FORM 10-K. - ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Amendment #1
(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, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission file number 333-07643
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 registered Name of each exchange on which
registered
None
Securities registered pursuantto Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((delta)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
As of February 28, 1998, 8,012,842 shares of common stock were outstanding,
and the aggregate market value of the common shares of Patient Infosystems, Inc.
held by non-affiliates was approximately $15 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders to be filed prior to April 30, 1998 are incorporated by reference
in Part III.
<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 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 and behavior modification based treatment 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
("MCOs") 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 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.
During its first two years of operations, the Company has emphasized
the development of disease management programs, which accounted for a
substantial portion of its revenue during 1997. However, during 1997, the
Company devoted increased resources to the development of other applications of
its technology platform, including demand management, patient surveys and
outcomes analysis.
Information Capture, Delivery and Analysis Technologies
The Company's technology platform integrates an advanced voice
recognition telephone system, high speed data processing and analysis
capability, demand publishing and information distribution capabilities and
behavior modification based compliance algorithms. 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.
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.
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 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.
The Company has found patient enrollment to be one of the particularly
challenging components to establishing effective programs. Although the Company
has completed the development of several disease management programs, the
Company's customers have been able to provide only limited patients to enroll in
the programs. To the extent that the Company's revenue is dependent upon the
number of contacts it is able to achieve, it will be required to work closely
with its customers to develop methods to increase patient enrollment.
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.
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.
The Company has developed or is developing programs in the following
areas:
Asthma
The Company has completed the development of a disease state management
program for asthmatic patients that has been marketed to payors and other
participants in the health care industry, and such program has been provided to
patients since January 1997. Through February 1998, the Company has had
approximately 2,900 interventions with patients participating in these programs.
American HomePatient, Inc. ("American HomePatient"), Centra Healthcare
Adminstrative Services, Inc. ("Centra"), Harris Methodist Health Plan ("Harris
Methodist") and Health Alliance, a Division of Astra Pharma Inc. ("Health
Alliance") 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.
Congestive Heart Failure
The Company has 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. The Company has completed
the development of the program in congestive heart failure in the English
language, and is currently developing the program in the Spanish language. This
program has been provided to patients since April 1997, and through February
1998, the Company has had approximately 6,000 interventions with patients
participating in this program.
Diabetes
The Company has completed the development of a disease state management
program for diabetic patients that has been marketed to payors and other
participants in the health care industry. Bristol-Myers, 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. These programs have
been provided to patients since August of 1997, and through February 1998, the
Company has had approximately 760 interventions with patients participating in
these programs.
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. The Company has completed the
development of this program in the English language and is continuing to develop
the program in the Spanish language. This program has been provided to patients
since January 1997, and through February 1998, the Company has had 30
interventions with patients participating in this program.
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 several 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 several 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. The Company is currently involved in discussions relating to
the continuation of these programs. 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
cardiovascular disease, chronic pain and weight management, diabetes and
hypertension compliance program.
Other Applications of the Integrated Information Capture and Delivery Technology
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. The Company is currently providing
demand management services in connection with programs that are intended to
reach approximately 40,000 patients.
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. The Company is developing a
series of 10 automated surveys ranging from general health to disease specific
instruments. The product line includes surveys for SF-12; child health
questionnaire; patient satisfaction; asthma; diabetes; back pain; depression;
prostatis; maternity; and the Pra Plus for elderly populations.
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
Through 1997, the Company's efforts focused primarily on the
development of disease management programs. During 1997, the Company began
aggressively marketing the other services that its technology platform can
provide including demand management, patient surveys and outcomes analysis. 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 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 has expanded its marketing efforts by conducting patient
surveys, 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 cardiac 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 $489,115 for the year ended December 31, 1997, and
$310,552 for the year ended December 31, 1996 and $89,909 for the period from
February 1995 (inception) to December 31, 1995. The increase in these costs from
1995 to 1997 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.
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.
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, 1998, the Company had 67 full and part-time
employees.
Item 2. Description of Properties.
The Company's executive and corporate offices are located in Rochester,
New York in approximately 13,000 square feet of leased office space under an
operating lease that expires on November 30, 1999.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1997.
<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 following table sets forth, for the periods
indicated, the range of the high and low sales prices for the Company's Common
Stock as reported on the Nasdaq National Market beginning in the fourth quarter
of 1996.
High Low
1996
Fourth Quarter $9.25 $8.00
1997
First Quarter $9.25 $6.38
Second Quarter $6.25 $4.50
Third Quarter $5.00 $2.88
Fourth Quarter $4.38 $2.63
(b) Holders
The approximate number of record holders of the Company's common stock as
of February 28, 1998 is 99. However, the Company believes that there are in
excess of 400 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.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Period from
February 22, 1995
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues $ 2,062,373 $ 845,412 $ 113,000
---------- --------- ---------
Costs and Expenses:
Cost of Sales 1,629,128 748,322 111,870
Sales and Marketing 1,609,837 913,547 375,384
General and Administrative 2,432,760 1,760,760 678,498
Research and Development 489,115 310,552 89,909
------- ------- ------
Total Costs and Expenses 6,160,840 3,733,181 1,255,661
--------- --------- --------
Operating Loss (4,098,467) (2,887,769) (1,142,661)
Interest Income 835,116 81,333 26,009
------- ------ ------
Net Loss $(3,263,351) $(2,806,436) $(1,116,652)
=========== =========== ===========
Net Loss Per Share - Basic and Diluted $ (.41) $ (.44) $ (0.18)
=========== =========== ===========
Weighted Average Common
and Potential Common Shares 7,980,094 6,347,716 5,954,299
========= ========= =========
December 31,
1997 1996 1995
---- ---- ----
Balance Sheet Data:
Cash and Cash Equivalents $ 779,317 $15,666,609 $ 1,182,080
Working Capital 13,242,387 14,591,700 611,655
Total Assets 15,036,473 17,085,387 1,763,629
Total Liabilities 587,728 1,631,650 598,464
Total Stockholders' Equity 14,448,745 15,453,737 1,165,165
</TABLE>
<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 years ended December 31, 1997 and 1996 and the period
from inception on February 22, 1995 to December 31, 1995, and its financial
condition at December 31, 1997. 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 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 even though over a year has passed, the
Company currently has patients enrolled in four of its disease-specific
programs. The enrollment of patients in the Company's programs has been limited
by several factors, including the limited ability of clients to provide the
Company with accurate information with respect to the specific patient
populations, including coding errors that necessitated significant
labor-intensive data processing prior to program implementation. In addition,
the Company has encountered resistance from patients and other sources of
information to the Company's systems.
In response to these market dynamics, the Company has taken several
tactical and strategic steps: formal designation of internal personnel at
customer sites to assist clients with implementation; closer integration of
Company systems personnel with clients to facilitate accurate data transfers;
and most importantly, promotion of a broader product line to enable clients to
enter the Company's disease management programs through a variety of channels.
The Company now sells two additional services, demand management services and
automated surveys (general health and disease-specific), both of which can
provide mechanisms for enrollment to the Company's disease management programs.
Through February 1998, an aggregate of approximately 38,000 persons have
enrolled and participated in Company programs.
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; and (iv) patients suffering from
chronic pain, 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. To the extent that the Company has had limited enrollment of patients
in its programs, the Company's operations revenue has been, and may continue to
be limited. Moreover, as the Company has completed the development of its
primary disease management programs, it anticipates that development revenue
will also decline over the next twelve months unless and until the Company
enters into new development agreements. 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 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 began to provide other services to customers in the
healthcare industry during 1997 which included new applications of its
information capture and delivery system. These consisted of 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
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Revenues are comprised of revenues from development fees, licensing
fees and operational fees. Revenues increased 144% from $845,412 for the year
ended December 31, 1996 to $2,062,373 for the year ended December 31, 1997. A
summary of these revenues by category is as follows:
Year Ended Year Ended
December 31, December 31,
1997 1996
---- ----
Revenues
--------
Development Fees $ 826,532 $798,138
Licensing Fees 500,000 35,556
Operational Fees 735,841 11,718
------- ------
Total Revenues $2,062,373 $845,412
========== ========
Revenues from development fees increased 3.6% from $798,138 for the
year ended December 31, 1996 to $826,532 for the year ended December 31, 1997.
The Company received $826,532 in development revenues for the year ended
December 31, 1997, primarily related to fees from Bristol-Myers for the
development of six disease state management contracts. The Company also received
development revenues from a small number of other customers related to other
disease-specific programs. The Company has completed substantially all services
under these agreements and is currently receiving revenues in connection with
only the development of three programs. The Company anticipates that revenue
from development fees will decline as the Company develops more programs using
its own resources.
The Company's development contracts generally require that payments be
made by the customer at the time of contract execution and at the achievement 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 foreseeable future.
Revenues from licensing fees increased 1306% from $35,556 for the year
ended December 31, 1996 to $500,000 for the year ended December 31, 1997.
Licensing revenue represents amounts that the Company charges its customers for
the right to enroll patients in or the right to market to other entities certain
of its programs, primarily the Company's standardized asthma and diabetes
programs, and the right to have access to data collected from patients enrolled
in such programs. The Company did not initiate any licensing activity until the
second quarter of 1996, therefore licensing revenues for the year ended December
31, 1997 were significantly higher that those generated during the year ended
December 31, 1996. In 1997, the Company received licensing revenues of $150,000
from the PulseGroup, Inc. for a licensing contract related to the Company's
asthma and diabetes programs.
Revenues from operations increased 6180% from $11,718 for the year ended
December 31, 1996 to $735,841 for the year ended December 31, 1997. Operations
revenues are generated as the Company provides services to its customers for
their disease-specific programs. Operations revenues increased significantly in
1997, as the Company began enrolling patients and implementing its disease state
management programs during 1997. Operations revenue consisted primarily of
$440,000 in fees received from Abbott Laboratories in connection with a
teleconference program completed during the year ended December 31, 1997. The
Company is currently engaged in discussions with Abbott Laboratories with
respect to providing additional services to Abbott Laboratories in the future.
The Company began to provide other services to customers in the
healthcare industry during 1997 which involve new applications of its
information capture and delivery system. These services include patient surveys,
health risk assessments, nursing support lines and marketing support functions.
As the Company expands its operations, it intends to continue to emphasize
operations revenues to the exclusion of development revenues.
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
1997 and 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 1997 and 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 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 increased 118% from $748,322 for the year ended December
31, 1996 to $1,629,128 for the year ended December 31, 1997. The increase in
these costs primarily reflects an increased level of program development and
operational activities.
Sales and marketing expenses increased 76% from $913,547 for the year
ended December 31, 1996 to $1,609,837 for the year ended December 31, 1997.
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 increased 38% from
$1,760,760 for the year ended December 31, 1996 to $2,432,760 for the year ended
December 31, 1997. 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. The Company expects that general and administrative
expenses will continue to increase in future periods.
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 increased 57% from $310,552 for the year ended December 31,
1996 to $489,115 for the year ended December 31, 1997. 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.
The Company generates net interest income primarily from cash balances
and investments. Interest income increased to $835,116 for the year ended
December 31, 1997 from $81,333 for the year ended December 31, 1996. 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 $3,263,351 for the year ended December 31,
1997 compared to $2,806,436 for the year ended December 31, 1996. This
represents a loss of $.41 per share for 1997 and $.44 for 1996.
Year Ended December 31, 1996 Compared to the Period from February 1995
(Inception) to December 31, 1995
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
December 31, 1996 December 31, 1995
----------------- -----------------
Revenues
--------
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 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, 1997 the Company had working capital of $13,242,387, as
compared to $14,591,700 at December 31, 1996 and $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 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. 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.
Capital expenditures during 1997 were $394,161, as compared to
expenditures of $494,577 during 1996 and $579,983 during the period from
inception on February 22, 1995 to December 31, 1995. The expenditures during
these 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 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 1997, 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.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". The new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the statement of operations and requires
a reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement is effective for periods ending after December 15,
1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which is required to be adopted for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Items
considered comprehensive income include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. In the opinion of management, SFAS 130 will not have
a material effect on the Company's financial statements.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. The statement requires that a public company report financial
and descriptive information about its reportable operating segments using the
management approach. In the opinion of management, SFAS 131 will not have a
material effect on the Company's financial statements.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and is effective for transactions entered into
in fiscal years beginning after December 15, 1997. The Company does not believe
that the implementation of SOP 97-2 will have a material effect on expected
revenues or earnings.
Year 2000
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company currently believes, with
planned modifications to existing software and converting to new software, the
Year 2000 problem will not pose significant operational problems and is not
anticipated to be material to its financial position or results of operations in
any given year. The Company has received confirmation from vendors of certain
purchased software that current releases or upgrades, if installed, will
eliminate any issues.
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.
<PAGE>
Item 8. Financial Statements And Supplemental Data
Index to Financial Statements Page
Independent Auditors' Report 24
Balance Sheets 25
Statements of Operations 26
Statements of Stockholders' Equity 27
Statements of Cash Flows 28
Notes to Financial Statements 29-34
<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. as of December 31, 1997 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1997 and
1996 and for the period from February 22, 1995 (Inception) to December 31, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits 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. as of December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996 and for the period from February 22, 1995
(Inception) to December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
January 30, 1998
<PAGE>
PATIENT INFOSYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 779,317 $15,666,609
Available-for-sale securities .................... 12,232,335 --
Accounts receivable .............................. 412,956 386,215
Prepaid expenses and other current assets ........ 405,507 170,526
---------- -----------
Total current assets ....................... 13,830,115 16,223,350
PROPERTY AND EQUIPMENT, net ........................ 958,965 862,037
OTHER ASSETS ....................................... 247,393 --
----------- -----------
TOTAL ASSETS ....................................... $15,036,473 $17,085,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 89,674 $ 196,674
Accrued salaries and wages ....................... 320,272 127,029
Accrued initial public offering costs ............ -- 446,568
Accrued expenses ................................. 79,236 211,457
Deferred revenue ................................. 67,549 582,783
Accrued loss on development contracts ............ 30,997 67,139
------------ ------------
Total current liabilities .................. 587,728 1,631,650
------------ ------------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value: shares - authorized:
20,000,000; issued and outstanding: 1997 - 8,011,522
1996 - 7,653,202 ............................... 80,115 76,532
Additional paid-in capital ....................... 21,550,009 19,300,293
Unrealized gain on available-for-sale securities . 5,060 --
Accumulated deficit .............................. (7,186,439) (3,923,088)
----------- -----------
Total stockholders' equity ................. 14,448,745 15,453,737
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 15,036,473 $ 17,085,387
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
PATIENT INFOSYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES ....................... $ 2,062,373 $ 845,412 $ 113,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales ................ 1,629,128 748,322 111,870
Sales and marketing .......... 1,609,837 913,547 375,384
General and administrative ... 2,432,760 1,760,760 678,498
Research and development ..... 489,115 310,552 89,909
----------- --------- ---------
Total costs and expenses 6,160,840 3,733,181 1,255,661
----------- ----------- ---------
OPERATING LOSS ................. (4,098,467) (2,887,769) (1,142,661)
INTEREST INCOME ................ 835,116 81,333 26,009
---------- ---------- ----------
NET LOSS ....................... $(3,263,351) $(2,806,436) $(1,116,652)
=========== =========== ===========
NET LOSS PER SHARE - BASIC
AND DILUTED ................. $ (.41) $ (.44) $ (.18)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
AND POTENTIAL COMMON SHARES . 7,980,094 6,347,716 5,954,299
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
PATIENT INFOSYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Additional Gains/Losses on Total
Preferred Stock Common Stock Paid-in Available-for-sale Accumulated Stockholders'
Shares Amount Shares Amount Capital Securities Deficit Equity
<S> <C> <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
Sale of common stock at $8.00 per
share in January 1997
(net of issuance costs of $168,000) - - 300,000 3,000 2,229,000 - - 2,232,000
Compensation expense related to
issuance of stock warrants - - - - 8,283 - - 8,283
Exercise of stock warrants - - 58,320 583 12,433 - - 13,016
Unrealized gain on investments
available for sale - - - - - 5,060 - 5,060
Net loss for the year end
December 31, 1997 - - - - - - (3,263,351) 3,263,351)
--------- ------ --------- ------- ----------- ------ ---------- ----------
Balances, December 31, 1997 - $ - 8,011,522 $80,115 $21,550,009 $5,060 $(7,186,439) $14,448,745
========= ====== ========= ======= =========== ====== ============ ===========
</TABLE>
See notes to financial statements.
<PAGE>
PATIENT INFOSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
OPERATING ACTIVITIES:
Net loss ....................................................... $(3,263,351) $(2,806,436) $(1,116,652)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 293,763 186,050 26,473
Loss on sale of property ................................... 2,171 -- --
Amortization of premiums and discounts on available-for-sale
marketable securities ................................. (209,832) -- --
Compensation expense related to issuance of
stock warrants ........................................... 8,283 13,208 --
Increase in accounts receivable ............................ (26,741) (382,160) (4,055)
Increase in prepaid expenses and other current assets ...... (234,980) (146,542) (23,984)
(Decrease) increase in accounts payable .................... (107,000) (166,095) 362,769
Increase in accrued salaries and wages ..................... 193,243 78,770 48,259
(Decrease) increase in accrued expenses .................... (132,221) 192,076 19,381
(Decrease) increase in deferred revenue .................... (515,234) 414,728 168,055
(Decrease) increase in accrued loss on development contracts (36,142) 67,139 --
--------- --------- ---------
Net cash used in operating activities ................ (4,028,041) (2,549,262) (519,754)
--------- --------- ---------
INVESTING ACTIVITY:
Property and equipment additions ............................... (394,161) (494,577) (579,983)
Proceeds from sale of property ................................. 1,299 -- --
Purchases of available-for-sale marketable securities .......... (18,121,444) -- --
Maturities of available for-sale marketable securities ......... 6,104,000 -- --
Increase in other assets ....................................... (247,393) -- --
--------- --------- ---------
Net cash used in investing activities ................. (12,657,699) (494,577) (579,983)
---------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred
stock, net ................................................... 2,245,016 17,081,800 2,281,817
(Decrease) increase in accrued initial public offering costs ... (446,568) 446,568 --
--------- ---------- ----------
Net cash provided by financing activities ............ 1,798,448 17,528,368 2,281,817
--------- ---------- ----------
INCREASE (DECREASES) IN CASH AND CASH EQUIVALENTS ............... (14,887,292) 14,484,529 1,182,080
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ............................................ 15,666,609 1,182,080 --
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD .................................................. $ 779,317 $15,666,609 $ 1,182,080
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid and received for income taxes, net .................. $ (9,509) $ 1,716 $ --
=========== =========== ===========
</TABLE>
See notes to financial statements ................................
<PAGE>
PATIENT INFOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
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. Prior to January 1, 1997, the Company was a development
stage enterprise.
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 equivalents and available-for-sale securities. The carrying
values of cash and equivalents and available-for-sale marketable securities
approximate fair 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,
disease management programs and other health care information system
applications. Deferred revenue represents amounts billed in advance under these
contracts.
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.
The Company's current contracts are concentrated in a small number of customers,
consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its operations. During the years ended December 31,
1997 and 1996, approximately $925,800 (45%) and $834,000 (99%), respectively, of
the Company's revenues arose from contracts with one customer. At December 31,
1997 and 1996, accounts receivable included balances of $231,484 and $265,940,
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.
The Company regularly assesses all of its long lived assets for impairment and
recognizes a loss when the carrying value of an asset exceeds its fair value.
The Company determined that no impairment loss need be recognized for applicable
assets in 1997 or 1996.
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 potential common 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 potential common 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 1997 or 1996.
Stock Split - On November 22, 1996, the Company effected a .72-for-1 reverse
stock split of all outstanding shares of common stock.
Statement of Financial Accounting Standards No. 128 - In March 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". The new standard
requires dual presentation of basic and diluted earnings per share (EPS) on the
face of the statement of operations and requires a reconciliation of the
numerators and denominators of basic and diluted EPS calculations. The statement
is effective for periods ending after December 15, 1997. The Company has
calculated and presented basic and diluted earnings per share on the face of
the statement of operations for the years ended December 31, 1997 and 1996 and
from the period of February 1995 (inception) to December 31, 1995.
Statement of Financial Accounting Standards No. 130 - In June 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which is
required to be adopted for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. In the opinion of management, SFAS 130 will not have a
material effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 131 - In June 1997 the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. The statement
requires that a public company report financial and descriptive information
about its reportable operating segments using the management approach. In the
opinion of management, SFAS 131 will not have a material effect on the Company'
financial statements.
Statement of Position 97-2 - In October 1997, the Accounting Standards Executive
Committee issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company does not believe that the implementation of SOP 97-2 will have a
material effect on expected revenues or earnings.
2. AVAILABLE -FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of December 31,
1997:
U.S. Government securities $12,232,335
===========
Realized and unrealized gains and losses on available-for-sale securities were
immaterial as of and for the year ended December 31, 1997.
The cost and estimated fair value of marketable securities by contractual
maturity at December 31, 1997 are as follows:
Amortized
Cost Fair Value
---- ----------
Due in one year or less $ 2,824,280 $ 2,823,704
Due after one year through two years 9,400,389 9,408,631
--------- ---------
$12,224,669 $12,232,335
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computer software ................................... $ 380,831 $ 307,735
Computer equipment .................................. 600,279 409,681
Telephone equipment ................................. 189,479 134,656
Leasehold improvements .............................. 41,504 37,729
Office furniture and equipment ...................... 249,291 184,708
--------- ---------
1,461,384 1,074,509
Less accumulated depreciation and amortization ...... 502,419 212,472
------- -------
Property and equipment, net ......................... $ 958,965 $ 862,037
========== ==========
</TABLE>
4. INCOME TAXES
The Company has not recorded any income tax expense during the period from
Inception to December 31, 1997 because of operating losses incurred since
inception
As of December 31, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $7,100,000 which are available to
offset future Federal taxable income. These carryforwards expire in varying
amounts through 2012. 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 valuation
allowances of $2,414,000 for 1997 and $1,326,000 for 1996 have been recognized
to offset any deferred tax asset related to these carryforwards. Future benefit
may occur to the extent taxable income is earned prior to the expiration of the
carryforward period.
5. 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.
6. 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 share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Period from
Feburary 22,1995
Year ended Year ended (Inception) to
December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C>
Net loss - as reported $(3,263,351) $(2,806,43) $(1,116,652)
Net loss - pro forma $(3,406,973) $(2,879,457) $(1,125,428)
Net loss per share - basic
and diluted - as reported $ (0.41) $ (.44) $ (.18)
Net loss per share - basic
and diluted - pro forma $ (0.43) $ (.46) $ (.18)
</TABLE>
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 rates of
5.98% for the year ended December 31, 1997 and 7% for the year ended December
31, 1996 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 .53 for year ended December 31, 1997
and .60 for year ended December 31, 1996. 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.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Weighted-
Outstanding Average
Options Exercise Price
------- --------------
<S> <C> <C>
Options granted during the period from Inception
to December 31, 1995 (weighted average fair value of $.13) ...................658,800 $ 0.35
Options forfeited by holders during the period
from Inception to December 31, 1995 ..........................................(65,520) $ 0.54
Options exercised during the period form Inception
to December 31, 1995 ......................................................... (2,880) $ 0.14
-------
Options outstanding at January 1, 1996 .........................................590,400 $ 0.33
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) $ 0.87
-------
Options outstanding at December 31, 1996 .......................................891,960 $ 2.34
Options granted during the year ended December 31, 1997
(weighted average fair value of $5.16) .......................................307,000 $ 4.39
Options forfeited by holders during the year
ended December 31, 1997 .....................................................(342,580) $ 4.83
Options exercised during the year ended December 31, 1997 ......................(58,320) $ 0.22
-------
Options outstanding at December 31, 1997 .......................................798,060 $ 2.21
=======
Options exercisable at December 31, 1997 .......................................212,928 $ 0.82
=======
Options available for grant at December 31, 1997 ...............................281,940
=======
</TABLE>
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
$.14 - $ .99 390,480 7.36 $ .29 177,792 $ 0.27
$1.00 - $1.99 44,640 7.94 $ 1.57 13,968 $ 1.52
$2.00 - $4.99 272,840 9.24 $ 2.95 13,608 $ 2.08
$5.00 - $10.00 90,100 9.08 $ 8.56 7,560 $10.00
-------- -------
798,060 212,928
======= =======
</TABLE>
The Company also has outstanding stock purchase warrants entitling the holders
to purchase a total of 23,400 shares of common stock at prices ranging from
$2.08 to $10.00 per share (weighted average exercise price of $2.69). At
December 31, 1997, 4,680 of these warrants are currently vested, with the
remaining 18,720 warrants vesting at 20% per year. The Company has recorded
compensation cost of $8,283 for the year ended December 31, 1997 and $13,208 for
the year ended December 31, 1996 in connection with the issuance of these
warrants.
7. 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 years ended December 31, 1997, 1996 and for the period from
February 22, 1995 (inception) to December 31, 1995, was $154,907, $70,479 and
$40,375 respectively.
At December 31, 1997, future minimum lease payments under this lease are
summarized as follows:
1998 $180,523
1999 173,100
-------
$353,623
========
8. EARNINGS 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
potential common 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 potential common shares outstanding for
all periods presented prior to the December 1996 initial public offering.
Because th Company is in a loss position at December 31,1997, options to
purchase 798,060 shares of common stock at $.14 to $10.00 per share were
outstanding as of December 31, 1997 but were not included in the computation of
diluted EPS as they would be antidilutive.
<TABLE>
<CAPTION>
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
For the year ended December 31, 1997
- ------------------------------------
Basic and diluted EPS $(3,263,351) 7,980,094 $(0.41)
=====================================
For the year ended December 31, 1996
- ------------------------------------
Earnings available to Common shareholders $(2,806,436) 3,678,435
Series A Convertible Preferred Stock 1,296,000
Series B Convertible Preferred Stock 437,500
Staff Accounting Bulletin potential common
shares calculated using the treasury stock
method:
Series B Convetible Preferred Stock
issued May and June 1996 177,365
Common stock options 758,416
-------------------------------------
Basic and diluted EPS $(2,806,436) 6,347,716 $(0.44)
=====================================
For the year ended December 31, 1995
- -----------------------------------
Earnings available to Common shareholders $(1,116,652) 3,602,880
Series A Convertible Preferred stock 518,400
Staff Accounting Bulletin potential common
shares calculated using the treasury stock
method:
Series A Convertible Preferred stock
issued August and September 1995 642,600
Series B Convertible Preferred stock
issued May and June 1996 375,000
Common stock options 815,419
------------------------------------
Basic and diluted EPS $(1,116,652) 5,954,299 $(0.18)
====================================
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Company's Proxy Statement for
Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year
ended December 31, 1997.
Item 11. Executive Compensation.
Director Compensation
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
Executive Compensation
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
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, 1997.
( 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.
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
38 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.
Exhibit 11. Statement of Computation of Per Share Earnings.
<TABLE>
<CAPTION>
PATIENT INFOSYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
Period From
February 22, 1995
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Loss ............................................... $(3,263,351) $(2,806,436) $(1,116,652)
Weighted average Common Stock outstanding .............. 7,980,094 3,678,435 3,602,880
Weighted average Series A Convertible Preferred Stock...
outstanding............................................. - 1,296,000 518,400
Weighted average Series B Convertible Preferred Stock
outstanding ............................................ - 437,500 -
Staff Accounting Bulletin potential common shares:
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
Dilutive effect of stock options granted in the
preceding twelve months, calculated using the
treasury stock method ................................. - 758,416 815,419
Weighted average common and potential
common shares ....................................... 7,980,094 6,347,716 5,954,299
Net Loss per share - Basic and Diluted .................. $ (.41) $ (.44) $ (.18)
=========== =========== ===========
</TABLE>
<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 March 31, 1998
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 31, 1998
Donald A. Carlberg Date
Director, President and Chief Executive Officer
By: /s/ Derace L. Schaffer, M.D. March 28, 1998
Derace L. Schaffer, M.D Date
Chairman of the Board
By: /s/ John Pappajohn March 31, 1998
John Pappajohn Date
Director
By: /s/ Barbara J. McNeil, M.D., Ph.D March 28, 1998
Barbara J. McNeil, M.D., Ph.D. Date
Director
By: /s/ Carl F. Kohrt, Ph.D. March 30, 1998
Carl F. Kohrt, Ph.D. Date
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 779,317
<SECURITIES> 12,232,335
<RECEIVABLES> 412,956
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,830,115
<PP&E> 1,461,384
<DEPRECIATION> 502,419
<TOTAL-ASSETS> 15,036,473
<CURRENT-LIABILITIES> 587,728
<BONDS> 0
0
0
<COMMON> 80,115
<OTHER-SE> 14,368,630
<TOTAL-LIABILITY-AND-EQUITY> 15,036,473
<SALES> 2,062,373
<TOTAL-REVENUES> 2,062,373
<CGS> 1,629,128
<TOTAL-COSTS> 6,160,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,263,351)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,263,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,263,351)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
