<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
MEDICAL MANAGER CORPORATION
(Exact name of registrant as specified in its charter)
APRIL 8, 1997
Date of Report (Date of earliest event reported)
<TABLE>
<S> <C> <C>
DELAWARE 0-29090 59-3396629
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation Identification No.)
</TABLE>
3001 NORTH ROCKY POINT DRIVE, SUITE 100, TAMPA, FLORIDA 33607
(Address of principal executive offices) (Zip Code)
(813) 287-2990
(Registrant's telephone number, including area code)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
In accordance with the requirements of Staff Accounting Bulletin No. 80,
Medical Manager Corporation is filing the financial statements of Systems Plus,
Inc. and Systems Plus Distribution, Inc., RTI Business Systems, Inc., National
Medical Systems, Inc. and Systems Management, Inc. included in Exhibit 99 to
this Form 8-K and incorporated by reference herein.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ -------
<S> <C> <C>
99 -- Financial Statements of Systems Plus, Inc. and Systems Plus
Distribution, Inc., RTI Business Systems, Inc., National
Medical Systems, Inc. and Systems Management, Inc. and the
Reports of Coopers & Lybrand L.L.P.
</TABLE>
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDICAL MANAGER CORPORATION
By: /s/ JOHN H. KANG
------------------------------------
John H. Kang
President
Dated: April 8, 1997
4
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C> <C>
99 -- Financial Statements of Systems Plus, Inc. and Systems Plus
Distribution, Inc., RTI Business Systems, Inc., National
Medical Systems, Inc. and Systems Management, Inc. and the
Reports of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 1
EXHIBIT 99
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
1
<PAGE> 2
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.
2
<PAGE> 3
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.
3
<PAGE> 4
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.
4
<PAGE> 5
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.
5
<PAGE> 6
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.
6
<PAGE> 7
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>
7
<PAGE> 8
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>
8
<PAGE> 9
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>
9
<PAGE> 10
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.
10
<PAGE> 11
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
11
<PAGE> 12
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.
12
<PAGE> 13
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.
13
<PAGE> 14
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.
14
<PAGE> 15
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
15
<PAGE> 16
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>
16
<PAGE> 17
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.
17
<PAGE> 18
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.
18
<PAGE> 19
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.
19
<PAGE> 20
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
20
<PAGE> 21
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.
21
<PAGE> 22
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.
22
<PAGE> 23
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.
23
<PAGE> 24
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.
24
<PAGE> 25
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
25
<PAGE> 26
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
26
<PAGE> 27
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>
27
<PAGE> 28
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.
28
<PAGE> 29
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.
29
<PAGE> 30
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.
30
<PAGE> 31
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.
31
<PAGE> 32
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
32
<PAGE> 33
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.
33
<PAGE> 34
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.
34
<PAGE> 35
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.
35
<PAGE> 36
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.
36
<PAGE> 37
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
37
<PAGE> 38
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>
38
<PAGE> 39
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 elected to terminate its
S corporation status 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
39
<PAGE> 40
SYSTEMS MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENTS: -- (CONTINUED)
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Had the Company elected to
terminate its S corporation status immediately prior to 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.
40
