report on
Form 10-K filed April 10, 1997).............................
23.1 -- Consent of Coopers & Lybrand L.L.P..........................
23.2 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit
5)..........................................................
24 -- Powers of Attorney (included on signature page).............
</TABLE>
<PAGE> 1
Exhibit 5
[Letterhead of Morgan, Lewis & Bockius LLP]
April 15, 1997
Medical Manager Corporation
3001 North Rocky Point Drive
Suite 100
Tampa, Florida 33607
Re: Issuance of Shares Pursuant to
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Medical Manager Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, of a Registration Statement on Form S-1 (the "Registration Statement")
relating to the public offering by the Company of an aggregate of 5,000,000
shares (the "Shares") of the Company's Common Stock, $.01 par value per share.
In so acting, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of the Certificate of Incorporation
of the Company and the By-Laws of the Company. We have assumed that (i) the
Registration Statement, and any amendments thereto, will have become effective,
(ii) the Shares will have been duly authorized and reserved for issuance and
certificates evidencing the same will have been duly executed and delivered,
against receipt of the consideration approved by the Board of Directors of the
Company or a committee thereof which will be no less than the par value
thereof, and (iii) the Shares will be issued in compliance with applicable
federal and state securities laws.
Based on the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated and validly
existing under the laws of the State of Delaware.
2. The Shares, when issued, will be duly authorized, validly
issued, fully paid and non-assessable.
<PAGE> 2
Medical Manager Corporation
April 15, 1997
Page 2
We are expressing the opinions above as members of the Bar of the State
of New York and express no opinion as to any law other than the General
Corporation Law of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated February 14, 1997, except for certain information in Note 8 for
which the date is April 6, 1997 on our audits of the combined financial
statements of Medical Manager Corporation and Personalized Programming, Inc.;
dated March 7, 1997 on our audits of Systems Plus, Inc. and Systems Plus
Distribution, Inc.; dated February 28, 1997 on our audits of RTI Business
Systems, Inc.; dated March 14, 1997 on our audits of Systems Management, Inc.;
and dated February 28, 1997 on our audits of National Medical Systems, Inc. We
also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Tampa, Florida
April 15, 1997
