UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECRUITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to ___________________
Commission file number 0-22319
PATIENT INFOSYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1476509
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
46 Prince Street, Rochester NY 14607
------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 242-7200
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value Per Share
--------------------------------------
(Title of Class)
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 last 90 days. Yes [X] No [ ]
1
<PAGE>
As of February 28, 1997, 7,953,202 shares of Common Stock were outstanding,
and the aggregate market value of the shares of Common Stock of Patient
Infosystems, Inc. held by non-affiliates was approximately $35 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
2
<PAGE>
PART I
Item 1. Description of Business.
General
Patient Infosystems, Inc. (the "Company" or "Patient Infosystems") was
incorporated in the State of Delaware on February 22, 1995 under the name DSMI
Corp., changed its name to Disease State Management, Inc. on October 13, 1995,
and then changed its name to Patient Infosystems, Inc. on June 28, 1996. The
Company's principal executive offices are located at 46 Prince Street,
Rochester, New York 14607 and its telephone number is 716-242-7200.
Patient Infosystems provides patient-centered health care information
systems and services to manage, collect and analyze information to improve
patient compliance with prescribed treatment protocols, to improve the process
of off-site patient management and to enhance patient and provider information.
The Company's technology platform integrates behavior modification based
treatment compliance algorithms with an advanced voice recognition telephone
system, high speed data processing and analysis capability and demand publishing
and information distribution capabilities. The system utilizes trained telephone
operators and computerized interactive voice response technology to communicate
via telephone directly with the patient at home in order to gather relevant
patient data. This data is subsequently evaluated and automatically transmitted
via computer generated reports to health care payors, providers and patients,
with these reports being tailored to the specific needs of each recipient.
The Company markets its services to pharmaceutical manufacturers, pharmacy
benefit managers ("PBMs") and health care payors, such as managed care
organizations and insurance companies and health care providers to collect data
outside of the physician office and institutional setting to enhance compliance
by patients with prescribed treatment protocols. The Company's disease state
management programs are designed to provide the following benefits: (i) for
patients, improved communication with health care resources, enhanced self-care
skills, increased treatment adherence resulting in improved quality of care and
reduced inconvenience, risk and expense associated with unscheduled physician
interventions; (ii) for health care providers, more information on patient
progress, quicker identification of hard-to-manage patients, enhanced ability to
make timely treatment modifications, triage capability and expanded information
for development of improved treatment protocols; and (iii) for payors and
program sponsors, cost-effective management of the disease risk, improved
patient compliance and outcomes and enhanced patient and provider satisfaction.
The Company`s systems may also be used to address the full spectrum of health
care information needs with respect to care quality, patient satisfaction and
patient and provider education
Information Capture, Delivery and Analysis Technologies
The Company's technology platform integrates behavior modification based
compliance algorithms with an advanced voice recognition telephone system, high
speed data processing and analysis capability and demand publishing and
information distribution capabilities. The system utilizes trained telephone
operators and computerized interactive voice response technology to communicate
via telephone directly with the patient at home in order to gather relevant
patient data. In order to minimize costly live operator interaction, a computer
initiates each call to the patient, which call is automatically transferred to
an operator and finally routed to an automated speech application. Patients
respond to the recorded speech application by speaking normally. This approach
is designed to enable a wider variety of possible responses than is achievable
via telephone key pad. Depending on the patient's response, situation-specific
algorithms are applied to modify future questions and thus help customize the
collection of data.
3
<PAGE>
The Company's system analyzes and prepares the captured data for automatic
delivery to the payor, provider and patient using demand publishing. Demand
publishing technology enables the creation of highly individualized reports by
inserting stored graphic images and text which can be customized for race,
gender and age. These reports are also customized to the patient's specific
situation, and the system utilizes the information received during contacts with
the patient to further customize the content of the report. The data relevant to
the separate report for health care providers is formatted in a customized
report to be automatically transmitted via mail, fax or on-line.
Each contact with a patient contributes to the establishment of a
longitudinal data base which can be analyzed to provide information about
treatment modalities for patients, providers and payors. The Company's system is
designed to analyze patient compliance to prescribed treatment regimens and
gather additional clinical information so that improvements in such regimens can
be developed.
Integrated Disease State Management System
The Company's first application of its integrated information capture and
delivery technology is its integrated disease state management system. This
system is designed to provide caregivers with the ability to monitor, on a
cost-effective basis, patient condition and behavior while the patient is
between physician consultations. The Company believes that this will permit
caregivers to improve patient compliance and, as a consequence, improve patient
outcomes.
Each of the Company's integrated disease state management programs is
designed to provide one or more of the following benefits. For patients, these
intended benefits include: (i) improved access to and communication with health
care resources beyond existing hospital care and office and in-home provider
visits; (ii) enhanced self-care skills and knowledge of the disease covered by
the program; (iii) increased treatment compliance, motivation and confidence in
disease self-management resulting in improved quality of life; and (iv) reduced
inconvenience, risk and expense associated with unscheduled office visits,
emergency room interventions and hospitalizations.
For health care providers, these intended benefits include: (i) more
comprehensive information on patient progress; (ii) earlier identification of
hard-to-manage patients; (iii) enhanced ability to make timely treatment
modifications; (iv) better utilization of health care resources appropriate to
patient needs; and (v) expanded information for development of improved
treatment methods.
For payors and program sponsors, these intended benefits include: (i)
cost-effective management of disease risk; (ii) improved patient compliance;
(iii) improved treatment outcomes; and (iv) enhanced patient and provider
satisfaction.
The Company enrolled its first patients in a disease state management
program in October 1996. Because no patients have yet completed the course of
scheduled interventions in any of the Company's disease state management
programs there can be no assurance that the benefits described above will be
achieved.
The Company's disease state management system has three primary components.
First, using a panel of recognized medical and clinical experts, the Company
develops a disease-specific patient intervention and compliance program that
includes a template for the integration of each patient's history, current
medical status and treatment protocol. If the program is being developed on a
custom basis for a particular customer, the program is developed in consultation
with the customer's clinical staff and consultants. Second, the Company
establishes periodic telephone contacts with each patient to monitor the
patient's compliance with prescribed therapies as well as the patient's
treatment progress. Third, using the information obtained from patient contacts
and other available information regarding the patient and his
4
<PAGE>
or her treatment, such as physician records and pharmacy information,
personalized reports are prepared, typically following each patient contact, for
evaluation by the patient, the patient's health care provider and, on a periodic
basis, payors.
Development of Disease-Specific Protocols
The Company's disease-specific compliance programs are developed for
targeted diseases either on a customized or standardized basis. The Company
retains an internal clinical staff and panels of independent medical and
clinical experts to identify guidelines of generally accepted treatment
protocols and diagnostic interventions for particular diseases. These guidelines
serve as a template for information to be gathered from each patient. If the
program is being developed on a custom basis for a particular customer, the
program is developed in consultation with the customer's clinical staff and
consultants. In addition, the Company's internal clinical staff conducts
research of available databases and gathers information provided by medical
experts, insurance providers, governmental agencies, Medicare and Medicaid and
other sources to develop with the medical experts the disease-specific program
structure. The resulting compliance protocols are designed to enable the Company
to gather the necessary patient information to determine the extent of a
patient's compliance with his or her prescribed treatment, the effectiveness of
treatment and the progress of the patient's disease. As the Company's database
of disease-specific treatments expands, the Company intends to use that data to
modify, update and enhance its own disease state management compliance programs
and assist health care providers in improving treatment protocols.
Patient Enrollment
When a patient is enrolled in one of the Company's disease state management
programs a patient history is obtained, including the histories of the chronic
illness, medications, and surgical procedures as well as other information
deemed relevant by the disease-specific compliance program. This information is
included in the Company's database for each patient and is used to create
customized reports for distribution to each of the patient's health care
provider and payor as well as the patient. The patient report can include
information on the prescribed treatment of the patient's disease as well as the
use of the program and social support services to improve compliance with the
patient's treatment regimen. In addition, the Company's demand publishing
technology provides personalized behavior modification and educational materials
for the patient. The health care provider report contains the relevant clinical
and behavioral information gathered from the patient.
Patient Contacts
In accordance with a designated patient contact schedule, a patient will
periodically receive telephone calls from a live operator who, after confirming
the identity of the patient, will transfer the patient to an automated system
that will ask specific questions determined in accordance with the
disease-specific compliance program and provide information and motivational
feedback. Patient contact schedules are established for each disease state
management program, with the frequency of patient contact varying with the
disease under management and the goal of the applicable treatment and occurring
as often as daily or as infrequently as on a quarterly basis. The data gathered
from the patient during each contact is processed and stored in the Company's
database.
The compliance program takes into account patient responses to treatment
follow-up questions and initiates specific courses of action which can include
positive reinforcement messages, confirmation of prescription instructions and
scheduled callbacks to remind the patient of the need to take prescribed
medication. In addition, questions to be asked in future calls are modified
based upon the patient's responses during previous calls.
5
<PAGE>
The Company's disease state management system captures and processes the
information obtained from the patient during the contact and integrates this
information with the other data maintained by the Company, including prior
patient responses, patient medical history, treatments administered to date and
the mandated treatment protocols for the disease. This system automatically
prepares distinct reports using the Company's demand publishing technologies for
the patient and for the physician or other caregiver. Each report is tailored
for the particular requirements of each recipient. The patient's report, for
example, may include pictures, diagrams and informative discussions relating to
the treatment course intended to modify or reinforce certain behaviors. The
physician's report would likely be more factual and direct and summarize the
clinical and behavioral information that has been gathered.
On a periodic basis the Company will provide data to the patient's health
care payor with respect to that patient's progress. The Company will be able to
include information from various data sources in these reports for the purpose
of providing additional information with respect to a patient. For example, the
Company may be able to interact with the pharmacy services division of a payor
to determine the renewal frequency of prescriptions, which provides an
indication of whether a patient is taking his or her medication. In addition,
the system provides the flexibility to allow other information from physicians'
reports and hospital tests to be included in the periodic reports.
Compliance Assistance
The Company assists payors and health care providers in monitoring patient
compliance and works with health care providers to develop compliance and
education programs that can be implemented through the Company's system. The
Company's publishing technology enables production of patient-specific
compliance and education literature that is customized for an individual
patient. Once this literature is prepared it may be delivered to a patient by
mail, facsimile or on-line. In addition, the Company can implement a variety of
procedures including medication reminders via wireless two-way communication and
more frequent telephone communications for non-compliant patients or patients
with more difficult treatment regimens. The Company can provide additional
support services, such as an 800 number that will provide recorded information
with respect to a variety of patient education topics or other support messages.
Patient Infosystems Programs
The Company is developing customized disease state management and risk
assessment programs in conjunction with a number of customers, as well as
standardized disease state management programs in the areas of asthma and
diabetes. Each of the Company's customer agreements for its customized programs
provide for development fees to be paid to the Company upon the achievement of
certain milestones. In addition, the agreements for customized disease state
management programs all provide for some form of exclusivity period, during
which the Company is prohibited from engaging or participating in other projects
involving the specific disease target that is the subject of that program. The
exclusivity periods extend until, in general, a certain date or certain period
(ranging from eight to 24 months) following the achievement of a specified
milestone in the development or implementation of the program. The Company
enrolled its first patients in a disease state management program in October
1996, and has only a limited number of persons enrolled to date.
All of the Company's customer agreements, which are typically terminable
without cause by either party, require payment to the Company of operational
fees per enrolled patient. The amount of the per patient program operational fee
varies with the length, complexity and frequency of patient contacts as dictated
by the respective program protocols. Patient enrollment in each of the Company's
programs will depend upon the identification and referral by the Company's
customers of patients to the Company's system which will vary from program to
program.
6
<PAGE>
The Company has developed or is developing programs in the follwing areas:
Asthma
The Company is developing a disease state management program for asthmatic
patients that is being marketed to payors and other participants in the health
care industry. This program is being developed in both the English and Spanish
languages. American HomePatient, Inc. ("American HomePatient"), Centra
Healthcare Administrative Services, Inc. ("Centra"), Health Resources, Inc.
("Health Resources") and Harris Methodist Health Plan ("Harris Methodist") have
retained the Company to provide disease state management programs for patients
who are suffering from asthma and are enrolled in health care programs for which
these companies provide services.
Chronic Pain Management
Bristol-Myers Squibb Company, U.S. Pharmaceuticals Division and
Oncology/Immunology Division (collectively "Bristol-Myers") has retained the
Company to develop, implement and update a program to manage patients who are
experiencing intense levels of chronic pain.
7
<PAGE>
Congestive Heart Failure
The Company has entered into a services agreement with Bristol-Myers to
develop, implement and operate a disease state management program to aid in the
treatment of patients suffering from congestive heart failure. This program is
being developed in both the English and Spanish languages.
Diabetes
The Company is developing a disease state management program for diabetic
patients that it is marketing to payors and other participants in the health
care industry. This program is being developed in both the English and Spanish
languages. Centra and Health Resources have retained the Company to provide this
disease state management program for patients who are suffering from diabetes
and are enrolled in health care programs for which these companies provide
services.
Epilepsy
The Company has been retained by a pharmaceutical manufacturer to develop
and implement a risk assessment program for patients suffering from epilepsy.
Secondary Cardiovascular Disease
The Company has entered into a services agreement with Bristol-Myers to
develop, implement and operate a disease state management program relating to
the prevention of cardiovascular sequelae in patients who have recently
experienced certain cardiovascular illnesses or treatments such as angina,
cardiac bypass surgery or myocardial infarction. This program is being developed
in both the English and Spanish languages.
Weight Management
Bristol-Myers has retained the Company to develop and implement a program
to manage patients suffering from anorexia or cachexia secondary to a diagnosis
of cancer or AIDS.
Additional Disease Targets
The Company has identified additional opportunities in large chronic
disease markets, including in the treatment of hypertension, chronic obstructive
pulmonary disease, depression, cancer, osteoporosis, arthritis, HIV infection
and high risk pregnancy. Each of these targets has been identified as having
characteristics which make them attractive candidates for the Company's
programs. The Company is currently involved in discussions with customers for
the development of programs in a variety of these areas.
Significant Customer Concentration
The Company's current contracts are concentrated in a small number of
customers, with six of the Company's most significant contracts being with
Bristol-Myers. The Company expects that its sales of services will be
concentrated in a small number of customers for the foreseeable future.
Consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its operations. There can be no assurance that
customers will maintain their agreements with the Company, enroll a sufficient
number of patients in the programs developed by the Company for the Company to
achieve or maintain profitability, or that customers will renew their contracts
upon expiration or on terms favorable to the Company.
Relationship with Bristol-Myers
The Company has entered into six service agreements with Bristol-Myers
relating to the development, implementation and operation by the Company of
disease state management programs for certain specified diseases, and the
development and operation of a patient satisfaction survey and a general
medication compliance program (collectively the "Service Agreements").
Each of the Service Agreements provides for an exclusivity period (the
"Exclusivity Period"), during which time the Company is prohibited from engaging
or participating in any other projects involving the specific disease target
that is the subject of the Service Agreements. The Exclusivity Periods extend
from the effective dates of the Service Agreements until, in general, a certain
date or a certain period (ranging from eight to 24 months) following the
achievement of a specified milestone in the development or implementation of the
program (such as the completion of the pilot program). Three of the Service
Agreements provide that upon conclusion of the Exclusitivity Period,
Bristol-Myers has the right to negotiate with the Company for an exclusive
arrangement for the administration of the disease state management program,
provided that Bristol-Myers has enrolled a certain number of patients in the
program to date. In the event that such negotiations prove unsuccessful,
Bristol-Myers retains a right of first refusal with respect to any other offers
made to the Company for such arrangements for a period of nine or 12 months
following the Exclusivity Period.
The Service Agreements generally provide that Bristol-Myers retains
ownership to certain materials and other work product created by the Company
pursuant to the Service Agreements and that the Company is entitled to use other
materials and data. The extent of these rights varies by agreement. The Company
and Bristol-Myers have agreed to indemnify each other with respect to losses
arising from willful or negligent acts or omissions or breaches of the Service
Agreements by the indemnifying party pursuant to the Service Agreement. The
Service Agreements are terminable without cause by either party with either 30
or 90 days' notice. The Company has entered into Service Agreements with
Bristol-Myers in the disease areas of congestive heart failure, secondary
cardiology disease, chronic pain and weight management.
8
<PAGE>
Other Applications of the Integrated Information Capture and Delivery Technology
Outcomes Analysis
The Company intends to utilize information gathered from patients enrolled
in its programs to serve two purposes. First, information regarding treatment
results, success of the compliance program and patient reaction to differing
treatments or compliance protocols may be used by the Company to further improve
each disease-specific compliance program. Second, this information may be used
by payors, pharmaceutical companies and health care providers to assist in the
development of improved treatment modalities. The Company has developed
analytical methodologies using database management and information technologies.
The Company intends to use these data analysis technologies to predict the best
treatment methodologies for patients.
Clinical Studies
Many pharmaceutical companies and contract research organizations are
seeking more economical, efficient and reliable methods for compiling and
analyzing clinical data in conducting clinical trials. Furthermore, many drug
development protocols have begun to emphasize subjective criteria and outcomes
information. The Company believes that its system will allow it to develop
programs tailored to the measurement of outcomes data relating to the conduct of
later stage clinical trials. The Company believes that its system can also
assist pharmaceutical companies in studying and documenting the efficacy of
approved products in order to provide ongoing information to FDA or for
marketing purposes.
Patient Surveys
Organizations in many different areas of the health care industry survey
users regarding their products and services for a variety of reasons including
regulatory, marketing and research purposes. The Company's information systems,
with their ability to proactively contact patients in a cost-efficient manner,
may be used for this type of application.
Demand Management
Demand management involves assisting providers in evaluating patient
treatment needs to identify those patients who may not require immediate or
intensive services. The goal of demand management is to reduce the need for and
use of costly, often clinically unnecessary, medical services and arbitrary
managed-care interventions while improving the overall quality of life of
patients. The Company believes that its system can be used to provide automated
or semi-automated demand management services.
Case Management
Patients who are prescribed complex or high cost treatment regimens may
require a higher level of monitoring, interaction, care planning and
reassessment than patients with less complicated treatment regimens. The Company
believes that its system is capable of providing these enhanced services to such
patients to eliminate or minimize the unnecessary costs and medical attention
that result from a patient's lack of compliance with a prescribed treatment
regimen.
Sales and Marketing
The Company markets its integrated disease state management system to
organizations within the health care industry that are involved in the treatment
of disease or payment of medical services for
9
<PAGE>
patients who require complex or long-term medical therapies. These industry
organizations include five distinct groups: pharmaceutical companies, medical
service companies, PBMs, health care payors and employer groups. The Company
employs a sales and marketing staff of eight persons to market the Company's
systems. In addition, the senior members of the Company's management are
actively engaged in marketing the Company's programs.
The Company intends to expand its marketing efforts by conducting clinical
studies and implementing other measures designed to document the clinical and
cost benefits it believes will result from the application of its integrated
information capture and delivery system. In collaboration with the members of
its expert panels who are retained to develop program protocols and other
research and clinical technicians, the Company intends to promote the benefits
of its system through publication in clinical journals and presentations at
scientific conferences of the results of these studies. The Company is
conducting such studies designed to produce significant short-term data with
respect to its asthma and chronic pain management programs.
Research and Development
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of its integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development
expenses were $310,552 for the year ended December 31, 1996, and $89,909 during
the period from inception on February 22, 1995 to December 31, 1995. The
increase in these costs from 1995 to 1996 reflects initiation of development of
the Company's standardized disease state management programs for patients
suffering from asthma and diabetes.
The development and maintenance of the telecommunications and computer
publishing systems through which the Company operates its integrated information
capture and delivery system is a major component of its business. The
communications and information technology industries are subject to rapid and
significant technological change, and the ability of the Company to operate and
compete is dependent in significant part on its ability to update and enhance
its system continuously. In order to do so, the Company must be able to utilize
effectively its research and development capabilities and implement new
technology in order to enhance its systems. At the same time, the Company must
not jeopardize its ability to contact patients and to process and publish
patient information or adapt to customer preferences or needs. The Company will
maintain a significant investment in its technology, and therefore is subject to
the risk of technological obsolescence.
Competition
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and the Company competes with various companies in each of its
disease target markets. Many of the Company's competitors have significantly
greater financial, technical, product development and marketing resources than
the Company. Furthermore, other major information, pharmaceutical and health
care companies not presently offering disease state management or other health
care information services may enter the markets in which the Company intends to
compete. In addition, with sufficient financial and other resources, many of
these competitors may provide services similar to those of the Company without
substantial barriers. The Company does not possess any patents with respect to
its integrated information capture and delivery system, and although it has
filed a patent application with respect to certain aspects of its integrated
information capture and delivery system and its integrated disease state
management system, there can be no assurance that this application will result
in the issuance of a patent, or if issued, that a patent would provide the
Company with any competitive advantage.
10
<PAGE>
The Company's potential competitors include specialty health care
companies, health care information system and software vendors, health care
management organizations, pharmaceutical companies and other service companies
within the health care industry. Many of these competitors have substantial
installed customer bases in the health care industry and the ability to fund
significant product development and acquisition efforts. The Company will also
compete against other companies that provide statistical and data management
services, including clinical trial services to pharmaceutical companies.
The Company is aware of several large pharmaceutical and medical service
companies that have publicly stated that they intend to be involved in providing
comprehensive disease state management services. The Company believes that the
principal competitive factors in its market are the ability to link patients,
health care providers and payors, and provide the relevant health care
information at an acceptable cost. In addition, the Company believes that the
ability to anticipate changes in the health care industry and identify current
needs are important competitive factors.
Quality Control
The Company has developed quality control measures designed to insure that
information obtained from patients is accurately transcribed, that reports
covering each patient contact are delivered to health care providers and
patients and that the Company's personnel and technologies are interacting
appropriately with patients and health care providers. Quality control systems
include random monitoring of telephone calls, patient surveys to confirm patient
participation and effectiveness of the particular program, and supervisory
reviews of telephone agents.
Government Regulation
The health care industry, including the current and proposed business of
the Company, is subject to extensive regulation by both the Federal and state
governments. A number of states have extensive licensing and other regulatory
requirements applicable to companies that provide health care services.
Additionally, services provided to health benefit plans in certain cases are
subject to the provisions of the Employee Retirement Income Security Act
("ERISA") and may be affected by other state and Federal statutes. Generally,
state laws prohibit the practice of medicine and nursing without a license. Many
states interpret the practice of nursing to include health teaching, health
counseling, the provision of care supportive to or restorative of life and well
being and the execution of medical regimens prescribed by a physician.
Accordingly, to the extent that the Company assists providers in improving
patient compliance by publishing educational materials or providing behavior
modification training to patients, such activities could be deemed by a state to
be the practice of medicine or nursing. Although the Company has not conducted a
survey of the applicable law in all 50 states, it believes that it is not
engaged in the practice of medicine or nursing. There can be no assurance,
however, that the Company's operations will not be challenged as constituting
the unlicensed practice of medicine or nursing. If such a challenge were made
successfully in any state, the Company could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results or the inability to
successfully restructure its contractual arrangements could have a material
adverse effect on the Company.
The confidentiality of patient information is subject to regulation by
state law. A variety of statutes and regulations exist safeguarding privacy and
regulating the disclosure and use of medical information. State constitutions
may provide privacy rights and states may provide private causes of action for
violations of an individual's "expectation of privacy." Tort liability may
result from unauthorized access and breaches of patient confidence. The Company
intends to comply with state law and regulations governing medical information
privacy.
11
<PAGE>
In addition, on August 21, 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191. This legislation
requires the Secretary of Health and Human Services to adopt national standards
for electronic health transactions and the data elements used in such
transactions. The Secretary is required to adopt safeguards to ensure the
integrity and confidentiality of such health information. Violation of the
standards is punishable by fines and, in the case of wrongful disclosure of
individually identifiable health information, imprisonment. The Secretary is
required to issue the standards not later than February 21, 1998. The Company
cannot predict what requirements will ultimately be adopted by the Secretary,
however, such requirements could have an adverse effect on the Company's
business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between health care
providers. These laws prohibit certain fee splitting arrangements between health
care providers, as well as direct and indirect payments, referrals or other
financial arrangements that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Possible sanctions for violation of these restrictions
include civil and criminal penalties. Further, criminal violations may result in
mandatory exclusions of up to five years and additional permissive exclusions
from participation in Medicare and Medicaid programs.
Regulation in the health care field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental approvals,
comply with applicable regulations or comply with existing or future laws, rules
or regulations or their interpretations.
Intellectual Property
The Company considers its methodologies, processes and know-how to be
proprietary. The Company seeks to protect its proprietary information through
confidentiality agreements with its employees. The Company's policy is to have
employees enter into confidentiality agreements containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company, requiring employees to acknowledge, and, if requested, assist in
confirming the Company's ownership of any new ideas, developments, discoveries
or inventions conceived during employment, and requiring assignment to the
Company of proprietary rights to such matters that are related to the Company's
business.
The Company has filed a patent application with respect to certain aspects
of its integrated information capture and delivery and integrated disease state
management systems. No assurance can be given that a patent will issue or that
if issued such patent will provide the Company with a competitive advantage.
Employees
As of February 28, 1997, the Company had 46 employees.
Item 2. Description of Properties.
The Company's executive and corporate offices are located in Rochester, New
York in approximately 11,400 square feet of leased office space under an
operating lease that expires on November 30, 1999.
Item 3. Legal Proceedings.
12
<PAGE>
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters To A Vote Of Security Holders.
On November 22, 1996 the stockholders of the Company, acting by the written
consent of a majority of stockholders, approved a .72 for 1.00 reverse stock
split of all outstanding shares of its common stock.
13
<PAGE>
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information
The Company's common stock is traded on the NASDAQ National Market System
under the symbol PATI. The Company's initial public offering occurred on
December 19, 1996, therefore information on the market value per share of the
Company's common stock as quoted on the NASDAQ National Market System is only
available for the period from December 19, 1996 through December 31, 1996.
1996 Market Value Per Share
---------------------------
Quarter High Low
------- ---- ---
4th $9.25 $8.00
Year $9.25 $8.00
(b) Holders
The approximate number of holders of the Company's common stock as of
February 28, 1997 is 62. However, the company believes that there are in excess
of 600 beneficial holders of Common Stock of the Company.
(c) Dividends
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all future earnings, if any, to fund the development
and growth of its business. Any future determination to pay cash dividends will
be at the discretion of the Board of Directors.
14
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Period from Period from
February 22, 1995 February 22, 1995
Year ended (Inception) to (Inception) to
December 31, 1996 December 31, 1995 December 31, 1996
----------------- ----------------- -----------------
Statement of Operations Data:
<S> <C> <C> <C>
Revenues $845,412 $113,000 $958,412
----------- ----------- -----------
Costs and Expenses:
Cost of Sales 748,322 111,870 860,192
Sales and Marketing 913,547 375,384 1,288,931
General and Administrative 1,760,760 678,498 2,439,258
Research and Development 310,552 89,909 400,461
----------- ----------- -----------
Total Costs and Expenses 3,733,181 1,255,661 4,988,842
----------- ----------- -----------
Operating Loss (2,887,769) (1,142,661) (4,030,430)
Interest Income 81,333 26,009 107,342
----------- ----------- -----------
Net Loss $(2,806,436) $(1,116,652) $(3,923,088)
=========== =========== ===========
Net Loss Per Common and
Common Share Equivalents(1) $ (.44) $ (.18) $ (.62)
=========== =========== ===========
Weighted Average Common
and Common Share Equivalents 6,347,716 5,954,299 6,347,716
=========== =========== ===========
</TABLE>
Balance Sheet Data: December 31, 1996 December 31, 1995
----------------- -----------------
Cash and Cash Equivalents $15,666,609 $1,182,080
Working Capital 14,591,700 611,655
Total Assets 17,085,387 1,763,629
Total Liabilities 1,631,650 598,464
Deficit Accumulated During
the Development Stage (3,923,088) (1,116,652)
Total Stockholders' Equity 15,453,737 1,165,165
(1) See Note 1 of Notes to Financial Statements for a description of the
calculation of net loss per share.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis provides a review of the Company's
operating results for the year ended December 31, 1996 and the period from
inception on February 22, 1995 to December 31, 1995, and its financial condition
at December 31, 1996. The focus of this review is on the underlying business
reasons for significant changes and trends affecting the revenues, net earnings,
and financial condition of the Company. This review should be read in
conjunction with the accompanying financial statements.
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities, this Annual Report on Form 10-K includes
forecasts by the Company's management about future performance and results.
Because they are forward-looking, these forecasts involve uncertainties. They
include risks of market acceptance of or preference for the Company's systems
and services, competitive forces, the impact of, and changes in, government
regulations, general economic factors in the healthcare industry, and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
Overview
The Company was formed on February 22, 1995, is in the development stage
and has a limited operating history from which to evaluate its performance.
Although the Company has completed the development of its integrated information
capture and delivery system and is developing several disease state management
programs for specific diseases, further development activities may be necessary
to implement these programs. In October 1996 the Company began enrolling
patients in its first disease state management program, and currently has
a limited number of patients enrolled in five of its disease-specific programs.
The Company has generated limited revenues to date and has recorded losses
since inception, totaling $3,923,088 through December 31, 1996, which losses are
continuing to date. The Company anticipates that its losses will continue at
least until it has completed the development of programs for several customers
and has begun providing services to a substantial number of patients for such
customers.
The Company has entered into services agreements to develop, implement and
operate programs for: (i) patients who have recently experienced certain
cardiovascular events; (ii) patients who have been diagnosed with primary
congestive heart failure; (iii) patients suffering from anorexia or cachexia
secondary to diagnosis of cancer or AIDS; (iv) patients suffering from chronic
pain, and (v) patients who are at increased risk of suffering from epilepsy. In
addition, the Company has entered into services agreements to operate its
disease management programs for patients suffering from asthma or diabetes.
These contracts provide for, and the Company anticipates future contracts will
provide for, fees paid by its customers based upon the number of patients
participating in each of its programs, as well as initial program development
fees from customers for the development of a disease-specific program. The
Company's program development contracts typically require payment from the
customer at the time that the contract is executed, with additional payments
made as certain development milestones are met. Development contract revenue is
recognized on a percentage of completion basis, in accordance with the ratio of
total development cost incurred to the estimated total development costs for the
entire project. Losses, if any, related to program development will be
recognized in full as identified. The Company's contracts call for a fixed
program operational fee to be paid by the customer for each patient enrolled for
a series of program services as defined in the contract. The timing of customer
payments for the delivery of program services varies by contract. Revenues from
program operations are recognized ratably as the program services are delivered.
The amount of the per patient fee varies from program to program depending upon
the number of patient contacts required, the complexity of the interventions and
the detail
16
<PAGE>
of the reports generated. The Company has not capitalized any costs related to
the development of software for use in its disease state management programs
since all of such software has been developed for internal use.
The sales cycle for the Company's programs is expected to extend for
periods of six to nine months from initial contact to contract execution. During
these periods, the Company may expend substantial time, effort and funds to
prepare a contract proposal and negotiate the contract. The Company may be
unable to consummate a commercial relationship after the expenditure of such
time, effort and financial resources.
The Company anticipates that it will begin to provide other services to
customers in the healthcare industry during 1997 which involve new applications
of its information capture and delivery system. These include patient surveys,
health risk assessments, nursing support lines and marketing support functions.
It is anticipated that the revenues generated from services other than those
provided in conjunction with disease state management programs will represent an
increasing percentage of total revenues as the Company continues to expand the
systems and services that it makes available to its customers.
Results of Operations
Revenues
The Company generated revenue of $845,412 for the year ended December 31,
1996, and $113,000 during the period from inception on February 22, 1995 to
December 31, 1995. A summary of these revenues by category is as follows:
Period from
February 1995
Year Ended (Inception) to
Revenues December 31,1996 December 31, 1995
- -------- ---------------- -----------------
Development Fees $798,138 $ 84,000
Licensing Fees 35,556 -
Operational Fees 11,718 29,000
-------- --------
Total Revenues $845,412 $113,000
======== ========
The increase in program development fees reflects the increase in the level
of development activities for the Company's customized programs. The increase in
program licensing fees reflects the initiation of licensing of the Company's
standardized programs. Revenues from program operations are not significant
because patient enrollments in the Company's disease state management programs
were not initiated until October 1996.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by
third parties, and other expenses associated with the development of the
Company's customized disease state management programs, as well as the operation
of each of its disease state management programs. In addition, cost of sales for
1996 includes accrued losses on program development in accordance with the
Company's policy of recognizing such losses, if any, in full as identified. The
accrued loss for 1996 is a result of a particular contract for which the amount
of the program development fee is based upon the success of the program, and the
fact
17
<PAGE>
that the guaranteed development revenue for this program is less than the
estimated cost of its development. To the extent that the Company enters into
any contracts of this type in the future, and that those contracts provide for
guaranteed development revenue which is less than the estimated cost of program
development, such losses will continue to be accrued. Cost of sales was $748,322
for the year ended December 31, 1996, and $111,870 for the period from inception
on February 22, 1995 to December 31, 1995. The increase in these costs primarily
reflects an increased level of program development activities.
Sales and marketing expenses for the year ended December 31, 1996 were
$913,547, and $375,384 for the period from inception on February 22, 1995 to
December 31, 1995. These costs consist primarily of salaries, related benefits
and travel costs. These expenditures allowed the Company to undertake initial
marketing efforts to pharmaceutical companies, payors and other health care
services organizations. The increase in these costs reflects an increase in the
size of the Company's sales and marketing staff.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of the Company. General and administrative expenses for the year ended
December 31, 1996 were $1,760,760, and $678,498 for the period from inception on
February 22, 1995 to December 31, 1995. These expenditures were incurred to
develop the corporate infrastructure necessary to support anticipated program
development and operations. The increase in these costs was caused by an
increase in the Company's level of business activity, and the addition of
required administrative personnel.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of its integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development
expenses for the year ended December 31, 1996 were $310,552, and $89,909 for the
period from inception on February 22, 1995 to December 31, 1995. The increase in
these costs reflects initiation of development of the Company's standardized
disease state management programs for patients suffering from asthma and
diabetes.
During 1996 each of the Company's categories of costs and expenses
decreased as a percentage of revenues from the prior period, despite the fact
that they increased in absolute dollars, due to the significant increase in the
Company's revenues during 1996.
Interest income was $81,333 for the year ended December 31, 1996, and
$26,009 for the period from inception on February 22, 1995 to December 31, 1995.
The increase in interest income reflects the additional funds available to the
Company for investment as a result of its initial public offering on December
19, 1996.
The Company had a net loss of $2,806,436 for the year ended December 31,
1996, and a loss of $1,116,652 for the period from inception on February 22,
1995 to December 31, 1995. This represents a loss of $.44 per share for 1996,
and a loss of $.18 per share for the period from inception on February 22, 1995
to December 31, 1995.
Liquidity and Capital Resources
At December 31, 1996 the Company had working capital of $14,591,700, as
compared to $611,655 at December 31, 1995. Since its inception the Company has
primarily funded its operations, working capital needs and capital expenditures
from the sale of equity securities. The Company's initial capitalization of
$500,000 was completed in February 1995. The Company received $1,800,000 from
the
18
<PAGE>
sale of equity securities in a private placement during the third quarter of
1995, and $3,000,000 from the sale of additional equity securities in a private
placement during the second quarter of 1996. On December 19, 1996 the Company
completed an initial public offering of its common stock which generated net
proceeds to the Company of $14,082,048.
Capital expenditures during 1996 were $494,577, as compared to expenditures
of $579,983 during the period from inception on February 22, 1995 to December
31, 1995. The expenditures during both periods represented the purchase of the
significant technology platform components of the integrated information capture
and delivery system as well as purchases required to support the Company's
growing employee base.
The Company's development contracts generally require that payments be made
by the customer at the time of contract execution and at the achievment of
certain milestones in the development process. These payments are normally
received in advance of the Company's recognition of the associated revenue. The
timing of customer payments for program operation services varies by contract,
but typically occurs prior to the associated services being provided. The
Company recognizes deferred revenue for amounts billed for these services in
advance of the rendering of the services. The advance payments have been a
source of liquidity for the Company. The Company anticipates that its billing
practices are likely to continue in this manner in the forseeable future.
The Company has been substantially dependent upon the public and private
sale of securities to fund its research and development activities and working
capital requirements. In order to implement programs using the Company's
integrated information capture and delivery system, the Company will be required
to devote substantial additional assets to the development of technology, the
construction of physical facilities and the acquisition of telephone and
computer equipment. The Company will also be required to retain the services of
employees in advance of obtaining contracts to provide services.
Inflation
Inflation did not have a significant impact on the Company's costs during
1996 or the period from inception on February 22, 1995 to December 31, 1995. The
Company continues to monitor the impact of inflation in order to minimize its
effects through pricing strategies, productivity improvements and cost
reductions.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project," or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
19
<PAGE>
Item 8. Financial Statements.
Index to Financial Statements Page
- ----------------------------- ----
Independent Auditors' Report 21
Balance Sheets 22
Statements of Operations 23
Statements of Stockholders' Equity 24
Statements of Cash Flows 25
Notes to Financial Statements 26-31
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Patient Infosystems, Inc.:
We have audited the accompanying balance sheets of Patient Infosystems, Inc. (a
development stage enterprise) as of December 31, 1996 and 1995 and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1996 and for the periods from February 22, 1995 (Inception)
to December 31, 1995 and from February 22, 1995 (Inception) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Patient Infosystems, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the year
ended December 31, 1996 and for the periods from February 22, 1995 (Inception)
to December 31, 1995 and from February 22, 1995 (Inception) to December 31, 1996
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Rochester, New York
January 31, 1997
21
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $15,666,609 $ 1,182,080
Accounts receivable 386,215 4,055
Prepaid expenses and other
current assets 170,526 23,984
----------- -----------
Total current assets 16,223,350 1,210,119
PROPERTY AND EQUIPMENT, net 862,037 553,510
----------- -----------
TOTAL ASSETS $17,085,387 $ 1,763,629
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 196,674 $ 362,769
Accrued salaries and wages 127,029 48,259
Accrued initial public offering costs 446,568 --
Accrued expenses 211,457 19,381
Deferred revenue 582,783 168,055
Accrued loss on development contracts 67,139 --
----------- -----------
Total current liabilities 1,631,650 598,464
----------- -----------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value:
shares - authorized: 5,000,000;
Series A Convertible Preferred Stock;
issued and outstanding:
1996 -0-; 1995 - 1,800,000 -- 18,000
Series B Convertible Preferred Stock;
issued and outstanding: None -- --
Common stock - $.01 par value: shares
- authorized: 20,000,000; issued and
outstanding: 1996 - 7,653,202;
1995 - 3,602,880 76,532 36,029
Additional paid-in capital 19,300,293 2,227,788
Deficit accumulated during the
development stage (3,923,088) (1,116,652)
----------- -----------
Total stockholders' equity 15,453,737 1,165,165
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,085,387 $ 1,763,629
=========== ===========
See notes to financial statements.
22
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Period from Period from
February 22, 1995 February 22, 1995
Year ended (Inception) to (Inception) to
December 31, December 31, December 31,
1996 1995 1996
REVENUES $ 845,412 $ 113,000 $ 958,412
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 748,322 111,870 860,192
Sales and marketing 913,547 375,384 1,288,931
General and administrative 1,760,760 678,498 2,439,258
Research and development 310,552 89,909 400,461
----------- ----------- -----------
Total costs and expenses 3,733,181 1,255,661 4,988,842
----------- ----------- -----------
OPERATING LOSS (2,887,769) (1,142,661) (4,030,430)
INTEREST INCOME 81,333 26,009 107,342
----------- ----------- -----------
NET LOSS $(2,806,436) $(1,116,652) $(3,923,088)
=========== =========== ===========
NET LOSS PER COMMON AND
COMMON SHARE
EQUIVALENTS $ (.44) $ (.18) $ (.62)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON SHARE
EQUIVALENTS 6,347,716 5,954,299 6,347,716
=========== =========== ===========
See notes to financial statements.
23
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Total
Preferred Stock Common Stock Paid-in Development Stockholders'
Shares Amount Shares Amount Capital Stage Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock, substantially
all of which was issued on
February 22, 1995 at $0.14 per share -- -- 3,602,880 $36,029 464,371 $ -- $ 500,400
Sale of Series A convertible preferred
stock at $1.00 per share in August and
September 1995 (net of issuance
costs of $18,583) 1,800,000 18,000 -- -- 1,763,417 -- 1,781,417
Net loss for the period from
Inception to December 31, 1995 -- -- -- -- -- (1,116,652) (1,116,652)
---------- ------- --------- ------- ---------- ----------- -----------
Balances, December 31, 1995 1,800,000 18,000 3,602,880 36,029 2,227,788 (1,116,652) 1,165,165
Sale of Series B convertible preferred
stock at $5.00 per share in May
and June 1996 (net of issuance
costs of $3,250) 600,000 6,000 -- -- 2,990,750 -- 2,996,750
Compensation expense related to
issuance of stock warrants -- -- -- -- 13,208 -- 13,208
Exercise of stock warrants -- -- 4,322 43 2,959 -- 3,002
Sale of common stock at $8.00 per share
in December 1996 (net of issuance
costs of $1,917,952) -- -- 2,000,000 20,000 14,062,048 -- 14,082,048
Conversion of Series A and B
convertible preferred stock
to common stock (2,400,000) (24,000) 2,046,000 20,460 3,540 -- --
Net loss for the year end
December 31, 1996 -- -- -- -- -- (2,806,436) (2,806,436)
---------- ------- --------- ------- ---------- ----------- -----------
Balances, December 31, 1996 -- $ -- 7,653,202 $76,532 19,300,293 $(3,923,088) $15,453,737
========== ======== ========= ======= ========== =========== ===========
</TABLE>
See notes to financial statements.
24
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from
February 22, 1995 February 22, 1995
Year ended (Inception) to (Inception) to
December 31, December 31, December 31,
1996 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,806,436) $(1,116,652) $(3,923,088)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 186,050 26,473 212,523
Compensation expense related
to issuance of stock warrants 13,208 -- 13,208
Increase in accounts receivable (382,160) (4,055) (386,215)
Increase in prepaid expenses and
other current assets (146,542) (23,984) (170,526)
(Decrease) increase in accounts payable (166,095) 362,769 196,674
Increase in accrued salaries and wages 78,770 48,259 127,029
Increase in accrued expenses 192,076 19,381 211,457
Increase in deferred revenue 414,728 168,055 582,783
Increase in accrued loss on
development contracts 67,139 -- 67,139
----------- ----------- -----------
Net cash used in operating
activities (2,549,262) (519,754) (3,069,016)
----------- ----------- -----------
INVESTING ACTIVITY:
Property and equipment additions (494,577) (579,983) (1,074,560)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock, net 17,081,800 2,281,817 19,363,617
Increase in accrued initial
public offering costs 446,568 -- 446,568
----------- ----------- -----------
Net cash provided by
financing activities 17,528,368 2,281,817 19,810,185
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 14,484,529 1,182,080 15,666,609
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,182,080 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $15,666,609 $ 1,182,080 $15,666,609
=========== =========== ===========
</TABLE>
See notes to financial statements.
25
<PAGE>
PATIENT INFOSYSTEMS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. designs and develops health care
information systems and services to manage, collect and analyze patient-related
information to improve patient compliance with prescribed treatment protocols.
Through its various patient compliance programs for disease state management,
the Company provides important benefits for the patient, the health care
provider and the payor. The Company was incorporated in Delaware on February 22,
1995 under the name DSMI Corp., changed its name to Disease State Management,
Inc. on October 13, 1995, and on June 28, 1996 changed its name to Patient
Infosystems, Inc. The Company has selected December 31 as the close of its
fiscal year.
Development Stage Activities - Through December 31, 1996 the Company's
development activities have consisted primarily of efforts to raise funds,
develop the first application of its information capture and delivery system
(which is a system that proactively collects and analyzes information relevant
to patients in specific disease categories to improve patient compliance with
prescribed regimens), and market its disease management programs for specific
diseases. Successful completion of the Company's program development, and
ultimately the attainment of profitable operations, is dependent upon future
events, including achieving market acceptance of its products.
Use of Estimates in the Preparation of Financial Statements - 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
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates.
Fair Value of Financial Instruments - The Company's financial instruments
consist of cash and cash equivalents, accounts receivable and accounts payable
which are carried at cost, which approximates fair market value.
Revenue Recognition and Deferred Revenue - The Company's principal source of
revenue to date has been from contracts with a pharmaceutical company for the
development and operation of disease management programs for chronic diseases.
Deferred revenue represents amounts billed in advance under these contracts.
Future revenue sources are expected to include disease management programs and
other health care information system applications.
Development Contracts - The Company's program development contracts typically
require payment from the customer at the time that the contract is executed,
with additional payments made as certain development milestones are met.
Development contract revenue is recognized on a percentage of completion basis,
in accordance with the ratio of total development cost incurred to the estimated
total development costs for the entire project. Losses, if any, are recognized
in full as identified.
Program Operations - The Company's program operation contracts call for a per
enrolled patient fee to be paid by the customer for a series of program services
as defined in the contract. The timing of customer payments varies by contract,
but typically occurs in advance of the associated services being provided.
Revenues from program operations are recognized ratably as the program services
are delivered.
Cash and Cash Equivalents - Cash and cash equivalents include all highly liquid
debt instruments with original maturities of three months or less.
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentration of credit risk consist principally of cash and cash
equivalents and accounts receivable. The Company places its cash and cash
equivalents with high credit quality institutions.
26
<PAGE>
The Company's current contracts are concentrated in a small number of customers,
with six of the Company's fifteen contracts being with one customer.
Consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its operations.
During the year ended December 31, 1996, and the period from February 22, 1995
(Inception) to December 31, 1995, approximately $796,800 (94%) and $84,000
(74%), respectively, of the Company's revenues arose from contracts with one
customer. At December 31, 1996 and December 31, 1995, accounts receivable
included balances of $265,940 and $0, respectively, from contracts with that
customer.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 10 years.
In 1996, the Company adopted 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". SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
Research and Development - Research and development costs consist principally of
compensation and benefits paid to Company employees. All research and
development costs are expensed as incurred.
Income Taxes - The Company uses the asset and liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". Under the asset and liability method,
deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards.
Net Loss Per Share - Net loss per share is based on the weighted average number
of common shares outstanding subsequent to the Company's initial public offering
in 1996. Pursuant to rules of the Securities and Exchange Commission Staff, all
common and common equivalent shares issued by the Company at a price less than
the initial public offering price during at least the 12 months preceding the
offering date (using the treasury stock method until shares are issued) have
been included in the calculation of common and common equivalent shares
outstanding for all periods presented prior to the December 1996 initial public
offering.
Retirement Plan - The Company has a retirement plan which qualifies under
Section 401(k) of the Internal Revenue Code. This retirement plan allows
eligible employees to contribute 1% to 15% of their income on a pretax basis to
the plan. The Company's annual contribution to the plan is at the discretion of
the Board of Directors. The Company made no contributions to this plan in 1996
or 1995.
Stock Split - On November 22, 1996, the Company effected a .72-for-1 reverse
stock split of all outstanding shares of common stock. Accordingly, all shares
and per share amounts have been adjusted to reflect the reverse stock split as
though it had occurred at February 22, 1995.
27
<PAGE>
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
December 31 December 31,
1996 1995
Computer software $ 307,735 $137,153
Computer equipment 409,681 242,393
Telephone equipment 134,656 120,233
Leasehold improvements 37,729 12,200
Office furniture and equipment 184,708 68,004
---------- --------
1,074,509 579,983
Less accumulated depreciation
and amortization 212,472 26,473
---------- --------
Property and equipment, net $ 862,037 $553,510
========== ========
3. INCOME TAXES
The Company has not recorded any income tax expense during the period from
Inception to December 31, 1996 because of operating losses incurred since
inception.
As of December 31, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $3,900,000 which are available to
offset future Federal taxable income. These carryforwards expire in 2011. No tax
benefit relating to the net operating loss carryforwards has been reflected in
the financial statements due to the uncertainty regarding the utilization of any
such benefit, and a valuation allowance has been recognized to offset any
deferred tax asset related to this item. Future benefit may occur to the extent
taxable income is earned prior to the expiration of the carryforward period.
4. PUBLIC OFFERING OF COMMON STOCK
In December 1996, the Company sold 2,000,000 shares of common stock through an
initial public offering which generated net proceeds of $14,082,048 after
deducting applicable issuance costs and expenses. On January 8, 1997, an
additional 300,000 shares of common stock were sold pursuant to an underwriters
over-allotment provision, which generated net proceeds to the Company of
$2,232,000 after deducting underwriting discounts and commissions.
In connection with this initial public offering, the Company's outstanding
shares of Series A and B convertible preferred stock were converted into
2,046,000 shares of common stock.
5. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for the
benefit of certain employees, non-employee directors, and key advisors. The
Company has adopted the disclosures-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the Stock Option Plan
as it relates to employees. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the date of grant for awards
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common and common share equivalents would have been increased to the
pro forma amounts indicated below:
28
<PAGE>
Period from Period from
February 22, 1995 February 22, 1995
(Inception) (Inception)
Year ended to December 31, to December 31,
December 31, 1996 1995 1996
Net loss - as reported $(2,806,436) $(1,116,652) $(3,923,088)
Net loss - pro forma $(2,879,457) $(1,125,428) $(4,004,885)
Net loss per common
and common share
equivalents - as reported $ (.44) $ (.18) $ (.62)
Net loss per common
and common share
equivalents - pro forma $ (.46) $ (.18) $ (.64)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using an assumed risk-free interest rate of
7% and an expected life of 7 years. As the Company was still considered a
private company for the purposes of applying SFAS No. 123 for the period from
Inception to June 30, 1996, the Company did not include a volatility factor
assumption in its fair value model. For the options granted after July 1, 1996,
the Company has used a volatility factor of .60. For purposes of pro forma
disclosure, the estimated fair value of each option is amortized to expense over
that option's vesting period. The Stock Option Plan authorizes 1,080,000 shares
of common stock to be issued.
Stock options granted under the Stock Option Plan may be of two types: (1)
incentive stock options and (2) nonqualified stock options. The option price of
such grants shall be determined by a Committee of the Board of Directors (the
"Committee"), but shall not be less than the estimated fair market value of the
common stock at the date the option is granted. The terms of the grants shall be
fixed by the Committee, with no term lasting longer than ten years. The ability
to exercise such options shall be determined by the Committee when the options
are granted. All of the outstanding options vest at the rate of 20% per year
with the exception of 36,000 options which were vested as of the date of grant.
29
<PAGE>
A summary of stock option activity follows:
Weighted-
Outstanding Average
Options Exercise Price
Options granted during the period
from Inception to December 31, 1995
(weighted average fair value of $.13) 658,800 $ .35
Options forfeited by holders during the
period from Inception to December 31, 1995 (65,520) $ .54
Options exercised during the period
from Inception to December 31, 1995 (2,880) $ .14
-------
Options outstanding at December 31, 1995 590,400 $ .33
Options granted during the year ended
December 31, 1996 (weighted average
fair value of $3.24) 365,400 $5.32
Options forfeited by holders during the year
ended December 31, 1996 (63,840) $ .87
-------
Options outstanding at December 31, 1996 891,960 $2.34
=======
Options exercisable at December 31, 1996 154,320 $ .30
=======
Options available for grant at December 31, 1996 188,040
=======
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
$.14 - $.99 504,900 8.34 $ .28 143,460 .24
$1.00 - $1.99 104,040 8.88 1.42 9,360 1.04
$2.00 - $4.99 130,740 9.25 2.08 1,500 2.08
$5.00 - $10.00 152,280 9.83 10.00 -- --
------- -------
891,960 154,320
======= =======
The Company also has outstanding stock purchase warrants entitling the holders
to purchase a total of 100,800 shares of common stock at prices ranging from
$.14 to $10.00 per share (weighted average exercise price of $.84). At December
31, 1996, 25,920 of these warrants are currently vested, with the remaining
74,880 warrants vesting at 20% per year. The Company has recorded compensation
cost of $13,208 for the year ended December 31, 1996 in connection with the
issuance of these warrants.
30
<PAGE>
6. COMMITMENTS
The Company leases office space for its main operating facility under an
operating lease agreement expiring in November 1999. Rental expense from this
lease for the year ended December 31, 1996 and the period from Inception to
December 31, 1995 was $70,479 and $40,375, respectively.
At December 31, 1996, future minimum lease payments under this lease are
summarized as follows:
1997 $152,910
1998 158,608
1999 150,535
--------
$462,053
========
31
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
32
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information concerning the Company's
directors and executive officers as of February 28,1997.
Name Age Position
- ---- --- --------
Derace L. Schaffer, M.D........... 48 Chairman of the Board
Donald A. Carlberg................ 45 Director, President and Chief
Executive Officer
Gregory D. Brown.................. 35 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
James D. Turner................... 37 Senior Vice President, Sales and
Marketing
Kent A. Tapper.................... 41 Vice President, Systems Engineering
John Pappajohn.................... 68 Director
Barbara J. McNeil, M.D., Ph.D..... 56 Director
Carl F. Kohrt, Ph.D............... 53 Director
Derace L. Schaffer, M.D. has been Chairman of the Board and a Director of
the Company since its inception in February 1995. Since 1980 Dr. Schaffer has
been the President of The Ide Group, P.C., a group of physicians providing
radiological services at multiple locations in New York State, and since 1990 he
has also been President of The Lan Group, a venture capital firm specializing in
health care investments. He serves as a Clinical Professor at the University of
Rochester School of Medicine and a Director of NeuralTech, Inc., NeuralMed,
Inc., Preferred Oncology Networks of America, Inc., American Physician Partners,
Inc., The Care Group, Inc., Oncor, Inc. and Medifax, Inc. as well as several
not-for-profit corporations.
Donald A. Carlberg has been President, Chief Executive Officer and a
Director of the Company since its inception. From February 1993 to December 1994
Mr. Carlberg served as Chief Executive Officer of Patient Management
Technologies, Inc., a medical services consulting company, which he founded.
From 1992 to 1994 Mr. Carlberg served as Senior Vice President Sales and
Marketing for Neurocare, Inc./Paradigm Health Corp. From 1990 to 1992 Mr.
Carlberg served as Director of Managed Care for Baxter Healthcare International
where he started managed care initiatives for its Caremark Division. From 1985
to 1990 Mr. Carlberg held several senior level positions in managed care at Blue
Cross/Blue Shield of Rochester, New York and Independence Blue Cross in
Philadelphia, Pennsylvania.
Gregory D. Brown has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since May 1995. From 1989 to 1995 Mr.
Brown was Chief Financial Officer of Pappajohn Capital Resources, a venture
capital firm specializing in health care investments, and Equity Dynamics, Inc.,
a financial consulting firm, both located in Des Moines, Iowa. From 1984 to 1989
Mr. Brown was a Senior Accountant with Vroman, McGowen, Hurst, Clark & Smith,
P.C., a certified public accounting firm.
James D. Turner has been Senior Vice President, Sales and Marketing of the
Company since September 1996. Mr. Turner served as Director of Business
Development for Preferred Oncology Networks of America, Inc. from January 1996
to September 1996. From 1987 to 1995 Mr. Turner held various sales, marketing
and business development positions with divisions of Coram Healthcare, Inc. and
Baxter Healthcare International, most recently as Director of Business
Development.
Kent A. Tapper has been Vice President, Systems Engineering of the Company
since July 1995. Prior to joining the Company and since 1992, Mr. Tapper was
Product Manager, Audio Response and Call Center Platforms for Northern Telecom,
Inc. From 1983 to 1992 Mr. Tapper held Product Manager, Systems Engineering
Manager and various engineering management positions with Northern Telecom.
33
<PAGE>
John Pappajohn has been a Director of the Company since its inception, and
served as its Secretary and Treasurer from inception through May 1995. Since
1969 Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a
venture capital firm specializing in health care investments, and President of
Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines,
Iowa. He serves as a Director for the following public companies: CORE, Inc.,
Drug Screening Systems, Inc., Fuisz Technologies, Ltd., GalaGen, Inc., OncorMed,
Inc., The Care Group, Inc., HealthDesk Corporation, United Systems Technology,
Inc. and Pace Health Management Systems, Inc.
Barbara J. McNeil, M.D., Ph.D. has been a Director of the Company since May
1995. Dr. McNeil is Head of the Department of Health Care Policy and a Professor
of Radiology at Harvard Medical School where she has served in various
capacities since 1971. For four years she has served as Chair of the Blue Cross
Massachusetts Hospital Association Fund for Cooperative Innovation and currently
she is a member of the National Council on Radiation Protection, the American
College of Radiology and its Board of Chancellors, the Society of Nuclear
Medicine, the Advisory Council for the Agency for Health Care Policy and
Research, and the National Academy of Sciences' Institute of Medicine where she
is a Council member. She also serves as a Director of CV Therapeutics, Inc.
Carl F. Kohrt, Ph.D. has been a Director of the Company since April 1996.
Dr. Kohrt is Executive Vice President and Assistant Chief Operating Officer of
the Eastman Kodak Company, where he has served in various capacities since 1971.
Dr. Kohrt is a recipient of a Sloan Fellowship for study at Massachusetts
Institute of Technology.
No family relationship exists between any of the above executive officers.
The normal term of office for all executive officers listed above runs from one
Annual Meeting of Stockholders of the Company to the next, or approximately one
year.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
10% of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based on a review of the copies of reports furnished to the Company, the Company
believes that during the year ended December 31, 1996 all filing requirements
applicable to its officers, directors and ten percent beneficial owners were
met, except that initial reports of beneficial ownership on Form 3 were filed
late.
Committees of the Board of Directors
The Board of Directors of the Company has appointed two committees: the
Audit Committee and the Compensation Committee. The Audit Committee periodically
reviews the Company's auditing practices and procedures, makes recommendations
to management or to the Board of Directors as to any changes to such practices
and procedures deemed necessary from time to time to comply with applicable
auditing rules, regulations and practices, and recommends independent auditors
for the Company to be elected by the stockholders. The Compensation Committee
meets periodically to make recommendations to the Board of Directors concerning
the compensation and benefits payable to the Company's executive officers and
other senior executives. The Company reimburses directors for their
out-of-pocket expenses incurred in attending Board and Committee meetings.
Item 11. Executive Compensation.
Director Compensation
During 1996 no separate cash compensation or fees are payable to directors
of the Company, other than reimbursement of expenses incurred in connection with
attending meetings.
On April 8, 1996, the Company granted options to acquire 36,000 shares of
Common Stock at an exercise price of $2.08 per share to Dr. Carl Kohrt, a
director of the Company.
34
<PAGE>
Executive Compensation
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities for executive officers of the
Company who received compensation in excess of $100,000 during the period from
inception on February 22, 1995 to December 31, 1995 and during 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Annual Compensation Securities Underlying
-------------------- Options
Name and Principal Position Year Salary Bonus (#)
- --------------------------- ---- ------ ----- -------------------
<S> <C> <C> <C> <C>
Donald A. Carlberg, President 1996 $131,731 $25,000 18,000
and Chief Executive Officer 1995(1) $96,417 $15,000 216,000
Gregory D. Brown, Sr. Vice 1996 $103,077 $20,000 10,800
President, Chief Financial 1995(1) $60,034 $0 90,000
Officer, Secretary and Treasurer
Giancarla Miele, Vice President 1996 $103,077 $5,000 36,000
of Operations (2) 1995(1) $16,912 $0 36,000
George T. Witter, Vice President 1996 $119,062 $12,500 18,000
of Sales (3) 1995(1) $49,512 $0 54,000
</TABLE>
(1) Reflects compensation paid from inception on February 22, 1995 to December
31, 1995.
(2) Ms. Miele resigned her position as Vice President of Operations as of
February 7, 1997.
(3) Mr. Witter resigned his position as Vice President of Sales as of November
1, 1996.
The following table sets forth certain information regarding options granted to
the Chief Executive Officer and other executive officers of the Company during
1996.
Option Grants in 1996
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------------- at Assumed Annual Rates of
Number of % of Total Stock Price Appreciation for
Securities Options Granted Exercise Option Term (2)
Underlying Options to Employees in Price Expiration -----------------------------
Name Granted (#)(1) Fiscal Year $/Share Date 5% ($) 10% ($)
---- -------------- ----------- ------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Carlberg 18,000 4.9% $2.08 4/08/06 $23,546 $59,670
Gregory D. Brown 10,800 3.0% $2.08 4/08/06 14,127 35,802
James D. Turner 72,000 19.7% $10.00 11/22/06 452,804 1,147,495
George T. Witter 18,000 4.9% $2.08 4/08/06 23,546 59,670
Giancarla C. Miele 36,000 9.9% $2.08 4/08/06 47,092 119,340
</TABLE>
(1) All options will become exercisable at the rate of 20% per year from the
date of grant and have ten year terms as long as the optionee's employment
with the Company continues. The exercise price of each option is equal to
the fair market value of the underlying Common Stock on the date of the
grant, as determined by the Board of Directors.
(2) Future value of current year grants assumes appreciation in the market
value of the Common Stock of 5% and 10% per year over the ten-year option
period as required by the rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of actual values.
The actual value realized may be greater than or less than the potential
realizable values set forth in the table.
35
<PAGE>
No stock options were exercised by the Chief Executive Officer or other
executive officers of the Company during 1996. The following table sets forth
certain information regarding unexercised options held by the Chief Executive
Officer and other executive officers of the Company at December 31, 1996.
December 31, 1996 Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1996(#) December 31, 1996($)(1)
-------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald A. Carlberg 72,000 162,000 $651,960 $1,425,060
Gregory D. Brown 18,000 82,800 162,000 725,436
James A. Turner 0 72,000 0 0
Kent A. Tapper 7,200 28,800 65,592 262,368
Giancarla C. Miele 7,200 64,800 59,112 494,568
</TABLE>
(1) Calculated based upon $9.25 market value of the underlying securities as of
December 31, 1996.
Stock Option Plan
The Company's Stock Option Plan (the "Plan") was originally adopted by the
Board of Directors and stockholders in June 1995. Up to 1,080,000 shares of
Common Stock have been authorized and reserved for issuance under the Plan.
Under the Plan, options may be granted in the form of incentive stock options
("ISOs") or non-qualified stock options ("NQOs") from time to time to salaried
employees, officers, directors and consultants of the Company, as determined by
the Compensation Committee of the Board of Directors. The Compensation Committee
determines the terms and conditions of options granted under the Plan, including
the exercise price. The Plan provides that the Committee must establish an
exercise price for ISOs that is not less than the fair market value per share at
the date of the grant. However, if ISOs are granted to persons owning more than
10% of the voting stock of the Company, the Plan provides that the exercise
price must not be less than 110% of the fair market value per share at the date
of the grant. The Plan also provides for a non-employee director to be entitled
to receive a one-time grant of a NQO to purchase 36,000 shares at an exercise
price equal to fair market value per share on the date of their initial election
to the Company's Board of Directors. Such NQO is exercisable only during the
non-employee director's term and automatically expires on the date such
director's service terminates. Each option, whether an ISO or NQO, must expire
within ten years of the date of the grant.
As of December 31, 1996 there were 891,960 options outstanding under the
Plan, 378,900 of which have an exercise price of $.14 per share, 126,000 of
which have an exercise price of $.69 per share, 46,800 of which have an exercise
price of $1.04 per share, 57,240 of which have an exercise price of $1.74 per
share, 130,740 of which have an exercise price of $2.08 per share, and 152,280
of which have an exercise price of $10.00 per share. Of these options, 36,000
were granted as of March 1, 1995 to Mr. Carlberg and vested immediately. The
remainder of Mr. Carlberg's options and all other options granted under the plan
vest as to 20% of the option grant on the first anniversary of the grant, and
20% on each subsequent anniversary.
Employment Agreement
The Company has entered into an employment agreement with Mr. Carlberg as
its President and Chief Executive Officer dated March 1, 1995, which has a term
of one year and is automatically renewed for successive one-year periods unless
either party receives written notice from the other party of such party's
intention not to renew within 60 days of the agreement's expiration date. The
agreement calls for Mr. Carlberg to receive a base salary of $125,000 per year,
which was increased to $150,000 per year in September 1996. Upon execution of
the agreement, Mr. Carlberg received a $15,000 signing bonus and an option to
purchase up to 180,000 shares of Common Stock of the Company at an exercise
price of
36
<PAGE>
$.14 per share, and on March 1, 1996 he received a $25,000 bonus. The option has
a ten-year term, vests over five years and was 20% vested upon grant. The
remainder of the option vests at a rate of 20% per year, and the option is
therefore fully exercisable after the first five years of employment. Mr.
Carlberg is eligible for any discretionary bonuses and additional option grants
in amounts to be determined by the Company's Board of Directors based upon the
performance of the Company and Mr. Carlberg. The agreement prohibits Mr.
Carlberg from engaging in any business activity involving the measurement of
clinical outcomes for patients with acute or chronic diseases, or the
measurement of patient compliance with prescribed treatments for acute or
chronic diseases within one year of the termination of his employment with the
Company.
Board Compensation Committee Report on Executive Compensation
Because the Company completed its public offering in late December 1996 no
formal Compensation Committee meetings have yet been held. Compensation for the
Company's Executive Officers was determined in light of the responsibilities
involved in commencing the Company's business operations, developing its initial
customer relationships and negotiating with the Company's investment bankers.
The Compensation Committee intends to evaluate the performance of each
executive officer of the Company in the context of the goals and challenges that
the Company faces over the next year. Because of the Company's early stage of
development, the Committee will consider factors other than profitability in
determining compensation for the next year.
37
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of December 31, 1996,
(i) by each person the Company knows to be the beneficial owner of 5% or more of
the outstanding shares of Common Stock, (ii) each named executive officer listed
in the Summary Compensation Table, (iii) each director of the Company and (iv)
all executive officers and directors of the Company as a group.
Shares Percentage
Beneficially Beneficially
Beneficial Owner (1) Owned Owned
-------------------- ----- -----
Derace L. Schaffer (2)...................... 1,711,700 21.4%
John Pappajohn (3).......................... 1,449,680 18.1%
Edgewater Private Equity Fund II, L.P., 970,000 12.2%
666 Grand Avenue, Suite 200
Des Moines, IA 50309
Donald A. Carlberg (4)...................... 72,000 *
Gregory D. Brown (5)........................ 23,760 *
James D. Turner (6)......................... - *
Kent A. Tapper (7).......................... 7,300 *
Barbara J. McNeil (7)...................... 7,200 *
Carl F. Kohrt (8)........................... - *
All directors and executive officers as a
group (8 persons) (9)....................... 3,271,640 38.9%
- ----------
* Less than one percent.
(1) Unless otherwise noted, the address of each of the listed persons is c/o the
Company at 46 Prince Street, Rochester, New York 14607.
(2) Includes 288,000 shares held by Dr. Schaffer's minor children. Also includes
7,200 shares which are issuable upon the exercise of options that are either
currently exercisable or which become exercisable within 60 days of December 31,
1996. Does not include 28,800 shares subject to outstanding options which are
not exercisable within 60 days of December 31, 1996.
(3) Includes 360,000 shares held by Halkis, Ltd., a sole proprietorship owned by
Mr. Pappajohn, 360,000 shares held by Thebes, Ltd., a sole proprietorship owned
by Mr. Pappajohn's spouse and 360,000 shares held directly by Mr. Pappajohn's
spouse. Mr. Pappajohn disclaims beneficial ownership of the shares owned by
Thebes, Ltd. and by his spouse. Includes options to purchase 7,200 shares which
are either currently exercisable or which become exercisable within 60 days of
December 31, 1996. Does not include 28,800 shares subject to outstanding options
which are not exercisable within 60 days of December 31, 1996.
(4) Represents options to purchase 72,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of December
31, 1996. Does not include 162,000 shares subject to outstanding options which
are not exercisable within 60 days of December 31, 1996.
(5) Includes options to purchase 18,000 shares which are either currently
exercisable or which become exercisable within 60 days of December 31, 1996.
Does not include 82,800 shares subject to outstanding options which are not
exercisable within 60 days of December 31, 1996.
(6) Does not include 72,000 shares subject to outstanding options which are not
exercisable within 60 days of December 31, 1996.
38
<PAGE>
(7) Includes options to purchase 7,200 shares which are either currently
exercisable or which become exercisable within 60 days of December 31, 1996.
Does not include 28,800 shares subject to outstanding options which are not
exercisable within 60 days of December 31, 1996.
(8) Does not include 36,000 shares subject to outstanding options which are not
exercisable within 60 days of December 31, 1996.
(9) Includes options to purchase 118,800 shares which are either currently
exercisable or which become exercisable within 60 days of December 31, 1996.
Does not include 468,000 shares subject to outstanding options and warrants
which are not exercisable within 60 days of December 31, 1996.
Item 13. Certain Relationships and Related Transactions
The Company was initially capitalized on February 22, 1995 through the sale
of 3,600,000 shares of its Common Stock for $.14 per share. Included among the
participants in that transaction were Dr. Derace Schaffer, Chairman of the
Board, who purchase 1,656,000 shares, Dr. Schaffer's spouse who purchased
144,000 shares, John Pappajohn, a director, who purchased 541,800 shares, a sole
proprietorship owned by Mr. Pappajohn which purchased 360,000 shares. Mr.
Pappajohn's spouse, who purchased 360,000 shares, and a sole proprietorship
owned by Mr. Pappajohn's spouse which purchase 360,000 shares.
In August and September of 1995 the Company sold 1,800,000 shares of its
Series A Preferred Stock in a private placement for $1.00 per share. Included
among the participants in that transaction were Gregory D. Brown, Sr., Vice
President, Chief Financial Officer, Secretary and Treasurer, who purchased
10,000 shares, and Mr. Pappajohn who purchased 10,000 shares. In addition,
Edgewater Private Equity Fund II, L.P., ("Edgewater"), a five percent owner of
the Common Stock of the Company, acquired 1,000,000 shares of Series A Preferred
Stock in the Series A Preferred Stock offering.
In May and June 1996, the Company sold 600,000 shares of its Series B
Preferred Stock in a private placement for $5.00 per share. Included among the
participants in that transaction were Dr. Schaffer, who purchased 20,000 shares,
Mr. Pappajohn, who purchased 40,000 shares, and Edgewater which purchased
200,000 shares.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
The financial statements of the Company are included in Part II, Item 8.
(b) Reports on Form 8 - K:
No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 1996.
(c) Exhibits:
Exhibit # Description of Exhibits
--------- -----------------------
(3) Articles of Incorporation and By-Laws:
Certificate of Incorporation
Incorporated herein by reference from Exhibit 3.1 on
Form S-1 Registration Statement of the Company, filed
with the Commission on December 17, 1996.
By-Laws
Incorporated herein by reference from Exhibit 3.3 on
Form S-1 Registration Statement of the Company, filed
with the Commission on December 17, 1996.
(10) Material contracts:
10.1 Employment agreement with Donald A. Carlberg,
President and Chief Executive Officer, dated March 1,
1995, incorporated by reference from Exhibit 10.1 on
Form S-1 Registration Statement of the Company, filed
with the Commission on December 17, 1996.
10.2 Patient Infosystems, Inc. Stock Option Plan,
incorporated by reference from Exhibit 10.2 on Form
S-1 Registration Statement of the Company, filed with
the Commission on December 17, 1996.
10.3 Patient Infosystems, Inc. Stock Option
Agreement, incorporated by reference from Exhibit
10.3 on Form S-1 Registration Statement of the
Company, filed with the Commission on December 17,
1996.
10.4 Services Agreement dated September 18, 1995
between the Company and Bristol-Myers Squibb U.S.
Pharmaceuticals, a division of Bristol-Myers Squibb
Company, incorporated by reference from Exhibit 10.4
on Form S-1 Registration Statement of the Company,
filed with the Commission on December 17, 1996.
10.5 Services Agreement dated February 1, 1996
between the Company and Bristol-Myers Squibb U.S.
Pharmaceuticals, a division of Bristol-Myers Squibb
Company, incorporated by reference from Exhibit 10.5
on Form S-1 Registration Statement of the Company,
filed with the Commission on December 17, 1996.
10.6 Services Agreement dated March 30, 1996 between
the Company and Bristol-Myers Squibb Oncology, a
division of Bristol-Myers Squibb Company,
incorporated by reference from Exhibit 10.6 on Form
S-1 Registration Statement of the Company, filed with
the Commission on December 17, 1996.
40
<PAGE>
10.7 Services Agreement dated April 23, 1996 between
the Company and Bristol-Myers Squibb
Oncology/Immunology, a division of Bristol-Myers
Squibb Company, incorporated by reference from
Exhibit 10.7 on Form S-1 Registration Statement of
the Company, filed with the Commission on December
17, 1996.
10.8 Services Agreement dated October 16, 1995
between the Company and Bristol-Myers Squibb U.S.
Pharmaceuticals, a division of Bristol-Myers Squibb
Company, incorporated by reference from Exhibit 10.8
on Form S-1 Registration Statement of the Company,
filed with the Commission on December 17, 1996.
10.9 Services Agreement dated June 24, 1996 between
the Company and American HomePatient, Inc.,
incorporated by reference from Exhibit 10.9 on Form
S-1 Registration Statement of the Company, filed with
the Commission on December 17, 1996.
10.10 Services Agreement dated June 21, 1996 between
the Company and Equifax Healthcare Administrative
Services, a division of Equifax, Inc., incorporated
by reference from Exhibit 10.10 on Form S-1
Registration Statement of the Company, filed with the
Commission on December 17, 1996.
10.11 Services Agreement dated July 28, 1996 between
the Company and Equifax Healthcare Administrative
Services, a division of Equifax, Inc., incorporated
by reference from Exhibit 10.11 on Form S-1
Registration Statement of the Company, filed with the
Commission on December 17, 1996.
10.12 Services Agreement dated September 13, 1996
between the Company and Health Resources,
Inc.(Asthma), incorporated by reference from Exhibit
10.12 on Form S-1 Registration Statement of the
Company, filed with the Commission on December 17,
1996.
10.13 Services Agreement dated September 13, 1996
between the Company and Health
Resources Inc. (Diabetes), incorporated by reference
from Exhibit 10.13 on Form S-1 Registration Statement
of the Company, filed with the Commission on December
17, 1996.
10.14 Services Agreement dated September 13, 1996
between the Company and Harris Methodist Health Plan,
incorporated by reference from Exhibit 10.14 on Form
S-1 Registration Statement of the Company, filed with
the Commission on December 17, 1996.
(11) Statement of Computation of Per Share Earnings See
page 45 of this Annual report on Form 10-K.
(27) Financial Data Schedule
Filed electronically
All other exhibits are omitted because they are not applicable or the required
information is shown elsewhere in this Annual Report on Form 10-K.
41
<PAGE>
Exhibit 11. Statement of Computation of Per Share Earnings.
PATIENT INFOSYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Period From February Period From February
Year Ended 22, 1995 (Inception) 22, 1995 (Inception)
December 31, 1996 to December 31, 1995 to December 31, 1996
----------------- -------------------- --------------------
<S> <C> <C> <C>
Net Loss ............................................... $(2,806,436) $(1,116,652) $(3,923,088)
Weighted average Common Stock outstanding............... 3,678,435 3,602,880 3,678,435
Weighted average Series A Convertible Preferred Stock
outstanding............................................. 1,296,000 518,400 1,296,000
Weighted average Series B Convertible Preferred Stock
outstanding............................................. 437,500 - 437,500
Staff Accounting Bulletin Common Stock Equivalents:
Series A Convertible Preferred Stock issued
August and September 1995, calculated using the
treasury stock method ........................... - 642,600 -
Series B Convertible Preferred Stock issued May
and June 1996, calculated using the treasury
stock method..................................... 177,365 375,000 177,365
Dilutive effect of stock options granted in the
preceding twelve months, calculated using the
treasury stock method............................ 758,416 815,419 758,416
Number of shares to be used in calculation.............. 6,347,716 5,954,299 6,347,716
Loss per common share................................... $ (.44) $ (.18) $ (.62)
=========== =========== ===========
</TABLE>
42
<PAGE>
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.
PATIENT INFOSYSTEMS, INC.
By: /s/ Donald A. Carlberg
------------------------------------
Donald A. Carlberg
Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Donald A. Carlberg March 24, 1997
---------------------------------- -------------------
Donald A. Carlberg Date
Director, President and Chief Executive Officer
By: /s/ Gregory D. Brown March 28, 1997
---------------------------------- -------------------
Gregory D. Brown Date
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
By: /s/ Derace Schaffer, M.D. March 24, 1997
---------------------------------- -------------------
Derace Schaffer, M.D. Date
Chairman of the Board
By: /s/ John Pappajohn March 29, 1997
---------------------------------- -------------------
John Pappajohn Date
Director
By: /s/ Barbara J. McNeil, M.D., Ph.D. March 24, 1997
---------------------------------- -------------------
Barbara J. McNeil, M.D., Ph.D. Date
Director
By: /s/ Carl F. Kohrt, Ph.D. March 25, 1997
---------------------------------- -------------------
Carl F. Kohrt, Ph.D. Date
Director
43
