UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 30, 2000
Commission file number 0-17822
MEDICAL MANAGER CORPORATION
(formerly known as Synetic, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 22-2975182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
669 River Drive
Elmwood Park, New Jersey 07407-1361
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-3400
<PAGE>
Item 2. Acquisition or Disposition of Assets
On December 7, 1999, Medical Manager Corporation ("the Company") entered
into a definitive agreement to acquire certain assets of Physician Computer
Network, Inc. for a purchase price of $53,000,000 (subject to possible
adjustment in the event that specified liabilities exceed tangible assets by
more thatn $13,000,000), payable $15,500,000 in cash and $37,500,000 in the
Company's common stock, plus the assumption of certain liabilities. The
acquisition was completed on March 30, 2000 and will be accounted for using the
purchase method of accounting. For a description of the assets acquired and the
terms of the asset purchase agreement, see footnote 1 in the notes to
consolidated financial statements if Physician Computer Network, Inc.
2
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
The following historical financial statements and notes thereto are of
Physician Computer Network, Inc. prior to the consummation of the acquisition
and are attached hereto at pages F-1 to F-30
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997
- Consolidated Statements of Changes in Shareholder's Equity (Deficit) for
the years ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
- Notes to Consolidated Financial Statements
(b) Pro forma financial information
The following pro forma financial statements and notes thereto are attached
hereto at pages PF-1 to PF-6.
- Pro Forma Combined Condensed Consolidated Statements of Operations
(unaudited) for the year ended June 30, 1999
- Pro Forma Combined Condensed Consolidated Statement of Operations
(unaudited) for the six months ended December 31, 1999
- Pro Forma Combined Condensed Consolidated Balance Sheet (unaudited) as of
December 31, 1999
- Notes to Pro Forma Combined Condensed Consolidated Financial Statements
(unaudited)
(c) Exhibits
Exhibit 2 - Copy of Asset Purchase Agreement dated as of December 7, 1999,
by and among Physican Computer Network, Inc., VERSYSS Incorporated, Wismer-
Martin, Inc., Integrated Health Systems, Inc., PCN HP Venture Corp.,
Medical Manager Corporation and Medical Manager Health Systems, Inc.,
incorporated by reference to Exhibit 2 of the Current Report on Form 8-K of
Physician Computer Network, Inc. dated December 10, 1999.
Exhibit 23.1 - Consent of Independent Public Accountants (filed herewith)
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDICAL MANAGER CORPORATION
/s/ James R. Love
------------------------------------------
James R. Love
Executive Vice President - Finance and
Administration and Chief Financial Officer
/s/ Kirk G. Layman
------------------------------------------
Kirk G. Layman
Senior Vice President - Finance
and Chief Accounting Officer
Dated: April 19, 2000
4
<PAGE>
Physician Computer Network, Inc.
Financial Statements
Table of Contents
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1999, 1998
and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Physician Computer Network, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Computer Network, Inc. (a New Jersey Corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Physician Computer
Network, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company filed a petition for
reorganization under Chapter XI of the U.S. Bankruptcy Code. In addition, the
Company has suffered recurring losses from operations, a working capital
deficiency and is in default under its debt obligations. These matters, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
/s/Arthur Andersen LLP
Roseland, New Jersey
March 24, 2000
F-2
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------- ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and 6) $ 5,216,000 $ 3,597,000
Accounts receivable, net of allowance for doubtful accounts of
$463,000 and $500,000 at December 31, 1999 and 1998 6,587,000 11,159,000
Inventories (Notes 2 and 4) 1,647,000 1,498,000
Prepaid expenses and other current assets 2,109,000 1,096,000
Restricted cash (Note 6) - 1,000,000
----------- -----------
Total current assets 15,559,000 18,350,000
INTANGIBLE ASSETS, net (Notes 2 and 3) 20,165,000 25,634,000
PROPERTY AND EQUIPMENT, net (Notes 2 and 5) 1,374,000 2,796,000
INVESTMENTS (Note 6) 222,000 200,000
OTHER ASSETS 135,000 470,000
----------- -----------
Total assets $37,455,000 $47,450,000
=========== ===========
</TABLE>
F-3
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1999 1998
----------------------------------------------- ------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit (Note 8) $ 7,076,000 $ 15,412,000
Line of credit assigned to buyer (Note 8) 3,500,000 -
Debtor in possession loan 1,500,000 -
Current portion of long-term debt (Note 8) 323,000 984,000
Current portion of obligations under capital leases (Note 9) 280,000 478,000
Accounts payable 704,000 6,662,000
Accrued expenses and other liabilities (Note 3) 3,750,000 18,921,000
Accounts payable and accrued expenses subject to compromise 13,505,000 -
Accrued legal settlements 23,400,000 -
Customer deposits - 867,000
Unearned income (Note 2) 10,187,000 10,096,000
------------ -------------
Total current liabilities 64,225,000 53,420,000
Long-term debt, net of current portion of obligations (Note 8) - 392,000
Long-term capital leases, net of current portion (Note 9) 759,000 1,251,000
------------ -------------
Total liabilities 64,984,000 55,063,000
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (DEFICIT) (Notes 2 and 13):
Preferred stock, $0.01 par value; 11,000 shares issued and
outstanding at December 31, 1999 and 1998 10,802,000 8,998,000
Common stock, $0.01 par value; 75,000,000 shares authorized;
55,846,918 shares issued and 53,521,918 shares outstanding
as of December 31, 1999; and 1998 558,000 558,000
Additional paid-in capital 200,507,000 200,507,000
Accumulated deficit (228,701,000) (206, 981,000)
Treasury stock, 2,325,000 shares held at cost in 1999 and 1998 (10,695,000) (10,695,000)
------------- --------------
Shareholders' equity (deficit) (27,529,000) (7,613,000)
------------- --------------
Total liabilities and shareholders' equity (deficit) $ 37,455,000 $ 47,450,000
============= ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
consolidated balance sheets.
F-4
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
NET REVENUES (Note 2) $ 68,823,000 $ 86,922,000 $ 78,082,000
COST OF REVENUES (Note 4) 48,598,000 56,421,000 56,504,000
------------- ------------ ------------
Gross margin 20,225,000 30,501,000 21,578,000
------------- ------------ ------------
OPERATING EXPENSES:
Research and development 3,963,000 7,075,000 9,605,000
Selling, general and administrative 25,662,000 41,393,000 37,011,000
Legal settlements 23,400,000 - -
Restructuring charges - 1,090,000 -
Impairment of assets writedown (Notes 2, 3 and 6) - 8,292,000 30,861,000
------------- ------------ ------------
Total operating expenses 53,025,000 57,850,000 77,477,000
------------- ------------ ------------
Loss from operations (32,800,000) (27,349,000) (55,899,000)
INTEREST AND OTHER (INCOME) EXPENSE:
Gain on sales of businesses (14,010,000) - -
Other income (Note 6) - (6,360,000) (2,029,000)
Interest income (61,000) (206,000) (485,000)
Interest expense 1,084,000 2,394,000 3,574,000
-------------- ------------- -------------
(12,987,000) (4,172,000) 1,060,000
-------------- ------------- -------------
Loss before income tax provision
(benefit), income (loss) on equity
investment and extraordinary item (19,813,000) (23,177,000) (56,959,000)
-------------- ------------- --------------
INCOME TAX PROVISION (BENEFIT) (Note 7) 125,000 - (89,000)
-------------- ------------- --------------
Loss before income (loss) on equity
investment and extraordinary item (19,938,000) (23,177,000) (56,870,000)
INCOME (LOSS)ON EQUITY INVESTMENT 22,000 (2,351,000) (2,645,000)
-------------- -------------- ---------------
Loss before extraordinary item (19,916,000) (25,528,000) (59,515,000)
EXTRAORDINARY ITEM - - 1,031,000
-------------- -------------- ---------------
Net loss $ (19,916,000) $ (25,528,000) $ (58,484,000)
============== ============== ===============
BASIC AND DILUTED LOSS PER SHARE (Notes 2, 10 and 13):
Loss available to common shareholders $ (0.41) $ (0.50) $ (1.14)
Extraordinary item - - 0.02
-------------- -------------- ---------------
Loss per share $ (0.41) $ (0.50) $ (1.12)
============== ============== ===============
Weighted average number of common shares
outstanding - Basic and Diluted 53,521,918 53,323,507 52,018,761
============== ============== ===============
</TABLE>
The accompanying notes to financial statements are an integral part of
these consolidated statements.
F-5
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER
31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Shareholders'
Preferred Stock Common Stock Paid-in Accumulated Treasury Equity
Shares Amount Shares Amount Capital Deficit Stock Deficit
------------------------ ---------------------- -------------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1996 1,000 $ - 52,982,484 $ 529,000 $ 192,618,000 $ (121,731,000) $ - $71,416,000
Exercise of stock
options - - 29,670 - 126,000 - - 126,000
Exercise of value
added reseller
options - - 1,350 - 7,000 - - 7,000
Conversion of
preferred stock
into common stock (1,000) - 187,424 2,000 (2,000) - - -
Purchase of 2,325,000
shares of common
stock as treasury - - - - - - (10,695,000) (10,695,000)
Common stock issued
for acquisition - - 450,990 5,000 3,120,000 - - 3,125,000
Exercise of warrants - - 775,000 8,000 (8,000) - - -
Net loss - - - - - (58,484,000) - (58,484,000)
--------- ------------ ----------- --------- -------------- --------------- ------------ -------------
BALANCE,
December 31,1997 - - 54,426,918 544,000 195,861,000 (180,215,000) (10,695,000) 5,495,000
Issuance of
preferred
stock 11,000 7,760,000 - - 3,240,000 - - 11,000,000
Preferred stock
dividend - 1,238,000 - - - (1,238,000) - -
Exercise of
warrants - - 1,420,000 14,000 1,406,000 - - 1,420,000
Net loss - - - - - (25,528,000) - (25,528,000)
--------- ------------ ----------- --------- -------------- --------------- ------------ -------------
BALANCE,
December 31, 1998 11,000 8,998,000 55,846,918 558,000 200,507,000 (206,981,000) (10,695,000) (7,613,000)
Preferred stock
dividend - 1,804,000 - - - (1,804,000) - -
Net loss - - - - - (19,916,000) - (19,916,000)
--------- ------------ ----------- --------- -------------- --------------- ------------ -------------
BALANCE,
December 31, 1999 11,000 $10,802,000 55,846,918 $ 558,000 $ 200,507,000 $ (228,701,000) $(10,695,000) $(27,529,000)
========= ============ ========== ========= ============== =============== ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of
these consolidated statements.
F-6
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,916,000) $ (25,528,000) $ (58,484,000)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 6,189,000 7,139,000 8,853,000
Write-down of assets and other charges - 8,292,000 30,861,000
Noncash restructuring change - 1,090,000 -
Gain on sale of assets (14,010,000) (6,060,000) -
Loss on equity investment (22,000) 2,351,000 2,645,000
Extraordinary gain on forgiveness of long-term
debt and other income - - (3,060,000)
(Increase) decrease in assets-
Restricted cash 1,000,000 (1,000,000) -
Accounts receivable, net 4,572,000 754,000 3,693,000
Inventories (149,000) 2,317,000 (392,000)
Prepaid expenses and other assets (678,000) 1,758,000 6,733,000
Increase (decrease) in liabilities-
Accounts payable, accrued expenses and
other liabilities 15,776,000 5,049,000 1,916,000
Customer deposits and unearned income (776,000) (5,894,000) (5,286,000)
-------------- ------------- --------------
Net cash used in operating activities (8,014,000) (9,732,000) (12,521,000)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (288,000) (483,000) (578,000)
Acquisition of licensing rights and other intangible
assets - (320,000) (214,000)
Purchase of business, net of cash acquired - 64,000 (7,086,000)
Cash received in sale of assets 15,000,000 6,414,000 -
Investment in joint venture and related costs - (700,000) (4,044,000)
-------------- ------------- --------------
Net cash provided by (used in) investing
activities 14,712,000 4,975,000 (11,922,000)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings (payments) of long-term debt, net (4,389,000) (6,479,000) 11,547,000
Principal payments under capital lease obligations (690,000) (476,000) (731,000)
Net proceeds (payments) from issuance of common
stock, preferred stock and warrants and purchase
of treasury stock - 12,420,000 (10,562,000)
-------------- ------------- --------------
Net cash provided by (used in) financing
activities (5,079,000) 5,465,000 254,000
-------------- ------------- --------------
Net increase (decrease) in cash and cash
equivalents 1,619,000 708,000 (24,189,000)
CASH AND CASH EQUIVALENTS, beginning of year 3,597,000 2,889,000 27,078,000
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 5,216,000 $ 3,597,000 $ 2,889,000
============== ============= ==============
</TABLE>
The accompanying notes to financial statements are an integral part of
these consolidated statements.
F-7
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND BUSINESS
-------------------------
Physician Computer Network, Inc. ("PCN" or the "Company") is a leading provider
of information technology to the office-based physician market. The Company's
flagship practice management software product, the PCN Health Network
Information System ("PCN Health Network"), is a multi-functional, advanced
system which automates scheduling, billing, financial reporting and other
"back-office" functions, and provides electronic links to payors and other
parties providing services to a physician's practice. In order to supplement its
practice management product offerings with knowledge-based clinical products and
services, in January 1996, the Company and Glaxo Wellcome, Inc. ("Glaxo
Wellcome") formed a joint venture, Healthmatics G.P. (formerly Healthpoint G.P.)
("Healthmatics"). The Company's interest in this venture was sold during 1998
(see Note 6).
Beginning in 1993, the Company instituted a strategy of developing and expanding
its business by acquiring practice management software businesses having an
installed base of physician practice customers and developing a common software
platform to which such customers could migrate over time. In execution of this
strategy, the Company made a series of acquisitions through 1998 in order to
expand various software and support services.
In 1996 and 1997, the Company sold support obligations for various customer
sites using legacy systems in order to concentrate on its three major software
platforms. In 1998, the Company announced the need to restate financial
information previously issued to the public. Instead of the reported profits
during the first three quarters of 1997, the Company would be reporting a
substantial loss and was in default of its bank agreement. The negative effects
of publicity surrounding the Company's announcements affected operating results
in 1998.
During 1998 and 1999 the Company undertook significant restructuring and cost
reduction efforts to mitigate the losses incurred in 1997. These efforts
included the sale of various noncore business assets. In addition, at the
direction of the Board of Directors, investment bankers were retained to
evaluate the strategic alternatives available to the Company.
In December 1999, immediately prior to the filing of Chapter XI, the Company
entered into an Asset Purchase Agreement with Medical Manager Corp. ("MMC") for
the purchase and sale of all PCN's operating assets and the assumption of
substantially all of PCN's operating liabilities. Medical Manager Health Systems
("MMHS") is the Purchaser under the Asset Purchase Agreement and MMC, the parent
Company of MMHS, guaranteed to PCN the performance of MMHS' obligations under
that agreement. The parties executed an amendment to the Asset Purchase
Agreement on December 23, 1999. The Asset Purchase Agreement, as amended, is
herein referred to as the "Purchase Agreement." The purchase price under the
Purchase Agreement is $53,000,000 (subject to possible adjustment in the event
that specified liabilities exceed tangible assets by more than $13,000,000),
payable $15,500,000 in cash and $37,500,000 in common stock of MMC, a company
listed on the NASDAQ National Market, plus assumption of liabilities. The value
of the MMC stock will be determined based on a ten trading day average closing
sale price preceding the third business day prior to the closing. The total
approximate value of the consideration to be paid by Purchaser is $83,000,000.
Also, prior to the Petition Date, as defined below. MMHS had purchased from the
Lenders (see Note 8) $3,500,000 of loans under the Agreement and obligations
arising thereunder, making $2.5 million of that sum available to PCN to cover
immediate expenses. In addition, MMHS will loan up to $3,500,000 to PCN for
working capital needs postpetition pursuant to the Post-Petition Loan and
Security Agreement between PCN and MMHS dated December 7, 1999. Such loan
amounts are part of the liabilities being assumed by MMHS.
F-8
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Under the Asset Purchase Agreement, subject to Bankruptcy Court approval, PCN
has agreed to pay MMHS a Break Up Fee in the amount of $2,000,000 plus
reimbursement of expenses. In the event the Bankruptcy Court approves a Break Up
Fee and expense reimbursement in favor of MMHS, then the interest rate on the
DIP Loan (see Note 8) will be reduced from 16% per annum to the Base Rate (as
defined in the Agreement), plus 3%. Upon the closing of the transaction with
MMHS, the Company is obligated to pay approximately $2.9 million to certain
employees and consultants.
On December 7, 1999 (the "Petition Date"), as part of the plan to consummate the
sale of the assets, PCN filed for protection under Chapter XI of the Federal
bankruptcy laws in the United States Bankruptcy Court in Newark, N.J. A Plan of
Reorganization was filed immediately thereafter, based on the agreement to sell
the Company to MMHS. On March 15, 2000, the Amended Plan of Reorganization was
confirmed by the Bankruptcy Court. A closing for the sale to MMC is scheduled
for March 31, 2000.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, recognizing that the Company is
currently in reorganization under the supervision of the Court. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this transaction.
Under Chapter XI, certain claims against the Company in existence prior to the
filing of the petitions for relief under the Federal bankruptcy laws are stayed
while the Company continues business operations as debtor-in-possession. These
claims are reflected in the balance sheet as "liabilities subject to
compromise." Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory contracts,
including leases, and from the determination by the court (or agreed to by
parties in interest) of allowed claims for contingencies and other disputed
amounts. Claims secured against the Company's assets ("secured claims") also are
stayed, although the holders of such claims have the right to move the court for
relief from the stay.
The following are the significant components of liabilities subject to
compromise as of December 31, 1999-
Liabilities subject to compromise-
Accounts payable $ 4,296,000
Accrued expenses 9,209,000
-----------
$13,505,000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the consolidated accounts of PCN
for the years ended December 31, 1999, 1998 and 1997, and its wholly-owned
subsidiaries, Medical Network Systems Corp. (MNS) from May 1998, Solion
Corporation (Solion) from September 1997 (MNS and Solion were merged into and
became divisions of PCN in August 1999), the business of Software Banc
Incorporated (SBI) from May 1997, the Healthcare Division of Data Systems of
Texas (Data Systems) from April 1997, Wismer Martin from September 1996 through
July 1999 and the Healthcare business of CUSA Technologies, Inc. (CTI) from July
1996. All significant intercompany transactions have been eliminated.
F-9
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Revenue Recognition
- -------------------
The Company recognizes revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition". The Company's software related revenue includes:
(i) license fees for internally developed and acquired practice management
software products; (ii) support and update agreements on the practice management
software products; (iii) hardware sales and the sale of hardware service
agreements; and, (iv) customer training, installation and consulting services.
Sales of licenses for internally developed and acquired software products are
made to independent resellers and directly to office based physicians and other
healthcare providers. Revenues from sales of such software packages are
primarily recognized upon shipment of the product, since no significant vendor
and/or post contract support obligations remain outstanding at the time of
revenue recognition. In certain cases, independent resellers were sold, for a
single fixed-price non-refundable fee, multi-copy licenses which permit resale
of the Company's software. In those cases, the software license fee was
recognized as revenue when the master copy of the software was delivered to the
independent reseller since the fee charged, and payment thereof, was not
contractually tied to subsequent sales by the reseller. The cost to distribute
additional copies of the software is insignificant. Revenue from software
support and update and hardware service agreements is deferred at the time the
agreement is executed and recognized ratably over the term of the agreement,
which typically does not exceed one year. Revenue from peripheral hardware sales
is recognized at the time of shipment. Revenue from customer training,
installation and consulting services is recognized when the earnings process is
substantially completed, which generally coincides with performance. All costs
associated with licensing of software products, support and update services, and
training and consulting services are expensed as incurred.
Fees from health care institutions and clinical laboratories for communication
links to the Company's systems and physicians are billed monthly or annually and
recognized as revenues over the term of the related agreements, generally one
year.
Research and Development Costs and
Capitalized Software Development Costs
- --------------------------------------
Research and development costs are expensed as incurred. Such costs generally
include software development costs of new products and enhancements up to the
date upon which technological feasibility is achieved. Costs incurred to develop
new software products after technological feasibility is achieved are
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed." Capitalized software development costs obtained as part
of Company acquisitions are amortized using the straight-line method over the
estimated product lives of three years. Net capitalized software reflected in
intangible assets at December 31, 1999 and 1998 was $98,000 and $264,000,
respectively. Capitalized software amortization expense was $166,000, $237,000
and $211,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
There were no additional costs capitalized during 1999 and 1998.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
F-10
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Inventories
- -----------
Inventories, consisting principally of computer hardware for resale and computer
maintenance parts held to repair customers' hardware under maintenance contracts
between the Company and certain of its customers, are stated at lower of cost or
market with costs determined on a first-in, first-out basis.
Intangible Assets
- -----------------
Intangible assets consist primarily of goodwill related to the Company's
acquisitions (see Note 3) and capitalized software development costs.
Amortization is computed using the straight-line method over a period of three
years for computer software and up to 15 years for goodwill. Amortization
expense for computer software and goodwill was $3,521,000, $4,758,000 and
$7,278,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121).
The adoption of this statement requires that long-lived assets, certain
identifiable intangible assets and goodwill related to those assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company's policy is to
evaluate the realizability of acquisition-related intangible assets and certain
other long-lived assets at each balance sheet date based upon the expectations
of nondiscounted cash flows and operating income (loss) for each subsidiary or
acquired business. Based upon its analyses, the Company concluded that no
impairment related to any of its long-lived assets had occurred as of December
31, 1999. For the years ended December 31, 1998 and 1997, the Company recorded a
write-down of certain intangible assets and investments of $8,292,000 and
$30,861,000, respectively (see Note 3).
Property and Equipment
- ----------------------
Equipment is recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from three to
seven years. Equipment under capital leases is amortized on the straight-line
method over the shorter of the useful lives of the leased assets or the term of
the related lease, ranging from three to five years. Repair and maintenance
costs are expensed as incurred. Gains and losses on disposal of property and
equipment are reflected in operations.
Fair Value of Financial Instruments
- -----------------------------------
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments" defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. Cash and cash
equivalents, accounts receivable, notes payable, debt, obligations under capital
leases, and accounts payable reported in the consolidated balance sheets equal
or approximate fair value.
F-11
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Income Taxes
- ------------
The Company has adopted SFAS No. 109 "Accounting for Income Taxes" (SFAS No.
109). Under SFAS No. 109, deferred 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 tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in the period that
the tax change occurs.
Accounting for Stock Based Compensation
- ---------------------------------------
The Company has adopted SFAS No. 123, "Accounting for Stock-based Compensation"
(SFAS No. 123). This statement requires companies to make pro forma disclosures
as if the fair value based method of accounting for stock options, as defined in
the statement, had been applied (see Note 13).
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Loss Per Share
- --------------
The Company calculates loss per share in accordance with SFAS No. 128, "Earnings
per Share" (SFAS No. 128). This standard requires the presentation of basic EPS
and diluted EPS. Basic EPS is calculated by dividing income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available to common shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities.
Segment Reporting
- -----------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement is effective
for the December 31, 1998 financial statements. Comparative information for
earlier years presented is to be restated. The Company does not believe it
operates in more than one segment.
New Accounting Pronouncements
- -----------------------------
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not
have a material effect on its financial position or results of operations.
F-12
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
3. ACQUISITIONS AND DISPOSITIONS AND RESTRUCTURING CHARGES
-------------------------------------------------------
Acquisitions and Dispositions
- -----------------------------
On May 31, 1998, the Company, through a newly formed wholly-owned subsidiary,
Medical Network Systems Corp. ("MNS"), acquired the business of Medical Network
Systems Inc., a reseller of the Company's products. As part of this acquisition,
the Company forgave certain accounts receivable of approximately $585,000 which
were recorded as goodwill. In accordance with SFAS No. 121, the Company
determined that an impairment occurred with respect to this intangible asset as
of December 31, 1998. Accordingly, the goodwill was expensed at December 31,
1998 and is included in impairment of assets writedown in the accompanying
statements of operations.
On September 23, 1997, the Company acquired Solion. Solion provides printed
products, forms and computer supplies to the healthcare industry. The purchase
price was $6,250,000 and was paid for with $3,125,000 in cash, 450,990 shares of
common stock valued at $3,125,000 and the Company assumed $1,628,000 of
liabilities. The resulting goodwill is being amortized over 15 years.
On May 1, 1997, the Company acquired the assets of SBI. SBI is a provider of
integrated information technology for the healthcare industry, providing these
organizations with hardware, software, installation, training, software support
and hardware maintenance. The Company paid $2,613,000 in cash and assumed
$75,000 of liabilities. The resulting goodwill is being amortized over 15 years.
At December 31, 1997, the Company recorded a writedown as a result of an
impairment of this intangible asset in the amount of $2,186,000.
On April 1, 1997, the Company acquired the assets of the Healthcare Division of
Data Systems of Texas ("Data Systems"), a value added reseller of the Company's
products. Data Systems is a provider of integrated information technology for
the healthcare and credit union industries, providing these organizations with
hardware, software, installation, training, software support, and hardware
maintenance. The acquisition agreement with Data Systems was for the purchase of
the assets of the healthcare division only, which is located in Texas. The Data
Systems business was acquired for $1,070,000 in cash, a $600,000 note payable
and the assumption of $168,000 in liabilities. The resulting goodwill is being
amortized over 15 years. At December 31, 1997, the Company recorded a writedown
as a result of an impairment of goodwill in the amount of $1,344,000.
On September 10, 1996, the Company acquired Wismer Martin, a provider of
practice management systems and healthcare information systems. Wismer Martin
was acquired for $1,980,000 in cash, 935,000 shares of common stock valued at
$9,366,000 and the assumption of $3,872,000 in liabilities. The resulting
intangible asset was $11,049,000 at the date of acquisition. At December 31,
1998 and 1997, the Company recorded a writedown as a result of an impairment of
this intangible asset in the amount of $2,782,000 and $6,661,000, respectively.
On July 9, 1999, the Company sold substantially all of the assets and assigned
certain of the liabilities of Wismer Martin to an affiliate of MMC. In addition,
the Company sold certain other assets related to the Wismer Martin business and
assigned certain other related liabilities to that purchaser. Contemporaneous
with the consummation of that transaction, the Company entered into an
agreement, (the "Web Agreement"), granting that purchaser the right to provide,
for a term of 11 months, certain web-based physician portal services and
clinical e-commerce transaction services, to the Company's customers on an
exclusive basis (which services are not currently offered by the Company). The
aggregate consideration
F-13
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
received by the Company and its subsidiary for such sale and for entering into
the Web Agreement was $10 million in cash less an escrow of $350,000. The Web
Agreement may be terminated early by the Company under certain circumstances.
After payment of certain expenses and $4.0 million of bank indebtedness, the
Company retained approximately $5.5 million. Revenues from the Wismer Martin
business were approximately $4.4 million in 1998.
On July 2, 1996, pursuant to an asset purchase agreement, the Company, through a
wholly-owned subsidiary, purchased substantially all of the assets of the
medical practice management software business and certain other software
businesses of CTI for $9,200,000 in cash, the assumption of $4,131,000 in
liabilities and the cancellation of outstanding debt owed by CTI to the Company.
The resulting intangible asset was $10,737,000 at the date of acquisition. At
December 31, 1997, the Company recorded a writedown as a result of an impairment
of this intangible asset in the amount of $4,696,000.
On October 27, 1995, the Company acquired all of the issued and outstanding
capital stock of VERSYSS Incorporated ("VERSYSS"), a developer of practice
management software products, pursuant to a merger agreement, for $12,333,000 in
cash and $11,750,000 in the form of a two year promissory note bearing interest
at the rate of 11% per annum issued by VERSYSS, as the surviving corporation of
the merger, to the VERSYSS Liquidating Trust, a liquidating trust formed for the
benefit of the former shareholders of VERSYSS. In addition, the Company assumed
VERSYSS liabilities aggregating $39,686,000 consisting of $14,367,000 in debt,
$14,199,000 in deferred maintenance revenue, and $11,120,000 in accrued expenses
derived from operations. At December 31, 1998 and 1997, the Company recorded a
writedown as a result of an impairment of this intangible asset of $3,605,000
and $11,128,000, respectively. On April 26, 1999, the Company sold the assets
and liabilities of the commercial division of VERSYSS ("Commercial Division").
The sale price was $3.6 million. After payment of approximately $600,000 in
expenses and $1.7 million of indebtedness, the remaining $1.3 million was
retained by the Company. In connection with the sale, the Company entered into a
3-year agreement to provide hardware services for the purchaser. Revenues from
this business were approximately $11 million in 1998.
In addition to the impairment charges discussed above, the Company recorded an
additional write-off of $4,846,000 during 1997 related to acquisitions made
prior to the VERSYSS acquisition in 1995.
The Company's acquisitions have all been accounted for by the purchase method of
accounting and, consistent with the requirements of Accounting Principles Board
No. 16, the tangible assets acquired and liabilities assumed have been recorded
at their fair values at the respective acquisition dates.
Sale of PMS Software
- --------------------
In October 1999, the Company sold all of its interests in a certain practice
management software product that was not part of its core business. The rights
were sold to a reseller of the Company's products and the Company received, as
consideration, $1 million and the assignment of certain physician practices
whose support billings generate approximately $500,000 per year offset by
obligations to fulfill the remaining portion of support contracts as of the date
of the transaction. In consideration for the Lenders releasing their liens on
the assets, the cash consideration was applied as a paydown on the line of
credit.
F-14
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Restructuring Charges
- ---------------------
During 1998, as a result of the financial difficulties discussed in Note 1, the
Company announced a restructuring plan (the "1998 Restructuring Plan") designed
to eliminate duplicate facilities and responsibilities in order to improve
operating efficiencies and cash flow. The following is a summary of the activity
in the 1998 Restructuring Plan-
<TABLE>
<CAPTION>
<S> <C>
1998 Provision for restructuring $ 1,365,000
Cash outflows from reductions in workforce, lease terminations, and
moving costs 790,000
------------
Balance at December 31, 1998 575,000
Lease terminations and moving costs 443,000
------------
Balance at December 31, 1999 $ 132,000
============
</TABLE>
The balance at December 31, 1999 primarily relates to lease and relocation costs
and is included in accrued expenses and other liabilities in the accompanying
balance sheets.
In the fourth quarter of 1995, after the completion of the VERSYSS acquisition,
management completed a review of the Company's operations and announced a
restructuring plan (the "1995 Restructuring Plan") designed to eliminate
duplicate administrative responsibilities, consolidate warehousing and
distribution of the Company's products and streamline other core business in
order to improve operating efficiencies and increase shareholder value. The 1995
Restructuring Plan does not include additional costs associated with the
consolidation of operations such as retraining, consulting, purchases of
equipment and relocation of employees and equipment. These costs were charged to
operations or capitalized, as appropriate, when incurred. Since implementation
of the 1995 Restructuring Plan, the 1995 accrual has decreased principally due
to expenditures related to headcount reduction and lease termination costs from
the consolidation and centralization of financial and administrative functions
to the Company's corporate headquarters in Morris Plains, New Jersey, the
centralization of purchasing, warehousing and order fulfillment to the Company's
Torrance, California service center and other functional downsizing. The
following is a summary of the activity in the 1995 Restructuring Plan-
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 615,000
Lease termination costs 195,000
Noncash recovery from change in estimated requirements 275,000
------------
Balance at December 31, 1998 145,000
Lease termination costs 145,000
------------
Balance at December 31, 1999 $ -
============
</TABLE>
4. INVENTORIES, NET
---------------
Inventories were as follows-
1999 1998
------------- ------------
Computer hardware and peripherals $ 1,115,000 $ 958,000
Customer maintenance parts 532,000 540,000
------------ -----------
$ 1,647,000 $ 1,498,000
============ ===========
F-15
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
5. PROPERTY AND EQUIPMENT, NET
---------------------------
1999 1998
------------ -------------
Property and equipment $ 8,387,000 $ 8,837,000
Leasehold improvements 446,000 1,230,000
Leased equipment 1,005,000 1,560,000
----------- ------------
9,838,000 11,627,000
Less- Accumulated depreciation and amortization (8,464,000) (8,831,000)
------------ -------------
Property and equipment, net $ 1,374,000 $ 2,796,000
============ =============
Accumulated amortization in connection with equipment under capital leases
included in the above amounts was approximately $387,000 and $626,000 as of
December 31, 1999 and 1998, respectively. Depreciation and amortization for the
years ended December 31, 1999, 1998 and 1997 was $1,392,000, $2,474,000 and
$2,743,000, respectively.
6. INVESTMENTS AND OTHER VENTURES
------------------------------
Healthmatics Joint Venture
- --------------------------
In January 1996, the Company and Glaxo Wellcome, through wholly-owned
subsidiaries, formed Healthmatics, a joint venture partnership, to design and
market clinical information technology products and services. Healthmatics was a
general partnership owned equally by, and operated independently of, the parent
companies. Both the Company and Glaxo Wellcome agreed to contribute product
development assets to Healthmatics and at least $50 million in cash to the
venture, of which $43 million was contributed by Glaxo Wellcome and $7 million
was to be contributed by the Company. Losses incurred by Healthmatics were
allocated between Glaxo Wellcome and the Company in proportion to their
respective cash contributions (approximately 85% to Glaxo Wellcome and 15% to
the Company).
On December 4, 1998, the Company sold its entire interest in Healthmatics to a
subsidiary of Glaxo Wellcome for gross proceeds of $5,000,000. The Company's
share of allocated losses was in excess of its investment at the time of sale
resulting in a funding requirement by the Company. The gain on the sale is
approximately $5,600,000 which represents the gross proceeds plus the
forgiveness of the funding of losses to the date of sale, less transaction
costs. In connection with this transaction, $1,000,000, reflected as restricted
cash, was deposited in escrow with the Company's Lenders to be returned to the
Company if certain events occurred. During 1999, this amount was applied against
the outstanding borrowings under the Company's line of credit.
Purchases by the Company from Healthmatics were considered immaterial for the
years ended December 31, 1998 and 1997.
Investment in HCC Communication, Inc.
- -------------------------------------
During 1997, the Company made a 19.9% investment in HCC Communications, Inc.
("HCC") in exchange for $2,000,000. The Company is entitled to elect one member
to HCC's board of directors. The Company accounts for this investment using the
equity method. The Company's share of net gains was $22,000 for the year ending
December 31, 1999, and net losses of $137,000 and $131,000 for the years ending
December 31, 1998 and 1997, respectively. Also, during 1997, HCC sold certain
assets to which the Company was entitled to a portion of the proceeds.
Approximately $212,000 was received and recorded as a return of the Company's
initial investment.
F-16
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
During 1998, the Company determined that an impairment had occurred with respect
to the value of this investment. As a result, the Company recorded a writedown
of $1,320,000 at December 31, 1998 which is included in impairment of assets
writedown in the accompanying statements of operations. The Company does not
believe that an impairment exists with respect to the value of this investment
at December 31, 1999.
7. INCOME TAXES
------------
Income tax provision (benefit) for each period is summarized as follows-
1999 1998 1997
--------- ---------- ---------
Current-
Federal 105,000 - (89,000)
State 20,000 - -
--------- ---------- ---------
125,000 - (89,000)
--------- ---------- ---------
Deferred-
Federal - - -
State - - -
--------- ---------- ---------
- - -
--------- ---------- ---------
Income tax provision (benefit) $125,000 - $(89,000)
========= ========== =========
The income tax benefit differs from applying the Federal income tax rate of 35%
for the fiscal years 1999, 1998 and 1997 loss before income tax provision, loss
on equity investment and extraordinary item due to the following-
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax benefit at statutory rate (35.0%) (35.0%) (35.0%)
Change in the valuation allowance for deferred tax
assets 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 0.1% - -
Other 0.6% - (0.1%)
--------- --------- ---------
Effective tax rate 0.7% 0.0% (0.1%)
========= ========= =========
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities at December 31, 1999 and 1998 are as follows-
1999 1998
------------ ------------
Deferred Tax Assets-
Net operating loss carryforward $ 30,686,000 $ 22,720,000
Restructuring provisions 53,000 304,000
Operating accruals 11,000,000 1,490,000
Allowance for doubtful accounts 185,000 215,000
Deductible goodwill writeoffs 1,810,000 1,974,000
------------- -------------
43,734,000 26,703,000
Valuation allowance (43,734,000) (26,703,000)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
F-17
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
At December 31, 1999, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $76.7 million which expire at
various dates through 2014. The Company believes it has previously experienced
ownership changes, which under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended (IRC), have resulted in certain limitations on
the Company's ability to utilize its net operating losses in the future.
8. DEBT
----
Line of Credit
- --------------
In September 1997, the Company entered into a Credit Agreement (the Agreement)
with Fleet Bank, N.A. as an administrative agent for a syndicate of banks (the
Lenders). The Agreement provided for borrowings of up to $110,000,000 and was to
expire in September 2001. Borrowings under the agreement bear interest at the
bank's base rate or LIBOR, as applicable, plus the applicable margin, as defined
in the Agreement.
On April 22, 1998, as a result of certain events of default, the Company and the
Lenders entered into a forbearance and amendment agreement in which the Lenders
agreed to forbear their remedies under the Agreement until September 30, 1998,
increased the interest to base rate plus two percent, terminated availability,
charged a restructuring fee and modified and added covenants. Pursuant to this
agreement, the Company repaid $6,000,000 principal from the proceeds of the
Series B Preferred Stock (see Note 13), paid a restructuring fee of
approximately $400,000, and the Investor guaranteed $2,000,000 of the remaining
balance (see Note 11).
As of September 30, 1998, the Company and the Lenders entered into a second
forbearance and amendment agreement which extended the forbearance and which
required, among other things, the delivery of audited financial statements and a
commitment to provide either refinancing of outstanding borrowings, or a
definitive purchase agreement, as defined, by certain dates. In consideration
for the second forbearance agreement, the Company paid $750,000 principal, a
restructuring fee of $250,000 and agreed to an extension fee of $1,000,000 due
on the extended maturity date of the refinancing or sale of the Company.
On April 26, 1999, the Company and the Lenders entered into a third forbearance
and amendment agreement, which provided the Company with additional time to meet
performance criteria established in the second agreement. In addition the
Lenders agreed to extend the maturity date of the borrowings to August 15, 1999,
and they agreed to release their security interests in the Commercial Division.
In consideration for the third forbearance agreement the Company agreed to apply
to principal $1,000,000 of the escrowed proceeds from the sale of Healthmatics
in December 1998 and to apply 50% of the net proceeds from the sale of the
Commercial Division against the principal due under the line of credit. The
remaining 50% was available for use by the Company for working capital and
general corporate purposes.
On July 9, 1999, the Company and the Lenders entered into a fourth forbearance
and amendment agreement, which, among other things, extended the forbearance
from September 30, 1999 to December 31, 1999. In consideration for the fourth
forbearance agreement, the Company agreed to an extension fee of $500,000 due on
the extended maturity date of the refinancing or sale of the Company. The
$500,000 and the $1,000,000 from the second forbearance agreement are reflected
in accrued liabilities on the accompanying balance sheet as of December 31,
1999.
F-18
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
On or about November 23, 1999, the conditions of the fourth forbearance
agreement not having been timely satisfied, PCN entered into a fifth forbearance
and amendment agreement with the Lenders under which the maturity date of the
remaining indebtedness was extended to the later of (i) November 30, 1999, and
(ii) five (5) days after completion of PCN's audit as of September 30, 1999, but
in no event later than December 31, 1999. Also, in connection with the fifth
forbearance agreement, MMC purchased from the Lenders $2,000,000 of the
indebtedness outstanding under the Agreement, on a subordinated basis, and the
Lenders advanced $1,000,000 to PCN for working capital. Prior to entering into
the fifth forbearance agreement, PCN had made a $1,000,000 principal payment to
the Lenders from the proceeds of the sale of certain software rights on which
the Lenders had a lien.
Prior to the filing of the petition, MMC purchased from the Lenders $1,500,000
of the indebtedness outstanding under the Agreement, which amount the Lenders
advanced to PCN, resulting in the principal amount outstanding the Agreement
being increased to $10,576,000 as of the Petition Date. This amount was conceded
by PCN to be due in Interim Cash Collateral Order dated December 8, 1999.
Outstanding borrowings under the line of credit were $7,076,000 and $15,412,000
as of December 31, 1999 and 1998, respectively. The line of credit is secured by
all of the assets of the Company.
Long-Term Debt
- --------------
<TABLE>
<CAPTION>
1999 1998
================ ================
<S> <C> <C>
Term note due monthly March 1995 through February 2001 at
8% assumed from VERSYSS acquisition (a) $ 95,000 $ 785,000
Subordinated promissory note payable to Gordon J. Romer,
President of Solion, with an interest rate of 6% per annum
payable annually, maturing and payable in full on March 2,
1999, assumed in connection with the Solion acquisition (b) 50,000 188,000
Note Payable to Data Systems in two equal payments on
February 15, 1998 and February 15, 1999, including interest
at a rate of 6% per annum incurred in connection with the
Data Systems acquisition (c) 46,000 250,000
Debtor-in-possession term note payable to Medical Manager
Health Systems Inc., with an interest rate of 16% per annum,
payable upon the occurrence of certain events (d) 1,500,000 -
Line of credit assigned to Medical Manager Health Systems, Inc.
with an interest rate of Prime plus 2%, payable on the maturity
date as defined in the original Credit Agreement with Fleet
Bank, N.A. (e) 3,500,000 -
Other 132,000 153,000
------------ -----------
5,323,000 1,376,000
Less- Current portion of long-term debt 5,323,000 984,000
------------ -----------
Long-term debt $ - $ 392,000
============ ===========
</TABLE>
F-19
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1999, 1998 AND 1997
(a) As part of the VERSYSS acquisition, the Company assumed a note payable
to a former landlord that was part of a settlement. As security for the
note, the landlord has a lien on substantially all of VERSYSS' assets. The
note had an aggregate outstanding balance of approximately $95,000 at
December 31, 1999, and is due in equal monthly installments of principal
and interest (at 8% per year). In April 1999, as part of the sale of the
commercial assets, a repayment of $400,000 was made with the balance to be
repaid over a one-year period.
(b) In September 1997, as part of the Solion acquisition, the Company
assumed a note payable to Solion's President, Gordon J. Romer. In March
1999, this note was restructured whereby the Company paid $68,000 and
entered into a new note for the remaining $120,000 which is payable in
monthly installments of principal and interest with a final maturity in
March 2000.
(c) The note payable to Data Systems was incurred as part of the acquisition
in 1997. $250,000 of the note was repaid in 1998. The remaining $250,000,
which was due in February 1999 was restructured whereby the Company paid
$90,000 and entered into a new note for the remaining $160,000 which is
payable in monthly installments of principal and interest with a final
maturity in March 2000.
(d) In December of 1999, PCN assumed a Debtor-in-Possession term note
payable to MMC. The interest rate on this term note is adjustable based on
the occurrence of certain events. Under the terms of this note, PCN has the
ability to borrow an aggregate principal sum of up to $3,500,000. As of
December 31, 1999, the note had an aggregate outstanding balance of
$1,500,000. The outstanding balance is payable upon the earlier of (i)
event of default, as defined, (ii) closing under asset purchase agreement,
(iii) termination of asset purchase agreement, or (iv) closing of the sale
assets of PCN to an entity other than MMC.
(e) In November and December, MMC purchased $2 million and $1.5 million,
respectively, of the amounts outstanding under the line of credit. This
transaction resulted in the banks agreeing to fund an additional $2.5
million under the line of credit, on a subordinated basis. As part of the
above transaction, the Company signed a non-solicitation agreement while it
is negotiating the sale of substantially all of its assets to this third
party. As of December 31, 1999, the aggregate outstanding balance under
this agreement was $3,500,000. The outstanding balance is payable on the
maturity date as defined in the original credit agreement with the Lenders.
F-20
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
9. LEASING TRANSACTIONS
--------------------
Future minimum lease payments under all leases with initial or remaining
non-cancelable lease terms, in excess of one year at December 31, 1999, are as
follows-
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------- --------------
<S> <C> <C>
2000 $ 382,000 $ 1,970,000
2001 808,000 1,074,000
2002 15,000 904,000
2003 - 766,000
2004 - 307,000
Thereafter - 180,000
----------- ------------
Total minimum lease payments 1,205,000 $ 5,201,000
============
Less: Amount representing interest 166,000
-----------
Present value of future minimum lease payments 1,039,000
Less: Current portion 280,000
-----------
Long-term portion $ 759,000
===========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately, $3,104,000, $4,511,000 and $3,639,000, respectively.
On December 6, 1994, the Company entered into a rental agreement with a
company wholly-owned by the Company's largest shareholder and Chairman of
the Board of Directors (the "Investor"). The ten year sublease consists of
44,725 square feet of office space at 1200 The American Road, Morris
Plains, New Jersey, to serve as the Company's corporate headquarters and
executive offices. The Company believes that the terms of the lease were no
less favorable than a lease that could have been obtained by the Company
from an unrelated third party in a transaction negotiated at an arm's
length basis. On September 1, 1996, the Company amended its agreement to
sublease an additional 14,170 square feet of office space. The landlord's
interest was assigned to an unrelated third party partnership on February
27, 1998. By amendment dated August 2, 1998, the Company relinquished all
rights to the 14,170 square feet of office space and increased the
remaining 44,725 square feet to 46,222 square feet. The amendment reduced
the term of the lease to July 31, 2001 and restructured the monthly rent.
On September 24, 1999, the landlord exercised its right to terminate the
lease effective September 30, 2000. On September 29, 1999, the landlord and
the Company entered into a second amendment to the lease which reduces the
amount of space leased to 39,000 square feet and reduced the monthly rent.
In addition, the Company granted the landlord the further right to
terminate the lease at any time after March 31, 2000, upon receipt of three
months advance notice.
In conjunction with the Company's various acquisitions, the Company assumed
operating leases for facilities and equipment.
F-21
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The Company had previously entered into a long-term operating lease for
certain office space at its Walpole Facility in Massachusetts. In 1998, the
Company decided that it would not occupy a certain part of this facility.
Accordingly, the Company recorded an accrual of $1,000,000 representing the
future lease payments under the lease agreement for the unoccupied space.
During 1999, the landlord and the Company entered into an agreement with a
third party to lease a portion of the vacant space. In connection
therewith, the Company reversed approximately $484,000 of the above accrual
representing the portion of the lease that was assumed by the new tenant.
The Company is a guarantor of the third party and is responsible for any
default under the lease.
10. LOSS PER SHARE
--------------
In accordance with SFAS No. 128, the following table reconciles net loss
and share amounts used to calculate net loss per share-
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Numerator-
Net loss before extraordinary item $ (19,916,000) $ (25,528,000) $ (59,515,000)
Less- Dividends on preferred stock (1,801,000) (1,238,000) -
--------------- --------------- ---------------
Loss available to common shareholders (21,717,000) (26,766,000) (59,515,000)
Extraordinary item - - 1,031,000
--------------- --------------- ---------------
Net loss - Basic and Diluted $ (21,717,000) $ (26,766,000) $ (58,484,000)
=============== =============== ===============
Denominator-
Weighted average number of common shares
outstanding - Basic and Diluted 53,521,918 53,323,507 52,018,761
=============== =============== ===============
Basic and Diluted- loss per share-
Loss available to common shareholders $ (0.41) $ (0.50) $ (1.14)
Extraordinary item - - 0.02
--------------- --------------- ---------------
Net loss $ (0.41) $ (0.50) $ (1.12)
=============== =============== ===============
</TABLE>
Outstanding options of 1,694,431, 2,338,631 and 2,620,231 as of December
31, 1999, 1998 and 1997, respectively, have been excluded from the above
calculations as they are antidilutive.
11. TRANSACTIONS WITH RELATED PARTIES
---------------------------------
In April 1998, in connection with a Stock Purchase Agreement, the Investor
guaranteed $2,000,000 of the outstanding debt owed to the Lenders (see
Notes 8 and 13).
F-22
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
Employment Agreements
- ---------------------
As of December 31, 1999, the Company has employment arrangements with
several employees which provide for the continuation of salary and other
compensation aggregating approximately $1,096,000 for the year ended
December 31, 1999. Upon the occurrence of certain events, varying amounts
of compensation would be due under these arrangements. In addition, as part
of the 1998 Restructuring Plan, the Company entered into severance and
"stay put" arrangements with certain key personnel. These programs obligate
the Company to pay approximately $810,000 in 2000.
Marketing Agreement
- -------------------
On January 25, 1995, the Company entered into an Exclusive Marketing Agreement
("the Marketing Agreement") with Equifax EDI, an electronic claims clearinghouse
and a wholly-owned subsidiary of Equifax, to establish "PCN Link", a
communication link between Equifax EDI and users of the Company's practice
management software products. On January 12, 1996, the Company and Equifax
entered into an amended and restated Marketing Agreement, which among other
things, revised the exclusive coverage of the services provided by Equifax EDI
to claims submission and related services, on-line eligibility and benefit
inquiries for indemnity plans, credit card and check guarantee and verification
services and electronic remittance services. In connection with such amendment,
which had an initial term of four years, the Company agreed to share with
Equifax EDI certain of the costs and expenses associated with the further
development and enhancement of PCN Link. Further, the Company agreed to pay
Equifax $125,000 per month for forty-eight months in order to offer, as a
marketing incentive, introductory free service for one year, with certain
limitations, to physician practices who subscribed to the services offered under
the Marketing Agreement.
During the third quarter of 1996, NDC acquired all of the outstanding capital
stock of Equifax EDI. On September 3, 1996, the Company, Equifax EDI, Equifax
and NDC entered into an agreement whereby, among other things, the Company
waived its right to terminate the Marketing Agreement, and received cash
consideration of $4.5 million. The Company recorded this amount as deferred
revenue in 1996 and reduced this amount as payments were made under the
Marketing Agreement. The acquisition of Equifax EDI by NDC did not result in any
changes to the Marketing Agreement except that the Company and NDC agreed that
the Company could, in its sole unrestricted discretion, terminate the Marketing
Agreement, on not less than ninety days written notice, at any time on or after
July 1, 1997.
The Company terminated the Marketing Agreement effective September 30, 1997. As
a result, the Company, in September 1997 recognized $2,029,000 which represented
the remaining unamortized deferred revenue amount. This amount is reflected as
other income in the consolidated statement of operations for the year ended
December 31, 1997.
Litigation
- ----------
Subsequent to the Company's announcements in early 1998 concerning the delay in
its annual audit and its expected restatement of previously issued reports,
numerous purported class actions were filed against the Company, certain
directors and former officers. These matters were consolidated into one action
in the United States District Court for the District of New Jersey.
F-23
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Prior to the bankruptcy filing, this Securities Class Action was settled by the
Company, subject to the approval of both Federal District Court and the
Bankruptcy Court. The settlement provided for a payment of $21.15 million plus a
share of certain other proceeds. The Class Plaintiffs also agreed that the
settlement is subject to downward adjustment risk based on the ultimate sale
price of the Company. The Bankruptcy Court approved the settlement when the Plan
reorganization was confirmed; the Federal District Court approved the settlement
on March 22, 2000.
The Company's former Chief Executive Officer also filed a suit against the
Company alleging among other things, wrongful termination. In March 2000, the
Company reached a tentative settlement with the former officer that will not
have a material impact on the financial statements.
In September 1997, the owner of Printed Products Group (PPG) agreed to merge his
company with and into Solion (a newly formed subsidiary of PCN) and to become an
officer of PCN. In June 1998, this individual served the Company, its subsidiary
Solion and certain current and former officers and directors of the Company with
a complaint that asserted claims for breech of contract, negligent
misrepresentation, and a violation of Massachusetts General Law. The complaint
alleged that the individual received misleading information about the Company's
financial condition and prospects in connection with his agreement of the merger
of his company, PPG, with and into Solion. In February 2000, the Company reached
a settlement with the individual requiring the payment of $1.65 million from the
proceeds and subject to the consummation of the sale of the Company.
A majority shareholder in Wismer Martin Inc. has filed suit against the Company
and certain current and former officers and directors alleging similar
violations of law with respect to the Company's purchase of Wismer Martin Inc.
In February 2000, the Company reached a settlement with the individual requiring
the payment of $0.6 million from the proceeds and subject to the consummation of
the sale of the Company.
The Company, during the normal course of business, has become involved in
certain litigation. The Company believes that the outcome of unsettled
litigation will not have a material adverse effect on the Company's financial
position and results of operations.
13. SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------
Placement of Securities
- -----------------------
During 1995, the Company completed a placement of securities pursuant to
Regulation S of the Securities Act of 1933. In connection with such placement,
the Company received net proceeds of approximately $25 million through the
issuance of 1,902,748 shares of its common stock and 18,500 shares of its Series
A non-dividend paying convertible preferred stock. The preferred stock, which
was issued at $1,000 per share was, at the option of the holder, convertible
into shares of common stock at a conversion price based on certain minimum and
maximum conversion prices. During the year ended December 31, 1997, 1,000 shares
of the Series A non-dividend paying convertible preferred stock issued pursuant
to such offering were converted into 187,424 shares of common stock. As of
December 31, 1999 and 1998 there were no shares of the Series A preferred stock
outstanding.
F-24
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Issuance of Preferred Stock
- ---------------------------
On April 1, 1998, in a single transaction, the Company entered into a Stock
Purchase Agreement (the Agreement) with an affiliate of the Investor. Under the
Agreement, the Company agreed to sell such affiliate, 11,000 shares of Series B
Cumulative Preferred Stock (the "Series B Preferred Stock") and grant and modify
certain warrants in exchange for $11,000,000 and a $2,000,000 guarantee by the
Investor on the Company's indebtedness to the Lenders. The Series B Preferred
Stock accumulates dividends at a rate of 15% per year through March 31, 1999,
increases 1% per year up to 18% and has a liquidation preference of $1,000 per
share plus accumulated dividends. The Series B Preferred Stock is senior to all
common stock and has no voting rights. It is redeemable at the Company's option,
subject to certain conditions, none of which were met as of December 31, 1999 or
1998.
In connection with the Agreement, the Company granted a warrant to purchase
6,000,000 shares of common stock at an exercise price of $1.00. Also, the
Company modified the terms and exercise price of warrants previously issued in
1995 (see "Stock Warrants").
Based upon an independent valuation of the Series B Preferred Stock on April 1,
1998, the value of the 11,000 shares was determined to be $7,760,000. As a
result, the Series B Preferred Stock is reflected in the accompanying balance
sheet at the fair value of $7,760,000 plus accumulated dividends of $1,801,000
and $1,238,000 for the years ended December 31, 1999 and 1998, respectively. The
remaining $3,240,000 is attributable to the value of the Warrants described
above and has been reflected as a credit to additional paid in capital. The
Company determined that the Guarantee had terms comparable to outstanding
borrowings of the Company.
Stock Options
- -------------
At December 31, 1999, 1998 and 1997, the Company had reserved 1,694,431,
2,338,631 and 2,620,231 shares of Common Stock, respectively, for issuance upon
exercise of stock options issued to Directors, officers, employees of the
Company as well as to independent value-added resellers of the Company's
practice management software products.
The following is a summary of each of the Company's stock option plans-
1989 Incentive and Non-Incentive Stock Option Plan (the "1989 Plan"): Under the
1989 Plan, as amended, 167,000 shares of Common Stock are reserved for issuance
upon exercise of options granted thereunder. Incentive stock options may be
granted to employees and non-incentive stock options may be granted to
employees, directors and such other persons as the Compensation Committee of the
Company's Board of Directors (the Compensation Committee) determines will assist
the Company's business endeavors, at exercise prices equal to at least 100% of
the fair market value of the Common Stock on the date of grant with respect to
incentive stock options (110% of fair market value in the case of incentive
stock options granted to any person who, at the time the incentive stock option
is granted, owns or is considered as owning within the meaning of Section 425(d)
of the IRC stock possessing more than 10% of the total combined voting powers of
all classes of stock of the Company or any subsidiary (10% Owner)), and at least
85% of the fair market value of the Common Stock on the date of grant with
respect to non-incentive stock options. Incentive stock options are granted for
a term of five years; those granted prior to April 30, 1989 may be exercised by
their respective holders two months after the date of grant, while incentive
stock options granted thereafter are exercisable cumulatively at the rate of 50%
per year commencing one year from the date of grant. Generally options granted
under the 1989 Plan prior to April 1992 expire six months after the holders'
separation from service with the Company. The 1989 Plan terminated on March 31,
1999.
F-25
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1990 Incentive and Non-Incentive Stock Option Plan ("the 1990 Plan"): Under the
1990 Plan, 167,000 shares of Common Stock are reserved for issuance upon
exercise of options granted thereunder. Incentive stock options may be granted
to employees and non-incentive stock options may be granted to employees,
directors and other such persons as the Compensation Committee determines will
assist the Company's business endeavors, at exercise prices equal to at least
100% of the fair market value of the Common Stock on the date of grant with
respect to non-incentive stock options (100% of fair market value in the case of
incentive stock options granted to any person who at the time the incentive
stock option is granted, is a 10% Owner), and at least 50% of the fair market
value of the Common Stock on the date of grant with respect to non-incentive
stock options. In addition to selecting the optionees, the Compensation
Committee determines the number of shares of Common Stock subject to each
option, the term of each non-incentive stock option, the time when the
non-incentive stock option becomes exercisable, though, pursuant to board
resolution, no option granted after April 7, 1992 may be exercisable within six
months of the date of the grant, and otherwise administers the 1990 Plan.
Incentive stock options are granted for a term of five years and are exercisable
cumulatively at the rate of 50% per year commencing one year from the date of
grant. Options expire six months from the date of the holder's termination of
employment with the Company by reason of retirement at age 65, disability or
death, or on the date of termination of employment for any other reason. The
1990 Plan terminates on March 26, 2000.
Amended and Restated 1993 Incentive and Non-Incentive Stock Option Plan (the
"Employee Plan"): The Employee Plan, as amended, reserves 3,300,000 shares of
Common Stock for issuance upon exercise of options to be granted thereunder.
Under the Employee Plan, incentive stock options qualifying under Section 422 of
the IRC, may be granted to employees of the Company, and non-incentive stock
options may be granted to employees, officers and directors and such other
persons as the Compensation Committee appointed by the Board of Directors
determines will assist the Company's business endeavors. Options to purchase
more than 250,000 shares of Common Stock may not be awarded to any employee in
any calendar year. The Compensation Committee selects the optionees and
determines: (i) whether the respective option is to be a non-incentive stock
option or an incentive stock option; (ii) the number of shares of Common Stock
purchasable under the option; (iii) the exercise price, which cannot be less
than 100% of the fair market value of the Common Stock on the date of grant
(110% of fair market value in the case of incentive stock options granted to any
person who, at the time the incentive stock option is granted, is a 10% Owner);
(iv) the time or times when the option becomes exercisable; and (v) its
duration, which may not exceed ten years from the date of grant (or five years
for any incentive stock option granted to a 10% Owner). The Employee Plan
terminates on July 13, 2003.
Amended and Restated 1993 Non-Employee Directors' Non-Incentive Stock Option
Plan (the "Directors' Plan"): The Directors' Plan, as amended, reserves 200,000
shares of Common Stock for issuance upon exercise of options to be granted
thereunder. Under the Directors' Plan, options can only be granted to a director
of the Company who is not an employee nor an officer of the Company. Such
options are non-incentive and are non-qualified under Section 422 of the IRC.
The Directors' Plan is administered by a special committee consisting of
employee directors and officers. The committee has no authority to grant
non-qualified stock options, as, immediately following the effective date of the
Directors' Plan, options to purchase 10,000 shares of Common Stock were granted
automatically to each non-employee director and will be granted on the next
succeeding business day following a director's election or appointment to the
Board of Directors'. In addition to the initial option grants, non-qualified
stock options to purchase 10,000 shares of Common Stock shall be granted
automatically to each non-employee director on the third anniversary date of his
initial option grant and every three years thereafter during the term of the
Directors' Plan. The Directors' Plan terminates on July 13, 2003.
F-26
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Value Added Reseller Stock Option Plan (the "VAR Plan"): The VAR Plan reserves
an aggregate of 3,500,000 shares of Common Stock for issuance upon the exercise
of options to be granted thereunder. Under the VAR Plan, options can only be
granted to independent resellers of the PCN Health Network Information System
who are not also members of the Board of Directors, officers, or employees of
the Company. The VAR Plan was adopted by the Board to provide incentives to the
independent resellers of the Company to market the PCN Health Network
Information System to current users of the Company's other practice management
software products as well as others, and became effective September 30, 1994.
The VAR Plan is administered by a committee appointed by the Board consisting of
no less than two individuals, and unless otherwise determined, includes the
chief executive officer and chief financial officer of the Company. Under the
VAR Plan on September 30, 1994 and in January 1995 and January 1996, independent
resellers were granted options based upon the product of: (i) 300; and (ii) the
number of existing licensees of the Company's practice management software
products in the independent reseller's installed base as of such dates; or, for
an independent reseller first becoming an independent reseller after September
30, 1994, the number of licenses of the Company's practice management software
products in the general geographic region in which such new independent reseller
conducts its business. The exercise price of options granted under the VAR Plan
is the market value of a share of Common Stock on the business day immediately
preceding the date on which an option is granted. The terms of options granted
under the VAR Plan may not exceed 10 years. Options vest based upon the number
of licenses for the PCN Health Network Information System sold to existing
customers of the Company (200 shares) and to new customers (100 shares) during
1994, 1995 and 1996. In addition, options vest for an additional 50 shares for
each license sold by the independent reseller during such periods in excess of
the minimum performance standard set forth in the independent reseller's
agreement with the Company. No option shall be granted pursuant to the VAR Plan
after December 31, 1997, but options theretofore granted may extend beyond that
date.
Stock option activity for all option plans is summarized as follows-
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Balance outstanding, December 31, 1997 2,620,231 $ 7.54
Granted 550,000 1.50
Forfeited (831,600) 8.51
Exercised -
----------
Balance outstanding, December 31, 1998 2,338,631 8.07
Granted - -
Forfeited (644,200) 8.40
Exercised - -
----------
Balance outstanding, December 31, 1999 1,694,431 $ 7.84
==========
Options to purchase 1,694,431 shares of Common Stock were exercisable at
December 31, 1999 and the weighted average exercise price of those options was
$7.84.
F-27
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The Company has adopted the disclosure provisions of SFAS No. 123 and applies
APB Opinion 25 in accounting for its plans and, accordingly, records no
compensation cost for stock option plans and stock purchase plans in its
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below-
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss available to common
shareholders- as reported $(19,916,000) $(26,766,000) $(58,484,000)
Net loss available to common
shareholders- pro forma $(22,552,000) $(30,976,000) $(62,248,000)
Loss per share- as reported $ (0.41) $ (0.50) $ (1.12)
Loss per share- pro forma $ (0.46) $ (0.58) $ (1.20)
</TABLE>
The pro forma amounts as noted above may not be representative of the effects on
reported income for future years. Pro forma net loss reflects only options
granted since January 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period of 5 years and compensation cost for
options granted prior to January 1, 1995 is not considered.
The fair value of the stock options granted is estimated at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions: for 1997, 1998 and 1999 - expected dividend yield 0.0%, risk free
interest rate of 6.0%, expected volatility of 75%, and an expected life of 7.5
years. The weighted average grant date fair value of options granted in 1998 was
$6.03. There were no options granted during 1999.
Stock Warrants
- --------------
In September 1995, the Investor purchased from the Company, for $1,500,000, a
warrant to purchase, in a single transaction, 5,000,000 shares of common stock
for an aggregate exercise price of $5.00 per share exercisable beginning
September 14, 1997. The proceeds from the issuance of such warrant were
determined to be within the range of fair value, as determined by an investment
banking firm, and therefore resulted in no expense charge in the consolidated
statements of operations. On April 1, 1998, under a Stock Purchase Agreement
(see Issuance of Preferred Stock) the Company adjusted the exercise price from
$5.00 to $0.70 per share. In addition, the options are not exercisable until
September 2002.
Also, on April 1, 1998, the Company granted to the Investor a warrant to
purchase 6,000,000 shares of common stock at a price of $1.00 per share. The
warrants may be exercised at any time after the first to occur of (i) April 1,
1999 and (ii) a Trigger Event, as defined in the warrant agreement. The warrant
expires on March 31, 2003.
In return for the above warrant grants and modifications and the 11,000 shares
of the Series B Preferred Stock, the Company received $11,000,000 in cash and a
$2,000,000 guarantee (Note 11). Based on an independent valuation of the Series
B Preferred Stock, the value of the 11,000 shares was determined to be
$7,760,000. The remaining $3,240,000 is attributable to the value of the
warrants and has been reflected as a credit to additional paid in capital.
F-28
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
In July 1998, the Company retained and granted a warrant to a professional
services firm. The warrant allows the holder to purchase 250,000 shares of
common stock at an exercise price of $1.50 per share. The warrant vested at
various dates through May 31, 1999. The warrant may become exercisable upon a
Trigger Event, as defined within the agreement. The Company utilized the Black
Scholes pricing model on the date of grant to determine the value of the warrant
in accordance with SFAS No. 123. As a result of the calculation, no value was
ascribed to this warrant in the accompanying consolidated financial statements.
In connection with the retention of this firm, the Company granted to such firm
a lien on substantially all the assets of the Company. The table below details
all warrants outstanding at December 31, 1999-
<TABLE>
<CAPTION>
Warrants
Exercise Warrants Exercised/ Outstanding
Date of Grant Price Granted Canceled Warrants
- ------------------ -------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
November 20, 1990 $1.00 417,500 (417,500) - Exercised February 20, 1998
June 11, 1991 $1.00 19,038 (19,038) - Exercised February 20, 1998
July 1, 1991 $9.00 10,000 (10,000) - Terminated June 30, 1996
September 17, 1991 $1.00 983,462 (983,462) - Exercised February 20, 1998
December 30, 1993 $1.00 775,000 - 775,000 Expires December 30, 2003
February 1, 1994 $2.50 100,000 - 100,000 Expires February 1, 2004
September 13, 1995 $0.70 (a) 5,000,000 - 5,000,000 (b) Expires September 13, 2002
April 1, 1998 $1.00 6,000,000 - 6,000,000 (c) Expires April 1, 2003
July 22, 1998 $1.50 250,000 - 250,000 Expires March 31, 2003
---------- ------------ -------------
13,555,000 (1,430,000) 12,125,000
</TABLE>
The number of warrants exercisable at December 31, 1999 was 1,125,000.
(a) Represents adjusted exercise price due to the amendment on April 1, 1998
discussed above.
(b) The Investor warrants granted in September 1995, are not considered
exercisable as they vest after the first of September 12, 2002 or a Trigger
Event, as defined.
(c) The Common Stock Purchase Warrants, granted on April 1, 1998, are not
considered exercisable as they vest after the first of April 1, 2003 or a
Trigger Event, as defined.
14. EMPLOYEE BENEFIT PLAN
The Physician Computer Network, Inc. 401(k) Plan (the "Plan"), is a participant
directed, defined contribution plan in which eligible employees, as defined, of
the Company may become participants in the Plan on the first day of the month
immediately following the date on which they have attained age 21 and after six
months following the employees' employment commencement dates, as defined.
Employees who are eligible under an existing 401(k) plan of an entity that the
Company acquires are automatically eligible to participate in the Plan. Eligible
employees include substantially all employees of the Company. The Plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Contribution expense amounted to $307,000, $464,000 and $602,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. As of December 31,
1999, the 1999 and 1998 employer contributions in the amount of $404,000
remained unpaid and are reflected in accrued liabilities.
F-29
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
15. INDUSTRY SEGMENT DATA
---------------------
The Company's operations are conducted within one business segment. There are no
material revenues attributable to foreign customers.
16. SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
------------------------
<TABLE>
<CAPTION>
Supplemental Disclosure of
Cash Flow Information 1999 1998 1997
---------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Cash paid for interest $1,610,000 $2,517,000 $ 3,125,000
Cash paid for income taxes 125,000 49,000 412,000
</TABLE>
17. CONCENTRATION OF CREDIT RISK
----------------------------
The Company's customers, in general, are primarily dependent upon the healthcare
sector of the economy. The Company's concentration of credit risk with customers
is largely dependent on its revenue mix which, at December 31, 1999, 1998 and
1997, was primarily from physician practices and independent resellers.
18. SUBSEQUENT EVENTS (UNAUDITED)
-----------------------------
On March 15, 2000, the Company received Bankruptcy Court approval of its Amended
Plan of Reorganization. The Plan contemplates the sale of ongoing operations to
MMHS by the end of March 2000, followed by a liquidation of the Company. In
addition, creditors should expect to receive their allowed claims. Outstanding
stock options under stock option plans will be cancelled. Amounts available (if
any) after the payment to the preferred stockholder of the preferred stock's
liquidation value and accumulated dividends and expenses of liquidation will be
distributed to the common shareholders.
F-30
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On March 30, 2000, Medical Manager Corporation completed the acquisition of
certain assets of Physician Computer Network, Inc. for a purchase price of $53
million plus the assumption of certain liabilities. The acquisition is
considered a taxable transaction for federal, state and local income tax
purposes.
The Unaudited Pro Forma Combined Condensed Consolidated Statements of
Operations have been presented as if the acquisition had been consummated at the
beginning of the earliest period presented in the respective Statements of
Operations. Also presented is the Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet as of December 31, 1999 as if the acquisition had
been completed on December 31, 1999. For purposes of combining Medical Manager
Corporation's historical financial data with Physician Computer Network's
historical financial data in the Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet, the unaudited balance sheet of Medical Manager
Corporation as of December 31, 1999 has been combined with Physician Computer
Network's audited balance sheet as of December 31, 1999.
Medical Manager Corporation's fiscal year ends June 30, while Physician
Computer Network's fiscal year ends on December 31. For purposes of combining
Medical Manager Corporation's historical financial data with Physician Computer
Network's historical financial data in the Unaudited Pro Forma Combined
Condensed Consolidated Statements of Operations, the audited financial data of
Medical Manager Corporation for the fiscal year ended June 30, 1999 has been
combined with the Physician Computer Network's unaudited financial data for the
year ended September 30, 1999; and Medical Manager Corporation's unaudited
financial data for the six months ended December 31, 1999 has been combined with
Physician Computer Network's unaudited financial data for the six months ended
December 31, 1999.
These unaudited pro forma combined condensed consolidated financial
statements should be read in conjunction with the historical consolidated
financial statements of Medical Manager Corporation and related notes and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" contained therein in the Registrant's Annual Report on Form 10-K, as
amended, for the year ended June 30, 1999 and the Quarterly Report on Form 10-Q
for the three and six months ended December 31, 1999.
We have included this unaudited pro forma combined condensed consolidated
financial data only for the purpose of illustration, and it does not necessarily
indicate what the operating results or financial position would have been if the
proposed acquisition between Medical Manager Corporation and Physician Computer
Network had been completed at the dates indicated. Moreover, this data does not
necessarily indicate what the future operating results or financial position of
the combined company will be.
The total estimated purchase price of Physician Computer Network has been
allocated on a preliminary basis to the assets and liabilities based on
management's best estimates of their fair value with the excess over the net
tangible assets acquired allocated to goodwill. These allocations are subject to
change pending a final determination and analysis of the total purchase price
and the fair value of the assets acquired and liabilities assumed.
PF-1
<PAGE>
Medical Manager Corporation
Pro Forma Combined Condensed Consolidated Statement of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Medical Manager Physician Computer
Corporation Network, Inc.
Historical - Year Ended Historical - Year Ended Pro Forma Pro Forma
June 30, 1999 September 30, 1999 Adjustments Combined
------------------------- ------------------------- ------------- -----------
<S> <C> <C> <C> <C>
Net Revenues............................... $ 268,354 $ 75,727 $ - $ 344,081
---------------- --------------- ------------ -----------
Costs and expenses:
Cost of revenues......................... 133,237 49,048 - 182,285
Selling, general and administrative...... 73,463 28,371 - 101,834
Research and development................. 18,780 4,589 - 23,369
Minority interest in CareInsite.......... 2,788 - - 2,788
Litigation expenses...................... 6,666 - - 6,666
Depreciation and amortization............ 14,829 5,983 (4,045) (1) 30,267
13,500 (2)
Interest and other income................ (20,457) (19,004) 1,006 (3) (28,617)
9,838 (4)
Interest and other expense............... 9,128 1,574 - 10,702
---------------- --------------- ------------ -----------
Total Costs and expenses............. 238,434 70,561 20,299 329,294
---------------- --------------- ------------ -----------
Income before provision for income taxes... 29,920 5,166 (20,299) 14,787
Provision for income taxes................. 12,307 100 (4,184) (6) 8,223
---------------- --------------- ------------ -----------
Net income................................. $ 17,613 $ 5,066 $ (16,115) $ 6,564
================ =============== ============ ===========
Net income per share - basic:
- -----------------------------
Net income per share $0.53 $0.19
================ ===========
Weighted average shares outstanding 33,544 779 (7) 34,323
================ ============ ===========
Net income per share - diluted:
Net income per share $0.48 $0.18
================ ==========-
Weighted average shares outstanding 36,663 779 (7) 37,442
================ ============ ===========
</TABLE>
PF-2
<PAGE>
Medical Manager Corporation
Pro Forma Combined Condensed Consolidated Statement of Operations
For the Six Months Ended December 31, 1999
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Medical Manager Physician Computer
Corporation Network, Inc. Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------------- -------------------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenues............................... $ 159,295 $ 33,333 $ - $ 192,628
--------------- ------------ ----------- -----------
Costs and expenses:
Cost of revenues...................... 81,047 22,897 - 103,944
Selling, general and administrative... 51,120 9,270 - 60,390
Research and development.............. 12,545 1,637 - 14,182
Minority interest in CareInsite....... 1,787 - - 1,787
Litigation expenses .................. 1,100 23,400 (23,400) (5) 1,100
Merger and related expenses........... 17,991 - - 17,991
Depreciation and amortization......... 11,365 3,601 (2,738) (1) 18,978
6,750 (2)
Net gain on sale of investments....... (24,887) - - (24,887)
Interest and other income............. (13,489) (10,741) 503 (3) (13,889)
9,838 (4)
Interest and other expenses........... 4,610 479 - 5,089
--------------- ------------ ----------- -----------
Total costs and expenses.......... 143,189 50,543 (9,047) 184,685
--------------- ------------ ----------- -----------
Income before provision for income taxes... 16,106 (17,210) 9,047 7,943
Provision for income taxes ................ 8,895 125 (1,806) (6) 7,214
Net income................................. $ 7,211 $ (17,335) $ 10,853 $ 729
=============== ============ =========== ===========
Net income per share - basic:
Net income per share $0.21 $0.02
=============== ===========
Weighted average shares outstanding 35,096 779 (7) 35,875
=============== =========== ===========
Net income per share diluted:
Net income per share $0.18 $0.02
=============== ===========
Weighted average shares outstanding 38,724 779 (7) 39,503
=============== =========== ===========
</TABLE>
PF-3
<PAGE>
Medical Manager Corporation
Pro Forma Combined Condensed Consolidated Balance Sheet
As of December 31, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Medical Manager Physician Computer
Corporation Network, Inc. Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------------- -------------------- ------------- -------------
Assets:
<S> <C> <C> <C> <C>
Current Assets:
Cash & cash equivalents................... $ 100,564 $ 5,216 $ (15,271) (8) $ 90,509
Marketable securities..................... 45,270 - - 45,270
Accounts receivable, net.................. 58,934 6,587 - 65,521
Other current assets...................... 53,309 3,756 (415) (9) 56,650
------------ ------------ ------------ -----------
Total current assets........................... 258,077 15,559 (15,686) 257,950
Property, plant, and equipment, net............ 65,061 1,374 - 66,435
Marketable securities.......................... 294,578 - - 294,578
Capitalized software development costs......... 30,807 - - 30,807
Goodwill and other intangibles................. 189,804 20,165 (20,165) (10) 257,304
67,500 (11)
Other assets................................... 11,061 357 - 11,418
------------ ------------ ------------- -----------
Total assets................................... $ 849,388 $ 37,455 $ 31,649 $ 918,492
============ ============ ============= ===========
Liabilities and stockholders' equity:
Current liabilities............................ $ 75,626 $ 64,225 $ 1,500 (12) $ 106,928
(34,423) (9)
Long-term debt, less current portion........... 168,175 759 - 168,934
Minority interest in consolidated subsidiary... 69,344 - - 69,344
Other liabilities.............................. 33,382 - - 33,382
Stockholders' equity........................... 502,861 (27,529) 37,043 (13) 539,904
27,529 (14)
------------ ------------ ------------- -----------
Total liabilities and stockholders' equity..... $ 849,388 $ 37,455 $ 31,649 $ 918,492
============ ============ ============= ===========
</TABLE>
PF-4
<PAGE>
Notes to Pro Forma Combined Condensed Consolidated
Financial Statements
(unaudited)
The Unaudited Pro Forma Combined Condensed Consolidated Statements of
Operations have been prepared to reflect the acquisition as if it had occurred
at the beginning of the respective periods presented. The acquisition will be
accounted for under the purchase method of accounting. The excess of the
purchase price over the fair value of the net assets acquired will be amortized
over 5 years.
The following is a summary of the adjustments reflected in the Unaudited
Pro Forma Combined Condensed Consolidated Statements of Operations (in
thousands):
1. Represents the elimination of historical amortization of goodwill.
2. Represents the amortization of the excess of the purchase price over the net
assets acquired of Physician Computer Network.
3. Represents the decrease in interest income to reflect (a) the payment of the
cash portion of the purchase price and (b) the estimated expenses associated
with the acquisition.
4. Represents the elimination of the gain on the sale of the Wismer Martin
division of Physician Computer Network to Medical Manager Corporation in July
1999.
5. Represents the elimination of the charge related to Physician Computer
Network's settlement of securities litigation.
6. Represents the tax effect of the adjustments to the Unaudited Pro Forma
Combined Condensed Consolidated Statements of Operations (excluding the
elimination of the gain on the sale of the Wismer Martin division of Physician
Computer Network to Medical Manager Corporation in July 1999 and the charge
related to Physician Computer Network's settlement of securities litigation),
based on a combined federal and state effective tax rate of 40% for all periods
presented.
7. Represents the increase in the number of outstanding shares of Medical
Manager Corporation common stock to reflect the payment of the stock portion of
the purchase price. The market price used in the calculation represents the
average of the average closing sale price during the ten trading days ending on
March 27, 2000 and the average closing sale price during the ten trading days
ending on March 28, 2000.
The Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet was
prepared to reflect the acquisition as of December 31, 1999.
PF-5
<PAGE>
The following is a summary of the adjustments reflected in the Unaudited
Pro Forma Combined Condensed Consolidated Balance Sheet (in thousands):
8. Represents the decrease in Cash and Cash Equivalents to reflect the payment
of the cash portion of the purchase price.
9. Represents assets and liabilities retained by Physician Computer Network
pursuant to the Asset Purchase Agreement.
10. Represents the elimination of Physician Computer Network's historical
goodwill.
11. Represents the preliminary estimate of the excess purchase price over the
net assets acquired as follows:
Purchase price (including $1,500 of transaction expenses) $54,500
Book value of acquired net liabilities 13,686
--------
Less: excess of net liabilities over the Permitted Amount (686)
--------
Excess of purchase price over net liabilities acquired $67,500
========
The purchase price is subject to adjustment at the time of closing. If the
net liabilities acquired at the time of closing as calculated pursuant to the
Asset Purchase Agreement is greater than $13,000 ("Permitted Amount"), then the
purchase price will be reduced by the excess over the Permitted Amount. The
purchase price will be reduced proportionately by one-third in cash and
two-thirds in stock. If the net liabilities at the time of closing is less than
the Permitted Amount (the amount less being referred to as the "Excess Amount"),
then the adjustment to the purchase price will be increased based on the
following formula:
- - if Excess Amount is $250 or less, there will be no adjustment to the purchase
price, or
- - if Excess Amount is greater than $250 but less than $500 then the purchase
price will be increased by the excess over $250, or
- - if Excess Amount is greater than $500 then the purchase price will be
increased by $250 plus 50% of the excess over $500;
provided, however, that the increase in the purchase price is limited to the
amount of Excess Cash, as calculated pursuant to the Asset Purchase Agreement,
included in the assets acquired pursuant to the Asset Purchase Agreement.
12. Represents the amount of estimated costs for legal and accounting services
and other expenses associated with the acquisition.
13. Represents the issuance of Medical Manager Corporation common stock to
reflect the payment of the stock portion of the purchase price.
14. Represents the elimination of Physician Computer Network's historical
deficit.
PF-6
<PAGE>
Exhibit Index
---------------
Exhibit 2 -
Copy of Asset Purchase Agreement dated as of December 7, 1999, by and
among Physician Computer Network Inc., VERSYSS Incorporated, Wismer
Martin, Inc., Integrated Health Systems, Inc., PCN HP Venture Corp.,
Medical Manager Corporation and Medical Manager Health Systems, Inc.
hereby incorporated by reference to Exhibit 2 of the current report on
Form 8-K of Physician Computer Network, Inc. dated December 10, 1999.
Exhibit 23.1 -
Consent of Independent Public Accountants (filed here with)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incoporation in this
Form 8-K of our report dated March 24, 2000 on the financial statements of
Physician Computer Network, Inc. It should be noted that we have not audited any
finanical statements of the company subsequent to December 31, 1999 or performed
any audit procedures subsequent to the date of our report.
/s/Arthur Andersen LLP
Roseland, New Jersey
April 13, 2000
