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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-29090
MEDICAL MANAGER CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 59-3396629
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 NORTH ROCKY POINT DRIVE EAST, 33607
SUITE 400, TAMPA, FLORIDA (Zip Code)
(Address of principal executive
offices)
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Registrant's telephone number, including area code: (813) 287-2990
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 5, 1999 was $343,897,273, using a closing stock price of
$24.875.
There were 22,230,749 shares of the Registrant's common stock outstanding
as of March 5, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement on Schedule 14A for
its 1999 Annual Meeting of Stockholders are incorporated by reference in Part
III of this Annual Report on Form 10-K. Financial statements of the Founding
Companies included in the Current Report on Form 8-K of the Registrant filed
with the Securities and Exchange Commission on April 8, 1997 are incorporated by
reference herein.
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MEDICAL MANAGER CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 23
Item 6. Selected Financial Data..................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 35
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 60
PART III
Item 10. Directors and Executive Officers of the Registrant.......... **
Item 11. Executive Compensation...................................... **
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ **
Item 13. Certain Relationships and Related Transactions.............. **
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 60
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** The information required by Items 10, 11, 12 and 13 of Part III is hereby
incorporated by reference to the Registrant's Definitive Proxy Statement on
Schedule 14A to be filed not more than 120 days after December 31, 1998.
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PART I
ITEM 1. BUSINESS
Medical Manager Corporation (the "Company") is a leading provider of
comprehensive physician practice management information systems to independent
physicians, independent practice associations ("IPAs"), management service
organizations ("MSOs"), physician practice management organizations ("PPMs"),
management care organizations and other providers of health care services in the
United States. The Company, which was founded in 1996, develops, markets and
supports The Medical Manager(R) practice management system, which addresses the
financial, administrative, clinical and practice management needs of physician
practices. The Company's system has been implemented in a wide variety of
practice settings from small physician groups to multi-provider IPAs and MSOs.
The Company's proprietary systems enable physicians and their administrative
staffs to efficiently manage their practices while delivering quality patient
care in a constantly changing health care environment. Since the development of
The Medical Manager software in 1982, the Company's installed base has grown to
over 24,000 client sites, representing more than 80 practice specialities,
making it the most widely installed physician practice management system in the
United States.
As part of the Company's initial public offering in February 1997 (the
"IPO"), the Company acquired in separate transactions (the "Mergers") five
businesses (each a "Founding Company" and collectively the "Founding Companies")
which were involved in one or more aspects of the development, sale and support
of The Medical Manager practice management system. Since the IPO, the Company
has implemented its strategy of acquiring selected independent dealers. As part
of this acquisition program, the Company has acquired an additional 42
independent dealers throughout the United States, each of which was involved in
the development, sale and support of The Medical Manager practice management
system. Of the 42 independent dealers acquired, 23 were accounted for using the
pooling of interests method of accounting and are collectively referred to as
the "Acquired Companies." The remaining 19 independent dealers acquired were
accounted for using the purchase method of accounting and are collectively
referred to as the "Purchased Companies."
The Company conducts its operations through eight wholly-owned
subsidiaries, each of which is involved in one or more of the research and
development, national sales and marketing, and direct sales, marketing and
support activities of the Company.
WHOLLY-OWNED SUBSIDIARIES
Medical Manager Research & Development, Inc.
Medical Manager Research & Development, Inc. ("MMR&D"), which was one of
the five Founding Companies, was founded in 1981 and is the developer of The
Medical Manager practice management system. Its progressive and innovative
approach to computer programming has made it a leader in the healthcare
information technology industry. MMR&D's research and development staff works
closely with its installed client base and academic institutions to ensure that
the product reflects the latest technologies, changes in health care industry
practices and modifications to state and federal governmental regulations. MMR&D
pioneered electronic claims submission software as well as electronic data
interfaces that allow a direct interchange of data with hospitals, laboratories,
pharmacies and other health care providers. MMR&D employs approximately 133
programmers, technicians, administrative staff and other personnel at its
research and development facility in Alachua, Florida.
Medical Manager Sales & Marketing, Inc.
Medical Manager Sales & Marketing, Inc. ("MMS&M"), which was one of the
Founding Companies, is principally responsible for sales and marketing of The
Medical Manager software. It coordinates the sales, support and training
activities of the independent resellers across the United States, markets
products, conducts user and dealer training programs, provides technical support
and performs quality assurance testing of The Medical Manager software prior to
general release. MMS&M also conducts market research, develops
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arrangements with providers of complementary products and services, and directs
national advertising, press and media relations. MMS&M represents The Medical
Manager product at major regional and national trade shows and hosts user events
such as Basic and Advanced Training Seminars and its annual MSO Users
Conference. MMS&M employs approximately 78 personnel, and is based in Mountain
View, California.
Medical Manager Southeast, Inc.
Medical Manager Southeast, Inc. ("MMSE") was one of the five Founding
Companies. Prior to the Mergers, it was a national dealer for The Medical
Manager system. In March 1997, MMSE became the southeast regional distributor
for the Company. MMSE employs approximately 148 personnel, and is based in
Tampa, Florida. It serves client sites in Florida and throughout the
Southeastern United States.
Prior to the Mergers, MMSE acquired Medix, Inc., a wholly-owned subsidiary
of Blue Cross and Blue Shield of New Jersey, Inc. on December 31, 1996. During
1997, MMSE acquired the assets and certain liabilities of AMSC, Inc., based in
Orlando, Florida, which was a wholly-owned subsidiary of CIS Technologies, Inc.,
a wholly owned subsidiary of National Data Corporation, and Companion
Technologies of Florida, Inc., a large regional reseller of The Medical Manager
system, and a wholly-owned subsidiary of Companion Technologies Corporation
(hereinafter "Companion"). Companion is a wholly-owned subsidiary of Blue Cross
and Blue Shield of South Carolina, a private label vendor of The Medical Manager
system since 1988, and it continues as one of the largest resellers of The
Medical Manager system in the country. MMSE expanded in1998 with the acquisition
of substantially all of the assets, or substantially all of The Medical Manager
related assets, of Qualified Technologies, Inc., based in Baton Rouge, Louisiana
and Circle Software, Inc., based in Ft. Lauderdale, Florida.
Medical Manager Northeast, Inc.
Medical Manager Northeast, Inc. ("MMNE") was also one of the Founding
Companies. Prior to the Mergers, it was a regional dealer for The Medical
Manager software in the Northeastern region of the United States. Based in
Albany, New York, MMNE employs approximately 303 personnel who serve client
sites in New York and throughout the Northeastern United States.
In 1997, MMSE acquired LSM Computing, Inc., a regional dealer in
Somerville, New Jersey. In October 1997, the New Jersey division of MMSE was
transferred to MMNE. Also in 1997, MMNE acquired Computer Clinic, Inc. and its
affiliates, based in Valhalla, New York; Boston Computer Systems, Inc., based in
Norwood Massachusetts; and CompRx Systems Corporation based in Hauppauge, New
York. MMNE expanded during 1998 with the acquisition of substantially all of the
assets, or all of The Medical Manager related assets, of Prism Microcomputers,
Inc., based in Fairfax, Virginia; Advantage Medical Systems, Inc., based in
Hurricane, West Virginia; LeeData Systems, Inc., based in Plymouth Meeting,
Pennsylvania; MedData Corporation, based in Ellicot City, Maryland; and ProMed
Systems, Inc., based in New Haven, Connecticut.
Medical Manager Midwest, Inc.
Medical Manager Midwest, Inc. ("MMMW"), was one of the five Founding
Companies and, prior to the Mergers, was a regional dealer for The Medical
Manager system in the Midwestern region of the United States. In July 1997,
Systems Management, Inc. merged with UNICO, Inc., a regional dealership in
Evansville, Indiana. Based in South Bend, Indiana, MMMW employs over 211
personnel who serve client sites in Indiana, Michigan, and throughout the
Midwestern region of the United States.
In addition to the merger with UNICO, Inc., during 1997 MMMW also acquired
the assets and certain liabilities of several local and regional dealerships,
including Artemis, Inc., based in Indianapolis, Indiana; Package Computer
Systems, Inc., d/b/a PAC-COMP, based in Sterling Heights, Michigan; and
Professional Management Systems, Inc., based in St. Charles, Illinois. Also
during 1997, it acquired by merger Medysis, Inc, based in Fort Wayne, Indiana.
In 1998, MMMW acquired Healthcare Management Solutions, d/b/a Healthcare
Informatics, Inc., based in Springfield, Illinois, and Medical Practice Support
Services, Inc., based
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in Pittsburgh, Pennsylvania. It also acquired substantially all of The Medical
Manager related assets of Walhtek, Inc., based in Des Moines, Iowa.
Medical Manager Northwest, Inc.
Medical Manager Northwest, Inc. ("MMNW") was founded in March 1992 and,
prior to being acquired by the Company in May of 1997, was a regional dealer of
The Medical Manager system in the Northwestern region of the United States.
Based in Federal Way, Washington, MMNW employs approximately 40 personnel, and
serves client sites in the state of Washington and throughout the Northwestern
region of the United States.
During 1997, MMNW acquired the assets and certain liabilities of a number
of local and regional resellers of The Medical Manager software in the Northwest
portion of the United States including Data Concepts, Inc. and Medical Systems
Consultants, Inc., both based in Boise, Idaho, and Medico Support Services,
Inc., based in Salem, Oregon.
Medical Manager West, Inc.
Medical Manager West, Inc. ("MMW") was founded in June 1987, and prior to
being acquired by the Company in May 1997, was a regional dealer of The Medical
Manager system in Southern California. Based in Van Nuys, California, MMW
employs approximately 99 personnel who serve client sites in Southern
California, Nevada and the Western region of the United States.
In 1997, MMW acquired by merger Computers for Medicine Corporation and
Carecom, Inc, based in Englewood, Colorado. Also during 1997, MMW acquired
Advanced Practice Management, Inc., based in San Diego, California. MMW's 1998
acquisitions included substantially all of the assets, or all of The Medical
Manager related assets, of Strategic Systems, Inc., based in Denver Colorado;
Intelligent Concept Ltd. (U.S.A.), based in Los Angeles, California; CSA
Provider Services Division of Blue Cross Blue Shield of Arizona, based in
Phoenix, Arizona; and Healthcare Automation Associates, Inc., based in Phoenix,
Arizona.
Medical Manager Southwest, Inc.
Medical Manager Southwest, Inc. ("MMSW") was founded in December 1983 and,
prior to being acquired in June 1997, was a regional dealer of The Medical
Manager system operating out of Houston, Texas. Medical Manager Southwest, with
a staff of 99 personnel, serves client sites in Texas and throughout the
Southwestern region of the United States.
In 1997, MMSW acquired substantially all of the assets of Matrix Computer
Consultants, Inc., based in Norman, Oklahoma; Unisource Systems, Inc., based in
Corpus Christi, Texas; and Companion Technologies of Texas, Inc., based in
Arlington, Texas. MMSW acquired substantially all of the assets of the following
resellers of The Medical Manager software in 1998: Management Integrated
Solutions, based in Dallas, Texas; Health-Tech Systems, Inc., based in El Paso,
Texas; Medical Systems, Inc., based in Dallas, Texas; LLBC Enterprises, Inc.,
based in San Antonio, Texas; Medical Design & Images, Inc., based in Austin,
Texas; and MSO Billing Services, Inc., based in Dallas, Texas.
INDUSTRY
In recent years, the healthcare information technology marketplace has
emerged as one of the fastest growing industries in the United States. The
business of healthcare has undergone a number of changes that are beginning to
have a significant impact on the demand for information technology including the
evolution of the reimbursement model, the demand for greater communication in a
consolidated healthcare environment, expanding budgets for information
technology and the need to replace legacy systems as the 21st century
approaches.
The changes that have occurred in the way the healthcare market is
reimbursed are perhaps the single most significant driver behind providers'
demand for information technology. Reimbursement for health care has
historically been based on a fee-for-service model of payment. However, in an
attempt to slow the growth
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of healthcare expenditures, the government began a prospective payment system in
the early 1980's. In response to this, managed care has emerged as the
predominant reimbursement model in which healthcare organizations operate. This
change in the reimbursement model, and specifically the forces of managed care,
has placed a tremendous amount of pressure on healthcare providers to remain
profitable without sacrificing their quality of care. This, in turn, has caused
physicians to join together in group practices to share administrative costs and
achieve economies of scale. The expansion in the number of managed care and
third-party payor organizations, as well as additional governmental regulation
and the change in reimbursement models, have greatly increased the complexity of
pricing practices, billing procedures and reimbursement policies in medical
practices. Practice management systems have come to the forefront as a solution
to help providers maintain profitability and efficiency in this environment
while keeping quality high and costs low. Information systems create
efficiencies for providers and reduce administrative costs through automated
billing and scheduling functions. In addition, applications such as managed care
can be used to assess profitability and assist providers in negotiating managed
care and capitation payment contracts.
Today's healthcare marketplace depends on integrated communication across
the entire continuum of care. Sole practitioners and small physician groups,
which once dominated the healthcare marketplace, have now given way to larger
integrated delivery networks that operate in enterprise-wide settings, managing
multiple practices spread across a number of locations. This general increase in
the size and complexity of medical practices has created a greater need for
analysis of data and sharing of patient data. The entire healthcare industry
must invest in this technology in order to fully computerize the flow of
financial and clinical information.
The consolidation in the healthcare industry not only calls for more
dependence on information technology, but it also means organizations are more
likely to have access to capital for information systems. According to the 1998
Healthcare Information and Management Systems Society leadership survey,
providers now spend between 1-3 percent of their operating budgets on
information technology. Though relatively low compared with most other
industries, this amount is expected to double over the next 3-5 years.
With the year 2000 closely approaching, many healthcare providers will opt
to purchase entirely new systems from an information technology vendor rather
than to invest significant capital in maintaining their old legacy systems
in-house. Many legacy systems lack the functionality and technology required by
today's healthcare market and would be difficult to maintain and support in the
year 2000. Most healthcare providers facing this dilemma will therefore, seek an
outside information technology vendor that can provide a functionally rich, Year
2000 compliant product that offers such services as support, maintenance,
training, and help desks.
Even with these pressures, the healthcare industry is behind the times when
it comes to dependence on and demand for information technology. As a result,
the industry is only in its infancy stage, and will undoubtedly expand over the
next several years. As of October 1998, the total market size was approaching
$14 billion, about 1.5 percent of total healthcare expenditures, and is
estimated to reach $21 billion by 2000.
BUSINESS STRATEGY
The Company's strategy is to build upon its leadership position as the
provider of the most widely utilized physician practice management system in the
United States. Key elements of this strategy include:
Continuing to Gain Market Share in Core Market. In November 1997, the
Company released its Version 9 product. This product is Year 2000 compliant
and offers many enhancements designed to meet the demands of our clients.
Approximately 9,000 of the Company's existing sites have upgraded to
Version 9, thus taking advantage of the new functionality. Version 9 also
offers a solution for many potential customers and the Company intends to
aggressively pursue these new opportunities.
Increasing Penetration of Management Service Organizations and Other Large
Physician Groups. The Company seeks to increase its sales of
enterprise-wide systems, products and services to IPAs, PPMs, MSOs and
large physician groups. As trends in the health care marketplace continue
to drive physician affiliations, the Company believes there is significant
opportunity to increase its share of this
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rapidly growing segment of the practice management market. In order to
capitalize on these opportunities, in 1997, the Company established the
Enterprise Business Group to coordinate large group sales and support in
conjunction with the regional subsidiaries and the independent local and
regional dealers. In addition, the Company has enhanced the functionality
of The Medical Manager system to deliver increasingly comprehensive
physician practice management services in enterprise-wide settings. With
sales of $6.8 million recognized during the year ended December 31, 1998
and an installed base of over 200 MSOs and PPMs, the Company has
demonstrated its ability to deliver the software and services which such
large providers demand. The Company believes that, through its continued
efforts, it can significantly increase its share of this market segment.
Cross-Selling Products and Services to Existing Client Base. The Company
intends to aggressively cross-sell additional products and services to its
existing client base. A majority of the Company's existing clients do not
currently use The Medical Manager system's entire suite of products and
services. Because of its substantial installed base of over 24,000 sites,
as well as the modular, integrated product design of The Medical Manager
system, the Company intends to work with the sales offices to target many
of its customers as candidates for cross-selling opportunities, including
system upgrades, additional software application modules, services such as
hardware and software maintenance, system and process planning, project
management, custom programming and electronic data interchange ("EDI")
capabilities.
Continuing Development of New Products, Product Enhancements and
Services. The Company intends to continue its leadership role in the
development and introduction of new products, product enhancements and
services for the physician practice marketplace. To do so, the Company
intends to continue to commit significant financial and human resources to
its research and development efforts. A key focus of the Company's research
and development efforts is the further enhancement of The Medical Manager
system's ability to operate within a variety of integrated delivery
environments. The Company's strategic development initiatives include
advanced systems, such as a version of The Medical Manager software
incorporating relational databases, a graphical user interface and enhanced
client-server applications. The Company develops new products, product
enhancements and services with input from its physician-clients.
Continuing to Enhance EDI Opportunities. The change to a paperless society
has fueled significant growth in EDI and E-commerce. Recently, EDI has
expanded to include such real time transactions as clinical data,
computer-based patient records, electronic prescription, lab test
requisitions, insurance eligibility verification, decision support and
outcomes measurement. To compete in this market, Medical Manager
Corporation introduced Medical Manager Network Services ("MMNS") in 1997, a
division specifically dedicated to the Company's EDI offerings. Because the
EDI marketplace is currently fragmented, MMNS has developed relationships
with EDI leaders such as Envoy Corporation and National Data Corporation to
provide our clients a single-source EDI connection. The Company will
continue to market these EDI services to our current provider marketplace
and to new customers. The Company intends to enhance EDI opportunities for
its customers through such future offerings as on-line claims adjudication
and internet services.
Consolidating and Rationalizing the Distribution Network. The Company
intends to continue the consolidation and rationalization of The Medical
Manager distribution network which began upon the consummation of the IPO
in February 1997. Prior to the 1990s, when independent physician practices
were most prevalent, the local focus of The Medical Manager independent
dealer network effectively addressed the practice management needs of the
market. However, due to the numerous trends in the health care industry
toward improved efficiency and cost containment, physicians have been
forced to consolidate into larger practice organizations. To meet the needs
of these larger groups, the Company believes it is necessary to adopt and
implement a two-fold product distribution strategy that includes the
acquisition of dealers in major medical communities and large metropolitan
markets and the rationalization of the Company's remaining independent
dealers. The acquisition of certain independent dealers in strategic
markets should enable the Company to market more effectively to larger
customers while assisting the remaining independent dealers in conducting
their marketing activities. The Company's strategy for its independent
dealer network includes the standardization of the independent dealers in
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order to ensure that The Medical Manager system is sold and supported on a
consistent and effective basis throughout the dealer network. The Company
intends to continue to use its existing network of independent dealers as
an integral part of its distribution network for The Medical Manager
software.
Continuing to Leverage Size to Create Efficiencies and Reduce Costs. As a
result of the Mergers and subsequent acquisitions, the Company has achieved
significant benefits through a national market presence, centralized client
support and the implementation of a national retail pricing structure. The
Mergers and subsequent acquisitions have created a vertically-integrated
entity that has greater financial strength and stability, which allows the
Company to compete more effectively on national, regional and local levels.
The Company has established local and regional resource centers, supported
by centralized corporate and regional operations, including help desks, EDI
departments and advanced technical and programming personnel. While
significant efficiencies have already been achieved, the Company expects
this structure to provide an even greater reduction of costs in the future.
PRODUCTS
The Medical Manager software is an integrated practice management system
encompassing patient care, clinical, financial and management applications. Due
to its scalable design, The Medical Manager software is a cost-effective
solution in a stand-alone or enterprise-wide environment. The Medical Manager
system is designed to operate on a wide range of hardware platforms, from
Intel-based computer systems for small and medium sized practices, to RISC-based
systems, such as the IBM RS/6000 and Hewlett-Packard 9000, for larger practices.
Its modular, fully integrated product portfolio allows clients to add
incremental capabilities to existing information systems while preserving and
minimizing the need for capital investments. The latest version of The Medical
Manager software is Year 2000 enabled.
In August of 1998, the Company announced that it was developing and had
begun in-house testing of a patch that would allow its previous version, Version
8, first released in November 1993, to handle the date change to the new
century. This patch, Version 8.12, is now available for general distribution to
its independent sales offices and its installed base.
The pricing of The Medical Manager system is a function of the number of
modules purchased, the number of users per site, the number of practices, the
operating system and the complexity of the installation. Hardware support,
software support and services are priced separately from software products and
are typically coordinated by the dealer.
The Medical Manager system provides to physician practices a broad range of
patient care and practice management features, including:
CORE APPLICATION
The Medical Manager Core Application includes base financial, clinical and
practice management functions.
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PRODUCT DESCRIPTION
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The Medical Manager Software........... Provides accounts receivable, insurance billing, basic
appointment scheduling and recalls, clinical history,
financial history, referral of physician information,
encounter form tracking, e-mail, office notes, hospital
rounds and over 150 standard reports.
MM Client.............................. A GUI/Windows-based Ultra-Thin Client user interface to
The Medical Manager software connecting to either a UNIX
or NT server.
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OFFICE MANAGEMENT
The Medical Manager Office Management application automates the essential
administrative tasks of a physician practice.
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Automated Collections.................. Maintains notes, promise to pay dates, budget payments,
next action to be taken indicators and prints collection
letters; automates "tickler" system to alert the user when
an account needs attention.
Chart and X-Ray Locator................ Tracks the location of a patient's medical and X-ray
charts.
Advanced Billing....................... Handles sophisticated billing needs, including the
necessary collapsing and sorting of charge items into
revenue codes for UB92 billing purposes; also used for the
specialized reporting needs for Workers' Compensation
First Report of Injury.
Custom Report Writer................... Provides access to all data elements of The Medical
Manager software; allows for the creation of user defined
custom reports.
Multiple Resource Scheduling........... Includes multi-resource display, search and posting of
scheduled appointments; coordinates the utilization of
exam rooms and equipment and schedules of teams of
physicians, nurses, therapists and others whose services
are needed within a specific time sequence of one another.
Patient Flow Tracking.................. Allows patient encounters to be tracked from the time the
patient makes the appointment, through encounters in the
waiting room, examination rooms, labs and other areas;
reports on time and resource utilization.
Case Management System................. Tracks all clinical events related to a specific case.
Provides the capability to view a snapshot of the diverse
aspects of a patient's case on a single screen and
instantly access the desired level of underlying detail.
Laser Form Generator................... Encounter forms, prescriptions, insurance forms, patient
bills and statement, referrals, letterheads, and other
forms can be printed. Forms are automatically created and
merged with data during printing on plain letter or legal
size paper.
Patient Advisory System................ Allows the practice to locate and print patient education
sheets on a variety of topics spanning many different
medical specialities.
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DEVELOPMENT TOOLS
Development Tools allow data to be accessed and manipulated, adding
flexibility to the system and allowing for customization to meet specialized
needs.
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PRODUCT DESCRIPTION
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Data Merge............................. A proprietary 4GL type language that allows the Company,
dealers and other qualified programmers to customize
functions and features of The Medical Manager system
without changing source code; also supports the exchange
of data between The Medical Manager system and hospital,
lab, pharmacy and other medical management systems.
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ELECTRONIC CONNECTIVITY
Electronic Connectivity supports the electronic submission of claims to
payors, and allows for the open exchange of information between various medical
institutions as well as the transfer of administrative transactions to support
managed care.
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PRODUCT DESCRIPTION
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Hospital Information Link.............. A Data Merge tool that allows hospital interfaces to be
written to local hospital requirements.
HL7 Connectivity Engine................ Allows users to provide real time demographic and
encounter information to hospitals and other organizations
(referred to as "Remotes") and queries the Remote's master
patient index in order to retrieve data on existing
patients; also allows the Remotes to automatically advise
the user site of patient admissions and discharges,
changes to inpatient/outpatient status and changes to
patient demographic information.
Electronic Data Interchange............ An interface that provides state of the art connectivity
for immediate access to various insurance providers,
third-party connectivity networks and other outside
facilities; features include pre-authorization status,
benefit eligibility, referral verification and rosters, as
well as credit card and check approval.
Electronic Claims...................... Supports direct electronic submission of claims to
Medicare, Medicaid, commercial carriers and
clearinghouses; expedites insurance payment turnaround
time; verifies claims for accuracy and reports on
submitted claims that have been accepted or rejected;
provides a complete audit trail and reports to ensure that
claims have been processed properly; supports NSF and ANSI
national standards.
Electronic Remittance.................. Used in combination with the Electronic Claims Module to
electronically download Explanation of Benefits ("EOBs")
from Medicare or other claim centers and to post directly
into patients' accounts, thereby saving a substantial
amount of data entry time and preventing keying errors.
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MANAGED CARE APPLICATIONS
Managed Care applications allow physicians to contain costs and deliver a
higher quality of care in the capitated environments.
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PRODUCT DESCRIPTION
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Managed Care........................... In addition to the managed care features offered in the
base system, supports the full functions required to track
incoming as well as outgoing referrals to facilities and
specialists; maintains membership eligibility lists,
capitation payment posting, contract management (including
number of visits, allowable time period, procedures and
diagnosis treatment plan) and reporting.
Claims Adjudication.................... Fully integrated with the Managed Care module, provides
full risk management capabilities, including the
processing of received claims, comparing the claim against
authorized services to determine amounts due, generating
checks for payments and producing an EOB; also provides
advanced features in the form of claims repricing,
bundling of services and optionally, provider
credentialing and risk pool management.
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CLINICAL APPLICATIONS
The Medical Manager Clinical application developments provide
fully-integrated components of a patient's medical record that contain the
functionality and knowledge bases required in today's practices.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Quality Care Guidelines................ Automates the process of tracking both the curative and
preventative services the practice has specified that it
wishes to perform; provides reports on physician
compliance with recommended care guidelines that are based
on the patient's age, sex, diagnoses and other key health
factors and are automatically printed with the patient's
encounter form. The guidelines are derived from U.S.
Preventative Healthcare Guidelines or other clinical
knowledge bases and reflect the practice's own suggested
intervals of exams, tests, injections and other procedures
specific to the individual patient.
Laboratory Interface................... Electronically downloads test requests and patient
demographics to a laboratory, and electronically transfers
results directly into the patient's file in The Medical
Manager software.
Prescription Writer.................... Provides a full set of tools for managing both the
clinical and administrative aspects of the prescription
process; provides for extensive interaction checking,
patient information printouts and prescription history on
the drugs being prescribed; administratively reduces
physician and staff time spent preparing and issuing
prescriptions.
Pharmacy Interface..................... Offers a direct electronic link to transfer prescriptions
and handle authorization requests between the Prescription
Writer module and the pharmacy.
Pharmacy Formulary Checking............ Offers an automatic formulary compliance check once the
prescription is created.
Voice Dictation........................ Through The Medical Manager software's link with Kurzweil
Applied Intelligence software, enables the physician to
dictate, edit and print patient charts and reports; pulls
and stores patient and physician information from the
patient file into the chart via a single, spoken command.
View Patient Chart..................... Brings a snapshot of the patient's medical records to a
single screen and then gives the user instant access to
almost any desired level of underlying detail; allows the
screen to be used for valuable side-by-side analysis of
chart data.
Medical Records........................ Designed to provide maximum flexibility and speed in
creating, storing and retrieving whatever medical
information the practice wishes to maintain on each
patient, fully integrated with the product's clinical
history, this application addresses the four fundamental
issues concerning medical records: creation and
maintenance of medical records, simultaneous access to
patient records, remote access and data for analysis.
Includes patient encounter knowledge base and generates
automated progress notes.
Document and Image Management System... Allows a practice to organize and store patient
photographs, X-rays, and other documents, and to instantly
retrieve images and associated image information to the
screen as part of the patient's medical record. General
practice documents such as EOB's and financial statements
can also be organized and stored.
</TABLE>
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MSO ENTERPRISE SYSTEM
The MSO Enterprise system addresses the needs of the MSO market by
providing enterprise-wide solutions for the management of integrated provider
networks.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
MSO Enterprise Manager................. Provides the MSO or multi-practice environment with
central administration of multiple practices,
enterprise-wide roll-up reports, a master patient index
for automatic synchronization of demographic data-updates
and remote access across multiple systems.
</TABLE>
DIALYSIS VERTICAL MARKET OPTION
The Medical Manager Dialysis Vertical Market Option expedites the
repetitive process of posting dialysis patients' weekly treatments.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Dialysis Calendar Posting.............. Using a calendar posting screen, automates and reduces the
repetitive, recurring posting dictated by dialysis
treatment.
</TABLE>
CHEMOTHERAPY VERTICAL MARKET OPTION
The Medical Manager Chemotherapy Vertical Market Option automates both the
clinical and financial aspects of the Oncology practice.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
Chemotherapy Management System......... Provides close control of chemotherapy drug administration
based on standard and customized protocols. Using an
online encounter form, automates posting of each treatment
session, reducing operator input time and opportunities
for error.
</TABLE>
CLIENT SERVICES
The Company's Client Services Division provides a wide range of services to
the entire client base to ensure customer satisfaction and maximize the utility
of The Medical Manager system. These services include both fundamental and
value-added services as described below:
Implementation Services. These services include planning, design and
installation of software, hardware and network solutions for stand-alone
practices to enterprise-wide environments. To ensure customer satisfaction,
the Company utilizes a team approach involving technical and professional
staff members who have a broad array of technical and business expertise.
This team approach includes project engineering, business redesign and
practice staff re-education. A client relationship manager, part of the
team from the outset, works with the client throughout the life of the
contract.
Support Services. A critical element in assuring proper use of and
satisfaction with the Company's products involves ongoing support services
provided to the end-users. The Company provides to its clients continuing
software and hardware support under agreements that typically have a one
year term. These agreements provide for general support via help desks,
error corrections to software, remote diagnostics and on-site hardware and
software technicians. Support services are provided during normal business
hours and can be expanded to include seven days a week, 24 hour coverage.
As of December 31, 1998, the Company had 336 full-time employees devoted to
providing support services to its customer base.
Value-Added Services. The Company advises its enterprise-wide clients on
how best to bring together disparate physician practices into an integrated
health care delivery network. The Company works in partnership with its
client's clinical and administrative management in the areas of patient and
workflow redesign, job function review and re-education, standardization
consultation, project engineer-
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ing, timeline and resource management and ongoing relationship management.
The Company and many of its independent dealers maintain substantial
resources capable of providing custom programming solutions for a broad
range of client requests. Many of these solutions may be generated at the
regional and local levels using the Company's Data Merge language, which
allows modification to be made without changing source code.
Training and Continuing Education. The Company believes initial training
and continuing education are key components in ensuring customer
satisfaction and retention and, accordingly, has devoted significant
resources to its Educational Services Division. Because The Medical Manager
software has been in use for 14 years, a substantial amount of experience
and expertise has been gained by the Company's training staff in optimizing
methodology and curriculum to achieve the best results. As of December 31,
1998, the Company had 130 full-time employees in its Education Services
Division. Training methods include classroom and computer-based training,
on-site visits for system setup and review and video training tapes
available on selected modules. The Company also assists its clients in
developing their own training staff, materials and guidelines. Continuing
education programs, a quarterly newsletter and user group conferences are
sponsored by the Company, providing the user with valuable information as
well as an opportunity for the Company to demonstrate new enhancements and
features of the product. The Company makes available to clients extensive
user documentation and reference manuals including, among others,
installation guides, advanced system manuals, a custom report writer manual
and an MSO implementation workbook.
SALES AND MARKETING
The Company sells its products and services nationally through a direct
sales organization consisting of 169 sales personnel, as well as through its
independent dealer network of approximately 130 dealers. This distribution
effort is responsible for sales to new clients, ranging in size from sole
practitioners to enterprise-wide clients, and follow-on sales of upgrades and
enhancements to existing clients. To enhance the effectiveness of its selling
effort, the Company provides its sales force and independent dealer network with
(i) comprehensive training in the Company's products and services, (ii)
marketing materials, and (iii) on-going support.
To address the more complex needs of larger potential clients, the Company
has formed the Enterprise Business Group. The Enterprise Business Group
coordinates the Company's sales effort for large clients (such as MSOs, IPAs and
managed care organizations) and assists in the implementation of systems and the
maintenance of ongoing client relationships. Many of the independent dealers are
experienced in selling to and supporting enterprise wide clients. The Company
has continued to utilize the Enterprise Business Group to assist local and
regional dealers in these efforts. At the enterprise-wide client level,
relationship managers work with the client throughout the contract term to keep
informed of customer expectations and help ensure customer satisfaction.
Small and medium-sized sales, routinely handled by the direct sales force
and independent dealers, generally involve a sales cycle of 30 to 60 days.
Larger sales, managed by the Enterprise Business Group, typically involve a
Request For Proposal ("RFP") process which lengthens the sales cycle to 60 to 90
days or longer. Hardware and software maintenance agreements are generally
renewed on an annual basis. Standard payment terms are 50% due upon system
order, with the balance due upon completion of system installation.
The Company generates sales leads through referrals from customers and
management consultants, responses to RFP's, strategic alliances with
complementary companies, the Company's Internet web sites and associated links,
industry seminars, trade shows, direct telephone and mail campaigns and
advertisements in trade journals.
In order to capitalize on opportunities to cross-sell its products and
services to existing clients, the Company maintains contacts with its clients at
the local, regional and national levels through electronic mail links on its
Internet web sites, monthly and quarterly newsletters, technical updates,
product release bulletins, user meetings, training seminars, industry
conferences and market-specific seminars, such as its MSO User Conference. The
Company also works with certain of its client base on the selection,
implementation, use and
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<PAGE> 14
benefits the product and publishes these as Client Profiles, providing both the
client and the Company with market exposure and the opportunity to share
successes.
An educational license of The Medical Manager physician practice management
system has been utilized to teach office automation within the medical field for
more than eight years. The system has been installed in vocational schools,
junior colleges and universities nationwide. Delmar Publishers Inc., one of the
leading educational textbook publishers in the country, markets a student
textbook and instructor's manual for courses that teach computer skills in the
medical field, using The Medical Manager software. Since 1988, more than 400
site licenses of the educational version have been sold.
DISTRIBUTION NETWORK
Prior to the 1990s, when independent physician practices were most
prevalent, the local focus of the Company's independent dealers of The Medical
Manager software effectively addressed the practice management needs of the
market. However, due to the numerous trends in the health care industry focusing
attention on the delivery of high quality and cost effective care (as well as
the need to demonstrate such quality and effectiveness), individual physicians
and small group practices have been forced to pool their resources in order to
compete effectively. As a result, large physician organizations have become much
more prevalent in the medical marketplace. To keep pace with the increasingly
sophisticated practice management needs of these larger groups, the Company has
been consolidating in order to build the necessary technical, service and
support resources.
Company-owned Dealer Network. The Company distributes, installs, supports
and services The Medical Manager software through six Company-owned
dealerships. These dealerships provide installation, support and service of
The Medical Manager software to both larger customers and individual
physician and small group practices.
Independent Dealer Network. The Company believes that a fundamental and
unique strength of The Medical Manager system is its nationwide dealer
network, which currently includes approximately 130 dealer organizations.
As a result of the many years of selling and supporting The Medical Manager
product line, the personnel in the Company's dealer network represent a
valuable resource. The Company's strategy for its independent dealer
network includes the rationalization of the independent dealers in order to
ensure that The Medical Manager system is sold and supported on a
consistent and effective basis throughout the dealer network. The Company
intends to continue to use its existing network of independent dealers as
an integral part of its distribution network for The Medical Manager
software. The Company will work with its independent dealers to institute a
program to standardize hardware configurations, client training programs
and service levels developed by the Company. The Company will also provide
services to the independent dealers, many of which are unable to provide
such resources as independent entities. Such services include: (i) dealer
training, (ii) help desks, (iii) advanced technical services, such as
custom programming services, and (iv) sales support for large systems sales
from the Enterprise Business Group.
Dealer Acquisitions. The Company believes that it must have representation
in all major medical communities and metropolitan markets throughout the
United States. As a result, the Company's dealer acquisition strategy has
focused on acquiring dealerships that had both a strong presence in key
markets and demonstrated expertise with The Medical Manager product line.
Since the Company's IPO in February 1997, the Company has acquired 42 of
its independent dealers. The Company will continue to acquire those
independent dealers which are in strategic markets.
RESEARCH AND DEVELOPMENT
The Company seeks to meet the needs of its clients by continuing to develop
new products and enhancements of existing products. Accordingly, the Company
believes that continued leadership in the practice management systems industry
will require significant additional commitments of resources to research and
development. The Company maintains its research and development campus in
Alachua,
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<PAGE> 15
Florida, where development of The Medical Manager software began over 17 years
ago. As of December 31, 1998, the Company had 92 employees engaged primarily in
its research and development efforts.
The Company's research and development activities involve Company personnel
as well as physicians, physician groups practice staff and leading health care
institutions. A key goal of current research and development efforts involves
adapting The Medical Manager system to operate more effectively within
integrated delivery environments. To achieve this goal, the Company is pursuing
a strategic development initiative directed toward the development of advanced
health care information systems that include a relational database, graphical
user interfaces and enhanced client-server applications. The Company's current
research and development efforts continue the tradition of The Medical Manager
system being a consistent leader in product innovation, as indicated by the
following:
- In 1982, The Medical Manager software was first installed.
- In 1985, The Medical Manager Electronic Media Claims module was released.
- In 1987, The Medical Manager software became the first practice
management system to perform electronic claims submission in all 50
states.
- In 1988, The Medical Manager Report Writer module was released.
- In 1990, The Medical Manager Data Merge Language module, was released,
allowing unlimited customization within The Medical Manager software
without changing the source code.
- In January 1991, The Medical Manager Electronic Remittance module was
released.
- In June 1991, The Medical Manager software became the first practice
management system to incorporate EDI with electronic interchange
partners.
- In 1992, The Medical Manager software became the first practice
management system to introduce electronic interfaces to laboratory
systems.
- In 1994, The Medical Manager Managed Care module was announced.
- In January 1995, The Medical Manager Quality Care Guidelines module was
released.
- In May 1995, The Medical Manager Dialysis Posting System was released.
- In October 1995, The Medical Manager integrated Claims Adjudication
System was released.
- In November 1995, The Medical Manager MSO Enterprise Manager was
announced.
- In April 1996, The Medical Manager prototype HL7 Connectivity Engine was
announced.
- In March 1997, The Medical Manager Case Management System was announced
and the Chemotherapy Management System was released.
- In July 1997, The Medical Manager Patient Flow Tracking, Advanced
Appointment Search (Multi-Resource) and Laser Form Generator modules were
released.
- In September 1997, The Medical Manager Medical Records System was
released.
- In January 1998, Medical Manager Network Services was released.
- In February 1998, The Medical Manager Patient Advisory Systems was
released.
- In April 1998, The Medical Manager Document and Image Management System
was released.
- In October 1998, The Medical Manager MMClient Module was released.
- In November 1998, The Medical Manager MMWin product was released.
Current focus areas for new product development and enhancement include the
following:
ENTERPRISE SYSTEM
The Company intends to develop an increasing number of automation tools to
support the growing number of integrated health care delivery systems across the
nation. Developments within The Medical Manager's MSO Enterprise System are
expected to include enterprise appointment and resource scheduling and
enterprise communications. In addition, further developments in The Medical
Manager software's
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connectivity engines should continue to promote the open exchange of information
between medical institutions.
MANAGED CARE
Physicians realize that sophisticated health care automation systems are
required to support managed care, compete for capitated contracts and contain
healthcare costs while providing effective, high quality care. Development
efforts within the Managed Care module are expected to result in a product that
provides referral outcome reporting that can perform outcome analysis across
multiple practices within the provider network. As managed care matures, new
markets will be created that require the support of automation. Development
efforts within the Managed Care module will be designed to support the evolving
subcapitation market by allowing primary care groups to receive the total
capitation from a payor and allocate the capitation payment among contracted
specialists for services they have provided.
CLINICAL APPLICATIONS
The Company recognizes that improvements in the technology that supports
the gathering, storing, retrieving and reporting of clinical data and the
creation of a sophisticated computerized patient record system are critical to
the enhancement and improvement of health care delivery across the United
States. As a result, the Company is engaged in efforts to rapidly develop
fully-integrated components of a computerized patient record containing
functionality and knowledge bases that support the way physicians provide health
care services. Research and analysis of various input technologies and devices
continue with the goal of providing physicians with usable tools that will allow
them to effectively gather and use clinical data at the point-of-care. The
Company is devoting considerable resources in the area of document and image
management pursuing the goal of a fully paperless office.
GRAPHICAL USER INTERFACE
The Company is continuing development on products utilizing a graphical
user interface and a relational database. The Company's development efforts are
intended to produce a product that will support users opting to install
technology to support a Windows environment, as well as providing the Company's
current installed base with a graphical user application which does not require
a sizable hardware investment.
WEB BASED PRODUCTS
The Company intends to enable The Medical Manager product to support web
access as well as seamless integration with other web-based products and
services.
EMPLOYEES
As of December 31, 1998, the Company had 1,152 employees. No employees are
covered by any collective bargaining agreements. The Company considers its
relationships with its employees to be good.
RISK FACTORS
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 issue
relates to whether computer systems will properly recognize and process
information relating to dates in and after the year 2000. These systems could
fail or produce erroneous results if they cannot adequately process dates beyond
the year 1999 and are not corrected. Significant uncertainty exists in the
software industry concerning the potential consequences that may result from the
failure of software to adequately address the Year 2000 issue.
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NON-PROPRIETARY (INTERNAL) SOFTWARE AND HARDWARE
The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties with which the Company deals
nationwide. The Company has undertaken a program, headed by a four-person Year
2000 Compliance Team, to determine that its systems will operate smoothly as the
year 2000 approaches. This process began with an inventory of the systems vital
to the Company's operations to identify those that may be affected by the Year
2000 issue. In addition, third party vendors and business partners which the
Company relies upon have been asked to confirm that their systems will be Year
2000 compliant. All critical systems have been assessed and a prioritized
implementation schedule has been defined for upgrading those systems which are
not currently Year 2000 compliant. The critical systems recognized by the year
2000 Compliance Team included financial and accounting systems, human resource
systems, customer support call management systems, telecommunications systems,
commercial general and administrative software used internally, hardware
systems, and other databases including enrollment and serialization databases.
FINANCIAL AND ACCOUNTING SYSTEMS. In the second quarter of 1998, the
Company purchased a Year 2000 compliant version of its financial and accounting
software. All subsidiaries of the Company have been using the Year 2000
compliant version of the accounting system since that time. The cost of the
upgrade of the accounting systems was insignificant and, in accordance with
Company policy, was capitalized to be amortized over its appropriate life.
HUMAN RESOURCE SYSTEMS. For the year ended December 31, 1998, the Company
used an outside vendor to process payroll. The Company made a decision to
internalize the payroll function by January 1, 1999. The Company's Human
Resources Department purchased a software package which is certified as Year
2000 compliant by the author, created the database for use with the software and
tested the software during the fourth quarter of 1998. The Company's payroll
went live on the new software on January 1, 1999. The cost of the new Human
Resources system and database was insignificant and, in accordance with Company
policy, was capitalized to be amortized over its appropriate life.
CUSTOMER SUPPORT CALL MANAGEMENT SYSTEMS. The Company uses a software
package to assist in recording, assigning and clearing of customer hardware and
support calls. In the second quarter of 1998, the Company purchased a new
software package, which is Year 2000 compliant, to perform these functions. The
software was tested concurrently with the Company's previous support call
management software for one month and is now in use by four subsidiaries of the
Company. The Company intends to have all subsidiaries on the new call management
system by the end of 1999. The Company's previous support software was earmarked
for replacement without regard for the Year 2000 issue and thus the cost of the
system is not considered a part of the Company's costs of Year 2000 compliance.
TELECOMMUNICATIONS SYSTEMS. Telecommunications systems of the Company
include not only voice communications, but significant data communications
systems such as e-mail and an internal network providing each subsidiary access
to servers located at the corporate offices. In October 1998, the Company
selected a single national vendor for all voice and data communications
throughout the Company. This vendor has provided a statement of their Year 2000
general plan which provides for a March 31, 1999 target completion date to be
completely Year 2000 compliant. The implementation of the new system is expected
to save the Company approximately $0.5 million over the next two years and thus,
the cost of the initial outlay for making the telecommunications systems Year
2000 compliant will be fully recovered.
VARIOUS GENERAL AND ADMINISTRATIVE SOFTWARE. As a result of the Year 2000
Compliance Team's efforts, the Company has noted that a portion of the current
in-house personal computers are known to be non-Year 2000 compliant. Some
workstations also have software programs installed which are not Year 2000
compliant. The Company has defined a minimum standard Year 2000 compliant
workstation with standardized software. The target date to have all workstations
in line with the minimum standard is March 31, 1999. Approximately 98% of this
project has been completed. The costs of upgrading all remaining workstations is
estimated to be less than $0.3 million.
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OTHER DATABASES. The Year 2000 Compliance Team has recognized two critical
databases used internally by the Company. The Network Services Client Enrollment
database is currently Year 2000 compliant. The Medical Manager Software
Serialization Database is stored in an internally written database which is not
Year 2000 compliant. The Company has scheduled an upgrade of this database to
Access 97, a completely Year 2000 compliant database package, for the third
quarter of 1999. The estimated costs of this upgrade will be the cost of
salaried employees which should not exceed $50,000 per quarter through the year
1999.
THIRD PARTY RELATIONSHIPS. The third party relationships identified as
critical to the Company's operations are computer hardware distributors and
shipping companies. As part of a standardization initiative which began in late
1997, the Company has partnered with three national distributors to supply all
hardware and third party software products sold to clients. All three companies
have provided documents stating that they are Year 2000 compliant. In addition,
all shipping companies used by the Company and other vendors have provided
documents stating their Year 2000 readiness.
The Company intends to continue to monitor the Year 2000 compliance of its
internal software and hardware packages, telecommunications systems, and
vendors. In the event that any of the Company's systems, or any of the Company's
vendors' systems, do not meet the Year 2000 requirement by December 31, 1999,
the Company could experience difficulties, including but not limited to, in
processing sales and other financial information, customer support calls,
serializations of the Company's product and orders of supplies from vendors.
This could have a materially adverse affect on the Company's financial position,
results of operations, or business. Although the Company expects its systems,
and its vendors' systems, to be Year 2000 compliant on or before December 31,
1999, it cannot predict the success of the Company's Year 2000 compliance
program. The Company does not anticipate problems with the Year 2000
preparedness of its internal hardware and software. If the Company experiences a
failure in its Year 2000 preparedness, the Company's contingency plan includes
the redeployment of experienced staff to address those Year 2000 compliance
issues.
PROPRIETARY (EXTERNAL SOFTWARE)
The Year 2000 issue also creates risk for the Company from problems that
may be experienced by customers of its software. While Version 9 of The Medical
Manager practice management system, which was commercially released in November
1997, is Year 2000 compliant, prior versions of the system are not. The Company
has encouraged users of pre-Version 9 versions of The Medical Manager software
to upgrade to Version 9 in order to become Year 2000 compliant. In August of
1998, the Company announced that it was developing and had begun in-house
testing of a patch that would allow its previous version, Version 8, first
released in November 1993, to handle the date change to the new century. This
patch, Version 8.12, is now available for general distribution to its
independent sales offices for installation for users of Versions 7 and 8.
However, there is no assurance that Versions 7 and 8, with or without the Year
2000 patch will not create additional issues for users of the software
including, but not limited to, additional costs for upgraded hardware,
additional costs for new operating systems and personnel training, additional
costs for conversion of Version 7 data, and the fact that Versions 7 and 8 do
not take into account current industry and regulatory requirements. Version 9
will remain the only enhanced and maintained version of the software.
A class action lawsuit was brought against the Company alleging Year 2000
issues regarding The Medical Manager software in versions prior to Version 9.0.
Seven additional lawsuits were also brought against the Company, each purporting
to sue on behalf of those similarly situated and raising essentially the same
issues. In December 1998, the Company preliminarily entered into an agreement to
settle the class action lawsuit, as well as five of the seven other similar
cases. The settlement created a settlement class of all purchasers of Version 7
and 8 and certain upgrades to Version 9 of The Medical Manager software, and
released the Company from Year 2000 claims arising out of the sales of these
versions of the Company's product. Under the terms of the settlement, Version
8.12, containing the Company's upgraded Version of 8.11 software with the Year
2000 patch, will be licensed without a license fee to Version 7 and 8 users who
participate in the settlement. In addition, the settlement also provides that
participating users who purchased a Version 9 upgrade will have the option to
obtain one of four optional modules from the Company without a license fee,
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or to elect to take a share of a settlement cash fund. The settlement required
the Company to make a cash payment of $1.455 million. The settlement was
approved by the District Court of New Jersey on March 15, 1999. Pursuant to the
settlement, the Company was released from liability due to the Year 2000 non-
compliance of Versions 7 and 8 by all users of Versions 7 and 8 except 29 users
who "opted-out" of the class settlement.
While the Company does not believe costs incurred by the Company to
distribute and install the Year 2000 patch will be material, there can be no
assurance that such costs will not have a material adverse effect on the
Company's financial condition or results of operations. Additionally, there can
be no assurance that the existence of the Year 2000 patch will not delay or
reduce the migration of users to Version 9 from earlier versions. Further, if
Version 9 or other customers experience significant difficulties as a result of
the Year 2000 issue, or if the Company encounters difficulties in responding in
a timely manner to customer requests to upgrade to Version 9, there could be a
material adverse impact on the Company's results of operations, financial
condition or business.
DEPENDENCE ON PRINCIPAL PRODUCTS
The Company currently derives a significant percentage of its revenue from
sales of The Medical Manager core system. As a result, any event adversely
affecting sales of its core product could have a material adverse effect on the
Company's results of operations, financial condition or business. Although the
Company has experienced increasing annual sales, on a pro forma basis, revenue
associated with existing products could decline as a result of several factors,
including price competition and sales practices. There can be no assurance that
the Company will continue to be successful in marketing its current products or
any new or enhanced products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Research and
Development."
DEPENDENCE ON PROPRIETARY SOFTWARE
As competing health care information systems increase in complexity and
overall capabilities and the functionality of these systems further overlap,
providers of such systems may become increasingly subject to infringement
claims. The Company believes that its products, trademarks and other proprietary
rights do not infringe upon the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such assertion will not require
the Company to enter into a license agreement or royalty arrangement with the
party asserting the claim. Responding to and defending any such claims may
distract the attention of the Company's management and otherwise have a material
adverse effect on the Company's results of operations, financial condition or
business.
PROPRIETARY RIGHTS AND LICENSES
The Company's success is dependent to a significant extent on its ability
to protect the proprietary and confidential aspects of its software technology.
The Company's software technology is not patented and existing copyright laws
offer only limited practical protection. The Company relies on a combination of
trade secret, copyright and trademark laws, license agreements, nondisclosure
and other contractual provisions and technical measures to establish and protect
its proprietary rights in its products. The Company distributes its products
under software license agreements that grant clients a nonexclusive,
nontransferable license to the Company's products. In addition, the Company
attempts to protect its trade secrets and other proprietary information through
agreements with employees and consultants. Substantially all of the Company's
current employees involved in product development have signed an assignment of
inventions agreement. There can be no assurance that the legal protections
afforded to the Company or the precautions taken by the Company will be adequate
to prevent misappropriation of the Company's technology. These protections do
not prevent independent third-party development of functionally equivalent or
superior technologies, products or services. There can also be no assurance that
the United States Patent and Trademark Office will not grant patent protection
to a third party which has independently developed a product or process which is
the same or substantially similar to the Company's product, process, or
services. Any infringement or misappropriation of
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the Company's proprietary software, or infringement by the Company of newly
patent protected technologies, products or services, could cause the Company to
lose revenues, pay patent royalties or incur substantial litigation expense. The
Company believes that, due to the rapid pace of innovation within the software
industry, factors such as the technological and creative skills of its personnel
and ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections afforded to its technology.
RISKS RELATED TO TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapid change and
technological advances requiring ongoing expenditures for research and
development and the timely introduction of new products and enhancements of
existing products. The Company's future success will depend in part upon its
ability to enhance its current products, to respond effectively to technological
changes, to sell additional products to its existing client base and to
introduce new products and technologies that address the increasingly
sophisticated needs of its clients. The Company will devote significant
resources to the development of enhancements to its existing products and the
migration of existing products to new software platforms. There can be no
assurance that the Company will successfully complete the development of new
products or the migration of products to new platforms or that the Company's
current or future products will satisfy the needs of the market for practice
management systems. Further, there can be no assurance that products or
technologies developed by others will not adversely affect the Company's
competitive position or render its products or technologies noncompetitive or
obsolete. See "Business -- Research and Development."
QUALITY ASSURANCE AND PRODUCT ACCEPTANCE CONCERNS
Health care providers demand the highest level of reliability and quality
from their information systems. Although the Company devotes substantial
resources to meeting these demands, its products may, from time to time, contain
errors. Such errors may result in loss of, or delay in, market acceptance of its
products. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
results of operations, financial condition or business. See "Business --
Research and Development".
RISKS ASSOCIATED WITH THE ACQUISITION STRATEGY
As part of its growth strategy, the Company intends to acquire additional
independent dealers of The Medical Manager physician practice management system
and complementary technologies outside of the dealer network. Increased
competition for acquisition candidates among the independent dealers or outside
the dealer network may develop, in which event there may be fewer acquisition
opportunities available to the Company as well as higher acquisition prices.
There can be no assurance that the Company will be able to identify, acquire or
profitably integrate and manage additional dealers or complementary
technologies, if any, into the Company without substantial costs, delays or
other operational or financial problems. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Company's operating
results, diversion of management's attention, failure to retain key acquired
personnel, amortization of acquired intangible assets and risks associated with
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the Company's results of operations, financial condition or
business. Customer dissatisfaction or performance problems at a single acquired
company could have an adverse effect on the reputation of the Company and render
ineffective the Company's national sales and marketing initiative. In addition,
there can be no assurance that dealers or complementary technologies acquired in
the future will achieve anticipated revenue and earnings. There also can be no
assurance that the existing dealer network will be receptive to the Company's
acquisition program or that dealers who are not acquired by the Company will
adhere to the Company's marketing, training, support and pricing directives,
thereby impairing the Company's plans to rationalize its distribution network.
See "Business -- Business Strategy."
18
<PAGE> 21
POSSIBLE NEED FOR ACQUISITION FINANCING
The Company currently intends to finance future acquisitions by using
shares of its Common Stock for all or a substantial portion of the consideration
to be paid. In the event that its Common Stock does not maintain a sufficient
market value, or potential acquisition candidates are otherwise unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, in order to initiate and maintain its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings. On January 14, 1998, the Company entered into a $10.0 million line
of credit agreement with NationsBank of Tampa. The line of credit matures on May
31, 1999. There can be no assurance that the Company will be able to obtain
financing beyond the maturity date of this line of credit. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
COMPETITION
The market for practice management systems such as The Medical Manager
system is highly competitive. The Company's competitors vary in size and in the
scope and breadth of the products and services they offer. The Company competes
with different companies in each of its target markets. Many of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. In addition, other entities not currently offering
products and services similar to those offered by the Company, including claims
processing organizations, hospitals, third-party administrators, insurers,
health care organizations and others, may enter certain markets in which the
Company competes. There can be no assurance that future competition will not
have a material adverse effect on the Company's results of operations, financial
condition or business.
RISK OF PRODUCT-RELATED CLAIMS
Certain of the Company's products provide applications that relate to
financial records, patient medical records and treatment plans. Any failure of
the Company's products to provide accurate, confidential and timely information
could result in product liability or breach of contract claims against the
Company by its clients, their patients or others. The Company's products manage
and report on financial data, and any errors in such financial data could result
in liability to the Company. In addition, because the Company's products
facilitate electronic claims submissions, any resulting loss of financial data
could result in liability to the Company. The Company maintains insurance to
protect against claims associated with the use of its products, but there can be
no assurance that such insurance coverage will be available or, if available,
will adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's results of operations, financial
condition or business. Even unsuccessful claims could result in the expenditure
of funds in litigation, as well as diversion of management time and resources.
There can be no assurance that the Company will not be subject to product
liability or breach of contract claims, that such claims will not result in
liability in excess of its insurance coverage, that the Company's insurance will
cover such claims or that appropriate insurance will continue to be available to
the Company in the future at commercially reasonable rates.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of the
executive officers and the senior management of the Founding Companies.
Furthermore, the Company will likely be dependent on the senior management of
any businesses acquired in the future. If any of these persons becomes unable or
unwilling to continue in his or her role with the Company, or if the Company is
unable to attract and retain other qualified employees, the Company's business
or prospects could be adversely affected. Although the Company has entered into
an employment agreement, which includes confidentiality and non-compete
provisions, with each of the Company's executive officers, there can be no
assurance that any individual will continue in his present capacity with the
Company for any particular period of time. The success of the Company is also
dependent to a significant degree on its ability to attract, motivate and retain
highly skilled sales, marketing and technical
19
<PAGE> 22
personnel, including software programmers and systems architects skilled in the
computer language with which the Company's products operate. Competition for
such personnel in the software and information services industries is intense.
The loss of key personnel or the inability to hire or retain qualified personnel
could have a material adverse effect on the Company's results of operations,
financial condition or business. Although the Company has been successful to
date in attracting and retaining skilled personnel, there can be no assurance
that the Company will continue to be successful in attracting and retaining the
personnel it requires to successfully develop new and enhanced products and to
continue to grow and operate profitably.
UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT HEALTH CARE REFORM PROPOSALS
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company's products
are designed to function within the structure of the health care financing and
reimbursement system currently being used in the United States. During the past
several years, the health care industry has been subject to increasing levels of
government regulation of, among other things, reimbursement rates and certain
capital expenditures. From time to time, certain proposals to reform the health
care system have been considered by Congress. These proposals, if enacted, may
increase government involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Health
care organizations may react to these proposals and the uncertainty surrounding
such proposals by curtailing or deferring investments, including those for the
Company's products and services. The Company cannot predict with any certainty
what impact, if any, such proposals or health care reforms might have on its
results of operations, financial condition or business.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION
The U.S. Food and Drug Administration (the "FDA") has jurisdiction under
the 1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act
(the "FDA Act") to regulate computer products and software as medical devices if
they are intended for use in the diagnosis, cure, mitigation, treatment or
prevention of disease in humans. The FDA has issued a final rule under which
manufacturers of certain medical image devices and related software are required
to submit to the FDA premarket notification applications and otherwise comply
with the requirements of the FDA Act applicable to medical devices.
The Company is distributing in the United States a medical image management
device (the "image module"), which was cleared by the FDA on April 4, 1997 and
is manufactured by a third party in accordance with the specifications set forth
in the cleared 510(k). The Company has created an interface between The Medical
Manager practice management system and the image module and is marketing the
interface and the image module as the Document Image Management System. The
Company believes that the addition of the Company's practice management system
to the image module does not change the image module's intended use or
significantly change the product such that a new 510(k) is required.
The FDA is currently reviewing its policy for the regulation of computer
software and there is a risk that The Medical Manager software could in the
future become subject to some or all of the above requirements, which could have
a material adverse effect on the Company's results of operations, financial
condition or business.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's directors, executive officers and holders of more than 5% of
the Common Stock beneficially own approximately 38.8% of the outstanding shares
of Common Stock as of December 31, 1998. Although these persons do not presently
have any agreements or understandings to act in concert, any such agreement or
understanding could allow them to continue to exercise substantial control over
the Company's affairs, to substantially influence the election of the entire
Board of Directors and to substantially control the disposition of any matter
submitted to a vote of stockholders.
20
<PAGE> 23
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the Common Stock in the
public market. The 6,000,000 shares sold in the IPO are freely tradable unless
held by affiliates of the Company. Simultaneously with the closing of the IPO,
the stockholders of the Founding Companies received, in the aggregate 11,705,470
shares of Common Stock as a portion of the consideration for the sale of their
businesses to the Company. These shares were not registered under the Securities
Act of 1933, as amended (the "Securities Act") and, therefore, may not be sold
unless registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. The stockholders who
received these shares also have certain demand and piggyback registration rights
with respect to these shares. In April 1998, 1,000,000 of the 11,705,470 shares
were registered and sold by the stockholders during the completion of the
Company's second underwritten public offering ("SPO") of Common Stock. These
shares are now freely tradable unless held by affiliates of the Company. Of the
2,500,000 shares offered to the public in the SPO, the remaining 1,500,000 were
sold by the Company and are freely tradable unless held by affiliates of the
Company. The Company has also registered 5,000,000 shares of Common Stock which
may be used in connection with future acquisitions. Such shares shall, upon
issuance thereof, be freely tradeable, unless acquired by parties in connection
with an acquisition by the Company or affiliates thereof, other than the issuer,
in which case they may be sold pursuant to Rule 145 under the Securities Act. In
addition, resale of these shares may be contractually restricted.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations in response to numerous factors, including variations in the annual
or quarterly financial results of the Company or its competitors, changes by
financial research analysts in their estimates of the earnings of the Company,
conditions in the economy in general or in the health care or technology sectors
in particular, announcements of technological innovations or new products or
services by the Company or its competitors, proprietary rights development,
unfavorable publicity or changes in applicable laws and regulations (or judicial
or administrative interpretations thereof) affecting the Company or the health
care or technology sectors. Moreover, from time to time, the stock market
experiences significant price and volume volatility that may affect the market
price of the Common Stock for reasons unrelated to the Company's performance.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
in one or more series without stockholder action. The existence of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, the Company's Certificate of
Incorporation (the "Certificate of Incorporation") provides for a classified
Board of Directors, which may also have the effect of inhibiting or delaying a
change in control of the Company. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. The Company's By-laws contain other
provisions that may have an anti-takeover effect.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at 3001 North Rocky
Point Drive East, Tampa, Florida. The Company's research and development
facilities are located in Alachua, Florida. The Company also maintains national
sales and support offices in Mountain View, California, and has 58 additional
offices in various regions of the country.
The Company leases the majority of its properties with remaining terms
between one and six years. Six of the Company's facilities are owned. The
Company believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.
21
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit was brought against the Company alleging Year 2000
issues regarding The Medical Manager software in versions prior to Version 9.0.
Seven additional lawsuits were also brought against the Company, each purporting
to sue on behalf of those similarly situated and raising essentially the same
issues. In December 1998, the Company preliminarily entered into an agreement to
settle the class action lawsuit, as well as five of the seven other similar
cases. The settlement created a settlement class of all purchasers of Version 7
and 8 and upgrades to Version 9 of The Medical Manager software, and released
the Company from Year 2000 claims arising out of the sales of these versions of
the Company's product. Under the terms of the settlement, Version 8.12,
containing the Company's upgraded Version of 8.11 software in addition to the
Year 2000 patch, will be licensed without a license fee to Version 7 and 8 users
who participate in the settlement. In addition, the settlement also provides
that participating users who purchased a Version 9 upgrade will have the option
to obtain one of four optional modules from the Company without a license fee,
or to elect to take a share of a settlement cash fund. The settlement required
the Company to make a cash payment of $1.455 million. The settlement was
approved by the District Court of New Jersey on March 15, 1999. Pursuant to the
settlement, the Company was released from liability due to the Year 2000
non-compliance of Versions 7 and 8 by all users of Versions 7 and 8 except 29
users who "opted-out" of the class settlement.
The Company has received notice of a lawsuit which was filed against the
Company and certain of its officers and directors, among other parties, on
October 23, 1998 in the United States District Court for the Middle District of
Florida. The lawsuit, styled George Ehlert, et al. vs. Michael A. Singer, et
al., purports to bring an action on behalf of the plaintiffs and others
similarly situated to recover damages for alleged violations of the federal
securities laws and Florida laws arising out of the Company's issuance of
allegedly materially false and misleading statements concerning its business
operations, including the development and sale of its principal product, during
the class period. An amended complaint was served on March 2, 1999. The class
period is alleged to be between April 23, 1998 and August 5, 1998. The lawsuit
seeks, among other things, compensatory damages in favor of the plaintiffs and
the other purported class members and reasonable costs and expenses. The Company
believes that this lawsuit is without merit and intends to vigorously defend
against it.
The Company is from time to time involved in other routine litigation
incidental to the conduct of its business. The Company believes that no such
currently pending routine litigation to which it is party will have a material
adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
On January 30, 1997, the Company's Common Stock began trading on the Nasdaq
National Market under the symbol "MMGR". Prior to such date, there was no
established trading market for the Company's Common Stock. The initial public
offering price per share of Common Stock was $11.00. On March 19, 1999, the
closing price of the Common Stock on the Nasdaq National Market was $23.0625.
The following table reflects the range of high and low selling prices of the
Company's Common Stock by quarter, for each quarter since the Company's initial
public offering.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Quarter Ended March 31, 1997 (since 1/30/97)................ $11.125 $9.125
Quarter Ended June 30, 1997................................. 15.375 8.000
Quarter Ended September 30, 1997............................ 21.625 14.750
Quarter Ended December 31, 1997............................. 21.125 15.500
Quarter Ended March 31, 1998................................ 29.625 17.250
Quarter Ended June 30, 1998................................. 31.875 20.750
Quarter Ended September 30, 1998............................ 30.000 12.625
Quarter Ended December 31, 1998............................. 31.750 18.500
</TABLE>
HOLDERS
As of March 19, 1999, there were approximately 207 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company did not pay any dividends during the year ended December 31,
1998. The Company intends to retain all of its earnings to finance the expansion
of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's line of credit
agreement with NationsBank of Tampa dated January 14, 1998 includes restrictions
on the ability of the Company to pay dividends without the consent of the
lender.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data reflects the results of
MMC, MMR&D and the Acquired Companies through February 4, 1997, the date of
MMC's acquisition of the Founding Companies, after which the historical
financial statements reflect the results of MMC, MMR&D, the Acquired Companies,
and the Founding Companies other than MMR&D (the "Other Founding Companies").
The results of the Purchased Companies are reflected subsequent to their
respective acquisition date. The selected historical financial data at December
31, 1995, 1996, 1997, and 1998 and for the years ended December 31, 1995, 1996,
1997, and 1998 have been derived from the financial statements of MMC, MMR&D and
the Acquired Companies, the majority of which were audited. The selected
historical financial data at December 31, 1994 has been derived from the audited
financial statements of MMR&D and the unaudited financial statements of the
Acquired Companies. The selected historical financial data for the year ended
December 31, 1994 has been derived from the unaudited financial statements of
MMR&D and the Acquired Companies.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
Revenue......................................... $135,912 $91,828 $48,888 $43,712 $37,708
Cost of revenue................................. 67,598 45,582 25,147 23,378 19,353
-------- ------- ------- ------- -------
Gross profit.................................... 68,314 46,246 23,741 20,334 18,355
Selling, general and administrative expenses.... 34,877 26,450 14,560 12,183 10,854
Year 2000 litigation expenses................... 2,366 -- -- -- --
Research and development expenses............... 4,506 3,170 2,672 2,048 1,525
Depreciation and amortization................... 3,488 1,688 661 692 630
-------- ------- ------- ------- -------
Income from operations.......................... 23,077 14,938 5,848 5,411 5,346
Interest expense................................ (170) (288) (200) (239) (186)
Interest income................................. 1,571 610 119 144 73
Other income (expense).......................... (39) 110 (570) (2) (5)
-------- ------- ------- ------- -------
Income before income taxes...................... 24,439 15,370 5,197 5,314 5,228
Income taxes.................................... 8,666 5,678 9 26 19
-------- ------- ------- ------- -------
Net income...................................... $ 15,773 $ 9,692 $ 5,188 $ 5,288 $ 5,209
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital................................. $ 58,214 $ 6,947 $ (726) $ (56) $ (538)
Total assets.................................... 120,386 61,351 14,273 15,058 13,383
Long-term obligations........................... 2,243 4,224 2,672 1,999 2,074
Stockholders' equity............................ 94,479 33,347 958 4,495 3,937
Basic earnings per share........................ $ 0.73 $ 0.48
Diluted earnings per share...................... $ 0.70 $ 0.47
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Item 6. Selected Financial Data"
appearing elsewhere in the report.
OVERVIEW
This filing contains forward-looking statements within the meaning of the
Private Litigation Reform Act of 1995. These statements are based on current
plans and expectations and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in
24
<PAGE> 27
the forward-looking statements. Important factors that could cause actual
results to differ include, among others, risks associated with acquisitions,
fluctuations in operating results because of acquisitions and variations in
stock prices, Year 2000 compliance issues, changes in government regulations,
competition, risks of operations, and growth of the newly acquired businesses.
Medical Manager Corporation's management is optimistic about the Company's
long-term prospects, however, in considering or evaluating the growth outlook of
the Company, it is important to read in conjunction with the following
discussion the Risk Factors identified in "Item 1. Business" of this document.
The Company is a leading provider of comprehensive physician management
systems to independent physicians, physician groups, MSOs, IPAs, PPM's, managed
care organizations, and other providers of health care services in the United
States. The Company's revenue is derived primarily from the licensing of its
core product, The Medical Manager practice management software, the furnishing
of value-added services and the sale of hardware. The Company's primary focus is
on the sale and support of The Medical Manager software and services, while
hardware is sold primarily in response to customer demand. Since the development
of The Medical Manager system in 1982, the Company's installed base has grown to
over 24,000 client sites, making it the most widely installed physician practice
management software in the United States.
The Company derives revenue from systems sales, software licensing and
maintenance and other services. Systems sales include sales of The Medical
Manager physician practice management system to new customers, sales of The
Medical Manager system upgrades and add-ons to existing customers, and sales of
The Medical Manager software licenses to independent dealers. Systems sales to
new customers include software licensing, hardware, installation, training, 90
days of software warranty, and varying periods of hardware maintenance,
depending on the warranty of the manufacturer. System upgrades and add-ons
include software licensing, peripheral hardware, installation, and training.
Software license sales to independent dealers include software serializations
and other services included in independent dealer agreements. Cost of system
sales reflects primarily the cost of The Medical Manager software, associated
hardware, operating systems, salaries, related benefits, as well as travel and
allocations of other overhead costs.
Maintenance and other revenue includes software and hardware maintenance
contracts, additional training, programming, and sales of additional associated
products and services such as forms, electronic data interchange (EDI) services,
and other products and services not included in system sales. Software
maintenance represents revenue derived from maintenance agreements, providing
customers with updates and enhancements developed by the Company, and access to
the Company's telephone support centers. Hardware maintenance represents revenue
derived from maintenance agreements for repairs and preventative maintenance to
the hardware. Both hardware and software maintenance are optional to the
customer for smaller installations and required for MSO and larger
installations. EDI services revenue includes revenues derived from transaction
fees, access fees, and rebates associated with the MMNS initiative. Cost of
maintenance contracts revenue reflects primarily salaries and related benefits,
travel, and allocations of other overhead costs, as well as costs of services
and goods related to the delivery of the MMNS products.
Revenue from software license is recognized upon sale and shipment. For the
years ended December 31, 1997 and 1996, revenue from the sale of systems was
recognized when the system was installed and when the related client training
was completed, as established in Statement of Position 91-1, Software Revenue
Recognition. Beginning January 1, 1998, revenue from the sale of systems is
recognized in accordance with Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"). SOP 97-2 requires the total contract revenue to be
allocated to the various elements of the contract based upon objective evidence
of the fair values of such elements and allows for only the allocated revenue to
be recognized upon completion of those elements. The effect of the adoption of
SOP 97-2 was not significant to the Company's results of operations for the year
ended December 31, 1998. Amounts billed in advance of recognized revenue are
deferred. Revenue from support and maintenance contracts is recognized as the
services are performed ratably over the contract period, which typically does
not exceed one year. Revenue from other services are recognized as they are
provided. Certain expenses are allocated between the cost of sales for systems
and maintenance and other based upon management's estimates.
25
<PAGE> 28
Selling, general and administrative expenses consist primarily of marketing
and advertising, salaries and related benefits, professional fees,
administrative costs and allocations of other overhead costs based on
management's estimates.
Research and development expenses represent salaries, related benefits
expenses, and allocations of other overhead costs associated with research and
development activities. Software development costs are included in research and
development and are expensed as incurred. Statement of Financial Accounting
Standards No. 86 requires the capitalization of certain software development
costs once technological feasibility is established. The capitalized cost is
then amortized over the estimated product life. The period between achieving
technological feasibility and the general availability of such software is short
and software development costs qualifying for capitalization are insignificant.
As a professional sales and value-added services organization, the Company
responds to the product opportunities and service demands from its clients.
Accordingly, the Company has limited control over the timing and circumstances
under which its products and services are provided. Therefore, the Company can
experience volatility in its operating results from quarter to quarter and year
to year. The operating results for any quarter or year are not necessarily
indicative of the results for any future periods.
RESULTS OF OPERATIONS
The financial information referenced below includes MMC, MMR&D and the
Acquired Companies through February 4, 1997, the date of MMC's merger with the
Founding Companies, after which the financial information referenced below
reflects the results of MMC, MMR&D, the Acquired Companies, and the Other
Founding Companies. The results of the Purchased Companies are reflected
subsequent to their respective acquisition dates.
SEGMENT INFORMATION
In 1998, the Company adopted SFAS 131. The segment information below
presents the Company's three reportable segments -- (1) Research & Development,
(2) Sales & Marketing and (3) Dealer Network, which represents the Company-owned
dealers.
The Company is organized primarily on the basis of the production,
distribution and service processes broken into nine production or distribution
units. Six of the distribution and service units have been aggregated into the
"Dealer Network" segment. These units derive their revenue from the sale and
service of The Medical Manager software. The "Sales & Marketing" unit consists
of a single distribution and service unit and derives its revenue from the sale,
licensing and distribution of The Medical Manager software to the Dealer Network
segment and the independent dealer network. Two of the production units have
been aggregated to form the "Research & Development" segment. These units derive
their revenue primarily from license royalties fees for The Medical Manager
software and other software packages.
The accounting policies of the segments are the same as those described in
"Management Discussion and Analysis: Overview." Segment data includes
intersegment revenues. Revenues and net income reported in the Research &
Development segment and the Sales & Marketing segment are derived primarily from
intersegment sales. The Dealer Network segment purchases software and licenses
from the Sales & Marketing segment, which recognizes these sales as revenue. The
Research & Development segment then collects royalties from the Sales &
Marketing segment as it's primary source of revenues. Sales to the Dealer
Network segment by the Sales & Marketing segment are made at the same wholesale
price sold to independent dealers. Royalties to the Research & Development
segment are based on royalty agreements with Sales & Marketing. The Company
evaluates the performance of all three of its segments based on revenues and net
income, and additionally, it evaluates the Dealer Network on operating margins.
26
<PAGE> 29
REVENUES
The following table reflects actual revenues for the Company's primary
business lines (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Systems..................................................... $ 87.3 $55.0 $32.2
Maintenance and other....................................... 48.6 36.8 16.7
------ ----- -----
Total............................................. $135.9 $91.8 $48.9
====== ===== =====
Systems percentage of total................................. 64.2% 59.9% 65.9%
Maintenance and other percentage of total................... 35.8% 40.1% 34.1%
</TABLE>
SEGMENT REVENUES
The following table reflects actual revenues for the Company's segments (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Research & Development...................................... $ 22.9 $15.7 $12.0
Sales & Marketing........................................... 22.9 17.1 0.0
Dealer Network.............................................. 115.2 72.1 38.3
Other and elimination of intersegment sales................. (25.1) (13.1) (1.4)
------ ----- -----
Consolidated................................................ $135.9 $91.8 $48.9
====== ===== =====
</TABLE>
Dealer Network
The increase in systems revenue between the years ended December 31, 1998
and December 31, 1997 was due to the growth of the Dealer Network as a whole,
the inclusion of the Purchased Companies from their respective acquisition date,
and the inclusion of three of the Other Founding Companies beginning on February
5, 1997.
An increase in systems sales volume from upgrades, combined with an
increase in the size of individual systems projects, were contributing factors
in the Dealer Network's systems revenue growth in 1998. The Dealer Network has
experienced an increase in upgrade sales in the current year due to the release
of Version 9 of The Medical Manager software in November of 1997. The previous
version of The Medical Manager software, Version 8, was released in 1993. The
Dealer Network continues to penetrate its base of smaller physician groups and
sole practitioners. The Dealer Network also continues to secure more MSO and
large IPA contracts, which have a greater average revenue per sale. The
Company's Enterprise Business Group ("EBG"), which specifically targets
national/regional clients, recently obtained contracts from which $6.8 million
of revenue was recognized in the year ended December 31, 1998. By comparison,
$3.5 million of revenue was recognized on EBG sales in the year ended December
31, 1997.
In addition, the Purchased Companies were reflected in the financial
statements subsequent to their respective date of acquisition. The largest of
the Purchased Companies, Companion Technologies of Florida, Inc. and Companion
Technologies of Texas, were acquired on December 31, 1997, thus contributing no
results of operations for the year ended December 31, 1997. Together they
contributed $7.0 million of system revenues for the year ended December 31,
1998. The remaining 1997 Purchased Companies occurred prior to December 31,
1997, thus their results of operations are reflected in the year ended December
31, 1997, subsequent to their respective acquisition date. In addition, the 1998
Purchased Companies are reflected solely in 1998, subsequent to their respective
acquisition date. Finally, three of the Other Founding Companies are included
beginning February 5, 1997.
The increase in systems revenue between the years ended December 31, 1997
and December 31, 1996 was primarily due to the inclusion of three of the Other
Founding Companies beginning on February 5, 1997. For the year ended December
31, 1997, the three Other Founding Companies and the Acquired Companies
contributed approximately $9.0 million, net of EBG sales, to the increase over
1996. The Dealer Network recognized $3.5 million in EBG systems sales in the
year ended December 31, 1997, while no EBG sales were recognized in 1996 since
the EBG group was not formed until 1997. Finally, 12 of the Purchased Companies
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<PAGE> 30
were completed in 1997 and their revenues were included subsequent to their
respective acquisition date. There were no material purchases completed during
the year ended 1996.
The increase in maintenance and other revenue in the year ended December
31, 1998 over the year ended December 31, 1997 was also due to the growth of the
Dealer Network as a whole, the inclusion of the Purchased Companies subsequent
to their respective acquisition date and the inclusion of three of the Other
Founding Companies beginning on February 5, 1997. For the year ended December
31, 1998, Companion Technologies of Florida, Inc. and Companion Technologies of
Texas, both purchased on December 31, 1997, together contributed $4.1 million of
maintenance and other revenue. Also, the three Other Founding Companies are
included beginning February 5, 1997.
The increase in maintenance and other revenue between the year ended
December 31, 1997 and December 31, 1996 was primarily due to the inclusion of
three of the Other Founding Companies beginning on February 5, 1997. For the
year ended December 31, 1997, the three Other Founding Companies and the
Acquired Companies contributed approximately $11.1 million to the increase over
1996. Finally, 12 of the Purchased Companies were completed in 1997 and their
revenues were included subsequent to their respective acquisition date. There
were no purchases completed during the year ended 1996.
The Company obtains a maintenance contract for a minimum of one year with
most new systems installed. Therefore, a portion of the Company's maintenance
and other revenue is recognized later than billed. Unearned maintenance and
other revenue as of December 31, 1998 was $4.6 million and will be recognized in
future quarters. The balance of unearned revenues on the accompanying balance
sheets represents customer deposits on systems implementation projects. Revenue
on these projects will be recognized in future periods as the implementation of
the system is completed.
The shift towards a greater percentage of systems sales during the year
ended December 31, 1998 was primarily due to the significant increase in EBG
sales and Version 9 upgrade sales. A large percentage of EBG sales revenues are
from the software and installation of the hardware and software rather than from
the maintenance of the software. The shift towards maintenance and other revenue
as a percentage of sales evident between 1997 and 1996 was primarily due the
inclusion of the Other Founding Companies beginning February 5, 1997. Three of
the Other Founding Companies, included in the Dealer Network segment, have a
greater percentage of sales from maintenance and other than do the Research &
Development and Sales & Marketing segments which obtain the majority of their
revenues from the licensing of The Medical Manager software, which is included
in systems revenue.
Sales & Marketing
The increase in revenues for the Sales & Marketing segment from 1997 to
1998 was primarily the result of an overall increase in the volume of licenses
sold to the independent dealers and to the Dealer Network segment. The volume of
licenses has increased primarily due to the growth of the Dealer Network as a
whole and the release of Version 9 of The Medical Manager software in November
of 1997. The Sales & Marketing segment was acquired by MMC on February 4, 1997.
Accordingly, revenues for the year ended December 31, 1998 include a full twelve
months of results while revenues for the year ended December 31, 1997 include
revenues only from February 5, 1997. No revenues are reported for the Sales &
Marketing segment for 1996 since their acquisition occurred on February 4, 1997.
Research & Development
The increase in systems revenues for the Research & Development segment
from 1997 to 1998 was primarily a function of an overall increase in sales of
licenses through the Sales & Marketing segment, and to a lesser extent, an
increase in the pricing structure of intersegment revenues. The increase in
maintenance and other revenue for the Research & Development segment was
primarily the result of an increase in EDI revenues of $0.8 million from 1997 to
1998. The increase in systems revenues for the Research & Development segment
from 1996 to 1997 was primarily the result of an overall increase in sales of
licenses through the Sales & Marketing segment. Maintenance and other revenues
in 1997 increased over 1996 due to the Research & Development segment
recognizing approximately $1.5 million in revenue related to the completion of
project-oriented national interface and national EDI agreements which did not
exist in the year ended December 31, 1996.
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<PAGE> 31
COSTS OF REVENUES, OPERATING EXPENSES AND NON-OPERATING ITEMS
The following table reflects actual operating expenses for the Company's
primary business lines (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cost of systems revenues.................................... $40.8 $25.0 $16.5
Cost of maintenance and other revenues...................... 26.8 20.6 8.6
----- ----- -----
Total cost of revenue............................. $67.6 $45.6 $25.1
===== ===== =====
Selling, general, and administrative........................ $34.9 $26.5 $14.6
Year 2000 litigation expense................................ 2.4 0.0 0.0
Research and development.................................... 4.5 3.2 2.7
Depreciation and amortization............................... 3.5 1.7 0.7
Systems gross profit percentage............................. 53.3% 54.6% 48.6%
Maintenance and other gross profit percentage............... 44.9% 44.0% 48.5%
Total gross profit percentage..................... 50.3% 50.4% 48.6%
</TABLE>
COSTS OF REVENUES
Dealer Network
The increase in systems cost of revenue for the year ended December 31,
1998 was due to the growth of systems revenue from the Dealer Network as a
whole, including EBG sales, and the inclusion of the Purchased Companies after
their respective acquisition dates. The largest of the Purchased Companies,
Companion Technologies of Florida, Inc. and Companion Technologies of Texas,
were acquired on December 31, 1997. For the year ended December 31, 1998,
Companion Technologies of Florida, Inc. and Companion Technologies of Texas
together contributed $5.5 million of system cost of revenue. The growth in
maintenance cost of revenue in 1998 was primarily due to the inclusion of the
Purchased Companies subsequent to their respective acquisition date. Companion
Technologies of Florida, Inc. and Companion Technologies of Texas contributed
$2.1 million of maintenance and other cost of revenue during the year ended
December 31, 1998.
The increase in systems cost of revenue between the years of 1997 and 1996
was primarily due to the inclusion of three of the Other Founding Companies
beginning on February 5, 1997. For the year ended December 31, 1997, the three
Other Founding Companies and the Acquired Companies contributed approximately
$6.2 million to the increase of system cost of revenue. The increase in
maintenance and other cost of revenue was also primarily due to the inclusion of
three of the Other Founding Companies. For the year ended December 31, 1997, the
three Other Founding Companies and the Acquired Companies contributed
approximately $9.6 million to the increase in maintenance and other costs of
revenue.
For the year ended December 31, 1998, systems gross profit percentage
declined due to the inclusion of Companion Technologies of Florida, Inc. and
Companion Technologies of Texas for 1998 which had a lower gross profit
percentage on systems sales than the Dealer Network as a whole. Systems gross
profit increased from 1996 to 1997 primarily due to gained efficiencies in the
Acquired Companies and the inclusion of EBG sales, which carry a greater gross
profit margin, in 1997. Maintenance and other gross profit percentage increased
in the year ended December 31, 1998 due to the allocation of costs to a larger
basis of revenue. Also contributing to the increase in maintenance and other
gross profit percentage was the inclusion of Companion Technologies of Florida,
Inc. and Companion Technologies of Texas in the year ended December 31, 1998,
both providing a maintenance and other gross profit percentage at a rate greater
than the Dealer Network contributed in the year ended December 31, 1997.
Systems gross profit percentage decreased for the Company as a whole as a
result of changes in the sales mix of the Company. The Company has grown
primarily from sales to end-users, which produce less gross profit percentage
than revenues from licensing. Maintenance and other gross profit percentage
declined between the years ended December 31, 1996 and 1997 due to the inclusion
of the Other Founding Companies,
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<PAGE> 32
which maintained a lower gross profit percentage on maintenance and other sales
than did the Research & Development segment.
Sales & Marketing
The increase in the Sales & Marketing's cost of systems revenue and cost of
maintenance and other cost of revenue from 1997 to 1998 was primarily the result
of a corresponding increase in systems sales and maintenance and other revenues.
The systems gross profit margin and the maintenance and other gross profit
margin remained relatively consistent between 1997 and 1998. No cost of systems
revenues or of maintenance and other revenues are reported for the Sales &
Marketing segment for 1996 since their acquisition occurred on February 4, 1997.
Research & Development
The increase in the Research & Development segment's systems costs of
revenues from 1997 to 1998 and from 1996 to 1997 was the result of a
corresponding increase in systems revenues. The systems gross profit percentage
for the Research & Development segment remained relatively consistent from year
to year. The increase in the Research & Development segment's maintenance and
other costs of revenues from 1997 to 1998 and from 1996 to 1997 was primarily
the result of a corresponding increase in maintenance and other revenues,
coupled with an increase in the initial start-up costs of the segment's EDI
initiative. These start-up costs caused the maintenance and other gross profit
margin to decrease slightly over the two years ended December 31, 1998 and 1997.
OPERATING EXPENSES
For the year ended December 31, 1998, the increase in selling, general and
administrative expenses was attributable to the growth of the Company as a
whole, the inclusion of the Other Founding Companies, and the inclusion of the
Purchased Companies from their respective date of acquisition. While each
segment's selling, general and administrative expenses increased during 1998,
selling, general and administrative expenses as a percentage of sales decreased.
For the Company as a whole, selling, general and administrative expenses as a
percentage of sales decreased to 25.7% in 1998 from 28.8% in 1997 due to the
Company benefitting from certain efficiencies, including the consolidation of
various operations and office space.
The Year 2000 litigation expenses represent a one-time charge for the
settlement of six of the eight lawsuits brought against the Company during 1998
alleging Year 2000 issues with previous versions of The Medical Manager
software. The settlement created a settlement class of all purchasers of Version
7 and 8 and upgrades to Version 9 of The Medical Manager software, and released
the Company from Year 2000 claims arising out of the sales of these version of
the Company's product. Under the terms of the settlement, Version 8.12,
containing the Company's upgraded Version of 8.11 software in addition to the
Year 2000 patch, will be licensed without a license fee to Version 7 and 8 users
who participate in the settlement. In addition, the settlement also provides
that participating users who purchased a Version 9 upgrade will have the option
to obtain one of four optional modules from the Company without a license fee,
or to elect to take a share of a settlement cash fund. The settlement required
the company to make a cash payment of $1.455 million. The Year 2000 expense
represents this $1.455 million cash settlement plus expenses related to legal
fees and estimated costs of installing the patch product for various customers.
The increase in research and development expenses of $1.3 million in the
year ended December 31, 1998 and $.5 million in the year ended December 31, 1997
resulted from investments in new research and development projects focusing on
(i) graphical user interface and relational database technologies for use in
future versions of The Medical Manager software; (ii) significant enhancements
in the development of the MSO Enterprise Manager modules; (iii) enhancements of
an electronic medical records module; (iv) EDI modules for focusing on
pharmaceutical formularies and laboratories; and (v) new web-based products.
Depreciation and amortization increased in the year ended December 31, 1998
and in the year ended December 31, 1997 from increased amortization of goodwill
from the Purchased Companies. To a lesser
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<PAGE> 33
degree, depreciation expense also increased due to additional capital equipment
required for operational initiatives and general infrastructure improvements.
NON-OPERATING ITEMS
Interest income consisted primarily of interest earned from the investment
of the proceeds from the IPO and the Company's SPO of Common Stock, which
occurred in April 1998. Interest expense is from notes issued and assumed in
connection with the mergers and the acquisitions of the Acquired Companies and
the Purchased Companies.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain selected statements of cash flow
information for the periods presented (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Net cash provided by operations............................. $11.9 $ .2 $ 7.8
Net cash used in investing activities....................... (7.9) (14.2) (.5)
Net cash provided by (used in) financing activities......... 38.7 17.8 (6.2)
----- ------ -----
Net increase in cash and cash equivalents................. $42.7 $ 3.8 $ 1.1
===== ====== =====
</TABLE>
Substantially all of the cash provided by operating activities for 1998
resulted from net income of $15.8 million and an increase in accounts payable
and accrued expenses of $2.9 million, reduced by an increase in accounts
receivable of $10.2 million. The increase in accounts payable and accrued
expenses primarily is the result of the accrual of the unpaid Year 2000
litigation expenses of approximately $2.1 million. The increase in accounts
receivable is primarily due to the significant growth in the volume of sales,
coupled with the fact that there has been a shift to a greater percentage of
sales to end-users, which have an extended period of collection as compared to
sales to dealers.
Investing activities included the purchase of approximately $3.9 million of
property and equipment and the payment of approximately $4.1 million for certain
of the Purchased Companies acquired during 1998.
Cash flows from financing activities results primarily from proceeds of
approximately $42.3 million from the Company's SPO in April 1998. In addition,
there were proceeds of approximately $2.0 million from the issuance of stock in
connection with the exercise of the Company's stock options granted to
employees. Finally, there were payments of approximately $5.3 million on the
debt assumed in connection with the Acquired Companies and the Purchased
Companies.
For the year ended December 31, 1997, substantially all of the net cash
generated by operating activities resulted from net income of $9.7 million,
reduced by the increase in accounts receivable of $5.9 million, the decrease of
accounts payable of $1.9 million, and the decrease of customer deposits and
deferred revenue of $1.1 million. The increase in accounts receivable is
primarily due to the significant growth in the volume of sales, coupled with the
fact that there has been a shift to a greater percentage of sales to end-users,
which have an extended period of collection as compared to sales to dealers. The
decrease in accounts payable and accrued expenses includes $1.4 million in
accounts payable of the Other Founding Companies as well as a general reduction
in payable days outstanding for the Acquired Companies and Purchased Companies.
The customer deposits and deferred maintenance revenue decrease of $1.1 million
stems primarily from the mergers and acquisitions in the year ended December 31,
1997. The Purchased Companies and Acquired Companies, on the date acquired, had
customer deposits and deferred maintenance balances of $2.5 million greater than
at December 31, 1997, relating primarily to the timing of revenue recognition.
In addition, MMR&D had increased customer deposits of $0.4 million at December
31, 1996 over December 31, 1997, also the result of timing issues.
Investing activities included the purchase of $1.3 million of fixed assets
in the ordinary course of business and amounts paid for the Other Founding
Companies and the Purchased Companies of $13.2 million.
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<PAGE> 34
Cash flows from financing activities includes cash flows from the IPO,
payments of debt acquired from the Founding Companies as well as the Acquired
and Purchased Companies, and payments of dividends by MMR&D in 1997 prior to the
IPO. On February 4, 1997, the Company completed the IPO of 6,000,000 shares of
Common Stock, resulting in net proceeds of approximately $58.4 million.
Approximately $46.9 million of the net proceeds were used to pay the cash
portion of the purchase price for the Founding Companies, including $35.0
million paid to MMR&D. Payments on notes payable include the payment, in full,
of the $5.7 million of the assumed debt of the Acquired and Purchased Companies.
In addition, $2.0 million was paid on debt issued in connection with the
purchase of one of the Purchased Companies. Lastly, cash dividends paid by MMR&D
and the Acquired Companies prior to the IPO and their respective purchase dates
total $3.1 million.
For the year ended 1996, the Company generated net income of $5.2 million.
Combined with the adjustments to reconcile net income to cash and an increase in
accounts payable and accrued expenses, operating activities added $7.8 million
to cash flows. Accounts receivable increased $.7 million as a result of the
revenue increase from 1995 to 1996. Customer deposits and deferred maintenance
liabilities increased $1.7 million from 1995 to 1996 as a result of timing of
jobs in progress at December 31, 1996 for the Acquired Companies. Also, MMR&D
had customer deposits of $0.4 million greater at December 31, 1996 than at
December 31, 1995 as a result of timing issues. Investing activities reflect the
substantial completion of the facilities built by MMR&D in the prior years.
Financing activities include dividends paid by MMR&D and other Acquired
Companies to their stockholders.
On January 14, 1998, the Company entered into a $10.0 million line of
credit agreement with NationsBank of Tampa. The line of credit matures on May
31, 1999. The line of credit bears interest at Prime or LIBOR, at the election
of the borrower, plus an applicable margin, as defined in the agreement. This
debt instrument is due on demand. The agreement contains customary events of
default and a number of customary covenants including certain financial ratios
and restrictions on dividends. No amounts were outstanding on this line of
credit as of December 31, 1998.
The Company's cash and cash equivalents equaled $49.6 million at December
31, 1998. 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. These cash equivalents are predominately in
U.S. dollar domestic tax free municipal instruments.
The Company believes the net proceeds from the sale of Common Stock in the
SPO in April 1998, together with existing cash and cash equivalents and future
funds generated from operations will provide adequate cash to fund its
anticipated cash needs at least through the next twelve months. The Company's
cash and cash equivalents are expected to be used to repay acquisition-related
indebtedness, for possible future acquisitions and for working capital and other
general corporate purposes. The Company's cash and cash equivalents are also
managed to be available for strategic investment opportunities or other
potential cash needs that may arise in the pursuit of the Company's long-term
strategies.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 issue
relates to whether computer systems will properly recognize and process
information relating to dates in and after the year 2000. These systems could
fail or produce erroneous results if they cannot adequately process dates beyond
the year 1999 and are not corrected. Significant uncertainty exists in the
software industry concerning the potential consequences that may result from the
failure of software to adequately address the Year 2000 issue.
NON-PROPRIETARY (INTERNAL) SOFTWARE AND HARDWARE
The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties with which the Company deals
nationwide. The Company has undertaken a program, headed by a four-person Year
2000 Compliance Team, to determine that its systems will operate smoothly as the
year 2000 approaches. This process began with an inventory of the systems vital
to the Company's
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<PAGE> 35
operations to identify those that may be affected by the Year 2000 issue. In
addition, third party vendors and business partners which the Company relies
upon have been asked to confirm that their systems will be Year 2000 compliant.
All critical systems have been assessed and a prioritized implementation
schedule has been defined for upgrading those systems which are not currently
Year 2000 compliant. The critical systems recognized by the Year 2000 Compliance
Team included financial and accounting systems, human resource systems, customer
support call management systems, telecommunications systems, commercial general
and administrative software used internally, hardware systems, and other
databases including enrollment and serialization databases.
FINANCIAL AND ACCOUNTING SYSTEMS. In the second quarter of 1998, the
Company purchased a Year 2000 compliant version of its financial and accounting
software. All subsidiaries of the Company have been using the Year 2000
compliant version of the accounting system since that time. The cost of the
upgrade of the accounting systems was insignificant and, in accordance with
Company policy, was capitalized to be amortized over its appropriate life.
HUMAN RESOURCE SYSTEMS. For the year ended December 31, 1998, the Company
used an outside vendor to process payroll. The Company made a decision to
internalize the payroll function by January 1, 1999. The Company's Human
Resources Department purchased a software package which is certified as Year
2000 compliant by the author, created the database for use with the software and
tested the software during the fourth quarter of 1998. The Company's payroll
went live on the new software on January 1, 1999. The cost of the new Human
Resources system and database was insignificant and, in accordance with Company
policy, was capitalized to be amortized over its appropriate life.
CUSTOMER SUPPORT CALL MANAGEMENT SYSTEMS. The Company uses a software
package to assist in recording, assigning and clearing of customer hardware and
support calls. In the second quarter of 1998, the Company purchased a new
software package, which is Year 2000 compliant, to perform these functions. The
software was tested concurrently with the Company's previous support call
management software for one month and is now in use by four subsidiaries of the
Company. The Company intends to have all subsidiaries on the new call management
system by the end of 1999. The Company's previous support software was earmarked
for replacement without regard for the Year 2000 issue and thus the cost of the
system is not considered a part of the Company's costs of Year 2000 compliance.
TELECOMMUNICATIONS SYSTEMS. Telecommunications systems of the Company
include not only voice communications, but significant data communications
systems such as e-mail and an internal network providing each subsidiary access
to servers located at the corporate offices. In October 1998, the Company
selected a single national vendor for all voice and data communications
throughout the Company. This vendor has provided a statement of their Year 2000
general plan which provides for a March 31, 1999 target completion date to be
completely Year 2000 compliant. The implementation of the new system is expected
to save the Company approximately $0.5 million over the next two years and thus,
the cost of the initial outlay for making the telecommunications systems Year
2000 compliant will be fully recovered.
VARIOUS GENERAL AND ADMINISTRATIVE SOFTWARE. As a result of the Year 2000
Compliance Team's efforts, the Company has noted that a portion of the current
in-house personal computers are known to be non-Year 2000 compliant. Some
workstations also have software programs installed which are not Year 2000
compliant. The Company has defined a minimum standard Year 2000 compliant
workstation with standardized software. The target date to have all workstations
in line with the minimum standard is March 31, 1999. Approximately 98% of this
project has been completed. The costs of upgrading all remaining workstations is
estimated to be less than $0.3 million.
OTHER DATABASES. The Year 2000 Compliance Team has recognized two critical
databases used internally by the Company. The Network Services Client Enrollment
database is currently Year 2000 compliant. The Medical Manager Software
Serialization Database is stored in an internally written database which is not
Year 2000 compliant. The Company has scheduled an upgrade of this database to
Access 97, a completely Year 2000 compliant database package, for the third
quarter of 1999. The estimated costs of this upgrade will be the cost of
salaried employees which should not exceed $50,000 per quarter through the year
1999.
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<PAGE> 36
THIRD PARTY RELATIONSHIPS. The third party relationships identified as
critical to the Company's operations are computer hardware distributors and
shipping companies. As part of a standardization initiative which began in late
1997, the Company has partnered with three national distributors to supply all
hardware and third party software products sold to clients. All three companies
have provided documents stating that they are Year 2000 compliant. In addition,
all shipping companies used by the Company and other vendors have provided
documents stating their Year 2000 readiness.
The Company intends to continue to monitor the Year 2000 compliance of its
internal software and hardware packages, telecommunications systems, and
vendors. In the event that any of the Company's systems, or any of the Company's
vendors' systems, do not meet the Year 2000 requirement by December 31, 1999,
the Company could experience difficulties, including but not limited to, in
processing sales and other financial information, customer support calls,
serializations of the Company's product, and orders of supplies from vendors.
This could have a materially adverse affect on the Company's financial position,
results of operations, or business. Although the Company expects its systems,
and its vendors' systems, to be Year 2000 compliant on or before December 31,
1999, it cannot predict the success of the Company's Year 2000 compliance
program. The Company does not anticipate problems with the Year 2000
preparedness of its internal hardware and software. If the Company experiences a
failure in its Year 2000 preparedness, the Company's contingency plan includes
the redeployment of experienced staff to address those Year 2000 compliance
issues.
PROPRIETARY (EXTERNAL SOFTWARE)
The Year 2000 issue also creates risk for the Company from problems that
may be experienced by customers of its software. While Version 9 of The Medical
Manager practice management system, which was commercially released in November
1997, is Year 2000 compliant, prior versions of the system are not. The Company
has encouraged users of pre-Version 9 versions of The Medical Manager software
to upgrade to Version 9 in order to become Year 2000 compliant. In August of
1998, the Company announced that it was developing and had begun in-house
testing of a patch that would allow its previous version, Version 8, first
released in November 1993, to handle the date change to the new century. This
patch, Version 8.12, is now available for general distribution to its
independent sales offices for installation for users of Versions 7 and 8.
However, there is no assurance that Versions 7 and 8, with or without the Year
2000 patch will not create additional issues for users of the software
including, but not limited to, additional costs for upgraded hardware,
additional costs for new operating systems and personnel training, additional
costs for conversion of Version 7 data, and the fact that Versions 7 and 8 do
not take into account current industry and regulatory requirements. Version 9
will remain the only enhanced and maintained version of the software.
A class action lawsuit was brought against the Company alleging Year 2000
issues regarding The Medical Manager software in versions prior to Version 9.0.
Seven additional lawsuits were also brought against the Company, each purporting
to sue on behalf of those similarly situated and raising essentially the same
issues. In December 1998, the Company preliminarily entered into an agreement to
settle the class action lawsuit, as well as five of the seven other similar
cases. The settlement created a settlement class of all purchasers of Version 7
and 8 and certain upgrades to Version 9 of The Medical Manager software, and
released the Company from Year 2000 claims arising out of the sales of these
versions of the Company's product. Under the terms of the settlement, Version
8.12, containing the Company's upgraded Version of 8.11 software with the Year
2000 patch, will be licensed without a license fee to Version 7 and 8 users who
participate in the settlement. In addition, the settlement also provides that
participating users who purchased a Version 9 upgrade will have the option to
obtain one of four optional modules from the Company without a license fee, or
to elect to take a share of a settlement cash fund. The settlement required the
Company to make a cash payment of $1.455 million. The settlement was approved by
the District Court of New Jersey on March 15, 1999. Pursuant to the settlement,
the Company was released from liability due to the Year 2000 non-compliance of
Versions 7 and 8 by all users of Version 7 and 8 except 29 users who "opted-out"
of the class settlement.
While the Company does not believe costs incurred by the Company to
distribute and install the Year 2000 patch will be material, there can be no
assurance that such costs will not have a material adverse effect
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<PAGE> 37
on the Company's financial condition or results of operations. Additionally,
there can be no assurance that the existence of the Year 2000 patch will not
delay or reduce the migration of users to Version 9 from earlier versions.
Further, if Version 9 or other customers experience significant difficulties as
a result of the Year 2000 issue, or if the Company encounters difficulties in
responding in a timely manner to customer requests to upgrade to Version 9,
there could be a material adverse impact on the Company's results of operations,
financial condition or business.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, effective for fiscal periods beginning after December 15,
1997. The new standard requires that comprehensive income, which includes net
income as well as certain changes in assets and liabilities recorded in common
equity, be reported in the financial statements. The Company adopted SFAS No.
130 during the year ended December 31, 1998. For the years ended December 31,
1998, 1997 and 1996 there were no components of comprehensive income other than
net income.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". In 1998, the Company adopted SFAS 131, which requires a
"management"approach of disclosing segment information. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". In February 1998, the Financial Accounting Standards
Board issued SFAS No. 132 which is effective for periods ending after December
15, 1998. The new standard revises employers' disclosures about pensions and
other postretirement benefits. For the years ended December 31, 1998, 1997 and
1996, there was no impact on the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities". SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not currently maintain any derivative investments nor does it
conduct any hedging activities, therefore, SFAS 133 is not expected to impact
the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's cash and cash equivalents are predominantly in U.S. dollar
domestic tax free municipal instruments which are not significantly affected by
changes in interest rates.
35
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the following Index to Consolidated Financial Statements. The
supplementary data is included in Part IV, Item 14. In addition, the financial
statements of four of the Founding Companies included in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 8,
1997 are incorporated herein by reference.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Report of Independent Accountants........................... 37
2. Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 38
3. Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... 39
4. Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. 40
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 41
6. Notes to the Consolidated Financial Statements.............. 42
</TABLE>
36
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Medical Manager Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a) (1) present fairly, in all material respects, the
financial position of Medical Manager Corporation and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and of their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 5, 1999, except for the second paragraph of
Note 13, the second paragraph of Note 14 and the
first paragraph of Note 14, as to which the dates
are March 2, 1999, March 15, 1999 and March 17,
1999, respectively
37
<PAGE> 40
MEDICAL MANAGER CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 49,583 $ 6,901
Accounts receivable, net of allowance of $2,413 and
$1,392, respectively................................... 27,624 17,769
Inventory................................................. 1,673 2,517
Prepaid expenses and other current assets................. 1,707 2,813
Deferred income taxes..................................... 1,291 727
-------- -------
Total current assets.............................. 81,878 30,727
PROPERTY AND EQUIPMENT, net................................. 8,888 6,724
GOODWILL AND OTHER INTANGIBLES, net......................... 28,266 23,775
OTHER ASSETS................................................ 1,354 125
-------- -------
Total assets...................................... $120,386 $61,351
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current.................................... $ 2,438 $ 5,115
Accounts payable and accrued liabilities.................. 11,855 8,582
Customer deposits and deferred maintenance revenue........ 8,350 9,466
Income taxes payable...................................... 1,021 617
-------- -------
Total current liabilities......................... 23,664 23,780
LONG-TERM OBLIGATIONS, net of current maturities............ 2,243 4,224
-------- -------
Total liabilities................................. 25,907 28,004
-------- -------
Commitments and contingencies (Notes 4, 5 and 13)
STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized, none issued
and outstanding Common stock, $.01 par value, 50,000,000
shares authorized......................................... 221 203
Additional paid-in capital................................ 75,704 29,818
Retained earnings......................................... 18,554 3,326
-------- -------
Total stockholders' equity........................ 94,479 33,347
-------- -------
Total liabilities and stockholders' equity........ $120,386 $61,351
======== =======
</TABLE>
See accompany notes to the consolidated financial statements.
38
<PAGE> 41
MEDICAL MANAGER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue
Systems................................................... $87,317 $55,028 $32,229
Maintenance and other..................................... 48,595 36,800 16,659
------- ------- -------
Total revenue.......................................... 135,912 91,828 48,888
------- ------- -------
Cost of revenue
Systems................................................... 40,802 24,978 16,565
Maintenance and other..................................... 26,796 20,604 8,582
------- ------- -------
Total costs of revenue................................. 67,598 45,582 25,147
------- ------- -------
Gross margin...................................... 68,314 46,246 23,741
------- ------- -------
Operating expenses
Selling, general and administrative....................... 34,877 26,450 14,560
Year 2000 litigation expenses............................. 2,366 0 0
Research and development.................................. 4,506 3,170 2,672
Depreciation and amortization............................. 3,488 1,688 661
------- ------- -------
Total operating expenses............................... 45,237 31,308 17,893
------- ------- -------
Income from operations............................ 23,077 14,938 5,848
Other income (expense)
Interest expense.......................................... (170) (288) (200)
Interest income........................................... 1,571 610 119
Other income (expense).................................... (39) 110 (570)
------- ------- -------
Income before income taxes.................................. 24,439 15,370 5,197
Income taxes................................................ 8,666 5,678 9
------- ------- -------
Net income........................................ $15,773 $ 9,692 $ 5,188
======= ======= =======
Basic earnings per share (Note 8):.......................... $ 0.73 $ 0.48
======= =======
Diluted earnings per share (Note 8):........................ $ 0.70 $ 0.47
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
39
<PAGE> 42
MEDICAL MANAGER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996, as restated............ 8,583 $ 86 $ 1,660 $ 2,749 $ 4,495
Dividends...................................... (8,691) (8,691)
Other.......................................... (33) (33)
Net income..................................... 5,188 5,188
------ ---- -------- ------- --------
Balance, December 31, 1996....................... 8,583 86 1,627 (754) 959
Dividends...................................... (5,567) (5,567)
Issuance of common stock at the Offering,
net......................................... 6,000 60 58,170 58,230
Mergers:
Payments to MMR&D Stockholder............... (35,062) (35,062)
Issuance of Common Stock and payment to
other Founding Companies' stockholders,
net....................................... 5,335 53 (1,609) (1,556)
Acquisitions:
Issuance of Common Stock for Acquisitions of
Purchased Companies....................... 380 4 6,521 6,525
Contributions from former stockholders of
certain of the Acquired Companies......... 45 (45) 0
Stock options exercised........................ 11 0 126 126
Net income..................................... 9,692 9,692
------ ---- -------- ------- --------
Balance, December 31, 1997....................... 20,309 203 29,818 3,326 33,347
Dividends...................................... (545) (545)
Secondary public offering, net of transaction
costs....................................... 1,500 15 42,245 42,260
Acquisitions:
Issuance of Common Stock for Acquisitions of
Purchased Companies....................... 21 0 572 572
Stock options exercised and related tax
benefit..................................... 230 3 3,069 3,072
Net income..................................... 15,773 15,773
------ ---- -------- ------- --------
Balance, December 31, 1998....................... 22,060 $221 $ 75,704 $18,554 $ 94,479
====== ==== ======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
40
<PAGE> 43
MEDICAL MANAGER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $15,773 $ 9,692 $ 5,188
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 3,488 1,688 661
Deferred income taxes................................... (563) (615) 0
Loss on sale of property and equipment.................. 0 6 1
Loss on impaired asset.................................. 0 0 533
Realized gain on marketable securities.................. 0 (52) (8)
Changes in assets and liabilities, net of effects from
acquisitions
Accounts receivable..................................... (10,229) (5,863) (687)
Inventory............................................... 503 (908) 258
Prepaid expenses and other assets....................... (187) (1,119) (227)
Accounts payable and accrued liabilities................ 3,021 (1,914) 381
Customer deposits and deferred maintenance revenue...... (1,323) (1,093) 1,724
Income taxes payable.................................... 1,497 345 8
------- -------- -------
Net cash provided by operating activities................. 11,980 167 7,832
------- -------- -------
Cash flow from investing activities:
Purchases of investments.................................. (30) 0 (61)
Proceeds from sale of investments......................... 30 264 110
Purchases of property and equipment....................... (3,891) (1,342) (641)
Proceeds from sale of property and equipment.............. 0 47 50
Payments for acquisitions made, net of cash acquired...... (4,069) (13,189) 0
------- -------- -------
Net cash used in investing activities..................... (7,960) (14,220) (542)
------- -------- -------
Cash flow from financing activities:
Proceeds from the issuance of notes payable............... 196 333 609
Payments of notes payable................................. (5,261) (7,704) (806)
Due to affiliates......................................... 0 4,998 17
Repurchase of treasury shares by one of the Acquired
Companies............................................... 0 0 (86)
Net proceeds from the issuance of common stock............ 42,260 58,230 0
Proceeds from the exercise of stock options............... 2,012 126 0
Equity contributions from a certain shareholder of one of
the Acquired Companies.................................. 0 0 55
Payments made to stockholder of MMR&D..................... 0 (35,062) 0
Dividends................................................. (545) (3,080) (5,982)
------- -------- -------
Net cash provided by (used in) financing activities....... 38,662 17,841 (6,193)
------- -------- -------
Net change in cash and cash equivalents..................... 42,682 3,788 1,097
------- -------- -------
Cash and cash equivalents:
Beginning of period....................................... 6,901 3,113 2,016
------- -------- -------
End of period............................................. $49,583 $ 6,901 $ 3,113
======= ======== =======
Non-cash dividends.......................................... $ 0 $ 2,468 $ 2,709
======= ======== =======
Cash paid for interest:..................................... $ 87 $ 275 $ 211
======= ======== =======
Cash paid for taxes:........................................ $ 7,435 $ 5,726 $ 17
======= ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
41
<PAGE> 44
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Medical Manager Corporation ("MMC") was founded on July 10, 1996 to bring
together the research and development, sales, marketing and support resources
for The Medical Manager(R) software, a leading physician practice management
system for independent physicians, physician groups, management service
organizations ("MSOs"), Physician Practice Management companies ("PPMs"),
independent practice associations ("IPAs"), managed care organizations and other
providers of health care services in the United States. On February 4, 1997, MMC
acquired in separate mergers (the "Mergers") simultaneously with the
consummation of the initial public offering ("IPO"), five companies: (i) Medical
Manager Research & Development, Inc. (formerly Personalized Programming, Inc.)
("MMR&D"), the owner and developer of The Medical Manager software; (ii) Medical
Manager Sales & Marketing, Inc. (formerly Systems Plus, Inc.) ("MMS&M"), the
long-time national distributor of the software; (iii) Medical Manager Southeast
(formerly National Medical Systems, Inc.) ("MMSE"), a national dealer located in
Tampa, Florida; (iv) Medical Manager Northeast (formerly RTI Business Systems,
Inc.) ("MMNE"), a large, regional dealership in Albany, New York; and (v)
Medical Manager Midwest, Inc. (formerly Systems Management, Inc.) ("MMMW"), a
large, regional dealership in South Bend, Indiana (collectively, the "Founding
Companies"), which became separate, wholly-owned subsidiaries of MMC. The
aggregate consideration paid by MMC for the Founding Companies was approximately
$46.9 million in cash and 11.7 million shares of MMC's common stock par value
$.01 per share (the "Common Stock") for an aggregate value of $175.7 million.
The acquisitions were accounted for as a combination of the Founding Companies
at historical cost for accounting purposes. MMR&D is identified as the acquirer
for financial statement presentation purposes and is presented on a combined
basis with MMC from July 10, 1996. MMC conducted no significant operations and
generated no revenue prior to the closing of the IPO.
During the year ended December 31, 1997, MMC or its affiliates executed and
closed agreements to acquire 10 resellers (the "1997 Acquired Companies") of The
Medical Manager software. These acquisitions were accounted for using the
pooling of interests method of accounting. The aggregate consideration paid for
the 1997 Acquired Companies consisted of 1,644,836 shares of Common Stock.
Also during the year ended December 31, 1997, MMC or its affiliates
executed and closed definitive agreements to acquire substantially all of the
assets or all of the outstanding equity securities of the following 12 resellers
(the "1997 Purchased Companies") of The Medical Manager software.
<TABLE>
<CAPTION>
COMPANY ACQUIRED DATE OF ACQUISITION LOCATION
- ---------------- ------------------- --------
<S> <C> <C>
Artemis, Inc. July 30, 1997 Indianapolis, Indiana
Package Computer Systems, Inc. d/b/a PAC-COMP August 1, 1997 Sterling Heights, Michigan
Boston Computer Systems, Inc. August 6, 1997 Norwood, Massachusetts
Matrix Computer Consultants, Inc. September 5, 1997 Norman, Oklahoma
Professional Management Systems, Inc. September 10, 1997 St. Charles, Illinois
AMSC, Inc., together with its wholly owned Orlando, Florida and
subsidiary, AMSC Midwest, Inc. September 11, 1997 Topeka, Kansas
Data Concepts, Inc. October 30, 1997 Boise, Idaho
Medical Systems, Consultants, Inc. October 30, 1997 Boise, Idaho
Advanced Practice Management, Inc. November 10, 1997 San Diego, California
Medico Support Services, Inc. November 18, 1997 Salem, Oregon
Companion Technologies of Florida, Inc. December 31, 1997 Tampa, Florida
Companion Technologies of Texas December 31, 1997 Arlington, Texas
</TABLE>
42
<PAGE> 45
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1997 Purchased Companies were accounted for using the purchase method
of accounting. The aggregate consideration paid for the 1997 Purchased Companies
was 380,230 shares of Common Stock, $4,265,866 in cash and the issuance of
$6,000,000 in debt.
During the year ended December 31, 1998, MMC or its affiliates executed and
closed agreements to acquire the following resellers of The Medical Manager
software (the "1998 Acquired Companies"): (i) Medical Practice Support Services,
Inc. ("MPSS") based in Pittsburgh, Pennsylvania; (ii) Health Care Management
Solutions, Inc. d/b/a Healthcare Informatics, Inc. ("HCMS") based in
Springfield, Illinois ; (iii) Strategic Systems, Inc. ("Strategic") based in
Denver, Colorado; (iv) Intelligent Concept, Ltd. (U.S.A.) ("IC") based in Los
Angeles, California; (v) Health-Tech Systems, Inc. ("Health-Tech") based in El
Paso, Texas; (vi) Healthcare Automation Associates, Inc. ("HAA") based in
Phoenix, Arizona; (vii) Qualified Technology, Inc. ("Qualified") based in Baton
Rouge, Louisiana; (viii) Medical Systems, Inc. ("MSI") based in Dallas, Texas;
(ix) Prism Microcomputers, Inc. ("Prism") based in Fairfax, Virginia; (x)
Advantage Medical Systems, Inc. ("Advantage") based in Hurricane, West Virginia;
(xi) Medical Design and Images, Inc. ("Medical Design") based in Austin, Texas;
(xii) Lee Data Systems, Inc. ("Lee Data") based in Plymouth Meeting,
Pennsylvania; and (xiii) MedData Corporation ("MedData") based in Elliot City,
Maryland. The acquisitions of the 1998 Acquired Companies were accounted for
using the pooling of interests method of accounting. The aggregate consideration
paid for the 1998 Acquired Companies consisted of 567,823 shares of Common
Stock.
During the year ended December 31, 1998, MMC or its affiliates executed and
closed agreements to acquire substantially all of the assets, or all of The
Medical Manager assets, of the following resellers ("the 1998 Purchased
Companies") of The Medical Manager software:
<TABLE>
<CAPTION>
COMPANY ACQUIRED DATE OF ACQUISITION LOCATION
- ---------------- ------------------- --------
<S> <C> <C>
Management Integrated Solutions April 4, 1998 Houston, Texas
CSA Provider Services June 25, 1998 Phoenix, Arizona
Wahltek, Inc. September 1, 1998 Des Moines, Iowa
LLBC Enterprises, Inc. September 21, 1998 San Antonio, Texas
Circle Software November 30, 1998 Ft. Lauderdale, Florida
ProMed Systems, Inc. December 31, 1998 New Haven, Connecticut
MSO Billing Services, Inc. December 31, 1998 Dallas, Texas
</TABLE>
The acquisitions of the 1998 Purchased Companies were accounted for using
the purchase method of accounting. The aggregate consideration paid for the 1998
Purchased Companies consisted of 21,445 shares of the MMC's Common Stock and
$4,082,500 in cash.
The 1997 Acquired Companies and the 1998 Acquired Companies are referred to
collectively as the Acquired Companies. The 1997 Purchased Companies and the
1998 Purchased Companies are referred to collectively as the Purchased
Companies. MMC, the Founding Companies, the Acquired Companies, and the
Purchased Companies are referred to collectively as the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying financial statements have
been presented on a consolidated basis for the years ended December 31, 1998,
1997 and 1996. The consolidated financial statements include MMC and its wholly
owned subsidiaries. All significant intercompany balances and intercompany
transactions have been eliminated in consolidation. The accompanying
consolidated financial statements
43
<PAGE> 46
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include MMC, MMR&D and the Acquired Companies through February 4, 1997, the date
of MMC's acquisition of the Founding Companies, after which the historical
financial statements reflect the results of MMC, MMR&D, the Acquired Companies,
and the other Founding Companies. The results of the Purchased Companies are
reflected subsequent to their respective acquisition date. The accompanying
financial statements have been adjusted retroactively to show the effect of the
acquisitions of the Acquired Companies as if they had occurred on January 1,
1996.
Revenue Recognition. Revenue from software licenses is recognized upon
sale and shipment. For the years ended December 31, 1997 and 1996, revenue from
the sale of systems was recognized when the system was installed and when the
related client training was completed, as established in Statement of Position
("SOP") 91-1, Software Revenue Recognition. Beginning January 1, 1998, revenue
from the sale of systems is recognized in accordance with SOP 97-2, Software
Revenue Recognition. SOP 97-2 requires the total contract revenue to be
allocated to the various elements of the contract based upon objective evidence
of the fair values of such elements and allows for only the allocated revenue to
be recognized upon completion of those elements. The effect of the adoption of
SOP 97-2 was not significant to the Company's results of operations for the year
ended December 31, 1998. Amounts billed in advance of recognized revenue are
deferred. Revenue from support and maintenance contracts is recognized as the
services are performed ratably over the contract period, which typically does
not exceed one year. Revenue from other services are recognized as they are
provided. Certain expenses are allocated between the cost of revenue for systems
and maintenance and other based upon revenue, which basis management believes to
be reasonable.
Goodwill and Other Intangibles. Goodwill and other intangibles consist of
covenants not to compete and goodwill arising from business acquisitions,
detailed as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Goodwill arising from business acquisitions................. $30,032 $24,523
Covenants not to compete.................................... 300 227
------- -------
Total gross goodwill and other intangibles.................. 30,332 24,750
Accumulated amortization.................................... 2,066 975
------- -------
Total net goodwill and other intangibles.................... $28,266 $23,775
======= =======
</TABLE>
The covenants not to compete are being amortized over periods of two to
three years and the goodwill arising from business acquisitions is being
amortized over a 20 year period.
Asset Impairment. Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, requires that long-lived assets and certain
intangibles to be held and used by the Company be reviewed for impairment. The
Company periodically assesses whether there has been a permanent impairment of
its long-lived assets, in accordance with SFAS No. 121. No write-down of assets
due to impairment was required in the years ended December 31, 1998 or 1997.
Approximately $500,000 of goodwill was recorded by one of the Acquired
Companies, prior to their acquisition by the Company, and was written off in the
year ended December 31, 1996.
Property and Equipment. Property and equipment are stated at cost.
Additions and major renewals are capitalized. Repairs and maintenance are
charged to expense as incurred. Upon disposal, the related cost and accumulated
depreciation are removed from the accounts, with the resulting gain or loss
included in income. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets. Amortization of leasehold
improvements is provided for over the shorter of the estimated service life of
the leased asset or the lease term using the straight-line method.
44
<PAGE> 47
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory. Inventory primarily consists of peripheral computer equipment.
Inventory cost is accounted for on the first-in, first-out basis and reported at
the lower of cost or market.
Research and Development. Software development costs are included in
research and development and are expensed as incurred. SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then amortized
over the estimated product life. To date, the period between achieving
technological feasibility and the general availability of such software has been
short and software development costs qualifying for capitalization have been
insignificant.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with maturity dates of three months or less when purchased to be
cash equivalents. These cash equivalents are predominantly in U.S. dollar
domestic tax free municipal instruments.
Income Taxes. The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recorded to reflect the tax consequences on future years differences between the
tax basis of assets and liabilities and their financial reported amounts at each
year end based on enacted laws and statutory rates applicable to the periods in
which differences are expected to affect taxable income. A valuation allowance
is provided against the future benefits of deferred tax assets if it is
determined that it is more likely than not that the future tax benefits
associated with the deferred tax asset will not be realized. See Note 11.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reported period. Actual results could differ from those estimates; however,
management does not believe these differences would have a material effect on
operating results.
Concentration of Credit Risk. The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. With regard to accounts receivables, credit
risk is limited due to the wide variety of customers in the health care industry
and the geographic areas into which the Company's systems and services are sold.
With regards to cash, the Company places its funds with high credit quality
institutions. At times, such monies may be in excess of the FDIC or other
insurance limits, however, the Company has not experienced any losses in such
accounts.
Non-cash Transactions. Non-cash investing and financing activities during
the year ended December 31, 1998 included the purchase of approximately $2.3
million of assets of the 1998 Purchased Companies through the assumption of
liabilities and the issuance of Common Stock and the purchase of equipment
through the assumption of a lease obligation. Non-cash transactions during the
year ended December 31, 1997 included the purchase of approximately $23.7
million of assets of the other Founding Companies and the 1997 Purchased
Companies through the assumption of liabilities and the issuance of Common
Stock.
Reclassifications. Certain prior year amounts have been reclassified to
conform with 1998 presentations. These reclassifications had no impact on net
income or stockholders' equity.
Segment Reporting. In 1998, the Company adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS 131 supersedes
SFAS 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management"approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of
45
<PAGE> 48
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAS 131 did not affect results of operations or financial position but did
affect the disclosure of segment information. See Note 12.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income". In
June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
effective for fiscal periods beginning after December 15, 1997. The new standard
requires that comprehensive income, which includes net income as well as certain
changes in assets and liabilities recorded in common equity, be reported in the
financial statements. The Company adopted SFAS No. 130 during the year ended
December 31, 1998. For the years ended December 31, 1998, 1997 and 1996 there
were no components of comprehensive income other than net income.
Employee Benefits Disclosures. SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". In February 1998, the Financial
Accounting Standards Board issued SFAS No. 132 which is effective for periods
ending after December 15, 1998. The new standard revises employers' disclosures
about pensions and other postretirement benefits. For the years ended December
31, 1998, 1997 and 1996, there was no impact on the Company's financial
statements.
SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities". SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not maintain any derivative investments nor does it conduct any
hedging activities, therefore, SFAS 133 is not expected to impact the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land and improvements....................................... $ 375 $ 360
Buildings................................................... 2,253 2,253
Furniture and fixtures...................................... 2,964 2,458
Office equipment and computers.............................. 7,952 5,328
Software.................................................... 871 160
Vehicles.................................................... 918 880
Leasehold improvements...................................... 533 288
------- -------
15,866 11,727
Less accumulated depreciation............................... (6,978) (5,003)
------- -------
Net property and equipment.................................. $ 8,888 $ 6,724
======= =======
</TABLE>
Depreciation expense was approximately $2.1 million, $1.1 million, and
$609,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
46
<PAGE> 49
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
Notes payable at December 31, 1998 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Note payable, stockholder (AAA distribution)(1) Interest:
5.8%, repaid in 1998...................................... $ 0 $ 693
Notes payable, stockholders Interest: various between 0% and
11%, repaid in 1998....................................... 0 404
Notes payable, remainder of purchase price for
acquisitions(2) Interest: 5.5%............................ 4,116 6,294
Promissory note, ($250,000 note)(3) Interest: 18%........... 250 250
Lines of credit(4) Interest: various between lender base
plus 2% and 10.5%, repaid in 1998......................... 0 189
Notes payable, various Interest: various between 6% and
12.75%, repaid in 1998.................................... 0 278
Mortgages payable Interest: 9%, repaid in 1998.............. 0 1,112
Non-compete agreements Due: various monthly amounts through
1998, repaid in 1998...................................... 0 34
Obligations under capital leases............................ 315 85
------ ------
Total debt.................................................. 4,681 9,339
Less current maturities..................................... 2,438 5,115
------ ------
Long-term debt.............................................. $2,243 $4,224
====== ======
</TABLE>
- ---------------
(1) Upon consummation of the IPO, MMR&D elected to terminate its S Corporation
status. The Notes Payable, Stockholder (AAA Distribution) represented
amounts due to the stockholder of MMR&D for dividends equal to the estimated
balance in the S Corporation's Accumulated Adjustment Account as of February
4, 1997.
(2) The Notes payable for the remainder of the purchase price for acquisitions
are due as follows: $25,000 due on demand; $2,000,000 due January 15, 1999;
$50,000 due April 7, 1999; $41,000 due June 29, 1999; $2,000,000 due January
15, 2000.
(3) On August 10, 1994, one of the Acquired Companies entered into a note
payable in the amount of $250,000. The note was issued in connection with
the Acquired Company's purchase of certain assets of Solutions Plus, Inc.
The note is payable in 48 monthly installments, beginning September, 1994.
Payment of this note is in dispute. The Company has not made payments
according to its terms; accordingly, the Company may be considered to be in
default. As a result of the potential default, the entire principal amount,
plus accrued interest of $99,900, has been recorded as a current liability.
(4) These lines of credit were all closed during the year ended December 31,
1998.
On January 14, 1998, the Company entered into a $10.0 million line of
credit agreement with NationsBank of Tampa. The line of credit matures on May
31, 1999. The line of credit bears interest at Prime or LIBOR, at the election
of the borrower, plus an applicable margin, as defined in the agreement. This
debt instrument is due on demand. The agreement contains customary events of
default and a number of customary covenants including certain financial ratios
and restrictions on dividends. As of December 31, 1998 and 1997, there were no
outstanding balances on this line of credit.
47
<PAGE> 50
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under all other debt obligations, excluding capital
lease obligations, during the fiscal years subsequent to December 31, 1998 are
as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $2,366
2000........................................................ 2,000
------
Total....................................................... 4,366
Less current maturities..................................... 2,366
------
Long-term portion........................................... $2,000
======
</TABLE>
Future minimum payments under capital lease obligations during the years
subsequent to December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 88
2000........................................................ 73
2001........................................................ 73
2002........................................................ 73
2003........................................................ 28
----
Total....................................................... 335
Less amount representing interest........................... 20
----
Present value of future minimum lease payments.............. 315
Less current maturities..................................... 72
----
Long-term portion........................................... $243
====
</TABLE>
The carrying amount of all debt obligations approximates fair market value
because of the short maturity of these instruments.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
operating leases which have remaining lease terms ranging from one to six years.
Future minimum rental commitments under noncancellable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $2,891
2000........................................................ 2,215
2001........................................................ 1,785
2002........................................................ 867
2003........................................................ 526
Thereafter.................................................. 166
------
Total....................................................... $8,450
======
</TABLE>
Rent expense was approximately $4.2 million, $2.6 million and $1.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
MMR&D and MMMW leases certain of its facilities under operating leases from
an entities owned by certain stockholders. The leases expire between the years
1999 and 2001. The MMR&D lease provides for two options to renew for one year
each and the MMMW lease provides for three options to renew for five years each.
Rent paid to the stockholders for these leases was $448,000, $423,000 and
$254,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
48
<PAGE> 51
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUMMARY FINANCIAL DATA OF THE ACQUISITIONS
The acquisitions of the Acquired Companies discussed in Note 1 have been
accounted for as pooling-of-interests, and accordingly, the consolidated
financial statements for the periods presented have been restated to include the
Acquired Companies. The Acquired Companies generated revenues of $11,138,000 for
the period January 1, 1998 through their respective acquisition date, revenues
of $23,873,000 for the year ended December 31, 1997 or through their respective
acquisition date and revenues of $36,418,000 for the year ended December 31,
1996. Net income of the Acquired Companies was $1,165,000 for the period January
1, 1998 through their respective acquisition date, a net loss of $793,000 for
the year ended December 31, 1997 or through their respective acquisition date,
and a net loss of $229,000 for the year ended December 31, 1996. Changes in the
Acquired Companies' stockholders' equity for the period January 1, 1998 through
their respective acquisition date was $545,000. Changes in the Acquired
Companies' stockholders' equity was $1,631,000 for the year ended December 31,
1997 or through their respective acquisition date. Changes in the Acquired
Companies' stockholders' equity was $917,000 for the year ended December 31,
1996.
The acquisitions of the Purchased Companies discussed in Note 1 were
accounted for using the purchase method of accounting, and accordingly the
consolidated financial statements reflect the results of operations for the
Purchased Companies only since their respective date of acquisition. Pro forma
revenues, net income and earnings per share of the Company are presented below
(in thousands, except per share data) as though the acquisitions of Companion
Technologies of Florida, Inc., Companion Technologies of Texas, and AMSC, Inc.
had occurred as of January 1, 1996. The remainder of the Purchased Companies'
revenues, net income, and earnings per share are not considered significant. The
results of operations for Companion Technologies of Florida, Inc., Companion
Technologies of Texas, and AMSC, Inc. are included in the full year ended
December 31, 1998 and accordingly, no pro forma information is necessary for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
-------- -------
<S> <C> <C>
Revenues.................................................... $106,393 $63,613
Net income.................................................. 8,942 5,415
Basic earnings per share.................................... $ 0.45
Diluted earnings per share.................................. $ 0.44
</TABLE>
7. STOCKHOLDERS' EQUITY
At December 31, 1998, the Company had two stock option plans as described
below:
AMENDED AND RESTATED 1996 LONG-TERM INCENTIVE PLAN
In September 1996, the Company adopted the 1996 Long-Term Incentive Plan,
amended on June 9, 1998 (the "Incentive Plan"), under which the Compensation
Committee has discretion to grant one or more of the following awards to
executive officers, key employees, consultants and other service providers: (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted or deferred stock, (v) dividend
equivalents, (vi) bonus shares and awards in lieu of the Company's obligations
to pay cash compensation, and (vii) other awards the value of which is based in
whole or in part upon the value of the Common Stock. Upon a change of control of
the Company (as defined in the Incentive Plan), certain conditions and
restrictions relating to an award with respect to the ability to exercise or
settle such award will be accelerated.
The maximum number of shares of Common Stock that may be subject to
outstanding awards under the Incentive Plan may not exceed the greater of
2,000,000 shares or 12% of the aggregate number of shares of
49
<PAGE> 52
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock outstanding. The number of shares deliverable upon exercise of
incentive stock options is limited to 500,000, and the number of shares
deliverable as non-performance based restricted stock and deferred stock, is
limited to 500,000.
Information regarding the stock option component of the Incentive Plan is
summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance, January 1, 1997.................................... 0 --
Granted..................................................... 1,753,100 $11.238
Exercised................................................... (11,525) 11.000
Forfeited................................................... (84,413) 11.120
---------
Balance, December 31, 1997.................................. 1,657,162 11.245
Granted..................................................... 411,397 25.493
Exercised................................................... (180,453) 11.150
Forfeited................................................... (29,062) 14.320
---------
Balance, December 31, 1998.................................. 1,859,044 $14.289
=========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE NUMBER WEIGHTED
OUTSTANDING REMAINING EXERCISABLE AVERAGE
EXERCISE AT DECEMBER 31, CONTRACTUAL AT DECEMBER 31, EXERCISE
PRICES 1998 LIFE 1998 PRICE
- -------- ----------------- ----------- ----------------- --------
<S> <C> <C> <C> <C>
$ 8.875 10,000 9 10,000 $ 8.875
11.000 1,389,795 9 621,920 11.000
17.000 61,001 9 12,126 17.000
17.875 125,000 10 0 17.875
21.750 15,000 10 0 21.750
23.125 1,000 10 250 23.125
26.563 10,000 10 0 26.563
26.688 4,000 10 0 26.688
27.000 3,000 10 750 27.000
29.563 240,248 10 60,062 29.563
--------- -------
1,859,044 705,108
========= =======
</TABLE>
With exception of 10,000 options, all of the 1,859,044 options which were
outstanding as of December 31, 1998, have a vesting schedule providing for 25%
vesting at 6 months, 18 months, 30 months, and 42 months after the grant date.
There are a total of 10,000 options which vested fully on April 30, 1998. All
options expire 10 years after the date of grant. As of December 31, 1998,
705,108 options granted under the Incentive Plan were exercisable with a
weighted average exercise price of $12.68. No compensation expense related to
the options has been recorded as the options were granted at an exercise price
equal to or greater than the fair market value of the Common Stock on the date
of grant.
A total of 50,000 shares of restricted stock awards were granted under the
Incentive Plan on April 18, 1997. Compensation expense equal to the fair value
of the Common Stock on the date of grant ($8.375 per share) is being recognized
over a six year vesting period of these stock awards.
50
<PAGE> 53
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 NON-EMPLOYEE DIRECTORS' STOCK PLAN
In September 1996, the Company adopted the 1996 Non-Employee Directors'
Stock Plan (the "Directors' Plan") which provides for the automatic grant to
each non-employee director an initial option to purchase 10,000 shares upon such
person's initial election as a director. In addition, the Directors' Plan
provides for an automatic annual grant to each non-employee director of an
option to purchase 5,000 shares at each annual meeting of stockholders;
provided, however, that a director will not be granted an annual option if he or
she was granted an initial option during the preceding three months, later
amended to sixty days. This plan also provides that each non-employee director
may elect to receive 2,000 stock options in each calendar year in lieu of an
annual cash fee and other cash payments for attending board meetings. A total of
250,000 shares are reserved for issuance under the Directors' Plan. The exercise
price of options granted under the Directors' Plan may be no less than the fair
market value of the Common Stock on the date of grant, and accordingly, no
compensation expense has been recorded in connection with the stock options
granted.
Information regarding the Directors' Plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance, January 1, 1997............................. 0 --
Granted.............................................. 51,000 $12.250
------
Balance, December 31, 1997........................... 51,000 12.250
Granted.............................................. 28,000 29.000
------
Balance, December 31, 1998........................... 79,000 $18.187
======
</TABLE>
All options under the Directors' Plan vest one year after the date of grant
and expire 10 years after the date of grant. The exercise price of the options
outstanding under this plan range from $8.875 to $29.00. As of December 31,
1998, 51,000 options granted under the Directors' Plan were exercisable with a
weighted average exercise price of $12.25.
FINANCIAL ACCOUNTING STANDARD NO. 123, "ACCOUNTING FOR STOCK BASED COMPENSATION"
In October of 1995, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation"
("FAS 123") which is effective for fiscal years beginning after December 15,
1995. As permitted by FAS 123, the Company has elected to account for its stock
based plans under APB No. 25, "Accounting for Stock Issued to Employees".
51
<PAGE> 54
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of the options granted during the year
ended December 31, 1998 was $13.12. If the Company had elected to recognize
compensation expense for stock options based on the fair value at grant date,
consistent with the method prescribed in FAS 123, net income and earnings per
share would have been reduced to the pro forma amounts shown below (in
thousands, except per share data):
<TABLE>
<S> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998:
Net income
As reported............................................... $15,773
Pro forma................................................. 14,285
Basic earnings per common share
As reported............................................... $ 0.73
Pro forma................................................. 0.66
Diluted earnings per common share and common equivalent
share
As reported............................................... $ 0.70
Pro forma................................................. 0.64
FOR THE YEAR ENDED DECEMBER 31, 1997:
Net income
As reported............................................... $ 9,692
Pro forma................................................. 6,605
Basic earnings per common share
As reported............................................... $ 0.48
Pro forma................................................. 0.33
Diluted earnings per common share and common equivalent
share
As reported............................................... $ 0.47
Pro forma................................................. 0.32
</TABLE>
There were no options outstanding as of December 31, 1996, thus pro forma
information is not provided for the year ended December 31, 1996.
The pro forma amounts were determined using the Black-Scholes Valuation
Model with the following key assumptions: (i) a 52% volatility factor initially
based on the Company's average trading price since the IPO, as well as the
average trading stock price of comparable companies over the previous five
years; (ii) no dividend yield; (iii) a discount rate equal to the rate available
on U.S. Treasury Strip (zero-coupon) bond on the grant date, and (iv) an average
expected option life of four years for directors' options and five years for
employees' options.
52
<PAGE> 55
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1998
and 1997 are calculated as set forth below (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income.................................................. $15,773 $ 9,692
======= =======
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding......................... 21,554 20,054
------- -------
Basic shares................................................ 21,554 20,054
======= =======
Basic earnings per share.................................... $ 0.73 $ 0.48
======= =======
DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding......................... 21,554 20,054
Effect of dilutive shares:
Stock options............................................. 877 410
Stock awards.............................................. 0 11
------- -------
Diluted shares.............................................. 22,431 20,475
======= =======
Diluted earnings per share.................................. $ 0.70 $ 0.47
======= =======
</TABLE>
9. EMPLOYEE BENEFIT PLAN
On July 1, 1997, the Company began a qualified 401(k) savings plan (the
"Plan") covering all employees meeting certain eligibility requirements. The
Plan permits each participant to reduce his or her taxable compensation basis by
up to 15% and have the amount of such reduction contributed to the Plan. During
the year ended December 31, 1998, the Company made a matching contribution of
15% of the first 6% of the compensation deferred by each participant. Effective
January 1, 1999, the Plan was amended so that the Company makes a contribution
of 25% of the first 6% of the compensation deferred by each participant. Salary
reduction contributions are immediately vested in full; matching contributions
vest 20% per year over a five year period. During the years ended December 31,
1998 and 1997, the Company made contributions of $181,000 and $69,000
respectively.
53
<PAGE> 56
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1998
and 1997 is as follows (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUE
As reported.............................. $27,651 $30,637 $35,233 $37,586
Effect of acquisitions treated as
poolings of interests completed
subsequent to quarter end............. 2,040 2,029 736 --
As adjusted.............................. 29,691 32,666 35,969 37,586
GROSS MARGIN
As reported.............................. $13,844 $15,693 $17,912 $18,818
Effect of acquisitions treated as
poolings of interests completed
subsequent to quarter end............. 813 993 241 --
As adjusted.............................. 14,657 16,686 18,153 18,818
NET INCOME
As reported.............................. $ 3,523 $ 4,210 $ 4,485 $ 3,375
Effect of acquisitions treated as
poolings of interests completed
subsequent to quarter end............. (91) 322 (51) --
As adjusted.............................. 3,432 4,532 4,434 3,375
BASIC EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT
As reported.............................. $ 0.18 $ 0.20 $ 0.21 $ 0.15
Effect of acquisition treated as pooling
of interests completed subsequent to
quarter end........................... ($ 0.01) $ 0.01 ($ 0.01) --
As adjusted.............................. $ 0.17 $ 0.21 $ 0.20 $ 0.15
DILUTED EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
As reported.............................. $ 0.17 $ 0.19 $ 0.20 $ 0.15
Effect of acquisition treated as pooling
of interests completed subsequent to
quarter end........................... ($ 0.01) $ 0.01 ($ 0.01) --
As adjusted.............................. $ 0.16 $ 0.20 $ 0.19 $ 0.15
</TABLE>
54
<PAGE> 57
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUE
As reported.............................. $16,554 $20,800 $23,105 $26,659
Effect of acquisitions treated as
poolings of interests completed
subsequent to quarter end............. 2,117 1,809 784 --
As adjusted.............................. 18,671 22,609 23,889 26,659
GROSS MARGIN
As reported.............................. $ 8,631 $10,997 $11,545 $13,173
Effect of acquisitions treated as
poolings of interest completed
subsequent to quarter end............. 729 853 318 --
As adjusted.............................. 9,360 11,850 11,863 13,173
NET INCOME
As reported.............................. $ 2,740 $ 2,276 $ 2,282 $ 2,440
Effect of acquisitions treated as
poolings of interests completed
subsequent to quarter end............. (365) 210 109 --
As adjusted.............................. 2,375 2,486 2,391 2,440
BASIC EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT
As reported.............................. $ 0.14 $ 0.12 $ 0.12 $ 0.12
Effect of acquisition treated as pooling
of interests completed subsequent to
quarter end........................... ($ 0.02) -- -- --
As adjusted.............................. $ 0.12 $ 0.12 $ 0.12 $ 0.12
DILUTED EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
As reported.............................. $ 0.14 $ 0.12 $ 0.11 $ 0.12
Effect of acquisition treated as pooling
of interests completed subsequent to
quarter end........................... ($ 0.02) -- -- --
As adjusted.............................. $ 0.12 $ 0.12 $ 0.11 $ 0.12
</TABLE>
55
<PAGE> 58
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Current:
Federal................................................... $8,076 $5,916 $ 9
State..................................................... 1,153 846 --
------ ------ ----
Total..................................................... 9,229 6,762 9
Deferred:
Federal................................................... (493) (949) --
State..................................................... (70) (135) --
------ ------ ----
Total..................................................... (563) (1,084) --
------ ------ ----
Total....................................................... $8,666 $5,678 $ 9
====== ====== ====
</TABLE>
Upon the consummation of the IPO and the acquisition of the Acquired
Companies, MMR&D and certain of the Acquired Companies which were S-Corporations
(collectively, the "S-Corporations") terminated their S-Corporation status.
Accordingly, current and deferred income taxes reflecting the tax effects of
temporary differences between the Company's financial statement tax bases of
certain assets and liabilities became assets and liabilities of the Company.
Accordingly, the above provisions for 1998 and 1997 income taxes include a
$548,000 and $650,000, respectively, nonrecurring benefit resulting from the
termination of the S-Corporation election and the corresponding required
adoption of SFAS 109.
The significant components of deferred tax assets (liabilities) as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Bad debts................................................... $ (646) $ (570)
Deferred revenue............................................ 856 425
Accrued expenses............................................ 1,033 848
Inventory................................................... (21) (21)
Other....................................................... 69 45
------ ------
Total....................................................... $1,291 $ 727
====== ======
</TABLE>
The following table accounts for the differences between the actual tax
provision and amounts obtained by applying the statutory U.S. federal income
rate of 35% to the income before income taxes.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Statutory tax provision at 35%.............................. $8,554 $5,379 $ 1,819
State taxes, net of federal benefit......................... 1,189 778 --
S-Corporation income not subject to tax..................... (231) (227) (1,810)
Change in valuation allowance............................... -- 36 --
Termination of S-Corporation status......................... (548) (650) --
Tax exempt income........................................... (547) (180) --
Non-deductible expense and other............................ 249 542 --
------ ------ -------
Total....................................................... $8,666 $5,678 $ 9
====== ====== =======
</TABLE>
56
<PAGE> 59
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SEGMENT REPORTING
In 1998, the Company adopted SFAS 131. The segment information below
presents the Company's three reportable segments -- (1) Research & Development,
(2) Sales & Marketing and (3) Dealer Network, which represents the Company-owned
dealers.
The Company is organized primarily on the basis of the production,
distribution and service processes broken into nine production or distribution
units. Six of the distribution and service units have been aggregated into the
"Dealer Network" segment. These units derive their revenue from the sale and
service of The Medical Manager software. The "Sales & Marketing" unit consists
of a single distribution and service unit and derives its revenue from the sale,
licensing and distribution of The Medical Manager software to the Dealer Network
segment and the independent dealer network. Two of the production units have
been aggregated to form the "Research & Development" segment. These units derive
their revenue primarily from license royalties fees for The Medical Manager
software and other software packages.
The accounting policies of the segments are the same as those described in
footnote 2. Segment data includes intersegment revenues. Revenues and net income
reported in the Research & Development segment and the Sales & Marketing segment
are derived primarily from intersegment sales. The Dealer Network segment
purchases software and licenses from the Sales & Marketing segment, which
recognizes these sales as revenue. The Research & Development segment then
collects royalties from the Sales & Marketing segment as it's primary source of
revenues. Sales to the Dealer Network segment by the Sales & Marketing segment
are made at the same wholesale price sold to independent dealers. Royalties to
the Research & Development segment are based on royalty agreements with Sales &
Marketing. The Company evaluates the performance of all three of its segments
based on revenues and net income, and additionally, it evaluates the Dealer
Network on operating margins.
The table below presents information about reported segments and the
reconciliation of total segment information to the consolidated information as
reflected on the accompanying financial statements for the years ending December
31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
ELIMINATION OF
RESEARCH & SALES & DEALER INTERSEGMENT SALES
DEVELOPMENT MARKETING NETWORK TOTAL ALL OTHERS OR RECEIVABLES CONSOLIDATED
----------- --------- -------- -------- ---------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Revenues............... $22,897 $22,895 $115,203 $160,995 $ 461 $ (25,544) $135,912
Interest income........ 0 0 138 138 1,433 0 1,571
Interest expense....... 27 0 143 170 0 0 170
Depreciation and
amortization......... 347 214 2,695 3,256 232 0 3,488
Income tax expense..... 456 0 259 715 7,951 0 8,666
Net income............. 11,321 5,619 13,169 30,109 (14,336) 0 15,773
Total assets........... 30,313 24,529 141,192 196,034 159,791 (235,439) 120,386
Expenditures for
goodwill additions in
connection with the
Purchased
Companies............ $ 0 $ 0 $ 270 $ 270 $ 3,799 $ 0 $ 4,069
</TABLE>
57
<PAGE> 60
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ELIMINATION OF
RESEARCH & SALES & DEALER INTERSEGMENT SALES
DEVELOPMENT MARKETING NETWORK TOTAL ALL OTHERS OR RECEIVABLES CONSOLIDATED
----------- --------- -------- -------- ---------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997:
Revenues............... $15,684 $17,078 $ 72,087 $104,849 $ 0 $ (13,021) $ 91,828
Interest income........ 11 0 36 47 563 0 610
Interest expense....... 90 22 176 288 0 0 288
Depreciation and
amortization......... 304 155 1,208 1,667 21 0 1,688
Income tax expense..... 278 1 21 300 5,378 0 5,678
Net income............. 8,197 3,303 6,367 17,867 (8,175) 0 9,692
Total assets........... 18,168 18,735 94,981 131,884 77,822 (148,355) 61,351
Expenditures for
goodwill additions in
connection with the
Purchased
Companies............ $ 0 $ (31) $ 1,338 $ 1,307 $ 11,882 $ 0 $ 13,189
1996:
Revenues............... $11,956 $ 0 $ 38,324 $ 50,280 $ 0 $ (1,392) $ 48,888
Interest income........ 108 0 11 119 0 0 119
Interest expense....... 0 0 200 200 0 0 200
Depreciation and
amortization......... 266 0 395 661 0 0 661
Income tax expense..... 0 0 9 9 0 0 9
Net income............. 5,846 0 (363) 5,483 (295) 0 5,188
Total assets........... 4,444 0 9,743 14,187 86 0 14,273
Expenditures for
goodwill additions in
connection with the
Purchased
Companies............ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
13. LEGAL PROCEEDINGS
A class action lawsuit was brought against the Company alleging Year 2000
issues regarding The Medical Manager software in versions prior to Version 9.0.
Seven additional lawsuits were also brought against the Company, each purporting
to sue on behalf of those similarly situated and raising essentially the same
issues. In December 1998, the Company preliminarily entered into an agreement to
settle the class action lawsuit, as well as five of the seven other similar
cases. The settlement created a settlement class of all purchasers of Version 7
and 8 and upgrades to Version 9 of The Medical Manager software, and released
the Company from Year 2000 claims arising out of the sales of these version of
the Company's product. Under the terms of the settlement, Version 8.12,
containing the Company's upgraded Version of 8.11 software in addition to the
Year 2000 patch, will be licensed without a license fee to Version 7 and 8 users
who participate in the settlement. In addition, the settlement also provides
that participating users who purchased a Version 9 upgrade will have the option
to obtain one of four optional modules from the Company without a license fee,
or to elect to take a share of a settlement cash fund. The settlement required
the Company to make a cash payment of $1.455 million. See Note 14.
The Company has received notice of a lawsuit which was filed against the
Company and certain of its officers and directors, among other parties, on
October 23, 1998 in the United States District Court for the Middle District of
Florida. The lawsuit, styled George Ehlert, et al. vs. Michael A. Singer, et
al., purports to bring an action on behalf of the plaintiffs and others
similarly situated to recover damages for alleged violations of the federal
securities laws and Florida laws arising out of the Company's issuance of
allegedly materially false and misleading statements concerning its business
operations, including the development and sale of its principal product, during
the class period. An amended complaint was served on March 2, 1999. The class
period is alleged to be between April 23, 1998 and August 5, 1998. The lawsuit
seeks, among other things, compensatory damages in favor of the plaintiffs and
the other purported class members and reasonable
58
<PAGE> 61
MEDICAL MANAGER CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs and expenses. The Company believes that this lawsuit is without merit and
intends to vigorously defend against it.
The Company is from time to time involved in other routine litigation
incidental to the conduct of its business. The Company believes that no such
currently pending routine litigation to which it is party will have a material
adverse effect on its financial condition or results of operations.
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company executed and closed agreements
to acquire the following resellers of The Medical Manager software: (i) Advanced
Medical Office Systems, Inc. d/b/a I.E. Corporation, based in Stockton,
California, (ii) Specialized Computer Systems, Inc., based in DuBois,
Pennsylvania and (iii) Shared Business Services, Inc., based in Clearwater,
Florida. The acquisitions were accounted for using the pooling of interests
method of accounting. The aggregate consideration paid was 98,911 shares of
Common Stock. These acquisitions, in aggregate, had revenues of $2.4 million and
net income of $0.3 million for the year ended December 31, 1998. The
acquisitions closed on February 26, 1999 and March 17, 1999.
The settlement of the Company's Year 2000 class action lawsuit was approved
by the District Court of New Jersey on March 15, 1999. Pursuant to the
settlement, the Company was released from liability due to the Year 2000
non-compliance of Versions 7 and 8 by all users of Versions 7 and 8 except 29
users who "opted-out" of the class settlement.
59
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 of Part III is hereby
incorporated by reference to the Registrant's Definitive Proxy Statement on
Schedule 14A to be filed not more than 120 days after the year ended December
31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements -- see index on Page 36 herein. The financial
statements of four of the Founding Companies included on the
Company's Current Report of Form 8-K filed with the Securities and
Exchange Commission on April 8, 1997 are specifically incorporated
herein by reference.
(a) (2) Schedule II -- Valuation and Qualifying Accounts -- see page 64
herein. Other financial statements and schedules are not presented
because they are either not required or the information required by
statements or schedules is presented elsewhere.
(a) (3) The exhibits filed as part of this Report as required by Item 601
of Regulation S-K are included in the Index to Exhibits included
elsewhere in this report.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on October 29, 1998, to disclose the Company's receipt of notice of a
lawsuit which was purportedly filed against the Company and certain of its
officers and directors, among other parties, on October 23, 1998, to recover
damages for alleged violations of the federal securities laws arising out of the
Company's issuance of allegedly materially false and misleading statements
concerning its business operations, including the development and sale of its
principal product, The Medical Manager practice management system. "See Item 3.
Legal Proceedings".
60
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 23rd day of
March, 1999.
MEDICAL MANAGER CORPORATION
By: /s/ MICHAEL A. SINGER
------------------------------------
Michael A. Singer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL A. SINGER Chairman of the Board and Chief March 23, 1999
- ----------------------------------------------------- Executive Officer (Principal
Michael A. Singer Executive Officer)
/s/ LEE A. ROBBINS Vice President and Chief March 23, 1999
- ----------------------------------------------------- Financial Officer (Principal
Lee A. Robbins Financial and Accounting
Officer)
/s/ JOHN H. KANG President; Director March 23, 1999
- -----------------------------------------------------
John H. Kang
/s/ FREDERICK B. KARL, JR. Vice President and General March 23, 1999
- ----------------------------------------------------- Counsel; Director
Frederick B. Karl, Jr.
/s/ RICHARD W. MEHRLICH Director March 23, 1999
- -----------------------------------------------------
Richard W. Mehrlich
/s/ CHRIS A. PEIFER Director March 23, 1999
- -----------------------------------------------------
Chris A. Peifer
</TABLE>
61
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.1 -- Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 (File No. 333-13101))
3.2 -- Amended and Restated By-laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K dated March 12, 1998)
4.1 -- Form of certificate evidencing ownership of Common Stock of
the Company (Incorporated by reference to Exhibit to
Amendment No. 4 to the Registration Statement on Form S-1
(File No. 333-13101))
4.2 -- Credit Agreement dated as of January 14, 1998 by and between
Medical Manager Corporation, a Delaware corporation as
Borrower, and Barnett Bank, N.A., a national banking
association, and its successors and assigns as Lender
(Incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K dated March 12, 1998)
10.1 -- Amended and Restated 1996 Long-Term Incentive Plan of the
Company (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated November 13,
1998)
10.2 -- 1996 Non-Employee Directors' Stock Plan of the Company
(Incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K dated March 12, 1998)
10.3 -- Employment Agreement between the Company and Michael A.
Singer (Incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.4 -- Employment Agreement between the Company and Richard W.
Mehrlich (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.5 -- Employment Agreement between the Company and John H. Kang
(Incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K filed April 10, 1997)
10.6 -- Employment Agreement between the Company and Frederick B.
Karl, Jr. (Incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.7 -- Employment Agreement, dated as of November 25, 1996, between
the Company and Lee A. Robbins (Incorporated by reference to
Exhibit 10.7 to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-13101))
10.8 -- Employment Agreement between the Company and Henry W.
Holbrook (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.9 -- Employment Agreement between the Company and Thomas P.
Liddell (Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K filed April 10, 1997)
10.10 -- Lease between PPI Holding Company, Inc. and Personalized
Programming, Inc., dated March 12, 1996, as amended,
(Incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 (File No. 333-13101))
10.11 -- Lease between Liddell, L.L.C. and Systems Management, Inc.
(Incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K filed April 10, 1997)
10.12 -- Master License Agreement between Personalized Programming,
Inc. and Systems Plus, Inc. dated November 15, 1982,
together with eight addenda thereto (Incorporated by
reference to Exhibit 10.12 to the Registration Statement on
Form S-1 (File No. 333-13101))
10.13 -- Management Services Agreement and Option Agreement, dated as
of September 1, 1996, between Medix, Inc. and National
Medical Systems, Inc. (Incorporated by reference to Exhibit
10.13 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-13101))
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.14 -- Stock Purchase Agreement, dated as of December 26, 1996, by
and among the Company, National Medical Systems, Inc. and
Electronic Data Systems Corporation (Incorporated by
reference to Exhibit 10.14 to Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-13101))
21 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21 to the Company's Annual Report on
Form 10-K filed March 12, 1998)
23 -- Consents of PricewaterhouseCoopers LLP
27 -- Financial Data Schedule (for SEC use only)
99 -- Historical Financial Statements of Systems Plus, Inc. and
Systems Plus Distribution, Inc., National Medical Systems,
Inc., RTI Business Systems, Inc., and Systems Management,
Inc. included in the Registrant's Form 8-K filed with the
Securities and Exchange Commission on April 8, 1997
</TABLE>
63
<PAGE> 66
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED ADDITIONS FROM BALANCE AT
YEAR BEGINNING OF YEAR TO EXPENSE ACQUISITIONS DEDUCTIONS END OF YEAR
---- ----------------- ----------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998........................ $1,392 $1,585 $ 3 $567 $2,413
1997........................ 323 616 661 208 1,392
1996........................ 212 180 0 69 323
</TABLE>
64
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Medical Manager Corporation on Forms S-8 (File Nos. 333-32717 and 333-73367)
and the Post Effective Amendment on Form S-4 (File No. 333-25215) of our report
dated February 5, 1999, except for the second paragraph of Note 13, the second
paragraph of Note 14 and the first paragraph of Note 14, as to which the dates
are March 2, 1999, March 15, 1999, and March 17, 1999, respectively, on our
audits of the consolidated financial statements and financial statement schedule
of Medical Manager Corporation as of December 31, 1998 and 1997 and for the
three years ended December 31, 1998, which report is included in this Annual
Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
March 23, 1999
65
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form
10-K of our reports dated March 7, 1997 on our audits of Systems Plus, Inc. and
Systems Plus Distribution, Inc.; dated February 28, 1997 on our audits of RTI
Business Systems, Inc.; dated March 14, 1997 on our audits of Systems
Management, Inc.; and dated February 28, 1997 on our audits of National Medical
Systems, Inc. which reports are included in Medical Manager Corporation's Form
8-K filed April 8, 1997.
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
March 23, 1999
4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 49,583
<SECURITIES> 0
<RECEIVABLES> 30,037
<ALLOWANCES> 2,413
<INVENTORY> 1,673
<CURRENT-ASSETS> 81,878
<PP&E> 15,866
<DEPRECIATION> 6,978
<TOTAL-ASSETS> 120,386
<CURRENT-LIABILITIES> 23,664
<BONDS> 0
0
0
<COMMON> 221
<OTHER-SE> 94,258
<TOTAL-LIABILITY-AND-EQUITY> 120,386
<SALES> 87,317
<TOTAL-REVENUES> 135,912
<CGS> 40,802
<TOTAL-COSTS> 67,598
<OTHER-EXPENSES> 45,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> 24,439
<INCOME-TAX> 8,666
<INCOME-CONTINUING> 15,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,773
<EPS-PRIMARY> .73
<EPS-DILUTED> .70
</TABLE>
