<PAGE>
PROSPECTUS
FILED PURSUANT TO
RULE 424(b)(1)
(333-3104)
5,600,000 SHARES
PHYSICIAN COMPUTER NETWORK, INC.
COMMON STOCK
----------------
Of the 5,600,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby, 3,667,783 shares are being offered by Physician
Computer Network, Inc. (the "Company" or "PCN") and 1,932,217 shares are being
offered by Equifax Inc. ("Equifax" or the "Selling Shareholder"). See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Shareholder. Of the 5,600,000 shares of
Common Stock offered hereby, 4,480,000 shares are being offered initially in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering") and
1,120,000 shares are being offered initially outside the United States and
Canada by the International Managers (the "International Offering" and together
with the U.S. Offering, the "Offerings"). The Common Stock is traded on the
Nasdaq National Market under the symbol "PCNI." On May 6, 1996, the last
reported sale price for the Common Stock was $10 5/16 per share. See "Price
Range of Common Stock."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions (1) Company (2) Shareholder
<S> <C> <C> <C> <C>
Per Share........... $10.00 $.50 $9.50 $9.50
Total (3)........... $56,000,000 $2,800,000 $34,843,938 $18,356,062
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $513,685.
(3) The Company has granted the U.S. Underwriters and the International Managers
a 30-day option to purchase up to an aggregate of 840,000 additional shares
of Common Stock on the same terms and conditions as set forth above solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $64,400,000, $3,220,000 and $42,823,938, respectively.
See "Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are offered by the
U.S. Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of certificates representing the shares of Common Stock will be made at
the offices of Lehman Brothers Inc., New York, New York, on or about May 10,
1996.
---------------------
LEHMAN BROTHERS
NATWEST SECURITIES LIMITED
VECTOR SECURITIES INTERNATIONAL, INC.
May 6, 1996
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR
"PCN" REFER TO PHYSICIAN COMPUTER NETWORK, INC. AND ITS CONSOLIDATED
SUBSIDIARIES, ITS PREDECESSORS OR TO ANY OF THEM, DEPENDING ON THE CONTEXT.
UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS. CERTAIN OF THE INFORMATION
CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," INCLUDING INFORMATION WITH RESPECT TO THE COMPANY'S
PLANS AND STRATEGY FOR ITS BUSINESS, ARE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS."
THE COMPANY
The Company is a leader in developing, marketing and supporting practice
management software products for physician practices. The Company's objective is
to establish a large installed base of physician practice customers who use the
Company's most advanced practice management software product, the PCN Health
Network Information System, thereby becoming an important link for the
electronic exchange of information between physician practices and other health
care providers and organizations. In furtherance of this objective, since
September 1993, the Company has acquired six practice management software
businesses, increasing the number of physicians associated with sites which have
purchased the Company's practice management software products from approximately
2,000 to approximately 80,000, making the Company one of the largest providers
of practice management software products in the United States. The Company plans
to migrate substantially all of its customers to the PCN Health Network
Information System during the next several years. In order to rapidly and
cost-effectively supplement its practice management software product offerings
with knowledge-based clinical products and services, in January 1996, the
Company formed a joint venture with Glaxo Wellcome, Inc. ("Glaxo Wellcome"). The
joint venture partnership, HealthPoint G.P. ("HealthPoint"), will develop and
market clinical information technology products and services that will provide
the clinical information needed at the point of patient care to enable
physicians and other health care providers to practice medicine more
efficiently. In March 1996, HealthPoint introduced its first product,
HealthPoint ACS, a product developed for medical offices to enable physicians
to, among other things, manage the clinical information required for treatment
at the point of care. HealthPoint ACS is expected to be commercially available
during the second half of 1996.
The Company's practice management software products, which, among other
things, automate physician scheduling and generate patient billings, insurance
claims billings and other financial reports, include interactive communication
software that links physician practices with hospitals, Medicare/Medicaid
carriers, commercial insurance carriers, claims clearinghouses, clinical
laboratories, pharmacies, HMOs and other health care organizations who have
established electronic communication links under agreements with the Company
(collectively, "Connecting Service Providers"). The PCN Health Network
Information System is designed to become the common practice management software
platform used by substantially all of the Company's physician practice customers
and, as an integrated unit with HealthPoint's products, is expected to provide
physicians with comprehensive financial, administrative and clinical
applications. The PCN Health Network Information System will primarily manage
the business elements of the physician's practice and HealthPoint's software
products and services will primarily provide physicians with clinical
applications and functionality intended to assist physicians in the clinical
aspects of their practices.
The Company's strategy for achieving its objective includes: (i) increasing
the usage of the PCN Health Network Information System by continuing to acquire
practice management software businesses having an installed base of physician
practice customers; (ii) migrating both the Company's existing and newly
acquired practice management software customers to the PCN Health Network
Information System during the next several years; (iii) marketing and licensing
the PCN Health Network Information System, both directly and through independent
resellers, to additional physician customers, in particular, large group
practices; (iv) marketing HealthPoint's clinical information system products and
other services to the Company's installed base of PCN Health Network Information
System customers, as well as customers of the Company's other
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<PAGE>
practice management software products; and (v) providing new and enhanced
services, including new Connecting Service Providers, through the PCN Health
Network Information System and HealthPoint's clinical information technology
products.
In addition to revenues generated by the Company from the licensing of both
its practice management software products and HealthPoint's clinical information
products, as well as related sales of computer hardware and services, as a
partner in the joint venture, the Company will generally receive 50% of any
profits generated by HealthPoint from its products and services, whether or not
sold by the Company. HealthPoint's products and services are expected to
include: (i) clinical information systems and related services; (ii) network
communication systems and services to facilitate the delivery of clinical data
and services from and to physicians, managed care organizations, health
insurance plan sponsors and payers, suppliers, pharmacies, clinical laboratories
and other health care industry participants; and (iii) the electronic
collection, support, management and analysis of patient and provider data.
RECENT DEVELOPMENTS
On May 1, 1996, the Company reported its results for its first quarter ended
March 31, 1996. For that quarter, revenues increased 226% to $21,026,948 from
$6,457,862 for the same period in 1995. The Company also reported net income of
$3,314,659, or $0.07 per share, for the first quarter compared to $1,090,655, or
$0.03 per share, for the same period in 1995. The first quarter results include
a provision for income taxes at an estimated full year effective tax rate of
21%, reflecting the utilization of net operating loss carry forwards available
to the Company. The Company expects its cash liability for income taxes for 1996
to be substantially less than the effective tax rate.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered by:
The Company..................... 3,667,783 shares
The Selling Shareholder......... 1,932,217 shares (1)
Total Common Stock offered.... 5,600,000 shares
Common Stock offered for sale in:
U.S. Offering................... 4,480,000 shares
International Offering.......... 1,120,000 shares
Common Stock to be outstanding
after the Offerings.............. 51,172,125 shares (1)(2)
Use of proceeds................... The net proceeds of the Offerings will be used to
finance future acquisitions and for general corporate
purposes, including working capital. In addition, the
Company may use up to $11,043,750 of the net proceeds of
the Offerings to exercise its right, at any time prior
to April 1, 1997, to repurchase up to 2,325,000 shares
of Common Stock held by IBM Credit Corporation ("ICC")
for $4.75 per share (the "ICC Call")(3). See "Use of
Proceeds" and "Certain Transactions."
Nasdaq National Market Symbol..... PCNI
</TABLE>
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(1) Reflects the conversion in full of the five-year, $10,000,000 principal
amount convertible subordinated promissory note issued to Equifax on
February 15, 1995 (the "Equifax Note"). See "Principal and Selling
Shareholders."
(2) Does not include warrants and options outstanding as of April 30, 1996 to
purchase 9,131,563 shares of Common Stock, of which warrants and options to
purchase 2,863,484 of such shares were exercisable on such date. Does not
include shares of Common Stock into which the 1,000 shares of the Company's
Series A Convertible Preferred Stock ("Convertible Preferred Stock")
outstanding as of April 30, 1996 are convertible. Each share of Convertible
Preferred Stock is convertible into between 142 and 333 shares of Common
Stock, depending upon the market price of the Common Stock on the date of
conversion. Any shares of
4
<PAGE>
the Convertible Preferred Stock not converted by October 27, 1997 will be
automatically converted on such date. See "Capitalization," "Management --
Stock Option Plans," "Certain Transactions," "Description of Capital Stock
-- Preferred Stock," "-- Value Added Reseller Stock Option Plan" and Note
12 to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
(3) The 2,325,000 shares of Common Stock subject to the ICC Call include a
warrant held by ICC to purchase 775,000 shares of Common Stock for no
consideration.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 (1) 1994 (2) 1993 (2) 1992 1991
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...................................... $ 41,805 $ 20,504 $ 6,109 $ 3,124 $ 2,101
Gross margin (loss)..................................... 25,516 14,428 (4,146) (4,726) (7,108)
Net income (loss) available to common shareholders...... (11,680 (3) 1,247 (20,039) (18,860) (24,664)
Earnings (loss) per common share........................ $ (0.29) $ 0.04 $ (0.97) $ (2.19) $ (4.29)
Weighted average shares used in per share calculation
(4).................................................... 40,068 35,634 20,688 8,601 5,746
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
PRO FORMA
ACTUAL (1) AS ADJUSTED(5)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 15,517 $ 49,847
Working capital (deficit)............................................................. (9,006) 25,324
Intangible assets, net................................................................ 53,701 53,701
Total assets.......................................................................... 100,260 134,590
Long-term liabilities................................................................. 19,730 9,730
Shareholders' equity.................................................................. 29,198 73,528
</TABLE>
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(1) Includes the operations of the Practice Management Systems Corp. business
(the "PMS Business") from April 24, 1995 and Versyss Incorporated
("Versyss") from October 27, 1995.
(2) The year ended December 31, 1994 includes the operations of Wallaby
Software Corporation ("Wallaby") and Calyx Corporation ("Calyx") for the
full year, the operations of the DOM/2 business (the "DOM/2 Business") from
March 11, 1994 and the operations of the Acclaim business (the "Acclaim
Business") from November 15, 1994. The year ended December 31, 1993
includes the operations of Calyx from September 23, 1993.
(3) Includes charges of $14,516 related to acquired technology in process and
$5,579 principally related to provisions for restructuring and the
write-down of assets and other charges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus.
(4) Primary and fully diluted earnings per common share are the same, as the
assumed exercise of outstanding stock options and warrants would not cause
a material dilutive effect on the earnings per common share for the year
ended December 31, 1994 and would be anti-dilutive in the calculation of
the loss per common share for December 31, 1995, 1993, 1992 and 1991. As of
December 31, 1995, warrants and options to purchase 10,244,280 shares of
Common Stock were outstanding, of which warrants and options to purchase
3,249,106 shares were exercisable on such date. Weighted average shares
used in per share calculation does not include shares issuable upon
conversion of the Equifax Note or the shares issuable upon conversion of
the 15,750 shares of Convertible Preferred Stock outstanding as of December
31, 1995. See "Capitalization" and "Description of Capital Stock --
Preferred Stock."
(5) Pro forma as adjusted reflects the Offerings, including the conversion in
full of the Equifax Note. The net proceeds from the Offerings have been
reflected as working capital, pending its use as described in "Use of
Proceeds." See "Capitalization," "Pro Forma Condensed Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Equifax Relationship."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
ACQUISITION STRATEGY AND IMPACT ON FUTURE OPERATING RESULTS. A key element
of the Company's strategy is to acquire established practice management software
businesses in order to increase the Company's installed base of physician
practice customers. There is significant competition for acquisitions of
practice management software businesses and the Company is in competition with
companies that may have significantly greater financial resources. Further, as
competition intensifies due to ongoing consolidation in the practice management
software industry, the costs of capitalizing on such opportunities may increase.
As a result, although the Company is actively pursuing potential acquisitions,
there can be no assurance that any potential acquisitions will be consummated.
Expansion and growth of the Company's business as a result of acquisitions may
also place significant demands on the Company's financial and management
resources. If the Company is unable to manage its growth effectively, the
quality of its services, its ability to recruit and retain key personnel or
physician practice customers and its results of operations could be materially
and adversely affected. In addition, the ability of the Company to meet its
objectives will depend on its ability to effectively integrate any additional
acquisitions into the Company's existing corporate structure. No assurance can
be given that the Company will be able to operate or successfully integrate the
acquired businesses profitably or otherwise successfully implement its expansion
strategy. The Company may finance any future acquisitions through borrowings or
the issuance of debt or equity securities. Any issuance of equity securities
could have a dilutive effect on the holders of Common Stock. In addition, in
connection with acquisitions, the Company may acquire intangible assets,
including goodwill. When factors indicate that these intangible assets should be
evaluated for possible impairment, the Company may be required to reduce the
carrying value of its intangible assets, which could have a material adverse
effect on the results of operations of the Company during the periods in which
such reduction is recognized. In addition, in connection with certain of its
past acquisitions, the Company acquired technology in process that had not
achieved technological feasibility at the date of acquisition and had no
alternative future uses. As a result, the Company has, and to the extent any
such acquired technology in process is acquired as part of future acquisitions
may, charge the fair value of such acquired technology in process against
operations at the time of acquisition. Any such future charges could have a
material adverse effect on the results of operations of the Company during the
period in which such charges are taken. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Strategy."
UNCERTAINTY OF ACCEPTANCE OF PRODUCT AND MIGRATION STRATEGY. In September
1994, the Company introduced its most advanced practice management software
product, the PCN Health Network Information System. This product is designed to
become the common practice management software platform used by substantially
all of the Company's physician practice customers and to provide enhanced
communication link capabilities. The Company's future growth and profitability
will be effected by its ability to migrate its customers, including customers
acquired through acquisitions, to the PCN Health Network Information System.
While to date migrations have generally proceeded in accordance with
management's plan, no assurance can be given that such migrations will continue.
In the event the Company is unable to migrate its customers, the Company may be
required to incur the additional expense of maintaining and supporting a number
of different practice management software products simultaneously and the
Company's ability to connect new Connecting Service Providers may be adversely
affected. There can be no assurance that the Company's efforts to migrate its
customers, particularly customers acquired through acquisitions, to the PCN
Health Network Information System will be successful. See "Business -- Strategy"
and "-- Products."
HISTORY OF SIGNIFICANT LOSSES. Although for the year ended December 31,
1994, the Company generated net income of $1,247,219, for the year ended
December 31, 1995 and the three year period ended December 31, 1993, the Company
sustained a net loss of $11,680,187 and $63,374,000, respectively. The net loss
in 1995 was the result of charges taken by the Company for acquired technology
in process, provisions for restructuring, the write-down of assets and other
charges and the extinguishment of debt. The Company's net losses prior to 1994
resulted principally from the development of its software and communication link
6
<PAGE>
products, as well as the capital intensive nature of the Company's prior direct
sales expansion strategy. There can be no assurance that the Company will
generate net income in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
HISTORICAL CAPITAL DEFICIENCY AND RELIANCE ON FUNDING FROM THE INVESTOR. At
December 31, 1995, the Company had a working capital deficit of approximately
$9,006,000, and shareholders' equity of approximately $29,198,000. At December
31, 1994, 1993 and 1992, the Company had a working capital deficit of
approximately $3,971,000, $2,675,000 and $790,000, respectively, and a
deficiency in shareholders' equity of approximately $8,574,000, $9,868,000 and
$5,531,000, respectively. Historically, the Company had received funds from Mr.
Jeffry M. Picower (the "Investor"), both in the form of equity investments (an
aggregate of $18,500,000, since March 1990) and loans (an aggregate principal
amount of $20,001,000, since September 1991), in order to permit the Company to
repay indebtedness, to continue operations and fund acquisitions. The Investor
is under no obligation to provide any additional funding in the future and no
assurance can be given that the Investor would, in the future, be willing to
provide additional funds on terms acceptable to the Company or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAIN AVAILABILITY OF ADDITIONAL FUNDING. The Company expects that its
operating cash flow, together with the proceeds from the Offerings, will be
sufficient to fund the Company's working capital requirements (including
research and development) at least through June 1997, and enable it to continue
its acquisition strategy and exercise the ICC Call. The Company's ability to
satisfy its working capital obligations will, however, be dependent upon its
future performance, which is subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. The Company's ability to continue its acquisition strategy and exercise
the ICC Call will be affected by the extent and pace at which the Company
utilizes its available resources for acquisitions. Accordingly, the Company may
in the future be required to seek additional sources of financing, including
borrowing and/or the sale of equity securities. The Company has not sought and
does not currently have a revolving credit facility and, if a shortfall occurs,
alternative sources of financing would be necessary in order for the Company to
meet its liquidity requirements. There can be no assurance that any additional
financing would be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, further dilution to shareholders may
result. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ACCEPTANCE OF HEALTHPOINT PRODUCTS; CONTROL OF JOINT VENTURE AND ALLOCATION
OF PROFITS AND LOSSES. In January 1996, the Company and Glaxo Wellcome formed
HealthPoint, a joint venture general partnership owned equally by wholly-owned
subsidiaries of the Company and Glaxo Wellcome (the "Company Partner" and the
"Glaxo Wellcome Partner," respectively), to develop and market clinical
information technology products and services to health care customers. The
Company's practice management software products are expected to continue to
focus on the business aspects of physician customers' practices and
HealthPoint's software products and services are expected to provide physician
customers with clinical applications and functionality. The Company has agreed
that HealthPoint's products and services will, generally, be the exclusive
clinical information technology products and services offered by the Company to
its customers. As a result, the Company's future growth and profitability will
depend in part upon future acceptance of HealthPoint's products and services. In
March 1996, HealthPoint introduced its first product, HealthPoint ACS, which is
expected to be commercially available during the second half of 1996. There can
be no assurance that HealthPoint's products will be successful. See "Business --
Products."
A management committee comprised of two Glaxo Wellcome Partner
representatives, two Company Partner representatives and one representative from
HealthPoint's management will oversee the venture's operations. Accordingly, the
Company does not have unilateral control over the strategic direction and
operations of HealthPoint. Glaxo Wellcome may at any time have economic,
business or legal interests or goals that are inconsistent with those of
HealthPoint or the Company. As a result, no assurance can be given that
HealthPoint will not establish objectives or operate its business in a manner
which diverges from or is inconsistent or competitive with the strategy and
objectives of the Company. In addition, losses incurred by Healthpoint will
generally be allocated between the Glaxo Wellcome Partner and the Company
Partner in
7
<PAGE>
proportion to their respective cash contributions (approximately 85% to the
Glaxo Wellcome Partner and 15% to the Company Partner), while any profits will
generally be allocated equally between the partners. The HealthPoint partners
have agreed to contribute an aggregate of $50 million ($43 million to be
contributed by the Glaxo Wellcome Partner and $7 million to be contributed by
the Company Partner) to fund HealthPoint's initial operating expenses. As a
result, the Company expects to incur losses during the startup phase of
HealthPoint's business. See "Business -- HealthPoint."
UNCERTAINTY OF DATA PRODUCT BUSINESS; REGULATORY AUTHORITY FOR AND POTENTIAL
LIABILITY ASSOCIATED WITH DATA PRODUCT BUSINESS. The Company expects that an
important aspect of HealthPoint's strategy will be to utilize anonymous
aggregate clinical data generated by, including data electronically accessed
from, the databases of its physician practice customers to develop and market
clinical and analytical information products and services, including those
related to the development and support of the disease management efforts of
health care suppliers, including potential pharmaceutical company customers of
the venture. Neither HealthPoint nor the Company has marketed any such products
or services. HealthPoint has not determined the nature of the products and
services to be developed or established a marketing strategy with respect to any
such products and services. There can be no assurance that any such products or
services can be successfully marketed and sold. In addition, HealthPoint's
ability to obtain a commercially significant pool of data is dependent on
HealthPoint creating an installed base of HealthPoint ACS customers. No
assurance can be given that a sufficient base of HealthPoint ACS customers will
be established or that such customers will utilize the system in a manner which
will render the pool of available data commercially significant. Further, no
assurance can be given that customers will not prohibit such access. See
"Business -- HealthPoint."
There are a number of legal and regulatory issues relating to the
utilization and sharing of anonymous aggregate clinical data that the Company
and HealthPoint are currently evaluating. There can be no assurance that future
interpretations by regulatory authorities of existing laws and regulations or
future laws and regulations will not directly or indirectly restrict the
collection or dissemination of information derived from patient records. The
American Medical Association (the "AMA") has issued a Current Opinion to the
effect that a physician that does not obtain a patient's consent to disclosure
of patient information, including anonymous disclosure, violates the AMA's
ethical standards with respect to patient confidentiality. While the AMA's
Current Opinions are not law, they may influence physicians' willingness to
obtain patient consents or agree to permit HealthPoint to access clinical data
in their systems without such consents. Any such restrictions could have a
material adverse effect on HealthPoint's ability to market certain clinical and
analytical products and services. Although HealthPoint intends to safeguard
patient privacy when clinical data is accessed, if a patient's privacy is
violated, HealthPoint could be liable for damages incurred by such patients and
customers. See "Business -- HealthPoint."
TECHNOLOGICAL CHANGES. The market for physician practice management systems
is characterized by continual change and improvement in computer hardware and
software technology, as well as in services. The PCN Health Network Information
System is a UNIX-based system which was first introduced in September 1994. In
March 1996, HealthPoint introduced its first product, HealthPoint ACS, which is
expected to be commercially available during the second half of 1996. Although
the Company believes that its products and services continue to be competitive
in the marketplace, the Company intends to continue to upgrade and enhance the
functionality and capabilities of its products and services and expects that
HealthPoint will do the same. The Company's success will depend considerably
upon the Company's and HealthPoint's ability to enhance its current products and
services, to introduce new products and services which keep pace with
technological and market developments and to address the increasingly
sophisticated needs of its customers. There can be no assurance that either the
Company or HealthPoint will be successful in developing and marketing, on a
timely basis, product or service enhancements or new products or services that
respond to advances by others, or that its new products or services will
adequately address the needs of, or be accepted by, the market. See "Business --
Software Development."
RELIANCE ON INDEPENDENT RESELLERS. The Company relies heavily on
independent resellers for the sale and distribution of its products, with
software and hardware sales by such resellers accounting for approximately 63%
of the Company's total software and hardware sales during the year ended
December 31, 1995.
8
<PAGE>
Although the Company is not dependent on one or a small number of resellers for
a significant percentage of its total revenues, the loss of a significant number
of resellers during a short period of time could have a material adverse effect
on the Company's results of operations and the migration of its physician
practice customers from their current practice management software products to
the PCN Health Network Information System. See "Business -- Sales and
Marketing."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company relies on a combination
of trade secrets, copyright and trademark laws, technology and nondisclosure and
other contractual provisions to protect its proprietary rights in its products.
There can be no assurance that these protections will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. Although the
Company believes that its products, trademarks and other proprietary rights do
not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future, that any such assertion of infringement will not result
in litigation, or that the Company would prevail in such litigation or be able
to license any valid or infringed products, trademarks or other proprietary
rights from third parties on commercially reasonable terms. Further, litigation,
regardless of its outcome, could result in substantial cost to the Company and
may divert management's efforts from operating the business. See "Business --
Proprietary Rights and Licenses."
GOVERNMENT REGULATION. The Company's business is not directly subject to
government regulation. However, the health care industry is subject to extensive
Federal, state and local regulation governing reimbursements for services
rendered and conduct of operations at health care facilities. The effect of
future legislation and regulation on current and prospective customers may, in
certain circumstances, have an adverse effect upon the Company's business.
However, the Company cannot predict the impact, if any, of future legislation
and regulation on its business. Further, certain clinical diagnostic
applications of HealthPoint's computer-assisted services may be subject to
regulation by the Federal Food and Drug Administration (the "FDA") as medical
devices, which could create delays in the marketing of HealthPoint's products
and services. See "Business -- Government Regulation." In addition,
HealthPoint's use of clinical data may also be affected by existing or future
laws and regulations. See "-- Uncertainty of Data Product Business; Regulatory
Authority For and Potential Liability Associated with Data Product Business."
HIGHLY COMPETITIVE MARKET. The practice management software industry is
highly competitive and fragmented. The Company believes that in 1994 the
industry included approximately 1,100 competitors of varying sizes. The
Company's principal competitors includes other physician practice management
software companies, software distributors which sell off-the-shelf programs and
compatible hardware to smaller practices where competition is based primarily on
price, certain national and regional companies which offer information systems
to health care providers, and data processing organizations which provide
computerized billing and record management services to medical offices. In
addition, certain claims processing organizations, hospitals, third-party
administrators, insurers and other health care organizations now provide
computer and/or other electronic data transmission systems, which sometimes
include practice management software, to physicians for a direct communications
link between the physician and the organization. Similarly, a number of other
companies have developed clinical information products, some of which are
commercially available. As the market for the Company's products develop,
additional competitors may enter the market and competition may intensify.
Certain of the Company's and HealthPoint's competitors have greater financial,
development, technical, marketing and sales resources than the Company and
HealthPoint and no assurance can be given that the Company or HealthPoint will
be able to compete with its competitors in the future.
During the twelve month period ended December 31, 1995 and 1994,
approximately 32% and 13%, respectively, of the Company's revenues were derived
from sales of hardware and hardware maintenance. The computer hardware business
is extremely competitive and there can be no assurance that the Company will be
able to continue to derive substantial operating revenues therefrom. See
"Business -- Strategy," "-- Products" and "-- Competition."
9
<PAGE>
CONCENTRATION OF STOCK OWNERSHIP. Prior to the Offerings, the Investor
beneficially owned approximately 48.8% of the outstanding Common Stock and, upon
completion of the Offerings, the Investor will beneficially own approximately
43.6% of the outstanding Common Stock. In addition, the Investor owns a warrant
to purchase 5,000,000 shares of Common Stock at an aggregate exercise price of
$25,000,000; however, such warrant is not exercisable until September 1997. As a
result, the Investor will be able to exert significant influence over the
Company's affairs and business. See "Management" and "Principal and Selling
Shareholders."
POSSIBLE VOLATILITY OF STOCK PRICE. Since the Common Stock has been
publicly traded, the market price of the Common Stock has fluctuated over a wide
range and may continue to do so in the future. See "Price Range of Common
Stock." Factors such as announcements of acquisitions, technological innovations
or new products by the Company or its competitors, as well as market conditions
in the computer software or hardware industries, may have a significant impact
on the market price of the Common Stock.
FUTURE SALES OF COMMON STOCK. Upon completion of the Offerings,
approximately 27,536,457 outstanding shares of Common Stock will be subject to
the restrictions of Rule 144 under the Securities Act, and, under certain
circumstances, may be sold without registration pursuant to Rule 144. In
addition, 1,000 shares of the Convertible Preferred Stock were outstanding as of
April 30, 1996. Each share of Convertible Preferred Stock is convertible into
between 142 and 333 shares of Common Stock, depending upon the market price of
the Common Stock on the date of conversion. Any shares of the Convertible
Preferred Stock not converted by October 20, 1997 will automatically be
converted on such date. Further, certain shareholders have registration rights
with respect to their restricted shares. In addition, the Company intends to
file a registration statement to register up to a total of 3,500,000 shares of
Common Stock issuable upon exercise of options available to be granted under the
Company's Value Added Reseller Stock Option Plan to the Company's independent
resellers. Upon effectiveness of such registration statement, shares of Common
Stock issuable upon exercise of vested options will be eligible for sale in the
public markets. As of April 30, 1996, vested options to purchase 199,925 shares
at an exercise price of $5 7/8 were outstanding under that Plan. The public sale
of restricted securities pursuant to Rule 144, an effective registration
statement, or otherwise, or the perception that such sales could occur, may have
an adverse effect on the market price of the Common Stock and on the Company's
ability to raise funds through the sale of additional equity securities. See
"Certain Transactions" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. As of December 31, 1995, the Company
had a deficit in net tangible book value of $24,503,517, or $0.57 per share of
outstanding Common Stock. Purchasers of Common Stock in the Offerings will
realize an immediate and substantial dilution in pro forma net tangible book
value of their shares of Common Stock in the amount of $9.59 per share ($9.44
per share if the Underwriters' over-allotment options are exercised in full).
See "Dilution."
NO DIVIDENDS. The Company has never declared or paid any dividends on its
Common Stock, and it is not anticipated that any dividends will be paid in the
foreseeable future. See "Dividend Policy."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK. The
Company's Board of Directors has the authority to issue up to 1,000,000 shares
of the Company's preferred stock, of which 1,000 shares were outstanding as
Convertible Preferred Stock as of April 30, 1996, without further stockholder
approval and upon such terms and conditions, having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of any holders of preferred stock that may be issued in the future. The issuance
of preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. See
"Description of Capital Stock."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,667,783 shares of
Common Stock offered by the Company hereby are estimated to be $34,330,253,
($42,310,253 if the Underwriters' over-allotment options are exercised in full).
The Company will not receive any proceeds from the sale of shares by the Selling
Shareholder.
The Company intends to use the net proceeds from the Offerings to acquire
practice management software businesses to increase the Company's base of
physician practice customers and for other general corporate purposes, including
working capital. The Company continually identifies and evaluates potential
acquisition candidates and in many cases engages in discussions and negotiations
regarding potential acquisitions. The Company is presently evaluating, and is in
discussions with, a number of possible acquisition candidates, however, the
Company currently has no agreement with respect to any acquisition and there can
be no assurance that any acquisitions will be made. See "Business -- Strategy."
In addition, the Company may use up to $11,043,750 of the net proceeds from the
Offerings to exercise its right to repurchase up to 2,325,000 shares of Common
Stock (including a warrant to purchase 775,000 shares of Common Stock for no
consideration) held by ICC at $4.75 per share pursuant to the ICC Call, which
right may be exercised by the Company at any time prior to April 1, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
Pending the foregoing uses, the net proceeds will be invested in short-term,
interest-bearing securities or money market investments.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and, therefore, does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. In
addition, the Equifax Note (which will be converted in full by the Selling
Shareholder in connection with the Offerings) prohibits the payment of cash
dividends.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
PCN's Common Stock is traded in the over-the-counter market and is quoted on
the Nasdaq National Market under the symbol "PCNI." The following table sets
forth the quarterly high and low sale prices of the Common Stock, as reported by
the Nasdaq National Market, since January 1, 1994:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1994
First Quarter......................................................................... $ 57/8 $ 35/8
Second Quarter........................................................................ 47/8 33/8
Third Quarter......................................................................... 63/8 33/8
Fourth Quarter........................................................................ 61/2 41/4
1995
First Quarter......................................................................... 53/4 35/8
Second Quarter........................................................................ 51/8 311/16
Third Quarter......................................................................... 63/4 33/4
Fourth Quarter........................................................................ 91/8 51/8
1996
First Quarter......................................................................... 14 7/8 81/2
Second Quarter (through May 6, 1996).................................................. 14 7/8 85/8
</TABLE>
There were approximately 449 holders of record of Common Stock, as of May 6,
1996. The last reported sales price of a share of Common Stock on May 6, 1996
was $10 5/16.
12
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization at December 31,
1995, and as adjusted to reflect the Offerings (including the conversion in full
of the Equifax Note into 1,932,217 shares of Common Stock). See "Pro Forma
Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, net of current portion........................ $ 19,730 $ 9,730
--------------- ---------------
Shareholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized,
Series A convertible preferred stock, $.01 par value, 15,750
shares issued and outstanding at December 31, 1995 (1)............
Common Stock, $.01 par value; 75,000,000 shares authorized;
42,937,147(2) shares outstanding and 48,537,147 shares as adjusted
(2)(3)............................................................ 429 485
Additional paid-in capital......................................... 129,729 174,003
Accumulated deficit................................................ (100,960) (100,960)
--------------- ---------------
Shareholders' equity................................................. 29,198 73,528
--------------- ---------------
Total capitalization............................................. $ 48,928 $ 83,258
--------------- ---------------
--------------- ---------------
</TABLE>
- ------------------------
(1) As of April 30, 1996, 1,000 shares of Convertible Preferred Stock were
outstanding. Each share of Convertible Preferred Stock is convertible into
between 142 and 333 shares of Common Stock, depending upon the market price
of the Common Stock on the date of conversion. Any shares of the
Convertible Preferred Stock not converted by October 27, 1997 will
automatically be converted on such date. See "Description of Capital Stock
-- Preferred Stock."
(2) Does not include: (i) warrants to purchase 7,305,000 shares of Common
Stock, of which warrants to purchases 2,265,000 shares, having a weighted
average exercise price of $0.73 per share, were exercisable on December 31,
1995; (ii) options to purchase 1,745,880 shares of Common Stock issued
under the Company's employee and directors stock option plans, of which
options to purchase 731,481 of such shares, having a weighted average
exercise price of $4.22, were exercisable on December 31, 1995; (iii)
options to purchase 1,193,400 shares of Common Stock granted under the
Company's Value Added Reseller Stock Option Plan, 252,625 of which were
exercisable for $5 7/8 per share on December 31, 1995; or (iv) the shares
of Common Stock issuable upon conversion of the 15,750 shares of
Convertible Preferred Stock outstanding as of December 31, 1995. See
"Management -- Stock Option Plans," "Certain Transactions" and "Description
of Capital Stock."
(3) As of April 30, 1996, warrants and options to purchase 9,131,563 shares of
Common Stock were outstanding, of which warrants and options to purchase
2,863,484 shares were exercisable on such date. See "Management -- Stock
Option Plans" and "Certain Transactions."
13
<PAGE>
DILUTION
The net tangible book value (capital deficiency) per share of the Company as
of December 31, 1995 was $(24,503,517), or $(0.57) per share of outstanding
Common Stock. Net tangible book value (capital deficiency) per share represents
the amount of total tangible assets less total liabilities of the Company,
divided by the number of shares of Common Stock outstanding prior to the
Offerings. After giving effect to (i) the issuance and sale of the 3,667,783
shares of Common Stock offered by the Company hereby and the receipt of the
estimated net proceeds therefrom, and (ii) the conversion of the Equifax Note by
the Selling Shareholder into 1,932,217 shares of Common Stock, the pro forma net
tangible book value (capital deficiency) per share of the Company as of December
31, 1995 would have been $19,826,736 or $0.41 per share. This represents an
immediate increase in net tangible book value of $0.98 per share to existing
shareholders and an immediate dilution in net tangible book value of $9.59 to
the persons purchasing shares offered hereby ("New Investors"), as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share..................................... $ 10.00
Net tangible book value (capital deficiency) per share as of
December 31, 1995................................................ $ (0.57)
Increase per share attributable to purchase by New Investors...... $ 0.98
---------
Pro forma net tangible book value per share as of December 31, 1995
after the Offerings (1)............................................ $ 0.41
---------
Dilution per share to New Investors (1)............................. $ 9.59
---------
---------
</TABLE>
- ------------------------
(1) If the Underwriters' over-allotment options were exercised in full, the pro
forma net tangible book value per share would be $0.56, resulting in an
immediate dilution to New Investors of $9.44 per share.
The foregoing computations assume no exercise of stock options or warrants,
or conversion of the 15,750 shares of Convertible Preferred Stock outstanding on
December 31, 1995. As of April 30, 1996, there were options or warrants to
purchase 9,131,563 shares of Common Stock outstanding, all of which options or
warrants have exercise prices less than the assumed public offering price and
2,863,484 of which were exercisable at April 30, 1996. As of April 30, 1996,
14,750 shares of Convertible Preferred Stock were converted into shares of
Common Stock since December 31, 1995 at a conversion price below the assumed
public offering price resulting in further dilution to New Investors. In
addition, to the extent any shares available for issuance upon exercise of
outstanding options or warrants with exercise prices below the assumed public
offering price are issued, or any of the 1,000 shares of Convertible Preferred
Stock outstanding as of April 30, 1996 are converted, there will be further
dilution to New Investors. See "Capitalization," "Management--Stock Option
Plans" and "Description of Capital Stock."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data are derived from the Company's audited
Consolidated Financial Statements which as to the years ended 1995, 1994 and
1993 are included elsewhere in this Prospectus. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Financial Statements,
related notes and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 (1) 1994 (2) 1993 (2) 1992 1991
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues.......................................... $ 41,805 $ 20,504 $ 6,109 $ 3,124 $ 2,101
------------ --------- --------- --------- ---------
Costs and expenses:
Cost of operating revenues................................ 16,289 6,076 10,255 7,850 9,209
Research and development.................................. 2,219 1,839 898 678 561
Selling and marketing..................................... 3,038 2,145 1,717 1,441 910
General and administrative................................ 13,238 7,386 6,454 7,877 5,571
Acquired technology in process............................ 14,516 -- 10,872 -- --
Restructuring............................................. 3,072 -- 3,165 -- --
Write-down of assets and other charges.................... 1,477 -- 3,300 -- --
Interest expense, net of interest income.................. 875 1,709 942 1,242 4,909
Gain on retirement of software............................ -- -- -- -- (123)
Charge related to issuance of warrants.................... -- -- -- -- 2,491
------------ --------- --------- --------- ---------
Income (loss) before income tax expense (benefit) and
extraordinary items........................................ (12,919) 1,349 (31,494) (15,964) (21,427)
Income taxes expense (benefit).............................. (1,419) 102 -- -- --
------------ --------- --------- --------- ---------
Income (loss) before extraordinary items.................... (11,500) 1,247 (31,494) (15,964) (21,427)
Extraordinary items:
Excess carrying value of preferred stock over liability
discharged............................................... -- -- -- -- (2,987)
Gain (loss) from the extinguishment of capital lease
obligations and debt..................................... (180) -- 8,498 -- --
------------ --------- --------- --------- ---------
Net income (loss)........................................... (11,680) 1,247 (22,996) (15,964) (24,414)
Forfeited (accrued) dividends on preferred stock............ -- -- 2,957 (2,896) (250)
------------ --------- --------- --------- ---------
Net income (loss) available to common shareholders.......... $ (11,680)(3) $ 1,247 $ (20,039) $ (18,860) $ (24,664)
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Earnings (loss) per common share:
Before extraordinary items................................ $ (0.29) $ 0.04 $ (1.38) $ (2.19) $ (3.77)
Extraordinary items....................................... -- -- 0.41 -- (0.52)
------------ --------- --------- --------- ---------
Earnings (loss)........................................... $ (0.29) $ 0.04 $ (0.97) $ (2.19) $ (4.29)
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Weighted average number of common shares outstanding (4).... 40,068 35,634 20,688 8,601 5,746
------------ --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------- AT DECEMBER 31,
PRO FORMA ------------------------------------------
ACTUAL (1) AS ADJUSTED (5) 1994 1993 1992 1991
----------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 15,517 $ 49,847 $ 2,512 $ 9,671 $ 1,472 $ 18,270
Working capital (deficit)....................... (9,006) 25,324 (3,971) (2,675) (790) 11,452
Current assets.................................. 42,326 76,656 8,731 11,890 4,141 19,637
Intangible assets, net.......................... 53,701 53,701 8,342 6,707 1,612 2,040
Total assets.................................... 100,260 134,590 18,233 20,504 15,604 31,807
Current liabilities............................. 51,332 51,332 12,702 14,565 4,931 8,185
Long-term liabilities........................... 19,730 9,730 14,105 15,807 16,204 10,297
Shareholders' equity (deficiency)............... 29,198 73,528 (8,574) (9,868) (5,531) 13,325
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
15
<PAGE>
- ------------------------
(1) Includes the operations of the PMS Business from April 24, 1995 and Versyss
from October 27, 1995.
(2) The year ended December 31, 1994 includes the operations of Wallaby and
Calyx for the full year, the operations of the DOM/2 Business from March
11, 1994 and the operations of the Acclaim Business from November 15, 1994.
The year ended December 31, 1993 includes the operations of Calyx from
September 23, 1993.
(3) Includes charges of $14,516 related to acquired technology in process and
$5,579 principally related to provisions for restructuring and the
write-down of assets and other charges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's Consolidated Financial Statements included elsewhere in this
Prospectus.
(4) Primary and fully diluted earnings per common share are the same, as the
assumed exercise of outstanding stock options and warrants would not cause
a material dilutive effect on the earnings per common share for the year
ended December 31, 1994 and would be anti-dilutive in the calculation of
the loss per common share for December 31, 1995, 1993, 1992 and 1991. As of
December 31, 1995, warrants and options to purchase 10,244,280 shares of
Common Stock were outstanding, of which warrants and options to purchase
3,249,106 shares were exercisable on such date. Weighted average shares
used in per share calculation does not include shares issuable upon
conversion of the Equifax Note or shares issuable upon conversion of the
15,750 shares of Convertible Preferred Stock outstanding as of December 31,
1995. See "Capitalization" and "Description of Capital Stock -- Preferred
Stock."
(5) Pro forma as adjusted reflects the Offerings, including the conversion in
full of the Equifax Note. The net proceeds from the Offerings have been
reflected as working capital, pending its use as described in "Use of
Proceeds." See "Capitalization," "Pro Forma Condensed Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Equifax Relationship."
16
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Unaudited Pro Forma Condensed Consolidated Statement of Operations and
Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the
Offerings, including the conversion in full of the Equifax Note. The Unaudited
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1995 also gives effect to the Company's February 1995 public
offering, October 1995 Regulation S offering and the acquisitions of Versyss and
the PMS Business and the related financings. The Unaudited Pro Forma Condensed
Consolidated Financial Statements are based on the assumptions set forth below
and in the accompanying notes to such statements.
Historical Consolidated Financial Statements of the Company are included
elsewhere herein. In addition, historical financial statements of Versyss and
the predecessor of the PMS Business are included elsewhere herein. The pro forma
information assumes that the transactions for which pro forma effects are shown
occurred on January 1, 1995 for the Unaudited Pro Forma Condensed Consolidated
Statement of Operations and on December 31, 1995 for the Unaudited Pro Forma
Condensed Consolidated Balance Sheet. Such pro forma information is not
necessarily indicative of the results which would actually have occurred had the
transactions been in effect for the period or on the date indicated or which may
occur in the future.
17
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS INCREASE/(DECREASE) GIVING EFFECT TO
--------------------------------------------------------------------------------
PCN HISTORICAL PMS ACQUISITION VERSYSS ACQUISITION EQUIFAX
(A) (B) ACQUISITION (C) ADJUSTMENTS OFFERINGS CONVERSION
-------------- --------------- --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues......... $ 41,805,342 $ 3,067,872 $ 44,398,000
-------------- --------------- --------------- --------------- ------------- --------------
Costs and expenses:
Cost of operating
revenues.................. 16,288,953 1,341,797 27,532,000
Research and development... 2,219,223 563,221 1,806,000
Selling and marketing
expenses.................. 3,038,069 371,739 5,340,000
General and
administrative............ 13,238,269 1,187,924 8,690,000 $ 3,864,532(d)
Acquired technology in
process................... 14,516,000 (14,516,000)(e)
Restructuring.............. 3,072,450
Write-down of assets and
other charges............. 1,477,000
-------------- --------------- --------------- --------------- ------------- --------------
53,849,964 3,464,681 43,368,000 (10,651,468)
Interest (income) expense:
Interest income.......... (577,039) (12,615)
Interest expense......... 1,451,604 2,183,000 901,903(f) $ (525,000)(g)
-------------- --------------- --------------- --------------- ------------- --------------
874,565 (12,615) 2,183,000 901,903 (525,000)
Income (loss) before income
tax expense (benefit) and
extraordinary item........ (12,919,187) (384,194) (1,153,000) 9,749,565 525,000
Income tax expense
(benefit)................. (1,419,000) 13,145 168,000
-------------- --------------- --------------- --------------- ------------- --------------
Income (loss) available to
common shareholders before
extraordinary
item...................... $(11,500,187) $ (397,339) $ (1,321,000) $ 9,749,565 $ 525,000
-------------- --------------- --------------- --------------- ------------- --------------
-------------- --------------- --------------- --------------- ------------- --------------
Earnings (loss) per common
share:
Before extraordinary item.. $(0.29)
--------------
--------------
Weighted average number of
common shares
outstanding............... 40,068,406 2,622,781 (i) 3,667,783 (j) 1,932,217 (g)
-------------- --------------- ------------- --------------
-------------- --------------- ------------- --------------
<CAPTION>
PRO FORMA
---------------
<S> <C>
Operating revenues......... $ 89,271,214
---------------
Costs and expenses:
Cost of operating
revenues.................. 45,162,750
Research and development... 4,588,444
Selling and marketing
expenses.................. 8,749,808
General and
administrative............ 26,980,725
Acquired technology in
process................... --
Restructuring.............. 3,072,450
Write-down of assets and
other charges............. 1,477,000
---------------
90,031,177
Interest (income) expense:
Interest income.......... (589,654)
Interest expense......... 4,011,507
---------------
3,421,853
Income (loss) before income
tax expense (benefit) and
extraordinary item........ (4,181,816)
Income tax expense
(benefit)................. (1,237,855)
---------------
Income (loss) available to
common shareholders before
extraordinary
item...................... $ (2,943,961)
---------------
---------------
Earnings (loss) per common
share:
Before extraordinary item.. $(0.06 )(h)
---------------
---------------
Weighted average number of
common shares
outstanding............... 48,291,187
---------------
---------------
</TABLE>
- ----------------------------------
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
18
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
ADJUSTMENTS INCREASE/(DECREASE)
GIVING EFFECT TO
------------------------------------
PCN EQUIFAX
HISTORICAL OFFERINGS CONVERSION PRO FORMA
-------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $ 15,516,883 $ 34,330,253(k) $ 49,847,136
Accounts receivable, net.................. 19,466,446 19,466,446
Inventories............................... 4,598,954 4,598,954
Prepaid expenses and other................ 1,093,306 1,093,306
Deferred tax asset........................ 1,650,000 1,650,000
-------------- ---------------- ------------------ --------------
Total current assets.................... 42,325,589 34,330,253 76,655,842
Intangible assets, net.................... 53,701,055 53,701,055
Equipment, net............................ 3,976,195 3,976,195
Other assets.............................. 256,998 256,998
-------------- ---------------- ------------------ --------------
Total assets............................ $ 100,259,837 $ 34,330,253 $ -- $ 134,590,090
-------------- ---------------- ------------------ --------------
-------------- ---------------- ------------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other................................... $ 9,080,000 $ 9,080,000
Related party........................... 750,000 750,000
Current portion of long-term debt......... 100,160 100,160
Current portion of obligations under
capital leases........................... 327,770 327,770
Accounts payable.......................... 4,935,601 4,935,601
Accrued expenses and other liabilities.... 17,024,828 17,024,828
Customer deposits......................... 3,504,980 3,504,980
Unearned income........................... 15,608,705 15,608,705
-------------- ---------------- ------------------ --------------
Total current liabilities............... 51,332,044 51,332,044
Long-term debt, net of current portion.... 18,924,000 $ (10,000,000)(k) 8,924,000
Obligations under capital leases, net of
current portion.......................... 806,255 806,255
-------------- ---------------- ------------------ --------------
Total liabilities....................... 71,062,299 (10,000,000) 61,062,299
SHAREHOLDERS' EQUITY:
Preferred stock........................... 157 157
Common stock.............................. 429,371 $ 36,678(k) 19,322(k) 485,371
Additional paid-in capital................ 129,728,821 34,293,575(k) 9,980,678(k) 174,003,074
Accumulated deficit....................... (100,960,811) -- -- (100,960,811)
-------------- ---------------- ------------------ --------------
Shareholders' equity.................... 29,197,538 34,330,253 10,000,000 73,527,791
-------------- ---------------- ------------------ --------------
Total liabilities and shareholders'
equity................................. $ 100,259,837 $ 34,330,253 $ -- $ 134,590,090
-------------- ---------------- ------------------ --------------
-------------- ---------------- ------------------ --------------
</TABLE>
- ------------------------
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
19
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Includes the operations of the PMS Business from April 24, 1995, the date of
acquisition (see note (b) below), and the operations of Versyss from October
27, 1995, the date of acquisition (see note (c) below). See the Company's
Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.
(b) Reflects the operations of the PMS Business from January 1, 1995 to April
24, 1995. On April 24, 1995, a wholly-owned subsidiary of the Company
acquired substantially all of the assets of the PMS Business for $4,861,000,
of which $2,861,000 was paid in cash and $2,000,000 was paid in the form of
a one year 10% interest bearing note. In addition, the Company assumed
$3,009,000 of certain liabilities of the PMS Business, primarily related to
software support and hardware maintenance agreements. See the financial
statements of the predecessor of the PMS Business included elsewhere in this
Prospectus.
(c) Reflects the operations of Versyss from January 1, 1995 to October 27, 1995.
On October 27, 1995, the Company acquired all of the issued and outstanding
capital stock of Versyss, pursuant to a merger agreement, for $12,333,000 in
cash and $11,750,000 in the form of a two year, 11% interest bearing note.
See the financial statements of Versyss included elsewhere in this
Prospectus.
(d) Reflects the prorated amortization of the PMS Business and of the Versyss
acquired intangible assets, with the exception of Acquired technology in
process, based on the estimated useful lives established in the table in
Note 3 to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. Included within PCN Historical is $421,365 of
PMS Business-related amortization expense for the period of April 24, 1995
to December 31, 1995, and $722,735 of Versyss-related amortization expense
for the period of October 27, 1995 to December 31, 1995. The pro forma
acquisition amortization adjustment therefore consists of the following:
<TABLE>
<S> <C>
Amortization of PMS Business acquired intangible assets (January 1 to April
24, 1995).................................................................. $ 210,692
Amortization of Versyss acquired intangible assets (January 1 to October 27,
1995)...................................................................... 3,653,840
---------
Total adjustment........................................................ $3,864,532
</TABLE>
(e) With the help of an appraiser, the Company allocated $14,516,000 of the
purchase price of the Versyss acquisition to Acquired technology in process
which was recorded as an expense in the year ended December 31, 1995. This
charge is non-recurring and unusual and, as it relates directly to the
acquisition, is excluded from the unaudited pro forma condensed consolidated
statement of operations.
(f) Reflects accrued interest expense on the following acquisition-related
indebtedness:
<TABLE>
<S> <C>
10% Interest on $2,000,000 note issued in connection with the acquisition of
the PMS Business (January 1 to April 24, 1995).............................. $ 66,667
11% Interest on $11,750,000 note issued in connection with the Versyss
acquisition (January 1 to October 27, 1995)................................. 1,077,083
---------
Subtotal................................................................. 1,143,750
Less: Interest paid to the Investor which would have been avoided if the
February 1995 offering had occurred on January 1, 1995...................... (241,847)
---------
Total adjustment to interest expense..................................... $ 901,903
</TABLE>
(g) Reflects the reversal of interest expense incurred on the Equifax Note and
an increase in the weighted average number of shares of Common Stock
outstanding after giving effect to the conversion of the Equifax Note into
1,932,217 shares of Common Stock.
(h) For the year ended December 31, 1995, the exercise of certain outstanding
options and warrants has not been included in the calculation of unaudited
pro forma loss per common share as they are anti-dilutive, thus making
unaudited pro forma primary and fully diluted loss per common share the
same.
20
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(i) Reflects the increase in the weighted average number of shares of Common
Stock outstanding after giving effect to (i) the issuance of 6,250,000
shares of Common Stock pursuant to the Company's February 1995 public
offering and (ii) the issuance of 1,902,748 shares of Common Stock pursuant
to the October 1995 Regulation S offering.
(j) Reflects the increase in weighted average number of shares of Common Stock
outstanding after giving effect to the issuance of the 3,667,783 shares of
Common Stock offered by the Company hereby.
(k) The following table details the net proceeds from the Offerings and its
effect on the Unaudited Pro Forma Condensed Consolidated Balance Sheet at
December 31, 1995:
<TABLE>
<CAPTION>
LONG-TERM
DEBT, NET OF
CURRENT COMMON PAID-IN
CASH PORTION STOCK CAPITAL
------------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Gross proceeds from the issuance of 3,667,783 shares of
Common Stock........................................... $ 36,677,830 $ 36,678 $ 36,641,152
Estimated offering expenses, including underwriting
discounts and commissions.............................. (2,347,577) (2,347,577)
Conversion of $10,000,000 Equifax Note into 1,932,217
shares of Common Stock................................. $ (10,000,000) 19,322 9,980,678
------------- -------------- --------- -------------
Total pro forma adjustment.............................. $ 34,330,253 $ (10,000,000) $ 56,000 $ 44,274,253
------------- -------------- --------- -------------
------------- -------------- --------- -------------
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data," "Pro Forma Condensed Consolidated Financial
Statements" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein. The following discussion and analysis includes
certain forward-looking statements. For a discussion of important factors that
could cause actual results to differ materially from such forward-looking
statements, including, but not limited to, the impact of the Company's
acquisition strategy on future operating results, the acceptance of and
migration to the Company's new products and availability of future financing,
see "Risk Factors."
OVERVIEW
The Company is a leader in developing, marketing and supporting practice
management software products for physician practices. The Company's products
include software which, among other things, automates physician scheduling and
general patient billing, insurance claims billing and other financial reports.
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 of acquiring and
developing a common software platform to which such customers could migrate over
time. In order to implement this strategy, the Company strengthened its
management team and abandoned its prior strategy of growth primarily through the
licensing of practice management software, together with computer hardware, to
new physician customers at low prices. The objective of such strategy had been
to develop a network which would generate revenues primarily from advertising
fees paid by pharmaceutical companies. Since September 1993, the Company has
increased the number of physicians associated with sites which have purchased
the Company's practice management software products from approximately 2,000 to
approximately 80,000, thereby making the Company one of the largest providers of
practice management software products in the country.
ACQUISITION HISTORY. On September 23, 1993, the Company acquired Calyx, a
company which develops and has sold practice management software products to
sites having an aggregate of approximately 9,000 physicians, for $4,050,000 in
cash and notes, as well as the assumption of certain labilities. On December 31,
1993, the Company acquired Wallaby, a company which develops and has sold
practice management software products to sites having an aggregate of
approximately 20,000 physicians, for $12,500,000 in cash and notes, as well as
the assumption of certain liabilities. On March 11, 1994, the Company acquired
the DOM/2 practice management software business, a business which has sold
practice management software products to sites having an aggregate of
approximately 9,000 physicians, for $1,024,000, as well as the assumption of
certain liabilities. On November 15, 1994, the Company acquired the Acclaim
Business, a business which has sold practice management software to sites having
an aggregate of approximately 6,000 physicians, for $1,200,000 in cash and
notes, as well as the assumption of certain liabilities.
On April 24, 1995, the Company acquired the PMS Business, a business which
develops and, through its own direct sales force, has sold practice management
software products and related equipment, to sites having an aggregate of
approximately 6,000 physicians, for approximately $4,861,000 in cash and notes,
as well as the assumption of certain liabilities. Most recently, on October 27,
1995, the Company acquired Versyss, a business which develops and, through both
a direct sales force and through a network of independent resellers, has sold
practice management software products and related equipment to sites having an
aggregate of approximately 30,000 physicians. The purchase price of such
acquisition consisted of $12,333,000 in cash, $11,750,000 in the form of a
promissory note and the repayment or assumption of approximately $45,800,000 in
liabilities. Versyss also provides integrated information systems to certain
industries other than health care, including the construction, timber, fuel oil
and publishing businesses.
In connection with certain of its acquisitions, the Company has acquired
technology in process that had not achieved technological feasibility at the
date of acquisition and had no alternative future uses. As a
22
<PAGE>
result, the Company has, and with respect to any acquired technology in process
acquired as part of future acquisitions may, charge the fair value of such
acquired technology in process against operations at the time of the
acquisition.
SALES AND MARKETING. Beginning with its acquisition of Calyx, the Company
adopted a sales, marketing and distribution strategy of utilizing independent
resellers who generally provide customers with computer hardware and direct
maintenance and support for the entire computer hardware and software system.
However, with the acquisitions of the PMS Business and Versyss, the Company has
acquired a direct sales force which it expects to maintain in order to
complement its independent reseller network. Historically, the Company purchased
hardware and, through a lease arrangement, provided its customers with computer
hardware and maintenance, as well as the Company's practice management software
products. The Company has also purchased computer hardware at a discount for
resale to its independent resellers, based upon the resellers' orders for such
hardware. With the acquisition of Versyss, the Company acquired a favorable
private-label and discount purchase agreement with International Business
Machines Corporation ("IBM") and began purchasing computer hardware from IBM at
a discount for resale to its direct customers and resellers.
HEALTHPOINT. In January 1996, the Company and Glaxo Wellcome formed
HealthPoint to develop and market clinical information technology products and
services. See "Business -- HealthPoint." The Company agreed to distribute
HealthPoint's products and services to the Company's customers generally on an
exclusive basis. Both the Company and Glaxo Wellcome, through their respective
wholly-owned subsidiaries, will contribute at least $50 million in cash to
HealthPoint, of which $43 million will be contributed by the Glaxo Wellcome
Partner and $7 million will be contributed by the Company Partner. Of such
amounts, as of March 31, 1996, the Glaxo Wellcome Partner had contributed
approximately $13.4 million and the Company Partner had contributed
approximately $2.7 million, with the remainder to be contributed by the partners
in semi-annual installments as needed by HealthPoint, but in no event later than
December 31, 1998. Losses incurred by HealthPoint will be allocated between the
Glaxo Wellcome Partner and the Company Partner in proportion with their
respective cash contributions (approximately 85% to the Glaxo Wellcome Partner
and 15% to the Company Partner), while any profits will generally be allocated
equally between the partners.
In March 1996, HealthPoint introduced its first product, HealthPoint ACS,
which is expected to be commercially available during the second half of 1996.
HealthPoint ACS, which is designed to interface (and is expected to be
integrated) with the PCN Health Network Information System, is developed for
medical offices to enable physicians to, among other things, manage the clinical
information required for treatment at the point of care.
CERTAIN HISTORICAL FINANCING ARRANGEMENTS. In May 1989, the Company entered
into a financing agreement with ICC (as modified, the "Restructured Lease")
pursuant to which ICC provided the Company with up to $35 million in financing
(the "ICC Debt") for use in the leasing of personal computers and related
computer equipment, the licensing of the Company's practice management software
products and the installing and customer training costs associated with sales of
its original practice management systems (the "Original PCN Software") to
physician subscribers ("Members"). The Restructured Lease was terminated on
December 30, 1993.
In July 1992, as an additional method of financing the cost of providing
computer hardware and software to new customers, the Company entered into an
arrangement with Carolan Leasing Corporation ("Carolan") pursuant to which
Carolan agreed to provide up to $25 million of annual lease financing directly
to Members to fund the purchase and installation of practice management systems
(such arrangement is referred to herein as the "Alternative Financing
Strategy"). Pursuant to the Alternative Financing Strategy, the Company sold the
computer equipment which runs the practice management software to Carolan after
having received a physician's commitment to purchase a system. Carolan then
entered into a rental agreement with the physician for a non-cancelable rental
period of between 36 and 60 months. The effect of the Alternative Financing
Strategy was to transfer to Carolan, in exchange for a lump sum payment, most of
the revenue stream from the Company's annual network membership fees with
respect to customers who entered into rental agreements with Carolan.
23
<PAGE>
In order to finance certain payments required to be made by the Company to
ICC upon termination of the Restructured Lease, as well as finance a portion of
the purchase price for the Company's acquisition of Wallaby, on December 31,
1993, the Company borrowed $12,000,000 from the Investor and issued a
$12,000,000 principal amount promissory note (the "Investor Note"). On January
3, 1995, pursuant to a debt refinancing, the Company issued to the Investor a
$16,050,000 principal amount promissory note due January 2, 1996 (the "1995
Investor Note") in exchange for $3,210,000 in cash and the cancellation of the
Investor Note, together with all $840,000 of interest accrued thereon through
January 3, 1995. The 1995 Investor Note was repaid by the Company in full from
the net proceeds of the Company's 1995 public offering of shares of its Common
Stock. See "Certain Transactions."
RESULTS OF OPERATIONS
The following chart provides a break-down of the Company's Revenues, Cost of
revenues, Gross margin and Operating expenses for the years ended December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Software license fees............................................. $ 15,450,897 $ 6,302,181 $ 381,047
Hardware.......................................................... 9,721,559 2,592,713 1,288,931
Software support and maintenance fees............................. 8,823,507 4,507,388 629,407
Hardware maintenance fees......................................... 3,508,552 -- --
Communication fees................................................ 2,565,907 3,793,598 3,308,820
Leasing and other fees............................................ 1,734,920 3,307,926 500,353
------------- ------------- -------------
Revenues........................................................ 41,805,342 20,503,806 6,108,558
------------- ------------- -------------
COST OF REVENUES:
Hardware.......................................................... 7,336,196 2,057,763 1,086,695
Software, maintenance, support, communication fees and other...... 8,952,757 4,018,189 9,168,403
------------- ------------- -------------
Cost of revenues................................................ 16,288,953 6,075,952 10,255,098
------------- ------------- -------------
GROSS MARGIN (LOSS)................................................. 25,516,389 14,427,854 (4,146,540)
As a % of Revenues................................................ 61.0% 70.4% N.M.
OPERATING EXPENSES:
Research and development.......................................... 2,219,223 1,838,823 898,000
Selling and marketing............................................. 3,038,069 2,144,464 1,717,115
General and administrative........................................ 13,238,269 7,385,792 6,453,757
Acquired technology in process.................................... 14,516,000 -- 10,872,000
Restructuring..................................................... 3,072,450 -- 3,165,000
Write-down of assets and other charges............................ 1,477,000 -- 3,300,000
------------- ------------- -------------
Operating expenses.............................................. $ 37,561,011 $ 11,369,079 $ 26,405,872
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues for the year ended December 31, 1995 were $41,805,342,
an increase of $21,301,536 or 104% over revenues of $20,503,806 for 1994.
The Company's software license fees are derived primarily from sales of
licenses for the PCN Health Network Information System and the Company's other
practice management software products. Revenues from software license fees
increased by $9,148,716 or 145% from $6,302,181 in 1994 to $15,450,897 in 1995,
primarily as a result of approximately $8,626,000 of increased sales of licenses
for the PCN Health Network Information System and as a result of approximately
$3,345,000 of sales of licenses for the Versyss and PMS
24
<PAGE>
Business acquired software products. This increase in software licensing fees
was partially offset by a $2,822,000 reduction in sales of the Company's other
acquired software products as physician customers migrated to the PCN Health
Network Information System.
Hardware revenues increased by $7,128,846 or 275% from $2,592,713 in 1994 to
$9,721,559 in 1995, primarily as a result of the acquisitions of Versyss and the
PMS Business, both of which sell computer hardware, peripherals and complete
systems (hardware and practice management software) directly to physician
practices and, in the case of Versyss, to independent resellers of Versyss'
practice management software products. Revenue in 1994 was primarily derived
from the hardware portion of sales under the Alternative Financing Strategy.
Software support and maintenance fees increased by $4,316,119 or 96% from
$4,507,388 in 1994 to $8,823,507 in 1995, primarily as a result of the
acquisitions of Versyss and the PMS Business. Hardware maintenance revenue of
$3,508,552 was also generated from the acquisitions of Versyss and the PMS
Business.
Communication fees declined by $1,227,691 or 32% from $3,793,598 in 1994 to
$2,565,907 in 1995, primarily as a result of declining membership fees billed to
Members as they migrate to the PCN Health Network Information System. The
Company expects membership fees to continue to decline as Members continue to
migrate to the PCN Health Network Information System.
Leasing and other fees revenue declined by $1,573,006 or 48% from $3,307,926
in 1994 to $1,734,920 in 1995 due to the reduction in fees derived from the
Alternative Financing Strategy. In 1995, Leasing and other fees primarily
included revenues derived from sales of forms and supplies directly to physician
customers. In 1994, Leasing and other fees primarily include the revenues from
the Alternative Financing Strategy not related to hardware.
COST OF REVENUES. Cost of software, maintenance, support, communication
fees and other revenue increased by $4,934,568 or 123% from $4,018,189 in 1994
to $8,952,757 in 1995, primarily as a result of the increased sales of the PCN
Health Network Information System and as a result of sales of the Company's
newly acquired Versyss and PMS Business practice management software products
and services. These costs include the costs of labor for software support,
hardware maintenance and training.
Cost of hardware, including installation costs, increased by $5,278,433 or
257% from $2,057,763 in 1994 to $7,336,196 in 1995 as a result of increased
computer hardware sales resulting from the acquisitions of Versyss and the PMS
Business.
Total cost of revenues increased as a percentage of total revenues from
29.6% in 1994 to 39.0% in 1995 primarily as a result of the higher mix of
hardware sales.
RESEARCH AND DEVELOPMENT. Research and development costs increased by
$380,400 or 21% from $1,838,823 in 1994 to $2,219,223 in 1995, primarily as a
result of the acquisitions of Versyss and the PMS Business. The Company expects
research and development costs to increase in 1996. See "-- Liquidity and
Capital Resources."
SELLING AND MARKETING. Selling and marketing expenses increased by $893,605
or 42% from $2,144,464 in 1994 to $3,038,069 in 1995 as a result of increased
headcount attributable to the acquisitions of Versyss and the PMS Business,
partially offset by efficiency savings realized from the elimination of
duplicate print advertising and trade show costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $5,852,477 or 79% from $7,385,792 in 1994 to $13,238,269 in 1995 as a result
of additional headcount and increased facilities and occupancy costs
attributable to the acquisitions of Versyss and the PMS Business. In the fourth
quarter of 1995, the Company announced a restructuring plan to centralize and
consolidate certain of these functions in order to achieve efficiency savings in
1996. See "Restructuring and Write Down of Assets and Other Charges" below.
25
<PAGE>
ACQUIRED TECHNOLOGY IN PROCESS. The acquired technology in process costs of
$14,516,000 incurred in 1995 reflect the fair value of the software products
under development at Versyss that had not achieved technological feasibility at
the date of acquisition, and had no alternative future uses, and were therefore
charged against operations at the time of the acquisition.
RESTRUCTURING AND WRITE DOWN OF ASSETS AND OTHER CHARGES. During the fourth
quarter of 1995, after the completion of the Versyss acquisition, management
completed a review of the Company's operations in conjunction with the newly
acquired PMS Business and Versyss 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 businesses in order to improve operating
efficiencies. The Company recorded a restructuring charge aggregating
$3,922,450, partially offset by a recovery of $850,000 from a change in
estimated requirements previously charged against operations as part of the
restructuring accrual recorded in 1993 (see "Year Ended December 31, 1994
Compared to the Year Ended December 31, 1993 -- Restructuring and Write Down of
Assets and Other Charges"). The 1995 Restructuring Plan provision included
$2,509,950 for lease termination costs (principally commencing in July 1996) and
$1,412,500 for severance and other employee reduction-related costs. The
implementation of this plan commenced immediately and it is anticipated to be
completed by the end of 1997. During the fourth quarter of 1995, the Company
also recorded a provision of $1,477,000 for the writedown of certain assets and
other charges. The charge consisted primarily of a $500,000 writedown of
impaired acquisition-related intangible assets, a $400,000 settlement of a
customer dispute related to a previously-acquired software product and $577,000
of other asset writedowns to fair value.
INTEREST INCOME/EXPENSE. Interest income increased by $488,222 or 550% from
$88,817 in 1994 to $577,039 in 1995, primarily as a result of a interest earned
on the investment of the proceeds from the February 1995 public offering and the
issuance of the Equifax Note.
Interest expense decreased by $346,449 or 19% from $1,798,053 in 1994 to
$1,451,604 in 1995 due to a net reduction of term indebtedness of approximately
$2,042,000 through October 27, 1995, primarily resulting from the repayment of
the 1995 Investor Note from the proceeds of the February 1995 public offering,
partially offset by an increase in debt service related to the Versyss
acquisition on October 27, 1995. As a result of the early extinguishment of the
1995 Investor Note, the Company recorded an extraordinary loss of $180,000.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues for the year ended December 31, 1994 were $20,503,806,
an increase of $14,395,248 or 236% over revenues of $6,108,558 for 1993.
The Company's software license fees increased by $5,921,134 from $381,047 in
1993 to $6,302,181 in 1994, primarily as a result of approximately $2,978,000 of
increased sales of licenses for its acquired practice management software
products and approximately $2,943,000 of increased sales of licenses for the PCN
Health Network Information System.
Hardware revenue increased by $1,303,782 or 101% from $1,288,931 in 1993 to
$2,592,713 in 1994 as a result of computer system upgrades sold to physician
practices under the Alternative Financing Strategy.
Software support and maintenance fees increased by $3,877,981 or 616% from
$629,407 in 1993 to $4,507,388 in 1994 as a result of acquisitions.
Communication fees increased by $484,778 or 15% from $3,308,820 in 1993 to
$3,793,598 in 1994, primarily as a result of higher network membership fees
attributable to price increases and increased usage by physician customers of
laboratory and electronic claims communication links. Leasing and other fees
increased by $2,807,573 or 561% from $500,353 in 1993 to $3,307,926 in 1994 as a
result of increased revenues derived from the Alternative Financing Strategy.
COST OF REVENUES. Cost of revenues decreased by $4,179,146 or 41%, from
$10,255,098 in 1993 to $6,075,952 in 1994. These costs include the costs of
labor for software support and training.
26
<PAGE>
Compensation expense increased by approximately $890,000 due to the
additional expense of $1,877,000 related to the headcount added resulting from
the Calyx, Wallaby and the DOM/2 Business (technical support and production
expense), offset by a decrease of approximately $1,938,000 from savings realized
from the elimination of the Company's in-house regional service group and other
cost-containment efforts. Amortization and depreciation expense decreased by
approximately $3,538,000 primarily as a result of a $3,300,000 adjustment made
at December 31, 1993 that reduced the net carrying value of computer equipment
previously leased from ICC which was determined to be higher than the net future
network revenues such equipment would generate. Other costs decreased by
approximately $591,000 primarily as a result of efficient management of hardware
maintenance costs combined with savings realized from cost-containment efforts.
Hardware costs increased as a result of additional sales volume associated with
the increased use of the Alternative Financing Strategy and additional sales of
practice management software products.
RESEARCH AND DEVELOPMENT. Research and development costs increased by
$940,823 or 105% from $898,000 in 1993 to $1,838,823 in 1994, primarily as a
result of increased headcount attributable to the acquisitions of Calyx and
Wallaby and the development of the PCN Health Network Information System.
SELLING AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling and
marketing and general and administrative expenses increased by $1,359,384 or 17%
from $8,170,872 in 1993 to $9,530,256 in 1994.
Compensation costs increased approximately $1,131,000 as a result of an
increase in expenses of $1,766,000 attributable to the acquisitions Wallaby and
Calyx, which increase was partially offset by $635,000 of savings realized from
the elimination of the Company's in-house sales force in June 1993 and other
cost-containment efforts. Amortization and depreciation increased by
approximately $1,441,000 due to the amortization of intangibles resulting from
the purchase of Calyx, Wallaby, DOM/2 Business and the Acclaim Business. Other
expenses decreased by approximately $1,212,000 as a result of reduced rent,
travel, and overhead expenses associated with the elimination of the area sales
force and the implementation of other cost saving measures, partially offset by
an increase of approximately $1,021,000 in normal non-compensation related
operating expenses incurred by Calyx and Wallaby.
ACQUIRED TECHNOLOGY IN PROCESS. The acquired technology in process costs of
$10,872,000 incurred in 1993 reflect the fair value of the software products
under development at Wallaby and Calyx that had not achieved technological
feasibility at the dates of acquisition, which were charged against operations
at the time of acquisition.
RESTRUCTURING AND WRITE DOWN OF ASSETS AND OTHER CHARGES. In the fourth
quarter of 1993, after completing the Calyx and Wallaby acquisitions, the
Company implemented a restructuring plan (the "1993 Restructuring Plan")
designed to reduce costs, improve operating efficiencies and increase
shareholder value. The Company recorded a restructuring charge aggregating
$3,165,000, for which no tax benefit was available, for the consolidation of
offices and facilities, where appropriate, the centralization of administrative
and overhead functions and certain other employee reduction-related costs. The
charge included $1,770,000 for lease termination costs, $192,000 for the
write-off of related equipment and leasehold improvements, $210,000 for office
relocation and consolidation costs, and $993,000 for severance and other
employee-related costs. The Company anticipated that efficiencies related to the
restructuring, primarily in the form of reduced facility and labor-related
costs, would be phased in by the end of 1995. Since implementation of the
restructuring plan, the 1993 restructuring accrual has decreased by
approximately $2,589,000, of which $1,739,000 was principally due to
expenditures related to the lease termination and consolidation of the Company's
corporate headquarters in Mahwah, New Jersey in 1994 and the resultant
centralization of
27
<PAGE>
certain financial and sales administrative functions previously performed at the
Brookfield, Wisconsin location. However, as of December 31, 1995, certain
restructuring charges related to other lease termination costs have not yet been
paid. The table below summarizes the activity of the 1993 Restructuring Plan:
<TABLE>
<CAPTION>
1993 RESTRUCTURING PLAN
- ------------------------------------------------------------------------------------------
<S> <C>
1993 Provision............................................................................ $3,165,000
1994 Activity:
Reduction in workforce, lease termination costs and other cash outflows................. 975,000
Write-off of equipment and leasehold improvements....................................... 165,000
------------
Balance at December 31, 1994.............................................................. 2,025,000
1995 Activity:
Reduction in workforce, lease termination costs and other cash outflows................. 572,000
Additional write-off of equipment and leasehold improvements............................ 27,000
Non-cash recovery from change in estimated requirements................................. 850,000
------------
Balance at December 31, 1995.............................................................. $576,000
</TABLE>
INTEREST INCOME/EXPENSE. Interest income decreased by $88,448 or 50% from
$177,265 in 1993 to $88,817 in 1994, as a result of lower average cash balances
during the twelve months ended December 31, 1994 as compared to those during the
twelve months ended December 31, 1993.
Interest expense increased by $678,585 or 61% from $1,119,468 for the twelve
months ended December 31, 1993 to $1,798,053 for the twelve months ended
December 31, 1994, primarily as a result of interest accruing on the Investor
Note, on the promissory notes issued by the Company in connection with the
acquisitions of Calyx and Wallaby, offset by the elimination of interest on the
ICC Debt, which was extinguished on December 31, 1993.
EXTRAORDINARY ITEM. At December 31, 1993, the Company recorded an
extraordinary gain in the amount of $8,498,472 from the extinguishment of
capital lease obligations under the Restructured Lease and the ICC Debt.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had available cash and cash equivalents of
$15,517,000. In addition, the Company had consolidated net accounts receivable
of $19,466,000. For the year ended December 31, 1995, net cash provided from
operating activities was $1,815,000 as compared to net cash used in operating
activities of $464,000 and $7,103,000 for the years ended December 31, 1994 and
1993, respectively. The increase in net cash provided by operating activities
was achieved primarily from the Company's improved results of operations for the
year ended December 31, 1995. At December 31, 1995, the Company had a working
capital deficit of approximately $9,006,000, primarily as a result of an
increase in unearned income, including customer deposits, of $15,968,000, a
majority of which is related to the acquisitions of Versyss and the PMS
Business. Unearned income consists primarily of software and hardware
maintenance contracts, most of which the Company expects to realize over the
life of the applicable contracts which typically do not exceed one year.
Historically, the Company has funded its working capital requirements and
acquisitions through external financing sources, including borrowing and/or the
sale of equity securities and not from operating cash flow. In the year ended
December 31, 1995, the Company raised financing proceeds, net of fees and
expenses, of $59,175,000 primarily consisting of: (i) $22,340,000 in net
proceeds from the public offering of 6,250,000 shares of Common Stock in
February 1995; (ii) $9,853,000 from the issuance of the Equifax Note in February
1995; (iii) $24,689,000 from the sale of 1,902,748 shares of Common Stock and
18,500 shares of Convertible Preferred Stock in October 1995 pursuant to
Regulation S under the Securities Act; (iv) $810,000 from the exercise of
options to purchase Common Stock; and (v) $1,483,000 from the sale to the
Investor of a warrant to purchase 5,000,000 shares of Common Stock. For the year
ended December 31, 1994, the Company raised $46,000 in financing proceeds from
the exercise of options to purchase Common Stock. For the year ended December
31, 1993, the Company raised financing proceeds, net of fees and
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expenses, of $27,073,000 consisting primarily of: (i) $14,232,000 from the sale
of shares of Common Stock to the Investor; (ii) $12,000,000 from the issuance of
the Investor Note, which was refinanced in 1995; and (iii) $751,000 from the
exercise of warrants.
For the year ended December 31, 1995, the Company used $21,387,000 for
investing activities, primarily related to the purchases of the PMS Business and
of Versyss, and $26,598,000 to repay indebtedness primarily relating to the
Wallaby and Versyss acquisitions. For the year ended December 31, 1994, the
Company used $1,804,000 for investing activities, primarily related to the
purchase of the DOM/2 Business and the Acclaim Business and $5,113,000 to repay
indebtedness primarily relating to the Wallaby and Calyx acquisitions. For the
year ended December 31, 1993, the Company used $7,064,000 for investing
activities, primarily related to the acquisitions of Calyx and Wallaby, and
$4,771,000 to repay indebtedness primarily relating to the Restructured Lease.
Significant payment obligations of the Company during 1996 include: (i) the
payment in April 1996 of the $2,000,000 promissory note issued in connection
with the acquisition of the PMS Business, plus accrued and unpaid interest
thereon; (ii) the payment in October 1996 of $5,875,000 in connection with the
Versyss acquisition, together with accrued and unpaid interest thereon; (iii) up
to approximately $4,300,000 in capital contributions required to be made by the
Company to HealthPoint; and (iv) the payment of $125,000 per month to Equifax
Healthcare EDI Services, Inc. ("Equifax EDI") in accordance with the terms of
the Amended and Restated Marketing Agreement, dated January 12, 1996 between
Equifax EDI and the Company. See "Business -- Equifax Relationship." In
addition, the Company has the right to repurchase up to 2,325,000 shares of
Common Stock held by ICC for $4.75 a share pursuant to the ICC Call at any time
prior to April 1, 1997. The Company currently expects to exercise the ICC Call
on or prior to April 1, 1997. See "Certain Transactions."
Research and development expenses were $2,219,223, $1,838,823 and $898,000
in 1995, 1994 and 1993, respectively. The Company expects that its research and
development expenses will increase significantly in 1996 as a result of ongoing
efforts to: (i) enhance the PCN Health Network Information System; (ii) develop
additional modules for the Company's other practice management software
products; (iii) create interfaces with HealthPoint products and integrate such
products with the PCN Health Network Information System; (iv) develop electronic
migration software for the MENDS product, as well as products acquired in the
future; and (v) share development costs incurred by Equifax EDI to enhance the
PCN Link products.
The Company expects that its operating cash flow, together with the proceeds
from the Offerings will be sufficient to fund the Company's working capital
requirements (including research and development) through at least June 1997,
permit the Company to continue its acquisition strategy and exercise the ICC
Call. However, the Company's ability to continue to pursue its acquisition
strategy and exercise the ICC Call will be affected by the extent and pace at
which the Company utilizes its available resources for acquisitions.
Accordingly, the Company may in the future be required to seek additional
sources of financing, including borrowing and/or the sale of equity securities.
If additional funds are raised by issuing equity securities, further dilution to
shareholders may result. The Company has not sought and does not currently have
a revolving credit facility and, if a shortfall occurs, alternative sources of
financing would be necessary in order for the Company to meet its liquidity
requirements. No assurances can be given that any such additional sources of
financing will be available on acceptable terms or at all. See "Risk Factors --
Acquisition Strategy and Impact on Future Operating Results" and "-- Uncertain
Availability of Additional Funding."
At December 31, 1995, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $65,000,000 which expire in 1999
through 2009. This includes approximately $11,000,000 of net operating loss
carryforwards from Versyss which are subject to separate return limitation year
rules. 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 (the "Code"), have resulted in a significant annual limitation on the
Company's ability to utilize net operating losses in the future. As a result, a
substantial portion of the pre-ownership change net operating losses of the
Company may be deferred by virtue of the Section 382 limitation beyond the
15-year carryover period allowed under Section 172 of the Code and, thereby,
lost to the Company forever.
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BUSINESS
GENERAL
The Company is a leader in developing, marketing and supporting practice
management software products for physician practices. The Company's objective is
to establish a large installed base of physician practice customers who use the
Company's most advanced practice management software product, the PCN Health
Network Information System, thereby becoming an important link for the
electronic exchange of information between physician practices and other health
care providers and organizations. In furtherance of this objective, since
September 1993, the Company has acquired six practice management software
businesses, increasing the number of physicians associated with sites which have
purchased the Company's practice management software products from approximately
2,000 to approximately 80,000, making the Company one of the largest providers
of practice management software products in the United States. The Company plans
to migrate substantially all of its customers to the PCN Health Network
Information System during the next several years. In order to rapidly and
cost-effectively supplement its practice management software product offerings
with knowledge-based clinical products and services, in January 1996, the
Company formed a joint venture with Glaxo Wellcome. The joint venture
partnership, HealthPoint, will develop and market clinical information
technology products and services that will provide the clinical information
needed at the point of patient care to enable physicians and other health care
providers to practice medicine more efficiently. In March 1996, HealthPoint
introduced its first product, HealthPoint ACS, a product developed for medical
offices to enable physicians to, among other things, manage the clinical
information required for treatment at the point of care. HealthPoint ACS is
expected to be made commercially available during the second half of 1996.
The Company's practice management software products, which, among other
things, automate physician scheduling and generate patient billings, insurance
claims billings and other financial reports, include interactive communication
software that links physician practices with hospitals, Medicare/Medicaid
carriers, commercial insurance carriers, claims clearinghouses, clinical
laboratories, pharmacies, HMOs and other health care organizations who have
established electronic communication links under agreements with the Company.
The PCN Health Network Information System is designed to become the common
practice management software platform used by substantially all of the Company's
physician practice customers and, as an integrated unit with HealthPoint's
products, is expected to provide physicians with comprehensive financial,
administrative and clinical applications. The PCN Health Network Information
System will primarily manage the business elements of the physician's practice
and HealthPoint's software products and services will primarily provide
physicians with clinical applications and functionality intended to assist
physicians in the clinical aspects of their practices.
The Company was incorporated under the laws of the state of New Jersey on
August 25, 1983. Its executive offices are located at 1200 American Road, Morris
Plains, New Jersey 07950. Its telephone number is (201) 490-3100.
INDUSTRY
Based on publicly available industry sources, the Company believes that in
1993 there were over 360,000 office-based physicians in the United States, with
approximately 1,100 businesses marketing practice management software products
to them in 1994. Current economic influences, including the increasing influence
of managed care in the health care marketplace, are leading to fundamental
changes in the health care industry in the United States. As the health care
delivery system evolves, the need for state-of-the-art information management
tools becomes critically important.
Managed care organizations are attempting to control health care costs by
pressuring health care providers to become more cost effective through the use
of capitated fees and intense monitoring of the number and types of procedures
used. As a result, sophisticated practice management software is increasingly
needed in order to track costs, clinical outcomes and patient health care needs
and to successfully negotiate contracts and maximize profitability. This focus
on costs has increased the need for communication links to permit the electronic
exchange of information, such as eligibility checks, claims processing,
treatment guidelines, prescribing guidelines, managed care parameters and
clinical laboratory results, rather
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than incur the cost of processing paper transactions. In addition, payers need
information to monitor the performance of physicians and to learn which clinical
protocols result in high quality, cost effective treatment. Large purchasers of
medical care, such as employers and governments, require information in order to
make decisions on how best to spend limited resources.
Other factors also are increasing the demand for more comprehensive and
accurate medical information systems. The growing administrative burdens placed
on medical practices have caused doctors and hospitals to consolidate both
vertically and horizontally in search of administrative efficiencies and
economies of scale. Primary care physicians, specialty physicians, ancillary
providers and payers are forming sophisticated networks designed to provide
comprehensive health care services ranging from preventive to rehabilitative
care in order to maximize efficiency, reduce administrative costs and increase
profits. The integrations of such health care delivery systems will result in a
greater need for information management tools which permit the rapid exchange of
information and provide quantitative measures and financial resource management
in order to match desired clinical outcomes with appropriate reimbursements.
The Company believes that these trends will increase the demand within the
health care industry for information management tools which allow various
participants in the industry to communicate and transmit both administrative and
clinical information among themselves. Further, the Company believes that such
trends will encourage greater consolidation within the practice management
software business, as many of the smaller practice management companies find it
more difficult to satisfy the industry's increasingly complex demands for
sophisticated practice management software products which provide networking and
communication capabilities, as well as clinical information technology products
and services.
STRATEGY
The Company's objective is to establish a large installed base of physician
practice customers who use the PCN Health Network Information System, thereby
becoming an important link for the electronic exchange of information between
physician practices and other health care providers and organizations. The
Company's strategy for achieving its objective includes: (i) increasing the
usage of the PCN Health Network Information System by continuing to acquire
practice management software businesses having an installed base of physician
practice customers; (ii) migrating both the Company's existing and newly
acquired practice management software customers to the PCN Health Network
Information System during the next several years; (iii) marketing and licensing
the PCN Health Network Information System, both directly and through independent
resellers, to additional physician customers, in particular, large group
practices; (iv) marketing HealthPoint's clinical information system products and
other services to the Company's installed base of PCN Health Network Information
System customers, as well as customers of the Company's other practice
management software products; and (v) providing new and enhanced services,
including new Connecting Service Providers, through the PCN Health Network
Information System and HealthPoint's clinical information technology products.
In addition to revenues generated by the Company from the licensing of both its
practice management software products and HealthPoint's clinical information
products, as well as related sales of computer hardware and services, as a
partner in the joint venture, the Company will generally receive 50% of any
profits generated by HealthPoint from its products and services, whether or not
sold by the Company.
ACQUISITION STRATEGY. In order to provide the Company with access to a
larger base of potential customers for the PCN Health Network Information
System, the Company intends to continue to pursue a strategy of acquiring
practice management software businesses having an installed base of physician
practice customers who, over time, can be migrated from their current practice
management software products to the PCN Health Network Information System.
As a result of this strategy, since September 1993, the Company has
increased the number of physicians who are associated with sites which have
purchased its practice management software products from approximately 2,000 to
80,000, thereby making the Company one of the largest providers of practice
management software products in the United States. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
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Most recently, in October 1995, the Company completed its largest
acquisition to date when it acquired Versyss. The Versyss business, through both
a direct sales force of approximately 25 employees and a network of
approximately 50 independent resellers, has sold its "MENDS" practice management
software products and related computer hardware to sites having an aggregate of
approximately 30,000 physicians and provides service and support of such
products and equipment. Versyss also provides application software packages and
related hardware services, for certain other industries, including the
construction, timber, fuel oil and publishing businesses. See "-- Versyss
Commercial Business." In addition to its software products, Versyss provides its
independent resellers and its direct customers with computer hardware and
peripherals, for which purpose it operates a national distribution center for
hardware systems in Torrance, California. See "-- Products."
In April 1995, the Company acquired the PMS Business which, through a direct
sales force, has sold practice management software products and related computer
hardware to sites having an aggregate of approximately 6,000 physicians and
provides service and support for such products and equipment.
The Company expects to continue to pursue its acquisition strategy. However,
no assurances can be given that any other acceptable acquisition candidates can
be identified and, if identified, that any such potential acquisitions can be
consummated. See "Risk Factors -- Acquisition Strategy and Impact on Future
Operating Results."
MIGRATION STRATEGY. Through its independent resellers and the direct sales
force acquired by the Company as part of the acquisitions of Versyss and the PMS
Business, during the next several years the Company intends to migrate a
substantial portion of its existing physician customers, and over time any newly
acquired physician customers, from their current practice management software
products to the PCN Health Network Information System. The Company has
established migration plans for each of its practice management software
products to the PCN Health Network Information System, with the migration of
certain products expected to proceed rapidly and the migration of other
products, such as MENDS (which is a more advanced product and has a number of
different versions in the market), expected to proceed at a somewhat slower
pace. If successful, the Company's migration strategy will result in the use of
a common software platform by a substantial portion of its physician practice
customers, replacing the assorted communication links required to connect the
users of the Company's seven other practice management software products to
Connecting Service Providers and reducing the costs of maintaining such
products.
In order to promote this migration, the Company has developed migration
software which permits the information stored in a customer's practice
management software system to be electronically transferred to the PCN Health
Network Information System in an efficient, cost-effective manner. The Company
has developed the software for electronic migration of users of the Wallaby,
Calyx, DOM/2, the Original PCN Software, Acclaim and PMS Business' practice
management software products to the PCN Health Network Information System, and
is in the process of developing similar migration software for the users of the
MENDS practice management software product. See "-- Sales and Marketing" and
"Risk Factors -- Uncertainty of Acceptance of Product and Migration Strategy."
CLINICAL INFORMATION PRODUCT STRATEGY. The Company and Glaxo Wellcome,
through wholly-owned subsidiaries of each, formed HealthPoint to integrate the
health care and clinical information technology expertise of Glaxo Wellcome with
the information technology and distribution capabilities of the Company. In
addition to its cash contributions, the Glaxo Wellcome Partner contributed to
HealthPoint a clinical patient records product which had been in development for
a number of years. As a result, the Company believes that the joint venture will
permit the Company to rapidly and cost-effectively supplement its practice
management software product offerings with knowledge-based clinical technology
products and services expected to be developed by HealthPoint. In March 1996,
HealthPoint introduced its first product, HealthPoint ACS, a product to enable
physicians to, among other things, manage the clinical information required for
treatment at the point of care. HealthPoint ACS is expected to be commercially
available during the second half of 1996. HealthPoint ACS will initially
interface, and is expected to be integrated, with the PCN Health Network
Information System, thereby permitting the Company to provide customers with
comprehensive financial, administrative and clinical applications in a single
package.
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The Company's strategy is to market HealthPoint ACS, as well as
HealthPoint's other products and services, to the Company's installed base of
PCN Health Network Information System customers, as well as customers of the
Company's other practice management software products, in particular, MENDS. The
Company believes that this strategy will not only provide the Company with
revenues as a result of sales of HealthPoint's products and services, but will
complement and thereby help to promote sales of the PCN Health Network
Information System to new customers, in particular, large group practices. See
"-- Products" and "-- HealthPoint."
PRODUCTS
PRACTICE MANAGEMENT SOFTWARE PRODUCTS
All of the practice management software products offered by the Company
provide physicians with comprehensive office management software designed to
automate the administrative, financial, practice management and, to a lesser
extent, the clinical requirements of a physician's office practice. The
applications of the practice management software products include the automation
of patient billing, insurance claims and collection processing, electronic
claims submission, patient records, appointment scheduling and financial
reporting. The Company's most advanced practice management software product, the
PCN Health Network Information System, is a UNIX-based system designed to
provide enhanced applications and communication link capabilities. The Company
continually seeks to enhance and upgrade the applications and functionality of
the PCN Health Network Information System to ensure that the product remains
competitive and satisfies the needs of the Company's physician practice
customers. It is the Company's strategy to migrate users of its other practice
management software products to the PCN Health Network Information System over
the next several years.
THE PCN HEALTH NETWORK INFORMATION SYSTEM. The PCN Health Network
Information System is designed to, among other things, provide the following
applications:
- PATIENT APPOINTMENT SCHEDULING. The PCN Health Network Appointment
Scheduling Module is designed to improve the efficiency of managing appointments
and cancellations. The Scheduling Module allows providers to: (i) schedule
appointments by first available time slot or by open calendar; (ii) coordinate
physicians, facilities, rooms and equipment in multiple provider locations;
(iii) track cancellations and no-shows; (iv) generate recall correspondence to
remind patients of appointments or to track patients not seen within a specified
time frame; (v) produce patient reports such as hospital round lists, discharged
patient lists, reschedule, cancel and no show reports; and (vi) generate fee
slips.
- PLAN MANAGEMENT. The PCN Health Network Managed Care Productivity Module
is designed to help managed care providers reduce the administrative costs
associated with managed care's detailed record keeping requirements. The Managed
Care Module allows providers to: (i) electronically communicate with managed
care organizations to check membership rosters, referral lists, covered services
and patient eligibility prior to providing services; and (ii) track plan
benefits, patient co-payments and noncovered services.
- PATIENT BILLING. The PCN Health Network Billing Module is designed to
improve the cash flow and collection performance of both solo practitioners and
multi-specialty groups with many providers. Functions include: (i) processing of
Medicare/Medicaid, Worker's Compensation, HMOs and other carriers' bills on
appropriate forms; (ii) group procedure function which handles billing of
multiple procedures which are performed together; (iii) batch billing to post
charges for multiple patients; (iv) coordination of patient benefits; (v)
preparation, submission and tracking of preauthorizations; and (vi)
establishment of prepayment plans.
- ELECTRONIC PATIENT RECORDS. The PCN Health Network Medical Records Module
provides basic clinical patient records applications which permit providers to:
(i) record laboratory results; (ii) document pre-op, post-op and surgical
results; (iii) transcribe notes; (iv) facilitate risk management; and (v)
analyze patient outcomes and quantify research data. This module will be
replaced by HealthPoint ACS, which is designed to provide more advanced clinical
patient records functionality than the PCN Health Network Medical Records
Module. See "-- Clinical Products."
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- FINANCIAL REPORTING. The accounts receivable function of the PCN Health
Network Information System allows providers to manage the financial aspects of
their practice. This function allows providers to: (i) post payments to a
specific visit and procedure or to the account in general; (ii) adjust payments
and handle automatic write-offs; (iii) batch post a single check to a number of
patient accounts; (iv) generate patient statements; (v) establish prepayment
plans; (vi) generate reports on, among others, aged account receivables, account
ledgers, collection agency reports, unapplied credits reports and patient
financial reviews; and (vii) generate revenue and production reports, trial
balances, credit balances, charge and medical history labels, identification
cards and other reports and statements required by the physician practice
customer.
- COLLECTIONS. The PCN Health Network Collections Module is designed to
monitor and improve providers' collection ratios, reduce delinquent accounts and
manage accounts in collection. The module allows providers to: (i) establish and
monitor payment plans; (ii) track collection ratios, identify potential
collection accounts and anticipate expected payments from plans; (iii) remove
delinquent accounts from accounts receivable; (iv) manage balances in
collection; and (v) generate collection reports on, among others, accounts in
collection, collections aged trial balances, cash flow projections, credit
manager reports, trend analysis and collection ratios.
- COMMUNICATION LINKS. The PCN Health Network Information System is
designed to enable physician practice customers to communicate electronically
with hospitals, Medicare/Medicaid carriers, commercial insurance carriers,
claims clearinghouses, clinical laboratories, pharmacies, HMOs and other health
care organizations who have established electronic communication links under
agreements with the Company. The Company has established communication links
with various Connecting Service Providers for the PCN Health Network Information
System, including clinical laboratories, a claims clearinghouse, insurance
carriers and hospitals. Communication links with clinical laboratories, which
the Company has established with LabCorp, Corning Clinical Laboratories and
SmithKline Beecham, as well as a number of smaller regional laboratories,
computerize and expedite the test requisition and result reporting process
thereby benefitting the physician and patient and providing a competitive
advantage to the clinical laboratory offering this capability. Communication
links with hospitals enable admitting physicians to, among other things, access
the hospital's information system to transmit patient pre-admission data,
operating room and laboratory scheduling, financial and other information,
thereby increasing the services the hospital provides to its attending
physicians. An electronic communication link between insurance carriers or other
third-party payers and physicians help to reduce the cost of processing claims
submitted by such physicians, including clerical data input costs associated
with manual entry of medical claims, and should expedite the payment of the
claim, thereby providing an additional economic benefit to the physician. In
addition, a communication link can allow the physician to communicate with the
insurance carrier or other third-party payer to verify patient eligibility. In
order to streamline this claims processing function, medical claims clearing
organizations currently link electronically with hospitals and/or physicians via
computer to submit claims to a variety of third-party payers and reconcile
payments received. In order to provide such electronic claims clearing services,
in January 1995, the Company entered into an agreement with Equifax EDI, a
subsidiary of Equifax, pursuant to which Equifax EDI provides electronic claims
clearinghouse services for the PCN Health Network Information System and the
Company's other practice management software products. See "-- Equifax
Relationship."
In addition to Equifax EDI, the Company has entered into agreements with
major Blue Cross/Blue Shield ("BC/BS") carriers under which physicians using the
Company's practice management software products may electronically transmit
claims payable by BC/BS using communication link software. The Company also has
a service available to link physician offices directly to various other
insurance carriers. Further, the Company has established communication links
between a number of managed care organizations and their affiliated physicians.
The Company has standardized and embedded into the PCN Health Network
Information System the software bridges that will enable the Company to more
easily provide communication links with Connecting Service Providers. As a
result, after the Company has entered into a contractual arrangement and
established a communication link with a Connecting Service Provider, upon the
request of a user of the PCN
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Health Network Information System, such link can be electronically activated on
the customer's system by the Company. Under such agreements, the Company
generally receives a royalty, an access fee and/or a transaction fee from the
Connecting Service Provider. Typically, such fees are based on: (i) a percentage
of the fees received by the Connecting Service Provider for providing services
to physician practice customers; (ii) the number of practices and/or physicians
with whom the Company provides a communication link; and/ or (iii) the number of
transactions transmitted between the physicians and the Connecting Service
Provider.
In the future, the Company expects sophisticated network communication links
which facilitate the delivery of clinical information to be provided through
HealthPoint ACS and HealthPoint's other products. Such links are expected to,
among other things, permit the delivery of information to physicians at the
point of patient care. It is expected that such information will include, among
other things, drug formularies and treatment protocols from health care plan
providers and sponsors, as well as more advanced clinical laboratory
information. See "-- HealthPoint."
OTHER PRACTICE MANAGEMENT SOFTWARE PRODUCTS. In addition to the PCN Health
Network Information System, the Company currently supports seven different
practice management software products: MENDS, System III Gold, The Resident,
MDX, DOM/2, Acclaim and the Original PCN Software. All of these practice
management software products provide physicians with software designed to
automate the administrative, financial, practice management and clinical
requirements of a physician's office practice. In addition, to varying degrees,
each of these practice management software products provides for the automation
of patient billing, insurance claims and collection processing, electronic
claims submission, patient records, appointment scheduling and clinical and
financial reporting, as well as communication links to certain Connecting
Service Providers.
CLINICAL PRODUCTS
In March 1996, HealthPoint introduced its first product, HealthPoint ACS
(Advanced Clinical System), a product designed for medical offices to enable
physicians to, among other things, manage the clinical information required for
treatment at the point of care. This product, which has been in development for
a number of years, is expected to be commercially available in the second half
of 1996. Under its arrangements with HealthPoint, the Company has agreed to
market HealthPoint ACS, as well as HealthPoint's other products and services to
the Company's customers.
Among other features, HealthPoint ACS provides physicians with the ability
to enter, revise and display each patient's medical history, medications,
allergies and previous clinical encounters. The product is also designed to
provide the physician customer with drug formularies, referral lists, treatment
protocols under the patient's health care plan, drug interaction warnings,
patient education material and a medical database of common patient complaints.
HealthPoint ACS is expected to serve as a foundation for additional clinical
information products and services such as enhanced network capabilities,
including clinical-based Connecting Service Providers, and clinical and
analytical products and services.
HealthPoint ACS will initially interface, and is expected to be integrated,
with the PCN Health Network Information System, thereby complementing and
enhancing the capabilities of the PCN Health Network Information System. As an
integrated unit, the PCN Health Network Information System and HealthPoint ACS
are expected to provide physician customers with comprehensive financial,
administrative and clinical applications. See "-- HealthPoint."
COMPUTER HARDWARE AND PERIPHERALS
In order to provide a complete product offering, the Company sells
computers, terminals, printers, modems and other peripherals in connection with
the licensing of its software products. The PCN Health Network Information
System and MENDS generally operate on IBM RS/6000 systems running AIX, as well
as 486 and Pentium-based systems running UNIX. The Company's other practice
management software products operate primarily on IBM compatible, Intel-based
processors. Versyss is a party to an agreement with IBM to private label and
resell IBM RS/6000 Reduced Instruction Set Computing (RISC) based hardware
systems to MENDS customers. Following the Company's acquisition of Versyss, IBM
agreed to
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permit the Company to take advantage of the favorable volume-based discounts
available under that agreement for all of the Company's customers, including
those using the PCN Health Network Information System. The agreement contains
certain performance provisions which the Company expects to satisfy.
The Company purchases computer hardware for resale to customers of its
direct sales force and provides maintenance and support of such equipment. The
Company's independent resellers generally provide customers with computer
hardware and maintenance and support of the entire hardware and software system.
As a result, the Company generally does not provide computer hardware directly
to the customers serviced by independent resellers. However, because of the
favorable volume-based discounts available to the Company, the Company does
purchase computer hardware and peripherals at a discount for resale to its
independent resellers, based upon the resellers' orders for such equipment. As a
result of its acquisition of Versyss, the Company acquired and continues to
operate a national distribution center for hardware systems in Torrance,
California. At the Torrance facility, the Company maintains a just-in-time
inventory system for the purchase of computer hardware, thereby controlling the
size of its inventory of equipment, which on average has not exceeded a 30 day
supply.
HEALTHPOINT
In January 1996, the Company and Glaxo Wellcome formed HealthPoint, a joint
venture partnership, to integrate the health care and clinical information
technology expertise of Glaxo Wellcome, one of the nation's leading
research-based pharmaceutical companies, with the information technology and
distribution capabilities of the Company. The objective of the venture is to
design and market clinical information technology products and services that
will help physicians and other health care providers practice medicine more
efficiently. These products and services are expected to initially consist of
automated patient records software products, clinical network capabilities and
data analysis.
THE PARTNERSHIP. HealthPoint is a general partnership formed by
wholly-owned subsidiaries of the Company and Glaxo Wellcome. A management
committee comprised of two representatives of the Company Partner, two
representatives of the Glaxo Wellcome Partner and one representative of
HealthPoint's management oversees the venture's operations. Accordingly,
HealthPoint is expected to set its own business strategy and objectives
independently from the objectives and strategies adopted by the Company.
Both the Company and Glaxo Wellcome, through their subsidiaries, have
committed to contribute a total of at least $50 million in cash to the venture,
of which $43 million will be contributed by the Glaxo Wellcome Partner and $7
million will be contributed by the Company Partner. Of such amounts, as of March
31, 1996, the Glaxo Wellcome Partner had contributed approximately $13.4 million
and the Company Partner had contributed approximately $2.7 million, with the
remainder to be contributed by the partners in semi-annual installments as
needed by HealthPoint, but in no event later than December 31, 1998.
Losses incurred by HealthPoint will generally be allocated between the Glaxo
Wellcome Partner and the Company Partner in proportion to the partners'
respective cash contributions (approximately 85% to the Glaxo Wellcome Partner
and 15% to the Company Partner), while any profits will, generally, be allocated
equally between the partners. See "Risk Factors -- Acceptance of HealthPoint
Products; Control of Joint Venture and Allocation of Profits and Losses."
STRATEGY. HealthPoint's objective is to improve the quality, efficiency and
cost effectiveness of health care delivery by providing state-of-the-art
clinical information management and communication services to health care
providers, suppliers, payers and patients. HealthPoint's strategy for achieving
its objective is to develop and market competitive: (i) clinical information
systems and related services which, among other things, enable physicians to
efficiently record their patient evaluations and recommendations and transmit
portions of this information to other health care system participants; (ii)
network communication systems to facilitate the delivery of clinical data and
services from and to physicians, managed care organizations, health insurance
plan sponsors and payers, suppliers, pharmacies, clinical laboratories and other
health care industry participants; and (iii) products and services for the
electronic collection, support, management and analysis of anonymous patient and
provider data.
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DISTRIBUTION OF PRODUCTS AND SERVICES. HealthPoint's products and services
are expected to be marketed to physicians and other health care providers,
payers and suppliers, whether or not they are users of the Company's practice
management software products. Distribution of HealthPoint's products is expected
to be performed by a number of independent resellers, one of which will be the
Company. In its capacity as a reseller of HealthPoint's software products, the
Company will generate revenue from the sale of HealthPoint's software products,
such amounts being in addition to the Company's allocable share of any of
HealthPoint's profits as a partner of the partnership. The Company has agreed
with HealthPoint to use its best efforts to distribute HealthPoint's clinical
information products and services, both directly and through the Company's
network of independent resellers, generally on an exclusive basis. In addition,
the Company has agreed to generally prohibit other clinical patient record
products from interfacing with the Company's practice management software
products.
PRODUCTS AND SERVICES. In addition to its cash contributions to
HealthPoint, Glaxo Wellcome contributed a clinical patient records product which
had been under development for a number of years and into which Glaxo Wellcome
had invested substantial resources. This product, HealthPoint ACS, is designed
to provide a foundation upon which HealthPoint provides to customers additional
products and services designed to facilitate the electronic exchange of clinical
information and outcome analysis. See "-- Products -- Clinical Products."
The products and services to be developed by HealthPoint are expected to
include clinical and analytical information and knowledge products and services,
including those developed to support the disease management efforts of health
care providers and suppliers, including pharmaceutical companies. The Company
expects that HealthPoint will put in place security features to allow
HealthPoint, through its software products, to facilitate the utilization and
sharing of anonymous aggregate clinical data contained in the databases of its
physician practice customers in compliance with applicable law. It is
contemplated that this anonymous aggregate clinical data will be of value to
health care providers and suppliers by supplying such analytical information as
treatment variables within a particular health care provider network, severity
measures, chronic disease monitoring, treatment interval outcome analysis and
quality analysis. Such products and analyses are expected to be developed by
HealthPoint both at the request of specific customers and for general
distribution and sale by HealthPoint. In addition, the Company expects that
HealthPoint will be able to market and sell reports and services based on such
clinical data to its physician customers. The Company believes that this data
will supplement the existing information available to health care service
providers and physicians and will increase in value as the availability of such
data grows. The Company and Glaxo Wellcome have agreed that, as between the
Company and Glaxo Wellcome, on the one hand, and HealthPoint, on the other hand,
all data generated or collected through the use of HealthPoint's software
products shall belong to HealthPoint.
To date, neither the Company nor HealthPoint has marketed any such clinical
or analytical products or services and HealthPoint has not determined the nature
of the products and services to be developed or established a marketing strategy
with respect to any such products or services. There can be no assurances given
that any such products or services can be successfully developed, marketed and
sold. See "Risk Factors -- Uncertainty of Data Products Business; Regulatory
Authority For and Potential Liability Associated With Data Products Business."
Further, as HealthPoint operates independently from the Company, all issues
regarding the use of clinical data by HealthPoint shall be subject to the
approval of HealthPoint's management and partners and there can be no assurance
that HealthPoint's objectives or strategy with respect to its use of clinical
data will not be inconsistent with those of the Company. See "Risk Factors --
Acceptance of HealthPoint Products; Control of Joint Venture and Allocation of
Losses." In addition, there are a number of significant legal and regulatory
issues relating to the utilization and sharing of anonymous aggregate clinical
data that the Company and HealthPoint are currently evaluating. HealthPoint
plans to commit to its customers that it will comply with all applicable laws
and, to the extent required by applicable law, will not access such data without
the express consent of the health care provider. The AMA has issued a Current
Opinion to the effect that a physician that does not obtain a patient's consent
to disclosure of patient information, including anonymous disclosure, violates
the AMA's ethical standards with respect to patient confidentiality. While the
AMA Current Opinions are not law, they may influence physicians' willingness to
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obtain patient consents or agree to permit HealthPoint to access clinical data
in their systems without such consent. Any such restrictions could have a
material adverse effect on HealthPoint's ability to market certain clinical and
analytical products and services. The Company expects HealthPoint to continue to
monitor and review the status and interpretations of laws and regulations which
impact HealthPoint's ability to access and utilize anonymous, non-patient
identifiable clinical and other data. See "-- Government Regulation" and "Risk
Factors -- Uncertainty of Data Products Business; Regulatory Authority For and
Potential Liability Associated With Data Products Business."
EQUIFAX RELATIONSHIP
In connection with the Company's goal of expanding the services provided by
Connecting Service Providers, on January 25, 1995, Equifax EDI, an "all payer"
electronic claims clearinghouse, entered into an Exclusive Marketing Agreement
(the "Marketing Agreement") with the Company to establish "PCN Link," a
communication link between Equifax EDI and users of the Company's practice
management software products. In connection with the execution of the Marketing
Agreement by Equifax EDI and the Company, Equifax, the parent of Equifax EDI,
purchased the $10 million Equifax Note, a five year convertible subordinated
promissory note of the Company, dated February 12, 1995, bearing interest at 6%
per annum and convertible into 1,932,217 shares of Common Stock. The Equifax
Note will be converted in full in connection with the Offerings. See "Principal
and Selling Shareholders."
Pursuant to the Marketing Agreement, the Company generally promotes Equifax
EDI as the exclusive provider of electronic data interchange services, including
claims processing, electronic eligibility and credit and check authorization,
and generally does not offer, sell or market any such service to its physician
practice customers, by or on behalf of any other person or entity. During the
term of the Marketing Agreement, Equifax EDI has agreed to make its electronic
data interchange services available to the Company's physician practice
customers and will pay to the Company a percentage of the gross revenues earned
by Equifax EDI for providing such services.
The Marketing Agreement, as originally executed, designated Equifax EDI,
generally, as the exclusive source of all electronic data interchange services
for users of the Company's practice management software products, including
clinical services. With the formation of HealthPoint, it is now anticipated that
HealthPoint will, either directly or through third parties designated by it,
provide many of the clinical information services which formerly were covered by
the Marketing Agreement. Accordingly, in January 1996, the Company and Equifax
EDI amended and restated the Marketing Agreement to, among other things, limit
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 addition, in connection with such amendments,
the Company agreed to share with Equifax EDI certain of the costs and expenses
associated with the further development and enhancement of PCN Link, as well as
to partially compensate Equifax EDI for offering certain free one-year
introductory services to physician practices who subscribe for PCN Link. The
Marketing Agreement, as amended and restated, has an initial term of four years.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
The Company believes that the arrangements contemplated by the amended and
restated Marketing Agreement enable the Company to provide users of its practice
management software products with enhanced services through Equifax EDI,
including electronic claims processing, eligibility and credit and check
authorization. Such services provide the Company's customers with a cost
effective way to electronically submit claims to a large number of indemnity
plan payers, reducing the Company's need to establish and maintain a large
number of point-to-point communication links between users of its practice
management software products and various payers.
VERSYSS COMMERCIAL BUSINESS
In addition to developing and marketing practice management software
products, Versyss provides application software packages for certain other
industries, including the construction, timber, fuel oil and publishing
businesses. Such software packages are designed to provide the customer with
such applications as payroll, accounts payable, general ledger, billing,
accounts receivable management, job scheduling,
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invoicing and inventory management. These software products are marketed and
distributed by a dedicated direct sales organization within Versyss, as well as
by Versyss' independent resellers (some of which are also resellers of Versyss'
practice management software product). See "-- Sales and Marketing." Versyss
also provides customers of its commercial business with computer hardware, as
well as maintenance and support services. See "-- Products -- Computer Hardware
and Peripherals."
SALES AND MARKETING
Since 1993, the Company's marketing and distribution efforts have focused on
the use of independent resellers who generally provide customers with computer
hardware and direct maintenance and support of the entire computer hardware and
software system. In addition to independent resellers, the Company has also
entered into agreements with a number of hospitals and hospital buying groups
pursuant to which such hospitals market the Company's practice management
software products to its attending physicians. In 1995, with the acquisitions of
Versyss and the PMS Business, the Company acquired a direct sales force which
markets and distributes practice management software products, as well as
computer hardware, maintenance and other services. The PMS Business has
historically marketed and distributed its products exclusively through its
direct sales force, while Versyss' sales were split between a direct sales force
and a network of independent resellers. The Company anticipates retaining the
direct sales forces in order to supplement its network of independent resellers,
as well as to focus on national accounts.
Pursuant to the Company's standard distribution agreement with its resellers
for the PCN Health Network Information System, the Company has granted to such
resellers the right to market licenses for such practice management software
product to customers on the Company's behalf. The Company receives a license fee
for each license sold based on the number of users of the product licensed. The
reseller determines the price charged to the customer for the license, retaining
the difference between the license fee paid by the customer and the amount
payable to the Company. The resellers, generally, may only sell the Company's
practice management software products.
In connection with the Company's objective of expanding the number of
physician practices using the PCN Health Network Information System, the Company
has undertaken a major sales and marketing effort to migrate the Company's
existing base of physician customers from their current practice management
software products to the PCN Health Network Information System, as well as to
license the product to new customers, particularly larger practice groups.
In order to promote the sale of licenses for the PCN Health Network
Information System, the standard reseller agreement for resellers of the PCN
Health Network Information System sets minimum performance standards for the
reseller designed to encourage the migration of customers to the PCN Health
Network Information System. In particular, in order to remain a reseller for the
Company, a reseller is generally required to sell a number of licenses each
month equal to 3% of such reseller's installed base of customers using any of
the Company's other practice management software products.
In addition, the Company has adopted a Value Added Reseller Stock Option
Plan (the "VAR Plan") designed to promote the sale of licenses for the PCN
Health Network Information System, in general, and the migration of the
Company's existing physician practice customers to such product, in particular.
Pursuant to the VAR Plan, each reseller of licenses for the PCN Health Network
Information System is granted options to purchase a number of shares of Common
Stock based upon the size of such reseller's installed base of practice
management software product customers, with such options vesting based upon
actual sales of the PCN Health Network Information System. See "Description of
Capital Stock -- Value Added Reseller Stock Option Plan."
Pursuant to the standard license agreement for the PCN Health Network
Information System, the Company licenses to the physician customer the right to
use such practice management software product. In addition, the license
agreements provide that, for an annual fee (currently, ranging from a minimum of
$450 to a maximum of $2,400 per year based upon the number of users of the
product licensed), the Company agrees to provide the customer with maintenance
of and certain updates to the product.
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SOFTWARE DEVELOPMENT
Technological changes in hardware and operating software systems, changing
requirements of outside parties (such as insurance companies and clinical
laboratories) and changing needs of health care providers require software to be
flexible, easily modified or revised to meet their needs. With the PCN Health
Network Information System, the Company believes it has developed a common
software platform for use by all physician practices and the Company continually
seeks to enhance and upgrade the applications and functionality of this product
in order to ensure that the product remains competitive and satisfies the needs
of the Company's physician practice customers. The Company may also be required
to establish customized software bridges to permit Connecting Service Providers
to establish communication links with the Company's physician practice customers
and develop interfaces to HealthPoint's products. The Company maintains a staff
of approximately 70 systems analysts and programmers to develop and enhance its
products.
Research and development expenses were $2,219,223, $1,838,823 and $898,000
in 1995, 1994 and 1993, respectively. The Company expects research and
development expenses to increase significantly in 1996 as a result of ongoing
efforts to (i) enhance the PCN Health Network Information System, (ii) develop
additional modules for the Company's other practice management software
products, (iii) develop electronic migration software for the MENDS product, as
well as products acquired in the future, (iv) develop interfaces between each of
the PCN Health Network Information System and MENDS, on the one hand, and
HealthPoint ACS, on the other hand and (v) integrate the PCN Health Network
Information System with HealthPoint ACS. In addition, the Company expects to
incur additional research and development expenses as a result of its agreement
to share with Equifax EDI certain development costs associated with enhancing
the PCN Link services. In connection with certain of its acquisitions, the
Company has acquired technology in process that had not achieved technological
feasibility at the date of acquisition and had no alternative future uses. As a
result, the Company has, and with respect to any acquired technology in process
acquired as part of future acquisitions may, charge the fair value of such
acquired technology in process against operations at the time of the
acquisition. See "-- Equifax Relationship." The Company has no significant
material customer sponsored research and development activities, nor any vendor
providing material development expertise or resources to the Company at this
time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GOVERNMENT REGULATION
The Company's business is not directly subject to government regulation.
However, the health care industry is subject to extensive Federal, state and
local regulation governing reimbursements for services rendered and conduct of
operations at health care facilities. The effect of future legislation and
regulation on current and prospective customers may, in certain circumstances,
have an adverse effect upon the Company's business. However, the Company cannot
predict the impact, if any, of future legislation and regulation on its
business. Certain clinical diagnostic applications of HealthPoint's
computer-assisted services may be subject to regulation by the FDA as medical
devices, which could create delays in the marketing of HealthPoint's products
and services. See "Risk Factors -- Government Regulation."
The Company expects HealthPoint to utilize anonymous, non-patient
identifiable clinical data electronically accessed from the databases of its
physician practice customers to develop and market clinical and analytical
information products and services, as well as to support the disease management
efforts of health care suppliers and pharmaceutical company customers of the
venture. There are a number of legal and regulatory issues relating to the
utilization and sharing of anonymous aggregate clinical data that the Company
and HealthPoint are evaluating. There can be no assurance that future
interpretations by regulatory authorities of existing or future laws and
regulations will not directly or indirectly restrict the collection or use of
information derived from patient records. See "Risk Factors -- Uncertainty of
Data Product Business; Regulatory Authority For and Potential Liability
Associated With Data Product Business."
COMPETITION
The practice management software industry is highly competitive and
fragmented. The Company believes that in 1994 the industry included
approximately 1,100 competitors of varying sizes. The Company's
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principal competitors include other physician practice management software
companies, software distributors which sell off-the-shelf programs and
compatible hardware to smaller practices where competition is based primarily on
price, certain national and regional companies which offer information systems
to health care providers, and data-processing organizations which provide
computerized billing and record management services to medical offices. In
addition, certain claims processing organizations, hospitals, third party
administrators, insurers and other health care organizations now provide
computer and/or other electronic data transmission systems, which sometimes
include practice management software, to physicians for a direct communications
link between the physician and the organization. Likewise, firms with financial
and other resources greater than those of the Company may seek to establish
competitive communication links with physician customers. See "Risk Factors --
Highly Competitive Market."
The Company believes that the principal competitive factors in the practice
management software market are product sophistication, ongoing system service
and support, flexibility, price, ease of use and compatibility of the system,
the potential for product enhancements, customer satisfaction and vendor
reputation and financial stability. The Company believes its principal
competitive advantages are the features and capability of the PCN Health Network
Information System, including its ability to interface with and, in the future,
be integrated with HealthPoint ACS, the high level of customer support and the
Company's reputation and relationship with both its resellers and physician
practice customers. A number of other companies have developed clinical
information products, some of which are commercially available. The Company
believes that HealthPoint ACS' principal competitive advantage will be its
advanced features and functionality. As the market for the Company's product
develops, additional competitors may enter the market for both practice
management software products and clinical information technology products and
competition may intensify. Certain of the Company's and HealthPoint's
competitors have greater financial, development, technical, marketing and sales
resources than the Company and HealthPoint and no assurance can be given that
the Company will be able to compete successfully with its competitors in the
future.
PROPRIETARY RIGHTS AND LICENSES
The Company depends upon a combination of trade secrets, copyright, and
trademark laws, license agreements, non-disclosure and other contractual
provisions and technical measures to protect its proprietary rights in its
products. The Company distributes its products under license agreements which
grant a non-exclusive, non-transferable license to the practice management
software product and contain terms and conditions prohibiting the unauthorized
reproduction or transfer of the practice management software. In addition, the
Company attempts to protect its trade secrets and other proprietary information
through agreements with employees and consultants. The Company also seeks to
protect the source-code of its products as trade secrets and as unpublished
copyright work. Despite these precautions, it may be possible for unauthorized
third parties to copy aspects of the Company's products or to obtain information
that the Company regards as proprietary. The Company believes that due to the
rapid pace of innovation within the software industry, factors such as the
technological and creative skills of its personnel and ongoing reliable product
maintenance and support are more important in establishing and maintaining a
leadership position within the industry than are the various legal protections
of its technology. See "Risk Factors -- Dependence on Proprietary Technology."
Because the Company believes that having the source-code for its products, and
thereby the ability to develop migration software to electronically transfer
data to the PCN Health Network Information System, gives the Company a
competitive advantage, a third party's unauthorized access to the source-code
could have an adverse effect on the Company. Notwithstanding such fact, prior to
its acquisition by the Company, Versyss had granted to certain of its
independent resellers copies of the source-code for older versions of the MENDS
products. Accordingly, such resellers have the ability to alter the
functionality of older versions of MENDS without the Company's consent. The
Company has sought to centralize the source-code for these versions of MENDS and
neither the Company nor Versyss permits resellers to grant access to the
source-code to customers.
EMPLOYEES
At March 31, 1996, the Company had approximately 640 full-time employees.
The Company is not a party to any collective bargaining agreement and believes
its relationship with its employees to be good.
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PROPERTIES
The Company's current headquarters and executive offices occupy
approximately 48,000 square feet of office space located at 1200 American Road,
Morris Plains, New Jersey, under a sublease expiring December 2004.
The Company's subsidiary, Versyss, occupies approximately 37,544 square feet
of office space in Needham Heights, Massachusetts and approximately 41,730
square feet of office space in Torrance, California under leases expiring May
2000 and January 2000, respectively.
The Company's subsidiary, PMS, occupies approximately 35,000 square feet of
office space in Needham, Massachusetts under a lease expiring March 2001.
In addition, the Company, primarily through its subsidiaries, leases a
number of other operating offices throughout the country with leases expiring at
various dates. The Company believes that such facilities are adequate for its
immediate needs and does not anticipate that it will have any problem obtaining
additional space if needed in the future.
LITIGATION
Set forth below is a description of the material litigation pending against
the Company. In addition to the matters discussed below, the Company is a party
to litigation and claims which are normal in the course of its operations. While
the results of litigation and claims cannot be predicted with certainty, the
Company believes that the final outcome of such matters will not have a material
adverse effect on its financial position or results of operations.
AON RE INC. V. PHYSICIAN COMPUTER NETWORK, INC. This action was filed in the
Superior Court of New Jersey, Middlesex County, on November 21, 1994, by the
lessor of the Company's former headquarters in Laurence Harbor, New Jersey. The
plaintiff alleges that the Company has defaulted on its obligations under its
lease of the premises in question and seeks $1,600,000 of rent through the end
of the term of the lease on December 29, 1996 and other unspecified damages. The
Company has answered the complaint and asserted counterclaims against the
plaintiff. The Company has vigorously contested this matter and the Company
believes it has substantial defenses.
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MANAGEMENT
The following table sets forth certain information regarding the Company's
directors and executive officers as of March 31, 1996:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------- --- ---------------------------------------------------------
<S> <C> <C>
Jeffry M. Picower 53 Chairman of the Board and Director
Henry Green 53 President, Chief Executive Officer and Director
John F. Mortell 53 Executive Vice President and Chief Operating Officer
James R. Bailey 42 Senior Vice President
Steven E. Kelsky 45 Senior Vice President
William S. Edwards 50 Vice President
Kenneth W. Ernsting 42 Vice President
Thomas F. Wraback 35 Vice President-Finance
Jerry Brager 47 Director
Frederick Frank 63 Director
Frederic Greenberg 55 Director
Richard B. Kelsky 40 Director
Daniel Kohl 39 Director
</TABLE>
JEFFRY M. PICOWER has been a Director of the Company since January 1994, and
was elected Chairman of the Board in June 1994. Mr. Picower is Chairman of the
Board of Monroe Systems For Business, Inc. ("Monroe") which is a worldwide
office equipment distribution and service organization. Mr. Picower is also the
Chairman of the Board and Chief Executive Officer of Advanced Medical, Inc., a
publicly-held company ("Advanced Medical"), which, through its subsidiary IMED
Corporation, manufactures intravenous infusion pumps. He is an attorney and
certified public accountant.
HENRY GREEN has been a Director of the Company since July 1993, its
President since May 1993, and in June 1994 was appointed Chief Executive
Officer. Mr. Green was President and Chief Operating Officer of Advanced Medical
from September 1990 to March 1993. He continues to be a Director of Advanced
Medical. From 1988 to September 1990, Mr. Green was Vice President of Johnson &
Johnson International, a manufacturer and provider of medical and home products.
From 1981 to 1988, Mr. Green was President of Vistakon, Inc., a subsidiary of
Johnson & Johnson.
JOHN F. MORTELL has been the Company's Chief Financial Officer since May
1992 and in March 1995 was appointed Executive Vice President and Chief
Operating Officer. From May 1991 to April 1992, Mr. Mortell was a Senior Vice
President of Northpoint Software Ventures, Inc., a software and consulting
company. Prior thereto, Mr. Mortell was Senior Vice President and Chief
Financial Officer at IBAX Healthcare Systems ("IBAX"), a hospital information
systems company, from October 1989 to April 1991. Prior to joining IBAX, Mr.
Mortell was employed by IBM for twenty-five years in various senior executive
positions in both the United States and Asia.
JAMES R. BAILEY has been a Vice President of the Company since April 1994
and in March 1995 was appointed a Senior Vice President of the Company. Mr.
Bailey is also President of Calyx, a position he has held since November 1991.
For four years prior thereto, Mr. Bailey was in senior management at Versyss.
STEVEN E. KELSKY has been a Vice President of the Company since September
1994 and in March 1995 was appointed a Senior Vice President of the Company. For
ten years prior thereto, Mr. Kelsky was President of Comptech Data Systems,
Inc., a systems and management consulting firm, the last year of which
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was spent by Mr. Kelsky as a consultant to the Company in product development,
technology planning, and acquisition analysis. Prior to that, Mr. Kelsky held
technical, marketing, and executive positions at IBM, General Foods Corporation,
Mobil Oil Corporation and Paine Webber Incorporated. Mr. Kelsky is the brother
of Richard B. Kelsky, a Director of the Company.
WILLIAM S. EDWARDS has been a Vice President of the Company since August
1995. Prior to that, Mr. Edwards was Vice President, Customer Service of
Versyss, a position he held since September 1992. Prior to that, Mr. Edwards
held management positions at LTX Corporation, Apollo Computer, Inc. and Nixdorf
Computer Corporation.
KENNETH W. ERNSTING has been a Vice President of the Company since August
1995. Prior to that, Mr. Ernsting was also Senior Vice President and General
Manager of the Healthcare Systems Division at Versyss, a position he held since
1993. Prior to his appointment as Senior Vice President, Mr. Ernsting held
various marketing positions at Versyss since March 1983.
THOMAS F. WRABACK has been Vice President-Finance since March 1995. Prior to
joining the Company as its Corporate Controller in August 1993, Mr. Wraback had
served in various financial and executive management positions in the financial
services and distribution industries. From July 1991 to August 1993 he was a
financial executive at J.P. Morgan & Co., Inc. From September 1985 to July 1991,
Mr. Wraback was Controller of the Baker & Taylor division of W.R. Grace & Co., a
distributor of books, video and software. Prior thereto, he held several
positions at Arthur Andersen & Co. Mr. Wraback is a certified public accountant.
JERRY BRAGER co-founded the Company in 1983 and was its Chairman of the
Board from inception until June 1994. In 1982, Mr. Brager also co-founded
Strategic Medical Communications, Inc., a health care advertising agency which
was a wholly-owned subsidiary of the Company. Mr. Brager has also held sales and
marketing management positions with Becton Dickinson and Company and with Baxter
Travenol Laboratories, Inc.
FREDERICK FRANK has been a Director of the Company since June 1989. Mr.
Frank has been an investment banker with Lehman Brothers and successor firms
since 1969, and is currently Vice Chairman and a Director of Lehman Brothers
Inc. He is a Chartered Financial Analyst, a member of the New York Society of
Security Analysts and a past President of the Chemical Processing Industry
Analysts. In addition to serving as a Director of Applied Bioscience
International Inc., Diagnostic Products Corporation and R.P. Scherer
Corporation, publicly-held corporations, Mr. Frank is a Chairman of the National
Genetics Foundation, a Director of the Salk Institute and a member of the Salk
Institute National Council.
FREDERIC GREENBERG has been a Director of the Company since July 1993. He
served as a pharmaceutical analyst with Goldman, Sachs & Co., an investment
banking firm, from 1974 to 1989, where he was instrumental in organizing health
care industry symposiums and conferences for leading pharmaceutical companies
and the investment community. He has participated in numerous mergers and
acquisitions and valuation analyses of some of the leading health care
organizations. In 1989, Mr. Greenberg founded EGS Partners, an asset management
and merchant banking firm located in New York City. Mr. Greenberg serves as a
Director of Advanced Medical, as well as several privately-held companies and
non-profit institutions, and as a consultant to numerous pharmaceutical
manufacturers.
RICHARD B. KELSKY has been a Director of the Company since December 1991.
Mr. Kelsky has been Vice President and General Counsel for Monroe since 1984 and
a Director since 1990, and in January 1996 was appointed Vice-Chairman of
Monroe. Mr. Kelsky is a Director of Advanced Medical, as well as of several
privately held companies. Mr. Kelsky is the brother of Steven E. Kelsky, a
Senior Vice President of the Company.
DANIEL KOHL has been a Director of the Company since June 1995. Mr. Kohl was
appointed Senior Vice President and General Manager of the Health Care
Information Services Division of Equifax in November of 1993. Prior to his
appointment at Equifax, Mr. Kohl was Corporate Vice President, Operations for
Healthdyne, Inc. From January of 1991 until December of 1992, Mr. Kohl was
President of HMSS, Inc., a
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<PAGE>
home infusion therapy company. Before that, Mr. Kohl worked at Abbey Healthcare,
Inc., as Chief Operating Officer from May of 1988 until December of 1990.
Pursuant to the terms of the Equifax Note, Equifax has the right to cause the
Company to nominate one designee for election to the Board of Directors. In
accordance with the Equifax Note, Equifax designated Mr. Kohl as a nominee for
election as a Director of the Company. The Equifax Note will be converted into
Common Stock in connection with the Offerings.
SUMMARY COMPENSATION
The following table summarizes for the last three fiscal years certain
information regarding the Company's compensation of its chief executive officer
and its four most highly compensated executive officers (other than the chief
executive officer) whose total annual salary and bonus for fiscal year 1995
exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------
------------------------------------------------------ RESTRICTED PAYOUTS
NAME AND OTHER ANNUAL STOCK OPTIONS/ ------------
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS(S) SARS LTIP PAYOUTS
- ---------------------- --------- ----------- ----------- ----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry Green (2) 1995 $ 213,860 $ 110,000(3) $ 3,500 -- 90,000(4) --
President and CEO 1994 $ 213,860 $ 75,000(5) $ 38,085(6) -- 125,000(7) --
1993 $ 176,538(8) $ 50,000(9) -- -- 250,000(10) --
John F. Mortell 1995 $ 203,860 $ 85,000(3) $ 8,400 -- 75,000(11) --
Executive Vice 1994 $ 185,400 $ 55,000(5) $ 8,400 -- 85,000(12) --
President and Chief 1993 $ 174,167 $ 40,000(9) $ 8,400 -- 100,000(13) --
Operating Officer
Steven E. Kelsky (14) 1995 $ 183,490 $ 50,000(3) $ 6,000 -- 50,000(15) --
Senior Vice President 1994 $ 56,667 $ 30,000 $ 2,000 -- 85,000(16) --
James R. Bailey (17) 1995 $ 186,860 $ 40,000(3) $ 6,000 -- 40,000(18) --
Senior Vice President 1994 $ 166,088(19) $ 30,000(5) $ 11,294 -- 45,000(20) --
Donald W. Hackett (21) 1995 $ 157,319 -- $ 9,000 -- -- --
Vice President 1994 $ 140,291 $ 25,000(4) $ 8,296 -- 25,000(22) --
1993 $ 130,932 -- $ 6,000 -- 60,000(23) --
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION
- ---------------------- ----------------
<S> <C>
Henry Green (2) --
President and CEO --
--
John F. Mortell --
Executive Vice --
President and Chief --
Operating Officer
Steven E. Kelsky (14) --
Senior Vice President --
James R. Bailey (17) --
Senior Vice President --
Donald W. Hackett (21) --
Vice President --
--
</TABLE>
- ------------------------------
(1) Includes perquisites, automobile allowances and other personal benefits,
the aggregate amount of which exceeds the lesser of $50,000 or 10% of the
total annual salary and bonus for the named executive officer.
(2) The Company's Board of Directors elected Henry Green as President on May
28, 1993. Mr. Green was appointed Chief Executive Officer in June 1994.
(3) Represents bonus compensation attributable to 1995 which was paid in 1996.
(4) In February 1996, the Company granted options under its Amended and
Restated 1993 Incentive and Non-Incentive Stock Option Plan (the "Employee
Plan") to purchase 90,000 shares of Common Stock which vest over the next
four year period commencing February 1997. Such options were granted in
1996 with respect to 1995.
(5) Represents bonus compensation attributable to 1994 which was paid in 1995.
(6) Represents relocation expenses of $35,321 and $2,764 for a vehicle leased
by the Company on behalf of Mr. Green.
(7) In January 1994, the Company granted options under the Employee Plan to
purchase 75,000 shares of Common Stock, of which 30,000 were exercisable as
of December 31, 1995 and the remaining 45,000 of which vest over the next
three year period. In March 1995, the Company granted additional options to
purchase 50,000 shares of Common Stock, of which 10,000 were exercisable as
of December 31, 1995 and the remaining 40,000 of which vest over the next
four year period. Such options were granted in 1995 with respect to 1994.
(8) Represents his salary as an employee from March through May of 1993, which
was $44,674, plus his salary as President from May 28 through December 31,
1993 of $131,864.
(9) Represents bonus compensation attributable to 1993 which was paid in 1994.
(10) Represents options issued under the Employee Plan, 170,000 of which were
exercisable as of December 31, 1995 and the remaining 80,000 of which vest
over the next two year period.
(11) In February 1996, the Company granted options to purchase 75,000 shares of
Common Stock under the Employee Plan, of which 15,000 were exercisable as
of December 31, 1995 and the remaining 60,000 of which vest over the next
four year period. Such options were granted in 1996 with respect to 1995.
(12) In January 1994, the Company granted options to purchase 50,000 shares of
Common Stock under the Employee Plan, 20,000 of which were exercisable as
of December 31, 1995 and the remaining 30,000 of which vest over the next
three year period. In March 1995, the Company granted additional options to
purchase 35,000 shares of Common Stock, of which 7,000 were exercisable as
of December 31, 1995 and the remaining 28,000 of which vest over the next
four year period. Such options were granted in 1995 with respect to 1994.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
45
<PAGE>
(13) Represents options issued under the Employee Plan, 60,000 of which were
exercisable as of December 31, 1995 and the remaining 40,000 of which vest
over the next two year period.
(14) Mr. Kelsky became a Vice President of the Company in September 1994 and a
Senior Vice President of the Company in March 1995.
(15) In February 1996, the Company granted options to purchase 50,000 shares of
Common Stock under the Employee Plan, of which 10,000 were exercisable as
of December 31, 1995 and the remaining 40,000 of which vest over the next
four year period. Such options were granted in 1996 with respect to 1995.
(16) In September 1994, the Company granted options to purchase 75,000 shares of
Common Stock under the Employee Plan, of which 30,000 were exercisable as
of December 31, 1995 and the remaining 45,000 of which vest over the next
four year period. In March 1995, the Company granted additional options to
purchase 10,000 shares of Common Stock, of which 2,000 were exercisable as
of December 31, 1995 and the remaining 8,000 of which vest over the next
four year period. Such options were granted in 1995 with respect to 1994.
(17) Mr. Bailey became a Vice President of the Company in April 1994 and Senior
Vice President in March 1995.
(18) In February 1996, the Company granted options to purchase 40,000 shares of
Common Stock under the Employee Plan, of which 8,000 were exercisable as of
December 31, 1995 and the remaining 32,000 of which vest over the next four
year period. Such options were granted in 1996 with respect to 1995.
(19) Represents his salary as an employee from January through March of 1994,
which was $59,918, plus his salary as a Vice President from April through
December 31, 1994 of $106,170.
(20) In January 1994, the Company granted options to purchase 20,000 shares of
Common Stock under the Employee Plan, of which 8,000 were exercisable as of
December 31, 1995 and the remaining 12,000 of which vest over the next
three year period. In March 1995, the Company granted additional options to
purchase 25,000 shares of Common Stock, of which 5,000 were exercisable as
of December 31, 1995 and the remaining 20,000 of which vest over the next
four year period. Such options were granted in 1995 with respect to 1994.
(21) Mr. Hackett resigned as an employee of the Company in January 1996.
(22) In March 1995, the Company granted options to purchase 25,000 shares of
Common Stock under the Employee Plan, of which 5,000 were exercisable as of
December 31, 1995 and the remaining 20,000 of which were canceled upon Mr.
Hackett's resignation as an employee of the Company. Such options were
granted in 1995 with respect to 1994.
(23) Represents options issued under the Employee Plan, 36,000 of which were
exercisable as of December 31, 1995 and the remaining 24,000 of which were
canceled upon Mr. Hackett's resignation as an employee of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information in respect of grants made
by the Company of stock options to its Named Executive Officers pursuant to the
Company's stock option plans during fiscal year 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE (PER EXPIRATION --------------------
NAME GRANTED (1) FISCAL YEAR SHARE) (2) DATE 5% 10%
- ------------------------------------------ ------------ --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Henry Green............................... 50,000(3) 6.3% $ 4.00 1/1/05 126,000 318,500
John F. Mortell........................... 35,000(4) 4.4% $ 4.00 1/1/05 88,200 222,950
Steven E. Kelsky.......................... 10,000(5) 1.3% $ 4.00 1/1/05 25,200 63,700
James R. Bailey........................... 25,000(6) 3.1% $ 4.00 1/1/05 63,000 159,250
Donald W. Hackett......................... 25,000(6) 3.1% $ 4.00 1/1/05 63,000 159,250
</TABLE>
- ------------------------------
(1) Includes options granted in 1995 with respect to 1994, but does not include
options granted in 1996 with respect to 1995. In February 1996, the Company
granted Messrs. Green, Mortell, Kelsky and Bailey additional options to
purchase 90,000, 75,000, 50,000 and 40,000 shares of Common Stock,
respectively, at an exercise price of $12.625 per share. Twenty-five
percent of Mr. Green's options vest in each of the next 4 years commencing
February 1997. Twenty percent of all other such options vested immediately
and the remaining balance will vest over the next 4 year period.
(2) The potential realizable values of all options above are calculated with
the assumption that all options are exercised on their respective vesting
dates.
(3) Options are subject to a maximum exercise period of 10 years. 10,000
options vest on the date of grant and 40,000 options vest in each of the 4
years succeeding the initial grant on the anniversary date.
(4) Options are subject to a maximum exercise period of 10 years. 7,000 options
vest on the date of the grant and 28,000 options vest in each of the 4
years succeeding the initial grant on the anniversary date.
(5) Options are subject to a maximum exercise period of 10 years. 2,000 options
vest on the date of grant and 8,000 options vest in each of the 4 years
succeeding the initial grant on the anniversary date.
(6) Options are subject to a maximum exercise period of 10 years. 5,000 options
vest on the date of grant and 20,000 options vest in each of the 4 years
succeeding the initial grant on the anniversary date.
46
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information with respect to the
exercise of stock options by the Company's Named Executive Officers during
fiscal year 1995 and information concerning the number and value of unexercised
stock options at December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
SHARES 1995 DECEMBER 31, 1995
ACQUIRED ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry Green....................... -- -- 210,000 165,000 1,185,000 825,000
John F. Mortell................... 20,000 76,500 67,000 98,000 363,000 494,000
Steven E. Kelsky.................. -- -- 36,000 59,000 180,000 295,000
James R. Bailey................... -- -- 43,000 52,000 215,000 260,000
Donald W. Hackett................. 61,875 260,099 -- 44,000 -- 220,000
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company, are reimbursed for
their expenses and receive a fee of $1,000 for each meeting of the Board of
Directors attended. Directors who are also executive officers of the Company are
not compensated for their services as directors.
In September 1993, the Company entered into an agreement with Richard B.
Kelsky, a member of the Company's Board of Directors, for Mr. Kelsky to provide
consulting services to the Company for a monthly fee of $2,500. See "Certain
Transactions -- Other."
EMPLOYMENT CONTRACTS
Henry Green entered into an amended and restated employment agreement in
March 1996 for a period of three years pursuant to which Mr. Green's employment
as President and Chief Executive Officer of the Company was extended until March
19, 1999. The agreement provides for, among other things, a base annual salary
of $230,000 and a severance payment on termination, other than for death,
disability or cause, equal to the base salary, less applicable deductions, of up
to one year. The Agreement permits either Mr. Green or the Company to terminate
Mr. Green's employment at the end of any calendar year, in which event Mr. Green
will then serve as a consultant to the Company.
In March 1996, John F. Mortell, Executive Vice President and Chief Operating
Officer of the Company, entered into an employment agreement with the Company
for a term of three years, which provides for, among other things, a base annual
salary of $225,000, and a severance payment of one year's base salary if Mr.
Mortell's employment is terminated without cause.
In April 1994, James R. Bailey entered into an employment agreement with
Calyx and the Company pursuant to which he became President of Calyx and a Vice
President of PCN. The agreement is for an indefinite period of time and is
terminable at any time by any party thereto. The agreement provides, among other
things, for the Company to pay Mr. Bailey a base annual salary of $150,000, a
severance payment of six months base salary if Mr. Bailey's employment is
terminated without cause, and options for 50,000 shares of Common Stock at an
initial exercise price of $4.125 per share, 10,000 of which vested immediately
and 40,000 of which vest over a four year period.
In November 1994, Steven E. Kelsky entered into an employment agreement with
the Company, for a term of three years, which provides for, among other things,
a base annual salary of $170,000, a severance payment of four months base salary
if Mr. Kelsky's employment is terminated without cause, a guaranteed minimum
bonus of $30,000 which was paid in the first quarter of 1995, and options for
75,000 shares of Common Stock at an initial exercise price of $5.125 per share,
15,000 shares of which vested immediately and 60,000 of which vest over a four
year period.
In August 1995, William S. Edwards entered into an employment agreement with
the Company pursuant to which he became a Vice President of PCN. The agreement
is for an indefinite period of time and
47
<PAGE>
is terminable at any time by any party thereto. The agreement provides, among
other things, for the Company to pay Mr. Edwards a base annual salary of
$157,500, a severance payment of four months base salary if Mr. Edward's
employment is terminated without cause, and options for 50,000 shares of Common
Stock at an initial exercise price of $6.50 per share, 10,000 of which vested
immediately and 40,000 of which vest over a four year period.
In August 1995, Kenneth W. Ernsting entered into an employment agreement
with the Company pursuant to which he became a Vice President of PCN. The
agreement is for an indefinite period of time and is terminable at any time by
any party thereto. The agreement provides, among other things, for the Company
to pay Mr. Ernsting a base annual salary of $150,000, a severance payment of
four months base salary if Mr. Ernsting's employment is terminated without
cause, and options for 35,000 shares of Common Stock at an initial exercise
price of $6.50 per share, 7,000 of which vested immediately and 28,000 of which
vest over a four year period.
STOCK OPTION PLANS
1989 PLAN
The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the
granting of incentive stock options to employees of the Company, and for the
granting of non-incentive stock options to employees, directors and such other
persons as the committee administering the Plan (the "1989 Plan Committee")
determines will assist the Company's business endeavors. The Company has
reserved 167,000 shares of Common Stock for issuance upon exercise of options
granted under the 1989 Plan. The exercise price with respect to incentive stock
options granted under the 1989 Plan cannot be less than 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, owns (or is considered as owning within the meaning of
Section 424(d) of the Internal Revenue Code of 1986, as amended (the "Code"),
stock possessing more than 10% of the total combined voting powers of all
classes of stock of the Company or any subsidiary ("10% Owner")). The exercise
price with respect to non-incentive stock options granted under the 1989 Plan
cannot be less than 85% of the fair market value of the Common Stock on the date
of grant.
In addition to selecting the optionees, the 1989 Plan Committee determines
the number of shares of Common Stock subject to each option, the term of each
non-incentive stock option, the time or times when the non-incentive stock
option becomes exercisable, though, pursuant to a board resolution, no option
granted after April 7, 1992 may be exercisable within six months of the date of
grant, and otherwise administers the 1989 Plan. Incentive stock options are
granted for a term of five years. Options 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 holder's separation from service with the Company. No options may be granted
under the 1989 Plan after March 31, 1999.
The 1989 Plan contains a customary antidilution provision which provides
that in the event of any change in the Company's outstanding capital stock by
reasons of stock dividends, recapitalization, mergers, consolidations,
split-ups, combinations or exchanges of shares and the like, the aggregate
number of shares of Common Stock subject to outstanding options and the option
price are to be appropriately adjusted by the Board.
1990 PLAN
Under the 1990 Stock Option Plan (the "1990 Plan"), incentive stock options
qualifying under Section 422A of the Code may be granted to employees and
non-incentive stock options may be granted to employees, officers, directors and
such other persons as the Board or a committee appointed by the Board (the "1990
Plan Committee") determines will assist the Company's business endeavors. The
Company has reserved 167,000 shares of Common Stock for issuance upon exercise
of options granted under the 1990 Plan. The 1990 Plan 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
48
<PAGE>
purchasable under the option; and (iii) the exercise price, which cannot be less
than 100% of the fair market value of the Common Stock on the date of grant with
respect to incentive stock options and 50% of the fair market value of the
Common Stock on the date of grant with respect to non-incentive options. With
respect to the granting of a non-incentive stock option, the Board or the 1990
Plan Committee further determines the time or times when the option becomes
exercisable and its duration. Incentive stock options are granted for a term of
five years and are exercisable one year from the date of grant to the extent of
50% and the balance exercisable at two years from the date of grant. The fair
market value of shares first exercisable by an optionee under any incentive
stock option may not exceed $100,000 in any calendar year.
All options are exercisable during the optionee's lifetime only by the
optionee and only while the optionee is in the Company's employ, except where
termination of employment is due to death, disability or retirement at or after
age 65. In the event of death or disability or retirement at or after age 65,
the option is exercisable by the optionee or the optionee's executor or
administrator within six months from the date of death or termination of
employment by reason of such disability or retirement to the extent exercisable
by the optionee as at the date of death or termination of employment by reason
of such disability or retirement. No option is transferable other than by will
or the laws of descent and distribution.
Options are exercisable by payment in cash to the Company, or a check to its
order, of the full purchase price for the shares of Common Stock to be
purchased. Options are not exercisable for fractional shares.
The 1990 Plan contains a customary antidilution provision which provides
that in the event of any change in the Company's outstanding capital stock by
reason of stock dividends, recapitalization, mergers, consolidations, split-up,
combinations or exchanges of shares and the like, the aggregate number of shares
of Common Stock subject to outstanding options and the option price are to be
appropriately adjusted by the Board.
The Board has the authority to terminate the 1990 Plan, to make changes in
and additions to the 1990 Plan as it deems desirable and to adopt rules and
regulations to carry out the 1990 Plan, but the Board may not, without
shareholder approval, increase the aggregate number of shares purchasable under
the 1990 Plan or the aggregate number of shares which may be granted to any
employee or adversely affect the rights of a holder of an option previously
granted under the 1990 Plan. No Options may be granted under the 1990 Plan after
March 26, 2000.
EMPLOYEE PLAN
The Employee Plan was adopted by the Board in its original form on May 28,
1993 and became effective on July 13, 1993. On August 9, 1994, the Board
approved proposed changes to the Employee Plan to increase the maximum aggregate
number of shares of Common Stock that may be issued under the plan from 900,000
to 1,800,000 shares, and the Employee Plan in its amended and restated form
became effective on September 14, 1994. On May 22, 1995, the Board approved
proposed changes to the Employee Plan to increase the maximum aggregate number
of shares of Common Stock that may be issued under the plan from 1,800,000
shares to 2,300,000 shares, and the Employee Plan in its amended and restated
form became effective on June 28, 1995.
The Employee Plan provides for the granting to employees of the Company of
incentive stock options within the meaning of Section 422 of the Code and for
the granting of non-incentive stock options to employees, officers and directors
and such other persons rendering services to the Company or any of it
subsidiaries. The Employee Plan is administered by a committee (the "Employee
Plan Committee") consisting of not less than a number of "disinterested persons"
(as such term is defined in Rule 16b-3 under the Exchange Act, who are also
"outside directors" (within the meaning of Section 162(m) of the Code). Subject
to the express provisions of the Employee Plan, the Employee Plan Committee
determines the terms and conditions of the options granted, including whether
the option is to be a non-incentive stock option or an incentive stock option,
the number of shares purchasable under the option, the exercise price, and the
exercisability thereof.
The exercise price of options granted under the Employee Plan cannot be less
than 100% of the fair market value of the shares of Common Stock on the date of
grant (110% of fair market value in the case of
49
<PAGE>
an incentive stock option 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 424(d) of the Code) stock possessing more than 10% of the total combined
voting powers of all classes of stock of the Company or any parent or subsidiary
(a 10% owner). The terms of options granted under the Employee Plan may not
exceed 10 years (or five years for any incentive stock option granted to a 10%
Owner).
The Employee Plan contains customary anti-dilution provisions which provide
that in the event of any change in the Company's outstanding capital stock, such
as a stock dividend, stock split or recapitalization, an adjustment shall be
made, as determined by the Employee Plan Committee in its sole discretion, in
the aggregate number of shares of Common Stock available for issuance under the
Employee Plan, the number of shares of Common Stock available for any individual
awards, and the number and exercise price of shares of Common Stock subject to
outstanding options under the Employee Plan. The Employee Plan also provides
that in the event of the dissolution or liquidation of the Company or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of all or substantially all the property of the Company or upon
any other similar extraordinary transaction, the Employee Plan Committee may
determine that all options then outstanding under the Employee Plan will become
fully vested and exercisable.
Shares subject to options under the Employee Plan may be purchased for cash
or check or, with the consent of the Employee Plan Committee, in exchange for
shares of Common Stock or by a promissory note. Options are not exercisable for
fractional shares. Options are not assignable or transferable except by will or
the laws of descent and distribution. The Employee Plan may be amended,
suspended or terminated by the Employee Plan Committee, except that: (i) any
revision or amendment that would cause the Employee plan to fail to comply with
Rule 16b-3 of the Exchange Act, Sections 422 or 162(m) of the Code or any other
requirement shall not be effective until shareholder approval is obtained; and
(ii) no such action may impair rights under a previously granted option. No
options may be granted under the Employee Plan after July 13, 2003.
DIRECTORS PLAN
The Amended and Restated 1993 Non-Employee Directors Non-Incentive Stock
Option Plan (the "Directors Plan") was adopted by the Board in its original form
on May 28, 1993 and became effective on July 13, 1993. On August 9, 1994, the
Board approved proposed changes to the Directors Plan to: (i) increase the
maximum aggregate number of shares of Common Stock that may be issued under the
plan from 100,000 to 200,000 shares; and (ii) to provide for, upon a "Change of
Control" (as defined in the Directors Plan) vesting of all unvested options
outstanding under the Directors Plan. The Directors Plan in its amended and
restated form became effective on September 14, 1994.
The Directors Plan provides for the granting of non-incentive stock options
to directors of the Company: (i) who are neither an employee nor an officer of
the Company or any subsidiary of the Company on the date of the grant of an
option; and (ii) who have not elected to decline to participate in the Directors
Plan pursuant to an irrevocable one-time election made within 30 days after
first becoming a director. The Directors Plan is administered by a committee
(the "Directors Plan Committee") consisting of not less than two or more persons
who need not be members of the Board, officers or employees of the Company.
Members of the Directors Plan Committee are not entitled to participate in the
Directors Plan. Subject to the limits imposed by the terms of the Directors
Plan, the Directors Plan Committee has the power to administer the Directors
plan in its sole and absolute discretion.
Any person who becomes a non-employee director after July 13, 1993 shall be
granted non-incentive stock options to purchase 10,000 shares of Common Stock on
the business day following such person becoming a non-employee director.
Additional non-incentive stock options to purchase 10,000 shares of Common Stock
will be granted automatically to each non-employee director on the third
anniversary date of his initial grant of non-incentive stock options and every
three years thereafter, provided that the non-employee director is a member of
the Board on the date of grant. Each non-incentive stock option has a term of
five years from the date of grant, has an exercise price equal to the fair
market value of a share of Common Stock on the date of grant and becomes
exercisable at the rate of 3,334 shares of Common Stock for a non-
50
<PAGE>
employee director's first twelve month period of continuous service on the Board
and 3,333 shares of Common Stock for each of such non-employee director's next
two twelve month periods of continuous service on the Board, commencing on the
date of such non-employee director's grant of options and including service
prior to July 13, 1993.
The Directors Plan contains customary anti-dilution provisions which provide
that in the event of any change in the Company's outstanding capital stock, such
as a stock dividend, stock split or recapitalization, an adjustment shall be
made, as determined by the Directors Plan Committee in its sole discretion, in
the aggregate number of shares of Common Stock available for issuance under the
Directors Plan, the number of shares of Common Stock available for any
individual awards, and the number and exercise price of shares of Common Stock
subject to outstanding options under the Directors Plan, PROVIDED, HOWEVER, that
no such adjustment shall be made if the adjustment would cause the Directors
Plan to fail to comply with the "formula award" exception, as set forth in Rule
16b-3(c)(2)(ii) of the Exchange Act. The Directors Plan also provides that in
the event of a "Change of Control" (as defined in the Directors Plan) all
options not vested on or prior to the effective time of any such Change of
Control shall immediately vest as of such effective time.
Shares subject to options under the Directors Plan may be purchased for cash
or check or, with the consent of the Directors Plan Committee, in exchange for
shares of Common Stock or by a promissory note. Options are not exercisable for
fractional shares. Options are not assignable or transferable except by will or
the laws of descent and distribution. The Directors Plan may be amended,
suspended or terminated by the Directors Plan Committee, except that: (i) any
revision or amendment that would cause the Directors Plan to fail to comply with
Rule 16b-3 of the Exchange Act or any other requirement shall not be effective
until shareholder approval is obtained; and (ii) no such action may impair
rights under a previously granted option. No options may be granted under the
Directors Plan after July 13, 2003.
51
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH THE INVESTOR
On February 22, 1993, the Investor, Jeffry M. Picower, and the Company
consummated the transaction which was contemplated in the Second Amended and
Restated Securities Purchase Agreement (the "Securities Purchase Agreement"),
pursuant to which, among other things, the Investor made an initial investment
of $10,000,000 and, in exchange, the Company issued 10,000,000 shares of Common
Stock to the Investor (the "Transaction"). The Transaction was negotiated at
arm's length by the Company and the Investor and approved by the Company's Board
of Directors and shareholders. The Transaction resulted in the Investor's
acquiring control of the Company by virtue of his ownership of a majority of the
outstanding shares of Common Stock. In addition, as part of the Transaction, the
Investor and the Company agreed that the Company would have the right, under
certain circumstances, to require the Investor to make or the Investor, at his
option, could make an additional investment of up to an aggregate $5,000,000
during 1993 and 1994 (the "Additional Investment") to be used for operations and
acquisitions by the Company of any vendor, dealer, software supplier or other
entity which would enable the Company to enroll, directly or indirectly,
additional physicians. The Company agreed that, in exchange for the Additional
Investment, the Company would issue to the Investor a new series of preferred
stock (the "Series D Preferred Stock") having a liquidation preference of an
amount equal to the Additional Investment and convertible, in whole or in part,
into shares of Common Stock at a conversion price equal to the lesser of: (i)
50% of the average daily closing price per share of Common Stock for the 30
consecutive trading days immediately preceding the conversion date; and (ii)
$2.50 per share of Common Stock, as adjusted pursuant to the terms of the
Company's Certificate of Incorporation setting forth the rights, powers and
preferences of the Series D Preferred Stock.
On April 14, 1993, the Investor agreed that, upon the request of the Company
and the approval of the Board, at any time on or before April 14, 1994, under
circumstances not contemplated under the terms of the Additional Investment: (i)
the Investor would make the Additional Investment in the full amount of
$5,000,000; (ii) the Investor would immediately convert all such shares of
Series D Preferred Stock into shares of Common Stock; and (iii) if necessary,
the Company would issue to the Investor such number of additional shares of
Common Stock as would, together with the shares of Common Stock issuable by the
Company to the Investor upon conversion of the Series D Preferred Stock, equal
an aggregate 5,000,000 shares of Common Stock, which includes a number of
additional shares of Common Stock to be issued in consideration of his making
the Additional Investment and such conversion, in each case at a time and under
circumstances under which he was not required to do so. Such transaction was
approved by a majority of the Company's disinterested directors. The Company
believes that the terms of such transaction were at least as fair to the Company
as a transaction which could have been negotiated with an unaffiliated third
party.
On May 10, 1993, pursuant to the terms of the Transaction, the Investor
voluntarily made the Additional Investment of $5,000,000 and received 5,000
shares of Series D Preferred Stock, which shares were immediately converted, in
accordance with the terms of the Series D Preferred Stock, into 5,206,074 shares
of Common Stock. In addition, the warrants to purchase an aggregate of 1,420,000
shares held by the Investor were amended and restated to provide for the
reduction in the exercise prices, which ranged from $7.39 to $3.00 per share of
Common Stock, to $1.00 per share of Common Stock, and the extension of the
expiration dates from September 17, 1996 to February 22, 1998.
On December 31, 1993, the Company borrowed $12,000,000 from the Investor and
issued to the Investor $12,000,000 principal amount promissory note (the
"Investor Note"). The Investor Note bore interest at the rate of 7% per annum,
was due on June 30, 1995 and was mandatorily prepayable out of the net proceeds
of the sale by the Company of any of its securities. The proceeds of such loan
were used by the Company to finance the cash portions of the ICC Transaction (as
described below) and the Wallaby acquisition. In addition, on December 31, 1993,
the Investor: (i) guaranteed $6,000,000 principal amount of certain promissory
notes (the "Wallaby Notes"), together with interest thereon, issued by the
Company to the shareholders of Wallaby in connection with the Company's
acquisition of Wallaby ($3,000,000 principal amount of which, together with
interest thereon, was repaid by the Company on January 3, 1994); and (ii)
pursuant to a plan of reorganization under Section 368(a)(1)(E) of the Code,
converted all of the 3,000
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shares of Series B Preferred Stock held by him and the dividends thereon into
924,648 shares of Common Stock and 2,838.67 shares of Series C Preferred Stock
of the Company, which shares of Series C Preferred Stock were immediately
surrendered to the Company and the Company issued to the Investor 5,000,000
shares of Common Stock. In connection with the foregoing transaction, on
December 31, 1993, the Investor also agreed that the Company could, under
certain circumstances, require the Investor, at any time prior to January 3,
1995, to make an additional investment in the Company of up to $5,299,000
through the purchase of shares of Common Stock at $1.00 per share, the proceeds
of which investment are to be used by the Company to repay the amounts owed by
the Company under certain promissory notes issued by the Company in connection
with its acquisition of Calyx (which was repaid in September 1993) and the
Wallaby Notes. Such transactions were approved by a majority of the Company's
disinterested directors. The Company believes that such transactions were at
least as fair to the Company as transactions which could have been negotiated
with an unaffiliated third party.
On December 6, 1994, the Company entered into an agreement with Monroe
Systems For Business, Inc., a company wholly-owned by the Investor, to sublease
44,725 square feet of office space, for a term of ten years, at The American
Road, Morris Plains, New Jersey, to serve as the Company's new corporate
headquarters and executive offices. The monthly base rent for such space,
initially $44,352, increases to $59,260 by 2003. The Company believes that the
terms of such lease are no less favorable than a lease that could have been
obtained by the Company from an unrelated third party in a transaction
negotiated on an arm's-length basis. See "Business -- Properties."
On January 3, 1995, the Company issued to the Investor a $16,050,000
principal amount promissory note due January 2, 1996 (the "1995 Investor Note")
in exchange for $3,210,000 in cash and the cancellation of the $12,000,000
principal amount Investor Note, together with all $840,000 of interest accrued
on the Investor Note through January 3, 1995 (the "1995 Debt Refinancing"). The
Company used the $3,210,000 of cash proceeds from the 1995 Debt Refinancing to
repay all $3,210,000 in principal and accrued interest due and payable on
certain of the Wallaby Notes on January 3, 1995. The 1995 Investor Note bore
interest at a rate of 12.5% per annum and was mandatorily prepayable out of the
net proceeds of the sale by the Company of any of its securities. The Company
prepaid the 1995 Investor Note in full out of the net proceeds of the Company's
sale of Common Stock in February 1995. The 1995 Debt Refinancing was approved by
a majority of the Company's disinterested directors. The Company believes that
the terms of the 1995 Debt Refinancing were at least as fair to the Company as a
transaction which could have been negotiated with an unaffiliated third party.
The Company believes that such transactions were at least as fair to the Company
as transactions which could have been negotiated with an unaffiliated third
party.
On August 2, 1995, the Company and the Investor entered into an agreement in
order to guarantee the availability of financing for the Company's acquisition
of Versyss. The terms of such financing were approved by a majority of the
Company's disinterested directors. Subsequent to August 2, 1995 and prior to the
consummation of the Company's acquisition of Versyss, management of the Company
determined that it could obtain financing for the Company's acquisition of
Versyss on terms more favorable to the Company. In order to permit the Company
to pursue such financing the Investor purchased from the Company, for
$1,500,000, a warrant to purchase 5 million shares of Common Stock for an
aggregate exercise price of $25 million and the financing agreement was
terminated. Such warrant, which is exercisable in whole, is not exercisable
until the first to occur of: (i) September 13, 1997 and (ii) the sale by the
shareholders of the Company of a majority of the capital stock of the Company or
the sale by the Company of at least 50% of its assets. The issuance of the
warrant and termination of the financing agreement was approved by a majority of
the Company's independent directors and the Company received a fairness opinion
from an investment bank.
TRANSACTION WITH ICC
Pursuant to an Agreement between the Company and ICC, dated December 30,
1993 (the "ICC Agreement"), on December 31, 1993, ICC: (i) terminated a warrant
it held entitling ICC to purchase 674,280 shares of Common Stock at a price of
$2.50 per share; (ii) converted the 15,000 shares of Series A Preferred Stock of
the Company held by ICC into 2,083,333 shares of Common Stock in accordance with
the terms of
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<PAGE>
the Series A Preferred Stock; (iii) terminated the Restructured Lease dated as
of December 1, 1992, pursuant to which the Company financed the leasing of
computer equipment; (iv) released liens on the assets of the Company securing
the Restructured Lease; (v) transferred ownership to the Company of certain
equipment which was the subject of the Restructured Lease; and (vi) released a
lien on 1,306,000 shares of Common Stock owned by Jerry Brager, a Director and
co-founder of the Company.
In consideration for the foregoing (including surrendering its right to
receive payment from the Company for $5,980,794 in capital lease obligations,
$6,954,678 of long-term debt and $4,916,466 of accrued dividends on the Series A
Preferred Stock), the Company, paid ICC $4,000,000 in cash and issued to ICC:
(i) 1,716,667 shares of Common Stock; and (ii) a warrant convertible at no
consideration into 775,000 shares of Common Stock. In addition, pursuant to the
ICC Agreement, the Company has the right to purchase from ICC up to 2,325,000
shares of the Common Stock so issued to ICC for $4.75 per share at any time on
or prior to July 1, 1997. Further, ICC agreed that, prior to the earlier to
occur of March 31, 1995 or six months following the consummation by the Company
of a public offering of the Common Stock, ICC would not sell or transfer any
shares of Common stock held by ICC. In January 1995, in consideration for ICC
agreeing not to sell or transfer any shares of Common Stock held by ICC until
120 days following the consummation of the Company's February 1995 public
offering, the Company agreed to shorten the period of time until which the
Company shall have the right to acquire up to 2,325,000 shares of Common Stock
held by ICC from July 1, 1997 to April 1, 1997. The Company may use a portion of
the net proceeds from the Offerings to acquire all or any part of such 2,325,000
shares on or prior to April 1, 1997. See "Use of Proceeds."
OTHER
In March 1993, Lehman Brothers Inc., a shareholder of the Company and of
which a Director of the Company is a Vice Chairman, received 129,032 shares of
the Company's Common Stock in full payment of an advisory fee in connection with
the Transaction. On December 30, 1993, Lehman Brothers Inc. exercised warrants
to purchase 417,500 shares of Common Stock at an exercise price of $1.80 per
share previously granted in May 1989. Lehman Brothers Inc. has provided
investment banking, financial advisory and other services to the Company for
which it has received customary fees and reimbursement of its out-of-pocket
expenses.
In September 1993, the Company entered into an agreement with Richard
Kelsky, a member of the Company's Board of Directors, for Mr. Kelsky to provide
consulting services to the Company for a monthly fee of $2,500. In February
1994, Mr. Kelsky received warrants to purchase 100,000 shares of Common Stock at
an exercise price of $2.50 per share. 40,000 of such warrants vested immediately
with the remaining 60,000 warrants vesting in increments of 20,000 on the first,
second and third anniversary dates of the issue date, respectively.
On February 22, 1993, Jerry Brager entered into a three year employment
agreement with the Company. The agreement provided for, among other things, a
base annual salary of $200,000, company paid life insurance policies with
premiums in the aggregate not to exceed $22,236 per year, the cancellation of
the "key man" life insurance policy on the life of Mr. Brager, and a severance
payment if the Company terminates Mr. Brager's employment without cause of up to
a maximum of $300,000. On June 27, 1994, Mr. Brager resigned from his position
at the Company to pursue personal interests. On that same date, Mr. Brager
entered into an agreement with the Company whereby Mr. Brager's employment
agreement was terminated and Mr. Brager agreed to perform certain independent
consulting services, as requested by the Company, during the period commencing
on June 27, 1994 and ending on December 31, 1995. The Company paid Mr. Brager a
fee of $15,000 per month plus certain expense reimbursements as compensation for
such consulting services.
In July 1993, the Company entered into an agreement with Comptech Data
Systems, Inc. ("Comptech") to provide technical consulting services. Steven
Kelsky, the brother of Richard B. Kelsky (a member of the Company's Board of
Directors) was president of Comptech. The Company paid Comptech $193,033 and
$81,152 for the years ended December 31, 1994 and 1993, respectively, for
consulting services provided by Comptech. On January 1, 1994, Steven Kelsky
received options to purchase 10,000 shares of Common Stock at exercise prices
ranging from $4.25 to $7.43 vesting over a period of four years.
The Company believes that the foregoing transactions were at least as fair
to the Company as transactions which could have been negotiated with
unaffiliated third parties.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of Common Stock of the Company, as of March 31, 1996, and as adjusted
to reflect the sale of the Common Stock offered hereby, by: (i) each person
known by the Company to own beneficially 5% or more of such shares; (ii) each
director of the Company; (iii) each of the Company's Named Executive Officers;
(iv) all directors and executive officers as a group; and (v) the Selling
Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERINGS SHARES BENEFICIALLY OWNED
----------------------------- AFTER OFFERINGS (1)
NAME AND ADDRESS PERCENT -----------------------------
OF BENEFICIAL OWNERS NUMBER OF CLASS NUMBER PERCENT
- ------------------------------------------------------- ---------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
Jeffry M. Picower (2).................................. 22,951,522(3) 49.68% 22,951,522(3) 44.29%
State of Wisconsin Investment Board (4)................ 3,235,000 7.22% 3,235,000 6.42%
IBM Credit Corporation (5)............................. 2,325,000(6) 5.10% 2,325,000(6) 4.54%
Jerry Brager........................................... 1,598,833(7) 3.57% 1,598,833(7) 3.17%
Henry Green............................................ 10,000(8) * 10,000(8) *
John F. Mortell........................................ 22,000(9) * 22,000(9) *
James R. Bailey........................................ 13,000(10) * 13,000(10) *
Steven E. Kelsky....................................... 30,000(11) * 30,000(11) *
Donald W. Hackett...................................... -- -- -- --
Frederick Frank........................................ 108,537(12) * 108,537(12) *
Frederic Greenberg..................................... 90,754(13) * 90,754(13) *
Richard B. Kelsky...................................... 86,667(14) * 86,667(14) *
Daniel Kohl............................................ -- (15) -- -- --
All Directors and Executive Officers as a group (11
persons).............................................. 24,911,313(16) 53.82% 24,911,313(16) 47.92%
SELLING SHAREHOLDER
Equifax Inc. (17)...................................... 1,932,217(18) 4.31% -- --
</TABLE>
- ------------------------------
* Less than 1%
(1) Assumes that the Underwriters' over-allotment options are not exercised.
(2) Address is South Ocean Blvd., Palm Beach, FL 33480.
(3) Includes 1,420,000 shares currently purchasable upon exercise of warrants.
Does not include warrants to purchase 5,000,000 shares granted September
13, 1995, which becomes exercisable two years from the date granted.
(4) Address is P.O. Box 7842, Madison, WI 53707.
(5) Address is 290 Harbor Drive, P.O. Box 10399, Stamford, CT 06904-2399.
(6) Includes 775,000 shares currently purchasable upon exercise of warrants
without further consideration.
(7) Includes 83,500 shares held by the minor children of Mr. Brager, the
beneficial ownership of which Mr. Brager disclaims.
(8) Includes 10,000 shares currently purchasable upon exercise of stock
options.
(9) Includes 22,000 shares currently purchasable upon exercise of stock
options.
(10) Includes 13,000 shares currently purchasable upon exercise of stock
options.
(11) Includes 30,000 shares currently purchasable upon exercise of stock
options.
(12) Includes 8,337 shares currently purchasable upon exercise of stock options.
Beneficial ownership of shares held by Lehman Brothers Inc. is disclaimed
by Mr. Frank, Vice Chairman of Lehman Brothers Inc.
(13) Includes 71,547 shares held by EGS Partners, a general partnership of which
Mr. Greenberg is a general partner. Also includes 6,000 shares held by Mr.
Greenberg's wife, the beneficial ownership of which Mr. Greenberg
disclaims.
(14) Includes 6,667 shares currently purchasable upon exercise of stock options
and 80,000 shares currently purchasable upon exercise of warrants issued
February 1, 1994.
(15) Mr. Kohl is an officer of Equifax Inc. Does not include 1,932,217 shares
into which the Equifax Note is convertible, beneficial ownership of which
Mr. Kohl disclaims.
(16) Includes 86,671 shares currently purchasable upon exercise of stock options
and 1,500,000 of warrants inclusive of those described in notes (3), (8),
(9), (10), (11), (12), (13) and (14).
(17) Address is 1600 Peachtree Street, N.W., Atlanta, GA 30302.
(18) Represents shares into which the Equifax Note is convertible.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $.01 per share. As of April 30, 1996, there were 45,572,125 shares of
Common Stock outstanding held by approximately 445 holders of record and 1,000
shares of Convertible Preferred Stock outstanding, which are convertible into
Common Stock, held by 2 holders of record. In addition, as of April 30, 1996:
(i) options and warrants to purchase 9,131,563 shares of Common Stock were
outstanding, of which warrants and options to purchase 2,863,484 were
exercisable; and (ii) the Equifax Note, which is convertible into 1,932,217
shares of Common Stock, was outstanding. See "Business -- Equifax Relationship,"
"Management," "Principal and Selling Shareholders" and "-- Value Added Reseller
Stock Option Plan."
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to share
ratably on a share-for-share basis with respect to any dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Each holder of Common Stock is entitled to one vote for each
share held of record. The Common Stock is not entitled to conversion or
preemptive rights and is not subject to redemption. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably with the holders of Convertible Preferred Stock in the
net assets legally available for distribution. All outstanding shares of Common
Stock are, and the shares of Common Stock offered hereby will upon issuance be,
fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further shareholder approval, to issue from time to time
additional shares of preferred stock in one or more series (the "Preferred
Stock"). Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences and conversion rights.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could adversely affect the voting power of holders of
Common Stock and could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, a majority of
the outstanding voting stock of the Company.
The Board of Directors has designated 25,000 shares of the Preferred Stock
as Convertible Preferred Stock. Each share of Convertible Preferred Stock is
convertible at the option of the holder at any time into such number of shares
of Common Stock determined by dividing (x) $1,000 by (y) 85% of the average
closing price of a share of Common Stock on the Nasdaq National Market during
the five trading days immediately preceding the date on which the Company
receives a notice of conversion from the holder thereof, provided that clause
(y) may not exceed $7 nor be less than $3. Shares of Convertible Preferred Stock
which remain outstanding on October 20, 1997 will automatically be converted
into shares of Common Stock at the then effective conversion rate. Except as
required by law, holders of Convertible Preferred Stock are not entitled to
vote. Upon liquidation, dissolution or winding up of the Company, the holders of
Convertible Preferred Stock are entitled to share ratably with the holders of
Common Stock in the net assets legally available for distribution. The holders
of outstanding shares of Convertible Preferred Stock are entitled to share
ratably with the holders of Common Stock on a share-for-share basis with respect
to any dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." All outstanding shares of
Convertible Preferred Stock are fully paid and non-assessable.
VALUE ADDED RESELLER STOCK OPTION PLAN
The Value Added Reseller Stock Option Plan was adopted by the Board of
Directors in order to provide incentives to independent resellers ("VARs") of
the Company to promote the marketing of the PCN Health
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Network Information System to current users of the Company's other practice
management software products, as well as others. The VAR Plan was adopted by the
Board in August 1994 and became effective on September 30, 1994. The VAR Plan
was amended in January, 1996 to extend its term for one year. Under the VAR
Plan, options covering an aggregate of 3,500,000 shares of Common Stock may be
granted to VARs who are not also members of the Board of Directors, officers or
employees of the Company.
Options under the VAR Plan are granted to VARs based upon their installed
base of practice management software product customers and vest based upon the
number of licenses for the PCN Health Network Information sold. With respect to
the 1996 calendar year, VARs will receive options based upon the product of: (i)
300; and (ii) for a VAR who is a VAR on January 15, 1996, such VAR's number of
existing licensees of the Company's practice management software products or,
for a VAR first becoming a VAR after January 15, 1996, the number of existing
licenses of the Company's practice management software products in the general
geographic region in which such new VAR conducts its business other than
licenses covered by options granted to other VARs. 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 for each license
sold), and to new customers (100 shares for each license sold) during the
periods from January 1, 1996 to June 30, 1996 and July 1, 1996 to December 31,
1996. In addition, options vest for an additional 50 shares for each license
sold by the VAR during such periods in excess of the minimum performance
standard set forth in the VAR's reseller agreement. No options may be granted
under the VAR Plan after December 31, 1996 and all unvested options shall expire
on January 1, 1997. No options granted under the VAR Plan may be exercised until
a registration statement with respect to all shares of Common Stock issuable
upon exercise of options granted under the VAR Plan becomes effective under the
Securities Act. The Company has committed to file such a registration statement
as soon as practicable following the consummation of the Offerings. At December
31, 1995, options to purchase 252,625 shares of Common Stock had vested and were
outstanding. Such options under the VAR Plan were granted in 1994 at an exercise
price of $5 7/8 per share. In accordance with the terms of the VAR Plan, certain
options granted in 1996 may vest on June 30, 1996 or December 31, 1996 and the
Company may have potential commission expense to the extent the market value of
the options on the vesting date exceeds the market value of the options on the
grant date.
FUTURE SALES OF COMMON STOCK
Future sales of substantial numbers of shares in the public market may
adversely affect the then prevailing market prices of the Common Stock.
Certain of the shares of Common Stock presently outstanding are "restricted
securities" as that term is defined in Rule 144 under the Securities Act, as
amended, and any sales thereof must be in compliance with such Rule, pursuant to
registration under the Securities Act or pursuant to an exemption therefrom.
Generally, under Rule 144, each person holding restricted securities for a
period of two years may, within any three month period, sell in ordinary
brokerage transactions or to market makers a number of shares equal to no more
than the greater of 1% of the Company's then outstanding shares of Common Stock
or the average weekly trading volume for the four weeks prior to the proposed
sale. This limitation on the number of shares which may be sold under the Rule
does not apply to restricted securities sold for the account of a person who is
not or has not been an affiliate of the Company during the three months prior to
the sale and who has beneficially owned the restricted securities for at least
three years. The Commission has proposed reducing the periods of beneficial
ownership of "restricted securities" required by Rule 144. Under the proposal,
persons who have beneficially owned restricted securities for at least one year
instead of two years as currently required, would be able to resell such
securities by complying with the volume limitations described above. In the case
of a person who is not deemed to be an affiliate of the Company during the
preceding three months, the proposal would permit sales without regard to the
limitations described above as long as such person has held the securities for
at least two years, instead of three years as currently required. There can be
no assurance that the proposed revisions to Rule 144 will be adopted by the
Commission.
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<PAGE>
Upon completion of the Offerings, approximately 27,536,457 outstanding
shares of Common stock will be subject to the restrictions of Rule 144 under the
Securities Act, and, under certain circumstances, may be sold without
registration pursuant to that Rule. In addition, shares of Convertible Preferred
Stock are convertible into Common Stock at any time at the option of the holders
thereof. As of April 30, 1996, there were 1,000 outstanding shares of
Convertible Preferred Stock, which, based on the market price of the Common
Stock on April 30, 1996, would have been convertible into an aggregate of
approximately 142,857 shares of Common Stock on such date. See "-- Preferred
Stock." Further, certain shareholders have registration rights with respect to
their restricted shares. In addition, the Company intends to file a registration
statement to register a total of 3,500,000 shares of Common Stock issuable upon
exercise of options available to be granted under the Company's Value Added
Reseller Stock Option Plan to the Company's independent resellers. As of April
30, 1996, options to purchase 199,925 shares of Common Stock had vested and were
outstanding. Upon effectiveness of such registration statement, shares of Common
Stock issuable upon the exercise of vested options will be eligible for sale in
the public markets. See "-- Value Added Reseller Stock Option Plan."
The Company's officers and directors, who collectively own 24,911,313 shares
(including shares issuable upon the exercise of currently exercisable options
and warrants), have agreed or are expected to agree not to offer, sell or
otherwise dispose of any of their shares of Common Stock until 90 days from the
date of this Prospectus without the prior written consent of the Representatives
of the Underwriters. At the expiration of the 90-day period, 23,491,313 of such
shares will be eligible for sale under Rule 144.
The public sale of restricted securities pursuant to Rule 144, an effective
registration statement or otherwise, or the perception that such sales could
occur, may have an adverse effect on the market price of the Common Stock. See
"Risk Factors -- Future Sales of Common Stock," "Certain Transactions," "--
Registration Rights" and "Underwriting."
REGISTRATION RIGHTS
Certain shareholders have been granted demand and/or "piggyback"
registration rights with respect to the Common Stock owned and/or issuable upon
exercise or conversion of the securities. Under the agreements between the
Company and such holders, various classes of such holders may independently
request that the Company file a registration statement under the Securities Act
and, subject to certain conditions, the Company generally will be required to
use its best efforts to effect such registration. The Company is not generally
required to effect more than two such registrations on behalf of any class of
holders. In addition, following the Offerings, in the event the Company proposes
to register any of its securities, either for its own account and/or for the
account of shareholders, the Company is required, with certain exceptions, to
notify the holders described above and, subject to certain limitations, to
include in such registration all shares of Common Stock requested to be included
by such holders. The Company is generally obligated to bear the expenses, other
than underwriting discounts and commissions, for all such registrations.
Any exercise of such registration rights may hinder efforts by the Company
to arrange future financing and may have an adverse effect on the market price
of the Common Stock.
LIMITATION OF LIABILITY
As permitted by the New Jersey Business Corporation Act, the Company's
Amended and Restated Certificate of Incorporation provides that Directors of the
Company shall not be personally liable to the Company or its shareholders for
damages for the breach of any duty owed to the Company or its shareholders
except for liability for any breach of duty based upon an act or omission: (i)
in breach of the Director's duty of loyalty to the Company or its shareholders;
(ii) not in good faith or involving a knowing violation of law; or (iii)
resulting in the receipt by such Director of an improper personal benefit.
As a result of this provision, the Company and its shareholders may be
unable to obtain monetary damages from a Director for breach of his duty of
care. Although shareholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a Director, shareholders may
not have an effective remedy against the challenged conduct if equitable
remedies are unavailable.
58
<PAGE>
In addition, the Company's Amended and Restated Certificate of Incorporation
and By-Laws provide that the Company will indemnify any and all corporate
agents, including any Director, officer, employee or agent of the Company, to
the fullest extent permitted by the New Jersey Business Corporation Act.
Accordingly, the Company will be required to indemnify any such corporate agent
against his expenses and liabilities in connection with proceedings other than
those by or in the right of the Company involving the corporate agent by reason
of his being such, if: (i) he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company; and (ii)
with respect to any criminal proceedings, he had no reasonable cause to believe
his conduct was unlawful. Subject to a contrary adjudication by a court, in a
proceeding by or in the right of the Company, the Company will be required to
indemnify a corporate agent against his expenses in any proceeding involving
liability by him to the Company if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the Company.
TRANSFER AGENT
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005 is the transfer agent and registrar for the Common Stock.
59
<PAGE>
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder who purchases Common Stock pursuant to the Offerings.
For this purpose, a "Non-U.S. Holder" is any person who is, for United States
federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign partnership or a foreign estate or trust. This discussion
does not address all aspects of United States federal income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to such Non-U.S. Holders in light of their personal circumstances.
Furthermore, this discussion is based on provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing and proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change. EACH PROSPECTIVE PURCHASER OF
COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISER WITH RESPECT TO CURRENT AND
POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON
STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY
STATE, MUNICIPALITY OR OTHER TAXING JURISDICTION.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) under certain circumstances,
including by virtue of being present in the United States on at least 31 days in
the calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year (counting for such purposes all of
the days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year). Resident aliens are subject to United States federal tax as if
they were U.S. citizens.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax either at a rate of
30% of the gross amount of the dividends or at such lower rate as may be
specified by an applicable income tax treaty. However, dividends that are
effectively connected with the conduct of a trade or business by the Non-U.S.
Holder within the United States are generally not subject to the withholding tax
(if the Non-U.S. Holder files the appropriate certifications with the payor of
the dividends), but instead are subject to United States federal income tax on a
net income basis at applicable graduated individual or corporate rates. Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
For purposes of determining whether tax is to be withheld at a 30% rate or a
reduced rate as specified by an income tax treaty, current law permits the
Company to presume that dividends paid to an address in a foreign country are
paid to a resident of that country unless the Company knows that such a
presumption is unwarranted. However, under proposed regulations, in the case of
dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-U.S.
Holder generally would be subject to United States withholding tax at a 31% rate
under the backup withholding rules described below, rather than at a 30% rate or
at a reduced rate under an income tax treaty, unless certain certification
procedures (or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures) are
complied with, directly or through an intermediary.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing a United States federal income tax return
with the Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) generally, the gain is effectively connected with a
trade or business of the Non-U.S. Holder in the United States; (ii) in the case
of a Non-U.S. Holder who is an individual and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the sale or other disposition and either (x) has a "tax
home in the United States" (as defined by the Code) or (y) maintains an office
or other fixed place of business in the United States and the income from the
sale of the Common Stock is attributable to such office or other fixed place of
business; (iii) the Non-U.S. Holder is subject to tax pursuant to provisions of
the
60
<PAGE>
United States tax law applicable to certain United States expatriates; or (iv)
the Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes. The Company believes it is not and does not
anticipate becoming a "U.S. real property holding corporation" for United States
federal income tax purposes.
If an individual Non-U.S. Holder falls under clause (i) above, he will,
unless an applicable treaty provides otherwise, be taxed on his net gain derived
from the sale under regular graduated United States federal income tax rates
applicable to capital gains. If an individual Non-U.S. Holder falls under clause
(ii) above, he will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by certain United States capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on its gain under regular graduated United States
federal income tax rates and may be subject to an additional branch profits tax
equal to 30% of its effectively connected earnings and profits within the
meaning of the Code for the taxable year, as adjusted for certain items, unless
it qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Common Stock held by an individual who is neither a citizen or resident of
the United States at the time of death will be included in such holder's gross
estate for United States federal estate tax purposes and may be subject to
United States federal estate tax, unless an applicable estate tax treaty
provides otherwise. For this purpose, a resident of the United States is an
individual having a domicile in the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
A backup withholding tax is imposed at the rate of 31% on certain payments
to persons not otherwise exempt that fail to furnish certain identifying
information to the payer. Under current law, backup withholding generally will
not apply to dividends paid to a Non-U.S. Holder at an address outside the
United States (unless the payer has knowledge that the payee is a U.S. person),
but backup withholding and information reporting generally will apply to
dividends paid on Common Stock at addresses inside the United States to Non-U.S.
Holders that fail to provide certain identifying information in the manner
required. However, under proposed regulations, in the case of dividends paid
after December 31, 1997 (December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-United States Holder
generally would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case or payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.
Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker will be subject to both backup withholding and
information reporting unless the beneficial owner provides the payer with among
other information its name and address and certifies under penalties of perjury
that it is a Non-U.S. Holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. If, however, such broker is, for United States federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, such payments will be
subject to information reporting, but not backup withholding, unless (i) such
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. Holder and certain other conditions are met; or (ii) the beneficial
owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
61
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part, the underwriters
named below (the "U.S. Underwriters"), for whom Lehman Brothers Inc., NatWest
Securities Limited and Vector Securities International, Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Shareholder, and the Company and the Selling
Shareholder have agreed to sell to each U.S. Underwriter, the aggregate number
of shares of Common Stock set forth opposite the name of each such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------
<S> <C>
Lehman Brothers Inc........................................................................ 930,000
NatWest Securities Limited................................................................. 930,000
Vector Securities International, Inc....................................................... 930,000
Alex. Brown & Sons Incorporated............................................................ 135,000
Dean Witter Reynolds Inc................................................................... 135,000
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 135,000
Prudential Securities Incorporated......................................................... 135,000
Robertson, Stephens & Company LLC.......................................................... 135,000
Smith Barney Inc........................................................................... 135,000
Adams, Harkness & Hill, Inc................................................................ 80,000
Branch, Cabell and Company................................................................. 80,000
Cowen & Company............................................................................ 80,000
Equitable Securities Corporation........................................................... 80,000
Fahnestock & Co. Inc....................................................................... 80,000
Jefferies & Company, Inc................................................................... 80,000
Ladenburg, Thalmann & Co. Inc.............................................................. 80,000
Pennsylvania Merchant Group Ltd............................................................ 80,000
Piper Jaffray Inc.......................................................................... 80,000
Ragen MacKenzie Incorporated............................................................... 80,000
Southcoast Capital Corporation............................................................. 80,000
----------
Total.................................................................................. 4,480,000
----------
----------
</TABLE>
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement, the managers named below of the concurrent
offering of the Common Stock outside the United States and Canada (the
"International Managers" and, together with the U.S. Underwriters, the
"Underwriters"), for whom Lehman Brothers International (Europe), NatWest
Securities Limited and Vector Securities International, Inc. are acting as lead
managers (the "Lead Managers"), have severally agreed to purchase from the
Company and the Selling Shareholder, and the Company and the Selling Shareholder
have agreed to sell to each International Manager, the aggregate number of
shares of Common Stock set forth opposite the name of each such International
Manager below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
----------
<S> <C>
Lehman Brothers International (Europe)..................................................... 334,000
NatWest Securities Limited................................................................. 333,000
Vector Securities International, Inc....................................................... 333,000
Argentaria Bolsa S.V.B., S.A............................................................... 60,000
Nikko Europe Plc........................................................................... 60,000
----------
Total.................................................................................. 1,120,000
----------
----------
</TABLE>
62
<PAGE>
The Company and the Selling Shareholder have been advised by the
Representatives and Lead Managers that the U.S. Underwriters and the
International Managers propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page hereof, and
to certain selected dealers (who may include the Underwriters) at such public
offering price less a selling concession not in excess of $.30 per share. The
U.S. Underwriters and International Managers may allow, and such dealers may
reallow a concession not in excess of $.10 per share to certain other brokers or
dealers. After the public offering, the public offering price, the concession to
selected dealers and the reallowance may be changed by the Underwriters.
The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the Underwriting Agreements") provide that the obligations of the
U.S. Underwriters and International Managers to pay for and accept delivery of
the shares of Common Stock offered hereby are subject to approval of certain
legal matters by counsel and to certain other conditions. The Underwriting
Agreements also provide that, if any of the foregoing shares of Common Stock are
purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement
or by the International Managers pursuant to the International Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by either the
U.S. Underwriters or the International Managers, as the case may be, pursuant to
their respective Underwriting Agreement, must be so purchased. The closing under
the International Underwriting Agreement is a condition to the closing under the
U.S. Underwriting Agreement, and the closing under the U.S. Underwriting
Agreement is a condition to the closing under the International Underwriting
Agreement. The offering price and underwriting discounts and commissions for
each of the Offerings are identical.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an aggregate of 840,000 shares of Common
Stock, exercisable solely to cover over-allotments, at the public offering
price, less the underwriting discounts and commissions, shown on the cover page
of this Prospectus. Either or both of such options may be exercised at any time
until 30 days after the date of the Underwriting Agreements. To the extent that
either option is exercised, each U.S. Underwriter or each International Manager,
as the case may be, will be committed, subject to certain conditions, to
purchase a number of the additional shares of Common Stock, proportionate to
such U.S. Underwriter's or International Manager's, as the case may be, initial
commitment as indicated in the preceding tables.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to which
each U.S. Underwriter has agreed that, as part of the distribution of the shares
of Common Stock offered in the United States and Canada: (i) it is not
purchasing any such shares for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (ii) it has not offered or sold, and will
not offer, sell, resell or deliver, directly or indirectly, any of such shares
outside the United States or Canada or to anyone other than a U.S. or Canadian
Person. In addition, pursuant to such agreement, each International Manager has
agreed that as part of the distribution of the shares of Common Stock offered
outside the United States and Canada: (i) it is not purchasing any such shares
for the account of a U.S. or Canadian Person and (ii) it has not offered or sold
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares in the United States or Canada or to any U.S. or Canadian Person. Each
International Manager has also agreed that it will offer to sell shares only in
compliance with all relevant requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S. Underwriters
and International Managers, including (i) certain purchases and sales between
the U.S. Underwriters and the International Managers; (ii) certain offers,
sales, resales, deliveries or distributions to or through investment advisors or
other persons exercising investment discretion; (iii) purchases, offers or sales
by a U.S. Underwriter who is also acting as an International Manager or by an
International Manager who is also acting as a U.S. Underwriter; and (iv) other
transactions specifically
63
<PAGE>
approved by the Representatives and the Lead Managers. As used herein, (a) the
term "United States" means the United States of America (including the District
of Columbia) and its territories, its possessions and other areas subject to its
jurisdiction, and (b) the term "U.S. or Canadian Person" means any resident or
citizen of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or Canada
or any political subdivision thereof (other than the foreign branch of any U.S.
or Canadian Person) or any estate or trust the income of which is subject to
United States federal income taxation or Canadian income taxation regardless of
the source, and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the International
Managers of such number of shares of Common Stock as may be mutually agreed
upon. The price of any shares sold shall be the public offering price then in
effect for Common Stock being sold by the U.S. Underwriters and the
International Managers, less the selling concession unless otherwise determined
by mutual agreement. To the extent that there are sales between the U.S.
Underwriters and the International Managers pursuant to the Agreement between
U.S. Underwriters and International Managers, the number of shares initially
available for sale by the U.S. Underwriters or by the International Managers may
be more or less than the amount appearing on the cover page of this Prospectus.
Each International Manager has represented and agreed that (i) it has not
offered or sold and, prior to the expiry of the period six months after the date
of issue of the shares of Common Stock, will not offer or sell any shares of
Common Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted in and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 (the "1986 Act")
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on, and will only issue or pass on to any person in the United
Kingdom, any investment advertisement (within the meaning of the 1986 Act)
relating to the shares of Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995.
No action has been taken or will be taken in any jurisdiction by the Company
or the International Managers that would permit a public offering of the shares
offered pursuant to the Offerings in any jurisdiction where action for the
purpose is required, other than in the United States. Persons into whose
possession this Prospectus comes are required by the Company and the
International Managers to inform themselves about and to observe any
restrictions as to the offering of shares offered pursuant to the Offerings and
the distribution of this Prospectus.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
The Company's officers and directors beneficially owning an aggregate of
24,911,313 shares of Common Stock (including shares issuable upon the exercise
of outstanding options and warrants) have agreed or are expected to agree not to
offer, sell or otherwise dispose of their shares, with certain limited
exceptions, until 90 days after the date of the Offerings without the prior
written consent of the Representatives. Except for the Common Stock to be sold
in the Offerings, the Company has agreed not to offer, sell, contract to sell or
otherwise issue any Common Stock or other capital stock or any securities
convertible into or exchangeable for, or any rights to acquire, Common Stock or
other capital stock, until 90 days after the date of the Offerings without the
prior written consent of the Representatives other than: (i) the issuance of
options to purchase shares of Common Stock pursuant to existing stock option
plans of the Company; and (ii) the issuance of shares of Common Stock upon the
exercise of currently outstanding options or warrants or options granted in the
future pursuant to existing stock option plans. See "Description of Capital
Stock -- Future Sales of Common Stock."
64
<PAGE>
In connection with the Offerings, the Underwriters and selling group members
may engage in passive market making transactions in the Company's Common Stock
on the Nasdaq National Market immediately prior to the commencement of sale of
shares in the Offerings, in accordance with Rule 10b-6A under the Exchange Act.
Passive market making consists of displaying bids on the Nasdaq National Market
limited by the bid prices of market makers not connected with the Offerings and
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited in amount to 30% of
the passive market maker's average daily trading volume in the Common Stock
during the period of the two full consecutive calendar months prior to the
filing with the Commission of the Registration Statement of which this
Prospectus is a part and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
Lehman Brothers Inc. has provided investment banking, financial advisory and
other services to the Company, for which it has received customary fees and
reimbursement of its out-of-pocket expenses. Lehman Brothers Inc.: (i) received
129,032 shares of Common Stock in March 1993 in full payment of an advisory fee;
(ii) received 417,500 shares of Common Stock in December 1993 upon the exercise
of warrants granted to Lehman Brothers Inc. in May 1989; and (iii) purchased
135,000 shares of Common Stock in November 1991 in connection with the Company's
initial public offering. Frederick Frank, Vice Chairman of Lehman Brothers Inc.,
serves as a Director of the Company. As of March 31, 1996, Lehman Brothers Inc.
owned 450,000 shares of Common Stock.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the shares of Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any shares of Common Stock within the
United States, its territories or possessions or to persons who are citizens
thereof or residents therein.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Gordon Altman Butowsky Weitzen Shalov & Wein, New York,
New York. Certain legal matters in connection with the shares of Common Stock
offered hereby will be passed upon for the Underwriters by Shearman & Sterling,
New York, New York.
EXPERTS
The consolidated financial statements and the financial statement schedule
of the Company as of December 31, 1995 and 1994, and for each of the years in
the three-year period ended December 31, 1995 have been included herein and in
the Registration Statement in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein and in
the Registration Statement, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Versyss and subsidiaries as of
December 31, 1992, 1993 and 1994 and for each of the three years in the period
ended December 31, 1994 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to a number of legal actions in which Versyss is
a defendant and certain other contingencies discussed in Note 12 to those
consolidated financial statements), and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Practice Management Systems, Inc. included in
this Prospectus have been audited by Cooper & Cobb, independent certified public
accountants, as stated in their reports appearing herein and are included in
reliance on their reports given on authority of said firm as experts in
accounting and auditing.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF
PHYSICIAN COMPUTER NETWORK, INC. AND SUBSIDIARIES:
Independent Auditors' Report....................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994........................ F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1994
and 1993........................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the years ended
December 31, 1993, 1994 and 1995................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993....... F-6
Notes to Consolidated Financial Statements......................................................... F-7
CONSOLIDATED FINANCIAL STATEMENTS OF VERSYSS INCORPORATED AND SUBSIDIARIES:
Independent Auditors' Report....................................................................... F-32
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1992, 1993 and 1994............................... F-33
Consolidated Statements of Operations for the years ended December 31, 1992, 1993 and 1994....... F-34
Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 1992, 1993
and 1994........................................................................................ F-35
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994....... F-36
Notes to Consolidated Financial Statements......................................................... F-37
FINANCIAL STATEMENTS OF PRACTICE MANAGEMENT SYSTEMS, INC.:
Independent Auditors' Report....................................................................... F-55
Financial Statements:
Balance Sheets as of December 31, 1994 and 1993.................................................. F-56
Statements of Operations for years ended December 31, 1994, 1993 and 1992........................ F-57
Statements of Cash Flows for years ended December 31, 1994, 1993 and 1992........................ F-58
Notes to Financial Statements...................................................................... F-59
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Physician Computer Network, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Computer Network, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in shareholders'
equity (deficiency), and cash flows for each of the years in the three-year
period ended December 31, 1995. 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, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
February 20, 1996
F-2
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
--------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 15,516,883 $ 2,512,047
Accounts receivable, net of allowance for doubtful accounts of $764,000 at
December 31, 1995, and $577,000 at December 31, 1994........................... 19,466,446 5,260,941
Inventories..................................................................... 4,598,954 392,304
Prepaid expenses and other...................................................... 1,093,306 565,421
Deferred tax asset.............................................................. 1,650,000 --
--------------- --------------
Total current assets.................................................... 42,325,589 8,730,713
Intangible assets, net of accumulated amortization of $6,840,000 at December 31,
1995 and $3,345,000 at December 31, 1994....................................... 53,701,055 8,342,411
Property and equipment, net..................................................... 3,976,195 847,172
Other assets.................................................................... 256,998 312,568
--------------- --------------
Total assets............................................................ $ 100,259,837 $ 18,232,864
--------------- --------------
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable:
Other......................................................................... $ 9,080,000 $ 2,100,000
Related party................................................................. 750,000 1,500,000
Current portion of long term-debt............................................... 100,160 99,695
Current portion of obligations under capital leases............................. 327,770 23,224
Accounts payable................................................................ 4,935,601 798,055
Accrued expenses and other liabilities.......................................... 17,024,828 5,035,496
Customer deposits............................................................... 3,504,980 226,022
Unearned income................................................................. 15,608,705 2,919,676
--------------- --------------
Total current liabilities............................................... 51,332,044 12,702,168
Long-term debt, net of current portion:
Other......................................................................... 18,924,000 750,000
Related party................................................................. -- 13,350,000
Obligations under capital leases, net of current portion........................ 806,255 5,071
--------------- --------------
Total liabilities....................................................... 71,062,299 26,807,239
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock, $0.01 par value, 1,000,000 shares authorized:
Series A convertible preferred stock, 15,750 shares outstanding at December 31,
1995........................................................................... 157 --
Common stock, $.01 par value, 75,000,000 shares authorized, 42,937,147 shares
issued and outstanding at December 31, 1995 and 34,179,120 shares issued and
outstanding December 31, 1994.................................................. 429,371 341,791
Additional paid-in capital...................................................... 129,728,821 80,364,458
Accumulated deficit............................................................. (100,960,811) (89,280,624)
--------------- --------------
Shareholders' equity (deficiency)............................................... 29,197,538 (8,574,375)
--------------- --------------
Total liabilities and shareholders' equity (deficiency)................. $ 100,259,837 $ 18,232,864
--------------- --------------
--------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Software license fees............................................. $ 15,450,897 $ 6,302,181 $ 381,047
Hardware revenue.................................................. 9,721,559 2,592,713 1,288,931
Maintenance, communication fees and other......................... 16,632,886 11,608,912 4,438,580
-------------- ------------- --------------
41,805,342 20,503,806 6,108,558
Cost of Revenues:
Hardware.......................................................... 7,336,196 2,057,763 1,086,695
Software, maintenance, communication fees and other............... 8,952,757 4,018,189 9,168,403
-------------- ------------- --------------
16,288,953 6,075,952 10,255,098
-------------- ------------- --------------
Gross margin (loss)............................................... 25,516,389 14,427,854 (4,146,540)
Operating expenses:
Research and development.......................................... 2,219,223 1,838,823 898,000
Selling and marketing............................................. 3,038,069 2,144,464 1,717,115
General and administrative........................................ 13,238,269 7,385,792 6,453,757
Acquired technology in process.................................... 14,516,000 -- 10,872,000
Restructuring..................................................... 3,072,450 -- 3,165,000
Write-down of assets and other charges............................ 1,477,000 -- 3,300,000
-------------- ------------- --------------
37,561,011 11,369,079 26,405,872
-------------- ------------- --------------
Interest (income) expense:
Interest income................................................. (577,039) (88,817) (177,265)
Interest expense................................................ 1,451,604 1,798,053 1,119,468
-------------- ------------- --------------
874,565 1,709,236 942,203
-------------- ------------- --------------
Income (loss) before income tax expense (benefit) and
extraordinary items.............................................. (12,919,187) 1,349,539 (31,494,615)
Income tax expense (benefit)...................................... (1,419,000) 102,320 --
-------------- ------------- --------------
Income (loss) before extraordinary items.......................... (11,500,187) 1,247,219 (31,494,615)
Extraordinary items:
Loss on extinguishment of debt.................................. (180,000) -- --
Gain from the extinguishment of capital lease obligations and
debt........................................................... -- -- 8,498,472
-------------- ------------- --------------
Net income (loss)................................................. (11,680,187) 1,247,219 (22,996,143)
Accrued dividends on preferred stock.............................. -- -- (2,992,531)
Forfeiture of preferred stock dividends........................... -- -- 5,949,101
-------------- ------------- --------------
Net income (loss) available to common shareholders................ (11,680,187) 1,247,219 (20,039,573)
-------------- ------------- --------------
-------------- ------------- --------------
Primary and fully diluted earnings (loss) per common share:
Before extraordinary items........................................ $ (0.29) $ 0.04 $ (1.38)
Extraordinary items............................................... -- -- 0.41
-------------- ------------- --------------
Net earnings (loss)............................................... $ (0.29) $ 0.04 $ (0.97)
-------------- ------------- --------------
-------------- ------------- --------------
Weighted average number of common shares outstanding.............. 40,068,406 35,634,106 20,688,289
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDERS'
---------------------- -------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
--------- ----------- --------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.............. 18,000 $ 180 8,600,831 $ 86,008 $61,913,977 $(67,531,700) $(5,531,535)
Common Stock issued................. -- -- 10,129,032 101,290 9,148,443 -- 9,249,733
Preferred Stock issued.............. 5,000 5,000 -- -- -- -- 5,000
Proceeds from and conversion of
Preferred Stock into Common
Stock.............................. (5,000) (5,000) 5,206,074 52,061 4,930,439 -- 4,977,500
Exercise of stock options........... -- -- 37,575 375 89,220 -- 89,595
Exercise of warrants................ -- -- 417,500 4,175 747,325 -- 751,500
Accrued dividends on Preferred
Stock.............................. -- -- -- -- (2,992,531) -- (2,992,531)
Conversion of Preferred Stock into
Common Stock....................... (3,000) (30) 5,924,648 59,246 570,634 -- 629,850
Forfeiture of Preferred Stock
dividends . -- -- -- -- 5,949,101 -- 5,949,101
Conversion of Preferred Stock into
Common Stock....................... (15,000) (150) 2,083,333 20,833 (20,683) -- --
Common Stock issued................. -- -- 1,716,667 17,168 (17,168) -- --
Net loss............................ -- -- -- -- -- (22,996,143) (22,996,143)
--------- ----------- --------- --------- ----------- ------------ -------------
Balance, December 31, 1993............ -- -- 34,115,660 341,156 80,318,757 (90,527,843) (9,867,930)
Exercise of stock options........... -- -- 63,460 635 45,701 -- 46,336
Net income.......................... -- -- -- -- -- 1,247,219 1,247,219
--------- ----------- --------- --------- ----------- ------------ -------------
Balance, December 31, 1994............ -- -- 34,179,120 341,791 80,364,458 (89,280,624) (8,574,375)
Common Stock issued................. -- -- 6,250,000 62,500 22,277,458 -- 22,339,958
Preferred Stock issued.............. 18,500 185 -- -- 18,499,815 -- 18,500,000
Issue of warrants to purchase Common
Stock.............................. -- -- -- -- 1,482,500 -- 1,482,500
Common Stock issued................. -- -- 1,902,748 19,027 6,170,299 -- 6,189,326
Exercise of stock options........... -- -- 203,380 2,034 808,282 -- 810,316
Compensatory value added reseller
options............................ -- -- -- -- 130,000 -- 130,000
Conversion of Preferred Stock into
Common Stock....................... (2,750) (28) 401,899 4,019 (3,991) -- --
Net loss............................ -- -- -- -- -- (11,680,187) (11,680,187)
--------- ----------- --------- --------- ----------- ------------ -------------
Balance, December 31, 1995............ 15,750 $ 157 42,937,147 $ 429,371 $129,728,821 $(100,960,811) $29,197,538
--------- ----------- --------- --------- ----------- ------------ -------------
--------- ----------- --------- --------- ----------- ------------ -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)................................................... ($11,680,187) $1,247,219 ($22,996,143)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Acquired technology in process.................................... 14,516,000 -- 10,872,000
Depreciation and amortization..................................... 4,121,992 2,988,766 5,084,687
Write-down of assets and other charges............................ 1,477,000 -- 3,300,000
Amortization of loan discount..................................... 60,000 480,000 --
Amortization of deferred charges.................................. 33,333 -- --
Compensatory value added reseller options......................... 130,000 -- --
Restructuring..................................................... 3,072,450 -- 3,165,000
Provision for inventory obsolescence.............................. 162,000 -- 200,000
Deferred compensation............................................. -- -- (100,000)
(Gain) loss on retirement of assets............................... (54,083) (168,558) 850
Provision for doubtful accounts................................... 225,703 376,487 11,917
Non-cash compensation expense..................................... 15,000 30,000 --
Extraordinary loss (gain) on extinguishment of capital lease
obligations and long-term debt................................... 180,000 -- (8,498,472)
(Increase) decrease in assets:
Restricted cash................................................. -- 206,500 1,163,021
Accounts receivable............................................. (5,659,700) (4,343,847) (197,009)
Inventories..................................................... 378,441 (62,163) (53,655)
Prepaid expenses and other assets............................... (1,258,227) 77,221 782,310
Increase (decrease) in liabilities, net
Accounts payable................................................ (2,009,162) 303,541 (434,634)
Accounts payable, related party................................. -- -- (28,427)
Accrued expenses and other liabilities.......................... (1,776,793) (1,804,759) 817,852
Accrued expenses and other liabilities, related party........... -- -- (108,479)
Customer deposits and unearned income........................... (118,612) 205,492 (84,199)
------------ ------------ ------------
Net cash provided by (used in) operating activities:.......... 1,815,155 (464,101) (7,103,381)
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of equipment............................................... (1,481,548) (280,694) (271,975)
Proceeds from disposal of equipment................................. 54,083 168,558 1,365
Acquisition of licensing rights and other intangible assets......... (575,885) (17,033) (330,284)
Purchase of businesses, net of cash acquired........................ (19,383,616) (1,674,601) (6,463,519)
------------ ------------ ------------
Net cash used in investing activities:........................ (21,386,966) (1,803,770) (7,064,413)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt................................ (26,349,000) (5,060,577) (4,654,124)
Net proceeds from issuance of long-term debt, related party......... -- -- 12,000,000
Net proceeds from issuance of notes payable and long-term debt,
other.............................................................. 9,852,649 176,250 63,750
Principal payments under capital lease obligations.................. (249,102) (52,761) (116,791)
Net proceeds from issuance of common stock, preferred stock and
warrants........................................................... 49,322,100 46,336 15,073,328
------------ ------------ ------------
Net cash provided by (used in) financing activities........... 32,576,647 (4,890,752) 22,366,163
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................. 13,004,836 (7,158,623) 8,198,369
Cash and cash equivalents, beginning of period........................ 2,512,047 9,670,670 1,472,301
------------ ------------ ------------
Cash and cash equivalents, end of period.............................. $15,516,883 $2,512,047 $9,670,670
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Note 16 for supplemental disclosure of cash flow information.
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Physician Computer Network, Inc. ("PCN" or the "Company") was founded in
August 1983. The Company develops, markets and supports practice management
software products for physician practices designed to link such practices using
the Company's practice management software products with hospitals,
Medicare/Medicaid carriers, commercial insurance carriers, claims
clearinghouses, clinical laboratories and HMOs ("Connecting Service Providers"),
among others, who establish electronic communication links under agreements with
the Company. In September 1994, the Company introduced its PCN Health Network
Information Systems product which is designed to serve as the common practice
management software platform used by the Company's physician practice customers
and to provide enhanced communication link capabilities.
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 of acquiring and
developing a common software platform to which such customers could migrate over
time. In execution of the new strategy, the Company acquired two practice
management software entities, Calyx Corporation ("Calyx") of Brookfield,
Wisconsin on September 23, 1993 and Wallaby Software Corporation ("Wallaby") of
Mahwah, New Jersey on December 31, 1993, pursuant to separate stock purchase
agreements (See Note 3). On March 11, 1994, the Company purchased substantially
all of the assets of the doctor's office practice management business (the
"DOM/2 Business") of IBAX Healthcare Systems (See Note 3). On November 15, 1994,
the Company purchased the Acclaim software maintenance and support business (the
"Acclaim" Business) from Sentient Systems, Inc. (See Note 3). On April 24, 1995,
the Company, through a wholly-owned subsidiary, Practice Management Systems
Corp. ("PMSC"), acquired substantially all of the assets of Practice Management
Systems, Inc., a business which developed and sold practice management software
products and related equipment, maintenance and support to physician practices
(the "PMS Business") (See Note 3). On October 27, 1995, the Company acquired
Versyss Incorporated ("Versyss"), through a merger of a wholly-owned subsidiary
of the Company with and into Versyss, with Versyss as the surviving corporation
of such merger. The Versyss business, based in Needham Heights, MA, develops and
sells practice management software products and related equipment, service and
support and provides integrated information systems to certain industries other
than health care (See Note 3).
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, 1995, 1994, and 1993 inclusive of the
results of Calyx from September 23, 1993, Wallaby from December 31, 1993, the
DOM/2 Business from March 11, 1994, the Acclaim Business from November 15, 1994,
PMSC from April 24, 1995, and Versyss from October 27, 1995. All significant
intercompany transactions have been eliminated. Certain reclassifications have
been made to the 1994 and 1993 consolidated financial statements to conform with
the December 31, 1995 presentation.
REVENUE RECOGNITION:
With the acquisitions of Calyx, Wallaby, the DOM/2 Business, the Acclaim
Business, the PMS Business and Versyss, the Company gained access to new revenue
streams which include the sale of: (i) licenses for internally developed
practice management software products; (ii) support and update service
agreements on the practice management software products; (iii) hardware sales
and hardware service agreements and (iv) customer training and consulting
services. Sales of licenses for internally developed software products are made
to independent resellers and, to a lesser extent, directly to office-based
physician practices and to hospitals over a wide national geographic area.
Revenues from sales of such software packages are primarily recognized upon
shipment and delivery of the product, as no significant vendor and/or
post-contract support obligations remain outstanding at the time of revenue
recognition. In certain cases, independent resellers
F-7
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are sold, for a single fixed-price non-refundable fee, multi-copy licenses which
permit resale of the Company's software. In these cases, the software license
fee is recognized as revenue when the master copy of the software is delivered
to the independent reseller customer as the fee charged, and payment thereof, is
not contractually tied to subsequent sales by the licensee. 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 and consulting services is recognized when the earnings process is
substantially completed, which generally coincides with performance. Revenues
from physician membership fees are recognized on a monthly basis over the 5 year
term of the membership agreement on a straight line basis. All costs associated
with licensing of software products, support and update services, and training
and consulting services are expensed as incurred (see Note 9).
Fees from health care institutions and clinical laboratories for
communications link access 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:
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. Capitalized software development costs are amortized using the
straight-line method over the estimated product lives of three years. Net
capitalized software at December 31, 1995 was $469,000 and capitalized software
amortization expense was $43,000 for the year ended December 31, 1995. There
were no software development costs capitalized at December 31, 1994 as
technological feasibility of new software products developed prior to that date
had not occurred until after substantially all of the costs were incurred. In
1995 and 1993, with the help of an appraiser, the Company allocated a portion of
the purchase prices of the Versyss, Calyx and Wallaby acquisitions to acquired
technology in process which amounts of $14,516,000 and $10,872,000 were recorded
as an expense in the years ended December 31, 1995 and 1993, respectively.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES:
Inventories, consisting principally of computer hardware for resale and
computer maintenance parts held to repair customers' hardware under hardware
maintenance contracts between the Company and certain of its customers, are
stated at lower of cost or estimated market with costs determined by the average
cost method.
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist primarily of the current
unamortized portion of five-year maintenance contracts on computer equipment.
INTANGIBLE ASSETS:
Intangible assets consist primarily of software licensing rights,
capitalized software development costs and other intangible assets related to
the Company's acquisitions (See Note 3). Software licensing rights in the amount
of $1,624,000 and $1,469,000 as of December 31, 1995 and 1994 are recorded at
cost of
F-8
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquisition. Amortization is computed using the straight-line method over a
period of four to five years. The associated amortization expense was $274,000,
$206,000, and $841,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Intangible assets related to the excess purchase price of acquired
businesses (see Note 3) were $57,912,000 and $10,389,000 as of December 31, 1995
and 1994 with total amortization expense of $2,884,000, $1,858,000 and $238,000
for the years ended December 31, 1995, 1994 and 1993. Amortization of the
acquisition-related intangible assets is based on their useful lives and is
computed using the straight-line method over periods currently ranging from one
to fifteen years (See Note 3).
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 five 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. At December
31, 1993, the net carrying value of such equipment was determined to be higher
than the net future network revenues and, as such, a $3,300,000 adjustment was
recorded which is included in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1993. Repair and maintenance costs
are expensed as incurred. Gains or losses on disposal of property and equipment
are reflected in operations.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS:
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed 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. It has been the Company's
policy to evaluate the realizability of acquisition-related intangible assets at
each balance sheet date based upon the expectations of non-discounted cash flows
and operating income for each subsidiary or acquired business having a material
acquisition-related intangible asset balance. Based upon its most recent
analysis, the Company recorded a charge to Write-down acquisition-related
intangible assets by $500,000 for the year ended December 31, 1995 which is
included in the write-down of assets and other charges in the 1995 Consolidated
Statement of Operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards 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 into 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
values.
INCOME TAXES:
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards SFAS No. 109 "Accounting for Income Taxes".
SFAS No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or the tax returns. Significantly for the Company, the
standard requires that the benefit of certain loss carryforwards be estimated
and recorded as an asset unless it is more likely than not that the benefit will
not be realized. From January 1, 1993 through September 30, 1995, the Company
recorded a full valuation allowance against the net deferred tax assets related
primarily to net operating loss carryforwards due to the uncertainty of their
realization. In the fourth quarter of 1995, based on the future outlook after
the Versyss acquisition, management believes that it is more likely than not
that the results of future operations will generate sufficient taxable income to
realize the deferred tax asset, and accordingly, the
F-9
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company reduced the valuation allowance recorded against previous years' net
operating loss carryforwards resulting in a net deferred tax asset of $1,650,000
reflected in the 1995 Consolidated Balance Sheet, with a corresponding deferred
tax benefit reflected in the 1995 Consolidated Statement of Operations (See Note
6).
STOCK OPTIONS:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation." This statement requires
companies to make pro forma disclosures in a footnote of net income as if the
fair value based method of accounting for stock options, as defined in the
statement, had been applied. The accounting requirements of this statement are
effective for transactions entered into during 1995 and ensuing years. However,
the footnote disclosure requirement does not begin until 1996, at which time the
disclosure will present information on a comparative basis.
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.
EARNINGS/(LOSS) PER SHARE:
Earnings/(loss) per share is determined by dividing earnings/(loss) (after
giving effect to accrued and forfeited preferred stock dividends for the year
ended December 31, 1993) by the weighted average number of shares of Common
Stock outstanding during the periods. For the years ended December 31, 1995, and
1993, common stock equivalents and other dilutive securities have not been
included in the calculation as they would be anti-dilutive on the loss per
share. For the year ended December 31, 1994, the assumed exercise of dilutive
stock options and warrants have been included in the calculation of earnings per
share.
3. ACQUISITIONS, RESTRUCTURING AND OTHER CHARGES
On October 27, 1995, the Company acquired all of the issued and outstanding
capital stock of Versyss, a private company, 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 $45,797,000
consisting of $14,367,000 in debt, $14,169,000 in deferred maintenance revenue,
and $17,261,000 in accrued expenses derived from operations. Versyss, based in
Needham Heights, MA, develops and sells practice management software products
and related equipment, service and support as well as provides integrated
information systems to certain industries other than health care.
On April 24, 1995, PMSC, a newly formed, wholly-owned subsidiary of the
Company, acquired substantially all of the assets of the PMS Business for
$2,861,003 in cash and $2,000,000 in the form of a one year promissory note from
PMSC to Practice Management Systems, Inc. ("PMSI"), the sellers of the PMS
Business, which note bears interest at the rate of 10% per annum. In addition,
the Company assumed certain liabilities of the PMS Business, primarily related
to software support and hardware maintenance agreements, in the aggregate amount
of $3,009,163. The PMS Business, founded in 1983 in Needham, MA, provides
practice management software and systems support services to physicians, medical
clinics and other medical service providers.
On November 15, 1994, the Company acquired the Acclaim software, maintenance
and support business from Sentient, a private company, for $600,000 in cash and
a one year promissory note in the aggregate principal amount of $600,000,
bearing interest at a rate of 8% per annum. In addition, the
F-10
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS, RESTRUCTURING AND OTHER CHARGES (CONTINUED)
Company assumed certain liabilities related to performance obligations under
software maintenance and support agreements entered into with, and prepaid by,
physician users of the Acclaim system. The fair value of the liabilities assumed
was $563,000. Due to the nature of the assets acquired, $1,500,000 of the
$1,763,000 purchase price was allocated to intangible assets, consisting of the
customer list, the software products, and goodwill and is being amortized over a
period of one to fifteen years.
On March 11, 1994, the Company acquired substantially all of the assets of
the DOM/2 Business from IBAX Healthcare Systems, a partnership owned by
International Business Machines Corporation ("IBM") and Baxter Healthcare
Corporation, for $1,024,000 in cash and the assumption of $976,000 of certain
liabilities related to performance obligations under prepaid software
maintenance and support agreements. Such assets included, without limitation,
the customer list, the maintenance and support agreements and the software
utilized in the DOM/2 Business (the "DOM/2 Software"). Due to the nature of the
assets acquired, the purchase price was allocated entirely to intangible assets,
primarily for the customer list and goodwill, and is being amortized over a
useful life of seven years.
Had both the Acclaim Business and DOM/2 Business acquisitions been
consummated on January 1, 1994, the Company's results of operations would not
have been materially affected for the purpose of pro forma disclosures.
On December 31, 1993, the Company purchased all of the issued and
outstanding capital stock of Wallaby, a private company, pursuant to a stock
purchase agreement, for $12,500,000, of which: $5,000,000 was paid in cash;
$3,000,000 was paid in the form of notes due and paid on January 3, 1994;
$3,000,000 was paid in the form of one year 7% promissory notes due and paid on
January 3, 1995; and $1,500,000 was paid in the form of two year 7% promissory
notes due and paid on January 3, 1996. Wallaby, founded in 1983, also provides
practice management software and systems support services to physicians, medical
clinics and other medical service providers, marketed directly and through
independent resellers.
On September 23, 1993, a wholly-owned subsidiary of the Company purchased
all of the outstanding capital stock of Calyx from the Flagship Group Inc., a
private company, pursuant to a stock purchase agreement, for $4,050,000 of which
$2,100,000 was paid in cash and $1,950,000 was paid in the form of a one year 7%
interest-bearing note. Calyx, founded in 1982, located in Brookfield, Wisconsin,
is engaged in the business of providing physicians, hospitals, medical clinics
and other facilities that provide medical services with practice management
software systems and maintenance and support for such systems, marketed
primarily through independent resellers.
The Versyss, PMS, Acclaim, DOM/2, Wallaby and Calyx transactions were
accounted for by the purchase method of accounting and, consistent with the
requirements of APB No. 16, the tangible assets acquired and liabilities assumed
have been recorded at their fair values at the respective acquisition dates.
F-11
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS, RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The specific intangible assets acquired in the Versyss, Wallaby and Calyx
transactions have been identified by and valued at their fair values, with the
help of an appraiser, at the acquisition dates. The consideration (including
acquisition costs) and the allocations of purchase price are summarized by
significant asset category below:
<TABLE>
<CAPTION>
CALYX WALLABY PMS VERSYSS
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Consideration:
Cash................................................. $ 2,100,000 $ 5,000,000 $ 2,861,003 $ 12,333,000
Notes payable........................................ 1,950,000 7,500,000 2,000,000 11,750,000
Liabilities assumed.................................. 1,836,981 959,698 3,009,163 45,797,000
Legal and accounting costs........................... 148,750 170,000 79,371 702,629
------------ ------------- ------------ -------------
Total purchase price............................... $ 6,035,731 $ 13,629,698 $ 7,949,537 $ 70,582,629
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Allocation of Purchase Price:
Tangible assets including receivables, inventories,
and equipment....................................... $ 498,580 $ 1,520,640 $ 2,206,150 $ 13,985,000
Acquired technology in process....................... 2,775,000 8,097,000 -- 14,516,000
Physician supplier base (amortized over seven
years).............................................. 267,000 369,000 483,151 --
Profit on support and update agreements (amortized
over one year)...................................... 375,000 -- 123,785 852,602
Acquired software products (amortized over three to
five years)......................................... 566,000 871,000 179,089 3,101,000
Profit on future support and update agreements
(amortized over three years to five years).......... 750,000 -- 267,750 820,281
Other intangible assets (includes non-compete
agreements, tradename and goodwill) (amortized over
seven years to fifteen years)....................... 804,151 2,772,058 4,689,612 37,307,746
------------ ------------- ------------ -------------
Total.............................................. $ 6,035,731 $ 13,629,698 $ 7,949,537 $ 70,582,629
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
The Consolidated Statement of Operations for the year ended December 31,
1995, includes the results of operations of PMSC from April 24, 1995 and Versyss
from October 27, 1995. The Consolidated Statement of Operations for the year
ended December 31, 1993 includes the results of operations of Calyx from
September 23, 1993 (closing date of the acquisition). The Company charged
operations $14,516,000 and $10,872,000 in 1995 and 1993, respectively, for the
acquired technology in process costs. The acquired technology in process costs
consist of the combination of the fair value of the software products under
development at Versyss, Wallaby and Calyx that had not achieved technological
feasibility at the dates of acquisition and had no alternative future uses and
were therefore charged against operations in the period of incurrence. The
physician supplier base is the fair value placed on the acquired users of the
Calyx, Wallaby, and the PMS Business software.
The following unaudited pro forma financial information represents the
combined results of operations of the Company, Versyss, and PMSC as if the
acquisitions had occurred as of January 1, 1994, after giving effect to certain
financing transactions completed in the first and third quarters of 1995 and
certain other adjustments including the amortization of intangible assets and
increased interest expense on debt related to both acquisitions. The unaudited
pro forma financial information for 1993 represents the combined results of
operations of the Company and Calyx and Wallaby as if the Calyx and Wallaby
acquisitions had occurred as of January 1, 1993, after giving effect to certain
adjustments, including amortization of intangibles,
F-12
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS, RESTRUCTURING AND OTHER CHARGES (CONTINUED)
increased interest expense on debt related to both acquisitions, and the
elimination of term indebtedness to IBM Credit Corporation ("ICC") and to Mr.
Jeffry M. Picower, the majority shareholder and Chairman of the Board of
Directors of the Company (the "Investor") who funded the Wallaby acquisition.
The unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company, Versyss, PMSC,
Calyx and Wallaby constituted a single entity during such periods nor does it
represent a basis for assessing future performance. With the help of an
appraiser, the Company allocated $14,516,000 of the purchase price of the
Versyss acquisition to Acquired technology in the Consolidated Statements of
Operations for the year ended December 31, 1995. This charge is non-recurring
and unusual and, as it relates directly to the acquisition, is excluded from the
unaudited pro forma consolidated results of operations.
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Operating Revenues....................................... $ 89,271,214 $ 99,458,962 $ 13,007,549
Net Loss before Extraordinary Item....................... $ (3,543,961) $ (7,706,759) $ (32,053,174)
Loss per Common Share Before Extraordinary Item.......... $ (.08) $ (.18) $ (1.05)
</TABLE>
In the fourth quarter of 1995, after the completion of the Versyss
acquisition, management completed a review of the Company's operations, in
conjunction with the newly acquired PMSC and Versyss 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 thus increase shareholder value. The
Company recorded a restructuring charge aggregating $3,922,450, partially offset
by a recovery of $850,000 from a change in estimated requirements previously
charged against operations as part of the restructuring accrual recorded in 1993
(see below). The 1995 Restructuring Plan provision included $2,509,950 for lease
termination costs (principally commencing in July 1996) and $1,412,500 for
severance and other employee reduction-related costs. The 1995 Restructuring
charges do not include additional costs associated with the consolidation of
operations such as re-training, consulting, purchases of equipment and
relocation of employees and equipment. These costs will be charged to operations
or capitalized, as appropriate, when incurred. The implementation of this plan
commenced immediately and it is anticipated to be completed by the end of 1997.
In the fourth quarter of 1993, after completing the Calyx and Wallaby
acquisitions, the Company implemented a restructuring plan (the "1993
Restructuring Plan") designed to reduce costs, improve operating efficiencies
and increase shareholder value. The Company recorded a restructuring charge
aggregating $3,165,000, for which no tax benefit was available, for the
consolidation of offices and facilities, where appropriate, the centralization
of administrative and overhead functions and certain other employee
reduction-related costs. The charge included $1,770,000 for lease termination
costs, $192,000 for the write-off of related equipment and leasehold
improvements, $210,000 for office relocation and consolidation costs, and
$993,000 for severance and other employee-related costs. The Company anticipated
that efficiencies related to the restructuring, primarily in the form of reduced
facility and labor-related costs, would be phased in by the end of 1995. Since
implementation of the 1993 Restructuring Plan, the 1993 accrual has decreased by
approximately $2,589,000, of which $1,739,000 was principally due to
expenditures related to the lease termination and consolidation of the Company's
corporate headquarters in Mahwah, New Jersey in 1994 and the resultant
centralization of certain financial and sales administrative functions
previously performed
F-13
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS, RESTRUCTURING AND OTHER CHARGES (CONTINUED)
at the Brookfield, Wisconsin location. However, as of December 31, 1995, certain
restructuring charges related to other lease termination costs have not yet been
paid. The table below summarizes the activity of the 1993 Restructuring Plan:
<TABLE>
<CAPTION>
1993 RESTRUCTURING PLAN
- ------------------------------------------------------------------------------------------
<S> <C>
1993 Provision............................................................................ $ 3,165,000
1994 Activity:
Reduction in workforce, lease termination costs and other cash outflows................. 975,000
Write-off of equipment and leasehold improvements....................................... 165,000
------------
Balance at December 31, 1994.............................................................. 2,025,000
1995 Activity:
Reduction in workforce, lease termination costs and other cash outflows................. 572,000
Additional write-off of equipment and leasehold improvements............................ 27,000
Non-cash recovery from change in estimated requirements................................. 850,000
------------
Balance at December 31, 1995.............................................................. $ 576,000
------------
------------
</TABLE>
During the fourth quarter of 1995, the Company recorded a provision of
$1,477,000 for the writedown of certain assets and other charges. The charge
consisted of a $500,000 writedown of impaired acquisition-related intangible
assets (See Note 2), a $400,000 settlement of a customer dispute related to a
previously-acquired software product and $577,000 of other asset writedowns to
fair value.
4. INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Computer hardware and peripherals.......................................... $3,120,969 $ 392,304
Customer maintenance parts................................................. 1,477,985 --
------------ ------------
$4,598,954 $ 392,304
------------ ------------
------------ ------------
</TABLE>
5. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Land.................................................................... $ 266,000 $ --
Building and Building Improvements...................................... 585,000 --
Computer equipment...................................................... 15,761,541 14,446,546
Furniture and fixtures.................................................. 683,512 406,252
Leasehold improvements.................................................. 605,989 62,404
Equipment under capital lease........................................... 1,072,857 565,597
-------------- --------------
18,974,899 15,480,799
Less: accumulated depreciation and amortization......................... (14,998,704) (14,633,627)
-------------- --------------
$ 3,976,195 $ 847,172
-------------- --------------
-------------- --------------
</TABLE>
Accumulated amortization in connection with equipment under capital leases
amounted to approximately $715,000 and $566,000 as of December 31, 1995 and
1994, respectively. Computer equipment under capital lease totaling $12,740,000
was reclassed to Computer equipment in 1993 as a result of the termination on
December 30, 1993 of the Amended and Restated Term Lease Master Agreement (the
"Restructured
F-14
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT, NET (CONTINUED)
Lease") with ICC, dated as of December 1, 1992 (See Note 12). At December 31,
1993, the net carrying value of equipment previously under capital lease was
determined to be higher than the net future network revenues of such equipment
and, as such, a $3,300,000 adjustment to the net carrying value of these assets
was recorded and is included in the accompanying Consolidated Statement of
Operations.
6. INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or the tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
To the extent that estimated loss carryforwards may not be realized, the
standard requires that a valuation allowance be recorded against the resulting
deferred tax asset.
Income tax expense (benefit) for each year is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal........................................................ $ 150,000 $ 53,000 --
State.......................................................... 81,000 49,320 --
------------- ---------- ----------
231,000 102,320 --
------------- ---------- ----------
Deferred:
Federal........................................................ (1,450,000) -- --
State.......................................................... (200,000) -- --
------------- ---------- ----------
(1,650,000) -- --
------------- ---------- ----------
Total income tax expense (benefit)............................... $ (1,419,000) $ 102,320 --
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
The income tax expense (benefit) differs from applying the federal income
tax rate of 35% for fiscal year 1995 (34% for fiscal years 1994 and 1993) to
income (loss) before income tax expense (benefit) and extraordinary items due to
the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ --------------
<S> <C> <C> <C>
Tax expense (benefit), at statutory rate.................. $ (4,522,000) $ 459,000 $ (10,708,000)
Change in beginning-of-the-year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense.................................................. (2,607,000) (1,042,680) 8,200,000
Amortization of goodwill and acquired technology in
process.................................................. 5,806,000 612,000 4,240,000
Adjustment for deferred tax assets and liabilities for
enacted changes in tax laws and rates.................... 614,000 -- --
State income tax, net of federal benefit.................. (710,000) 74,000 (1,732,000)
------------- ------------ --------------
$ (1,419,000) $ 102,320 $ --
------------- ------------ --------------
------------- ------------ --------------
</TABLE>
F-15
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1995 and December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss..................................................... $ 13,902,000 $ 7,500,000
Restructuring provisions............................................... 7,320,000 --
Operating accruals..................................................... 5,194,000 468,000
Allowance for doubtful accounts........................................ 1,087,000 261,000
Depreciation and amortization.......................................... 1,126,000 876,000
Alternative minimum tax credit......................................... 186,000 53,000
Valuation allowance.................................................... (26,145,000) (8,917,000)
-------------- -------------
2,670,000 241,000
Deferred Tax Liabilities:
Software maintenance income............................................ 37,000 --
Amortization........................................................... 983,000 241,000
-------------- -------------
Net Deferred Tax Asset................................................... $ 1,650,000 $ --
-------------- -------------
-------------- -------------
</TABLE>
From January 1, 1993 through September 30, 1995, the Company recorded a full
valuation allowance against net deferred tax assets related primarily to
operating loss carryforwards due to the uncertainty of their realization. In the
fourth quarter of 1995, based on the future outlook of the Company after the
Versyss acquisition, the Company reduced the valuation allowance recorded
against previous years' net operating loss carryforwards and recorded a net
deferred tax asset of $1,650,000.
A provision for current income taxes was recorded for the years ended
December 31, 1995 and 1994 of $231,000 and $102,000, respectively, to satisfy
Federal Alternative Minimum Tax and certain state income tax obligations. During
1995, the deferred tax asset valuation allowance increased by $17,228,000 due
primarily to incorporating Versyss' net operating loss carryforwards and other
temporary differences, and the acquired technology in process write-off. Any
reductions of the valuation allowance attributed to Versyss' $11,000,000 net
operating loss carryforwards will be treated as a reduction of intangible
assets.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $65,000,000 which expire in 1999
through 2009. This includes approximately $11,000,000 of net operating loss
carryforwards from Versyss which are subject to separate return limitation year
("SRLY") rules. 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 a significant annual limitation on
the Company's ability to utilize its net operating losses in the future. As a
result, a substantial portion of the pre-change net operating losses of the
Company may be deferred by virtue of the IRC Section 382 limitation beyond the
15-year carryover period allowed under IRC Section 172 and, thereby, lost to the
Company forever.
F-16
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C>
Term indebtedness payable to Versyss Liquidating Trust due annually in October 1996
and 1997 at 11% (See Note 3)...................................................... $ 11,750,000 $ --
Convertible subordinated note payable to Equifax, Inc. due February 2000 at 6% (See
below and Notes 11 and 12)........................................................ 10,000,000 --
Subordinated term notes due monthly March 1995 through February 2001 at 8% assumed
from Versyss acquisition.......................................................... 2,004,000 --
Term indebtedness payable to PMSI due April 1996 at 10% (See Note 3)............... 2,000,000 --
Term indebtedness payable to IBM due by October 1997 at prime plus 2.5% (11% at
December 31, 1995) assumed from Versyss acquisition (See Note 3).................. 1,500,000 --
Term indebtedness payable to Wallaby non-employee selling stockholders due January
1995 through January 1996 at 7% (See Note 3)...................................... 750,000 2,250,000
Term indebtedness payable to Sentient Systems, Inc. due November 1995 at 8% (See
Note 3)........................................................................... -- 600,000
Other.............................................................................. 100,160 99,695
------------- -------------
28,104,160 2,949,695
Less: notes payable -- current..................................................... 9,080,000 2,100,000
------------- -------------
19,024,160 849,695
Less: current portion of long-term debt............................................ 100,160 99,695
------------- -------------
Long-term debt..................................................................... $ 18,924,000 $ 750,000
------------- -------------
------------- -------------
Long-term debt, related party:
Term indebtedness payable to the Investor originally due January 1996 at 7%, net
of discount (See Notes 10, and 12).............................................. $ -- $ 12,600,000
Term indebtedness payable to Wallaby selling stockholders employed at the
Company, due January 1995 through January 1996 at 7% (See Note 3)............... 750,000 2,250,000
------------- -------------
750,000 14,850,000
Less: current portion of related party debt........................................ 750,000 1,500,000
------------- -------------
Long-term debt, related party...................................................... $ -- $ 13,350,000
------------- -------------
------------- -------------
</TABLE>
In conjunction with the acquisition of Versyss on October 27, 1995, the
Company issued a two year promissory note for $11,750,000 payable to Versyss
Liquidating Trust, a liquidating trust formed for the benefit of the former
shareholders of Versyss, in equal annual installments at an interest rate of
11%. Also, the Company assumed subordinated notes payable to a former landlord
that were part of settlement claims for damages alleged in connection with lease
defaults. The notes which are secured by a second security interest in
substantially all of Versyss' assets have an aggregate outstanding balance of
approximately $2,004,000 at December 31, 1995 and are being paid in equal
monthly installments of principal and interest (at 8% per year). Along with the
subordinated lease settlement notes, the Company also assumed $1,500,000 in
notes payable to a supplier for funds advanced to Versyss to finance inventory
purchases. The notes are secured by a purchase money security interest in such
inventory acquired from the supplier and by a second lien on such accounts
receivable derived from sales of inventory purchased from the supplier.
Principal is payable upon maturity of the notes in 1997 and interest is due
annually at a rate of prime plus 2.5%. Principal will be forgiven, and a credit
against payments provided, according to provisions of the supply agreement if
the Company exceeds certain annual purchase requirements with the supplier.
F-17
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
On February 15, 1995, Equifax Inc. ("Equifax") made an investment in the
Company through the purchase of a $10,000,000 principal amount five year
convertible subordinated promissory note (the "Equifax Note"). The Equifax Note,
which bears interest at a rate of 6% per annum, payable quarterly, is
convertible into shares of the Company's common stock at a conversion price of
approximately $5.175 per share (See Note 12).
As part of the terms of the acquisition of the PMS Business on April 24,
1995, the Company issued a $2,000,000 one year promissory note to the sellers of
the PMS Business which bears interest at 10% per year.
Three of the previous Wallaby stockholders are employees of the Company. As
such, a total of $750,000 and $2,250,000 of the indebtedness to Wallaby selling
shareholders referred to in the table above was due to these individuals at
December 31, 1995 and 1994, respectively, and has been included as related party
debt. On January 2, 1996, the Company paid the $750,000 of indebtedness
outstanding at December 31, 1995.
On January 3, 1995, pursuant to a debt refinancing (the "1995 Debt
Refinancing"), the Company issued to the Investor a $16,050,000 principal amount
promissory note (the "1995 Investor Note") in exchange for $3,210,000 in cash
and the cancellation of the $12,000,000 principal amount promissory note dated
December 31, 1993, together with all $840,000 of interest accrued thereon
through January 3, 1995. The Company used the $3,210,000 of cash proceeds it
received from the Investor upon the issuance of the 1995 Investor Note to repay
all $3,210,000 in principal and accrued interest due and payable on certain of
the promissory notes issued to Wallaby selling stockholders on January 3, 1995.
The 1995 Investor Note which bore interest at a rate of 12.5% per annum from
January 3, 1995, was due and payable on January 2, 1996 and was mandatorily
prepayable out of the proceeds of the February 15, 1995, offering (the "February
1995 Offering") completed by the Company for 6,250,000 shares of its common
stock at a price of $4.00 per share (see Note 12). Accordingly, amounts
outstanding at December 31, 1994 were classified as non-current in the
accompanying consolidated balance sheet based on the terms of the new promissory
note. Upon completion of the February 1995 Offering, the Company received net
proceeds of approximately $22,300,000 of which $16,050,000 was used to repay the
1995 Investor Note. As a result of the early extinguishment of the 1995 Investor
Note, the Company recorded an extraordinary loss of $180,000.
The annual aggregate maturities of long-term debt at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
Fiscal year ending December 31,
1996......................................................... $9,930,160
1997......................................................... 7,852,000
1998......................................................... 346,000
1999......................................................... 362,000
2000 and thereafter.......................................... 10,364,000
----------
$28,854,160
----------
----------
</TABLE>
F-18
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASING TRANSACTIONS
Future minimum lease payments under all leases with initial or remaining
noncancelable lease terms, in excess of one year at December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ -------------
<S> <C> <C>
Fiscal year ending December 31,
1996..................................................................... $ 442,453 $ 3,204,158
1997..................................................................... 485,535 2,675,772
1998..................................................................... 282,955 2,460,074
1999..................................................................... 145,534 2,256,847
2000..................................................................... 45,020 1,333,600
Thereafter............................................................... -- 3,246,414
------------ -------------
Total minimum lease payments............................................... 1,401,497 $ 15,176,865
-------------
-------------
Less: amount representing interest......................................... 267,472
------------
Present value of future net minimum lease payments......................... 1,134,025
Less: current portion of obligations under capital lease................... 327,770
------------
Capital lease obligations, net of current portion.......................... $ 806,255
------------
------------
</TABLE>
Rent expense for years ended December 31, 1995, 1994 and 1993 was
approximately, $1,209,000, $554,000, and $804,000, respectively. Certain other
future lease commitments have been accrued as part of a restructuring charge
(See Note 3).
In June 1990, the Company entered into an operating lease for office space.
The provisions of the lease required the Company to make lease payments of
$49,596 per month increasing to $52,351 per month in June 1994, plus its
proportionate share of certain other costs. Beginning in June 1992, PCN's
monthly lease payments increased from $41,330 to $49,596. In April 1994,
following notice to its landlord, the Company vacated the space subject to this
lease (See Note 3).
On November 21, 1994, an action was filed by the lessor of the Company's
former headquarters in Laurence Harbor, New Jersey. The plaintiff alleges that
the Company has defaulted in its obligations under its lease of the premises in
question and seeks $1,600,000 of rent through the end of the term of the lease
on December 29, 1996 and other unspecified damages. The Company has answered the
complaint and asserted counterclaims against the plaintiff. The Company intends
to vigorously contest this matter and the Company believes it has substantial
defenses.
The Company occupied office space in Mahwah, New Jersey, under certain lease
agreements providing for a minimum monthly rental payment of approximately
$21,000 through April 6, 1997, cancelable at the Company's option beginning
December 31, 1994. Pursuant to the terms of the lease, the Company notified the
landlord of its intention to cancel the lease commencing February 28, 1995.
On December 6, 1994, the Company entered into an agreement with Monroe
Systems For Business, Inc., a company wholly-owned by the Investor, to sublease
44,725 square feet of office space, for a term of ten years, at The American
Road, Morris Plains, New Jersey, to serve as the Company's new corporate
headquarters and executive offices. The monthly base rent for such space will
initially be $44,352, escalating to $59,260 by 2003. The Company believes that
the terms of such lease are no less favorable than a lease that could have been
obtained by the Company from an unrelated third party in a transaction
negotiated on an arm's-length basis.
In conjunction with the acquisitions of the PMS business and Versyss, the
Company assumed operating leases for facilities and equipment.
F-19
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
9. REVENUES
Revenues for the years ended December 31, 1995, 1994, and 1993 consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Software license fees...................................... $ 15,450,897 $ 6,302,181 $ 381,047
Hardware revenue........................................... 9,721,559 2,592,713 1,288,931
Maintenance, communication fees and other:
Software support and maintenance fees.................... 8,823,507 4,507,388 629,407
Hardware maintenance..................................... 3,508,552 -- --
Communication fees....................................... 2,565,907 3,793,598 3,308,820
Leasing and other........................................ 1,734,920 3,307,926 500,353
------------- ------------- ------------
Total maintenance, communication fees and other............ 16,632,886 11,608,912 4,438,580
------------- ------------- ------------
Total revenues............................................. $ 41,805,342 $ 20,503,806 $6,108,558
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
Software revenues are primarily generated from transactions with independent
resellers who have entered into distribution agreements with the Company. For
the years ended December 31, 1995 and 1994, volume multi-copy sales transactions
were entered into with several major resellers of PCN Health Network software
products for aggregate amounts of $4,521,000 and $1,000,000, respectively. Such
transactions are typically characterized by granting these resellers an
inventory of software licenses and credit terms extending up to 12 months.
Communication fees include membership fees paid by physician members of the
original PCN network and fees paid for communication links to the PCN Health
Network Information System and to the original PCN network by clinical
laboratories, insurance companies, claims clearinghouses and hospitals.
10. TRANSACTIONS WITH RELATED PARTIES
The Investor made common equity investments in the Company of $10,000,000
and $5,000,000 on February 22, 1993 and May 10, 1993, respectively (See Note
12). On December 31, 1993, in conjunction with providing the Company with a loan
in the amount of $12,000,000 bearing interest at a rate of 7% per annum and due
and payable on June 30, 1995, the Investor, pursuant to a plan of reorganization
under section 368 (a)(1)(E) of the IRC, as amended, (i) converted all shares and
dividends accrued through December 31, 1993 of the Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") held by him into
924,648 shares of Common Stock and 2,838.67 shares of Series C Non-Convertible
Preferred Stock (the "Series C Preferred Stock") and (ii) immediately
surrendered the 2,838.67 shares of Series C Preferred Stock and was issued
5,000,000 shares of Common Stock (see Notes 7 and 12).
In addition, the Investor guaranteed the notes due and payable on January 3,
1995 related to the Wallaby acquisition (See Note 3) and agreed to purchase up
to $5,299,000 in Common Stock at $1.00 per share to provide to the Company, if
necessary, sufficient proceeds to pay and perform outstanding obligations
related to the Wallaby notes due and payable on January 3, 1995. As a result of
the favorable interest rate and the guaranty provided by the Investor, the
Company allocated a portion of the value of the Common Stock provided to the
Investor when the Series C Preferred Stock was exchanged to original issue
discount in the amount of $720,000 and a deferred guaranty charge in the amount
of $100,000, both of which were amortized over the term of the loan. All of
these amounts were amortized by February 16, 1995 when the 1995 Investor Note
was repaid out of the proceeds of the February 1995 Offering and $180,000 of the
original issue discount was recorded as an extraordinary loss at that time. For
the year ended December 31, 1994, $480,000 and $67,000 of these amounts,
respectively, were amortized.
On August 2, 1995, the Company entered into a binding financing agreement
with the Investor, in order to guarantee the availability of financing for the
acquisition of Versyss (See Note 3). Subsequent to that time,
F-20
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
management determined it was likely that the Company would be able to obtain
financing on terms more favorable to the Company. Therefore, the Company asked
the Investor to terminate the financing agreement, allowing the Company to
pursue that financing. The Investor agreed to do so and, accordingly, the
financing agreement was terminated. In connection therewith, 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
$25,000,000. The proceeds from such warrant were determined to be within the
range of fair value, as determined by an investment banking firm, and thereby
resulted in no expense charge in the Consolidated Statement of Operations.
In September 1993, the Company entered into an agreement with Richard B.
Kelsky, a member of the Company's Board of Directors, for Richard Kelsky to
provide consulting services to the Company for a monthly fee of $2,500. In
February 1994, Richard Kelsky received warrants to purchase 100,000 shares of
Common Stock at an exercise price of $2.50 share.
In July 1993, the Company entered into an agreement with Comptech Data
Systems Inc. ("Comptech") to provide technical consulting services. Steven E.
Kelsky, the brother of Richard Kelsky, a member of the Company's Board of
Directors was the president of Comptech. The Company recorded expense of
$193,033 and $81,152 for the years ended December 31, 1994 and 1993,
respectively, for the consulting services provided by Comptech. On January 1,
1994, Steven E. Kelsky received options to purchase 10,000 shares of Common
Stock at exercise prices ranging from $4.25 to $7.43, vesting over a period of
four years. On September 1, 1994, Steven Kelsky commenced employment by the
Company as a Vice President.
In June 1994, Jerry Brager, the Company's former Chairman of the Board of
Directors and co-founder, resigned from his position as Chairman to pursue
personal interests. On that same date, Mr. Brager entered into an agreement with
the Company whereby Mr. Brager's employment agreement dated February 22, 1993
was terminated and Mr. Brager agreed to perform certain independent consulting
services, as required by the Company, commencing on the date of the agreement
and terminating on December 31, 1995. The Company was obligated to pay Mr.
Brager a fee of $15,000 per month plus certain expense reimbursement as
compensation for such consulting services through December 31, 1995. For the
years ended December 31, 1995 and 1994, the Company paid Mr. Brager in excess of
approximately $180,000 and $117,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS:
As of December 31, 1995, the Company has employment arrangements with
several employees which provide for the continuation of salary and other
compensation aggregating approximately $1,035,000 for terms ranging through
1996. Upon certain events of termination, varying amounts of severance would be
due under these arrangements.
SOFTWARE LICENSING AGREEMENTS:
In October 1989, the Company entered a six-year software licensing agreement
with Wallaby, requiring minimum aggregate payments of approximately $2,316,000,
after giving effect to annual consumer price index increases under which the
Company obtained the right to install practice management software in 15,000
physician sites. The Company paid $294,000 for the year ended December 31, 1993.
The agreement was terminated in connection with the Company's acquisition of
Wallaby on December 31, 1993 and a remaining software licensing obligation of
$613,000 was avoided.
In October 1992, the Company entered into a one-year database manager
software licensing agreement whereby the Company purchased for $240,000, payable
in twelve equal monthly installments commencing in January 1993, the right to
install a new data base management system in an additional 1,500 physician
sites.
F-21
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The agreement further provides for installations in additional physician sites
at $160 per site. In May 1994, the Company made a subsequent payment of $100,000
to obtain the right to install the new data base management system in an
additional 625 physician sites.
ACCESS AGREEMENTS:
The Company had a co-marketing agreement with a wholly-owned subsidiary of a
national association of voluntary hospitals (the "Association") to market the
Company's network to the Association's member hospitals and their respective
attending physicians. The Company receives an annual fee of $10,000 from each
contracting member hospital plus an annual fee for each physician who enrolls in
the network.
At December 31, 1995 and 1994, the Company had agreements with certain
national clinical reference laboratories (the "Laboratories") to establish
communication links with physicians to enable the Laboratories to provide
clinical laboratory information to and receive such information from physicians
electronically, and to enable the Laboratories to print their requisition forms
containing patient information and insurance information (where applicable) in
certain of the physician's offices. Under the agreements, the Laboratories will
pay PCN a variable access fee per year for each physician's site at which the
clinical laboratory software, developed and owned by PCN, has been installed and
is operational.
On January 25, 1995, the Company entered into an Exclusive Marketing
Agreement (the "Marketing Agreement") with Equifax Healthcare EDI Services, Inc.
("Equifax EDI"), an "all payer" 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. Pursuant to the Marketing Agreement, the Company agreed to generally
promote Equifax EDI to users of the Company's practice management software
products as the exclusive provider of electronic data interchange services,
including claims processing and electronic eligibility and credit and check
authorization. During the term of the Marketing Agreement, Equifax EDI agreed to
make its electronic data interchange services available to the Company's
physician practice customers and to pay to the Company an agreed upon percentage
of the gross revenues earned by Equifax EDI for providing such services to users
of the Company's practice management software products. The Marketing Agreement
also called for Equifax EDI to collect and store the clinical data of the
Company's customers that flows through its system, thereby providing the Company
with a readily available source of data which it could retrieve.
On January 12, 1996, the Company and Equifax entered into an amended and
restated Marketing Agreement which, among other things, limited 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 has 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. The Company will reimburse Equifax for one third of Equifax's
development costs with respect to PCN Link up to $250,000 per year for four
years. Further, the Company will pay to 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
subscribe to the services offered under the Marketing Agreement.
12. SHAREHOLDERS' EQUITY (DEFICIENCY)
PUBLIC OFFERING:
The Company received net proceeds of approximately $22,339,958 from the
February 1995 Offering of which $16,050,000 was used to repay the principal
amount of outstanding indebtedness, a substantial majority of which indebtedness
was incurred to finance previous acquisitions. The balance of the net proceeds
of the February 1995 Offering were used to fund the acquisition of the PMS
Business and for
F-22
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
general corporate purposes. Contemporaneously with the completion of the
February 1995 Offering, Equifax made an investment in the Company through the
purchase of the $10,000,000 principal amount Equifax Note, a five year
convertible subordinated promissory note of the Company, bearing interest at a
rate of 6% per annum, payable quarterly (See Note 7). The Equifax Note is
convertible into shares of Common Stock at a conversion price of $5.175 (subject
to certain conditions and adjustment, including, without limitation, in the
event that shares of Common Stock are issued by the Company at a price which is
lower than the conversion price).
PLACEMENT OF SECURITIES:
On October 20, 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 $24,689,326 through the issuance
of 1,902,748 shares of its common stock and 18,500 shares of its Series A
non-dividend rate convertible preferred stock. The preferred stock, which was
issued at $1,000 per share was, at the option of the holder, convertible after
60 days into shares of common stock at a conversion price of approximately 85%
of the market price of the common stock on the date of conversion. The minimum
and maximum conversion prices are $3.00 and $7.00, respectively, and are
automatically convertible in two years. As of December 31, 1995, 2,750 shares of
the Series A non-dividend paying convertible preferred stock issued pursuant to
such offering had been converted into 401,899 shares of Common Stock.
OTHER SIGNIFICANT SHAREHOLDERS' EQUITY TRANSACTIONS:
On February 22, 1993, the Investor and the Company consummated the
investment contemplated by the Second Amended and Restated Securities Purchase
Agreement, (the "Securities Purchase Agreement") pursuant to which, among other
things, the Investor made an initial investment of $10,000,000 (the
"Investment") and, in exchange, the Company issued 10,000,000 shares of Common
Stock to the Investor, which resulted in the Investor's control of the Company
by virtue of his ownership of a majority of the outstanding shares. In addition,
pursuant to the Securities Purchase Agreement, the Company, under certain
circumstances, was entitled to require the Investor to make an additional
investment of up to an aggregate $5,000,000 ("Additional Investment") during
1993 and 1994 to be used for operations and acquisitions by the Company of any
vendor, dealer, software supplier or other entity which would enable the Company
to enroll, directly or indirectly, additional physician members. In exchange for
such additional investment, the Company would issue a new series of preferred
stock, Series D Cumulative Convertible Preferred Stock ("Series D Preferred"),
having a liquidation preference equal to such investment, which preferred stock
would be convertible, in whole or in part, into shares of Common Stock at a
conversion price equal to the lesser of: (i) 50% of the average daily closing
price per share of Common Stock for the 30 consecutive trading days immediately
preceding the conversion date; and (ii) $2.50 per share of Common Stock, as
adjusted pursuant to the terms of PCN's Amended and Restated Certificate of
Incorporation setting forth the rights, powers and preferences of the new series
of convertible preferred stock.
The Investor committed to make the Additional Investment pursuant to an
agreement dated April 14, 1993, and on May 10, 1993, the Investor made the
Additional Investment of $5,000,000 and received 5,000 shares of Series D
Preferred Stock which was converted immediately, pursuant to the terms of the
Series D Preferred Stock, into 5,206,074 shares of Common Stock.
In addition, the Company filed an Amendment to its Restated Certificate of
Incorporation pursuant to which, among other things: (i) the conversion
provisions of the Company's Series B Preferred Stock owned by the Investor were
amended so that, upon conversion of the Series B Preferred Stock, the Investor
would receive the number of shares of Common Stock he is currently entitled to
receive plus a new series of Series C Preferred Stock, as set forth in the
Securities Purchase Agreement; (ii) the Company authorized the issuance of the
Series C Preferred Stock, which would be issued upon conversion of the Series B
Preferred Stock so as to preserve $2,262,900 of the $3,000,000 liquidation
preference of the Series B Preferred Stock;
F-23
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
and (iii) the Company authorized the issuance of the Series D Preferred Stock
upon the making of the additional investment, as described above. In addition,
the warrants to purchase an aggregate 1,420,000 shares held by the Investor were
amended and restated to provide for the reduction in the exercise prices, which
ranged from $7.39 to $3.00 per share of Common Stock, to $1.00 per share of
Common Stock, and the extension of the expiration dates from September 17, 1996
to February 22, 1998.
On December 31, 1993, in conjunction with providing the Company with a loan
in the amount of $12,000,000 bearing interest at a rate of 7% per annum and due
and payable on June 30, 1995, the Investor, pursuant to a plan of reorganization
under section 368 (a)(1)(E) of the IRC: (i) converted all shares and dividends
accrued through December 31, 1993 of the Series B Preferred Stock held by him
into 924,648 shares of Common Stock and 2,838.67 shares of Series C Preferred
Stock; and (ii) exchanged the 2,838.67 shares of Series C Preferred Stock for
5,000,000 shares of Common Stock.
In addition, the Investor guaranteed the notes due and payable on January 3,
1994 and the notes due and payable on January 3, 1995 related to the Wallaby
acquisition (See Note 3) and agreed to purchase up to $5,299,000 in Common Stock
at $1.00 per share to provide to the Company, if necessary, sufficient proceeds
to pay and perform outstanding obligations related to the Wallaby notes due and
payable on January 3, 1995 and the Calyx note, due and payable on September 23,
1994. As a result of the favorable interest rate and the guaranty provided by
the Investor, the Company allocated a portion of the value of the Common Stock
provided to the Investor when the Series C Preferred Stock was exchanged to
original issue discount in the amount of $720,000 and a deferred guaranty charge
in the amount of $100,000, both of which were amortized over the term of the
loan.
Effective December 30, 1993, the Company entered into an agreement with ICC
whereby ICC: (i) terminated the warrant it held entitling ICC to purchase
674,280 shares of Common Stock at a price of $2.50 per share; (ii) converted the
15,000 shares of Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") held by ICC into 2,083,333 shares of Common Stock and
surrendered its right to cash payment of previously accrued dividends of the
Series A Preferred Stock in accordance with the terms of the Series A Preferred
Stock; (iii) terminated the Restructured Lease; (iv) released liens on the
assets of the Company securing the Restructured Lease created pursuant to a
security agreement; (v) transferred title to the Company for the equipment which
was the subject of the Restructured Lease; and (vi) released a lien on 1,306,000
shares of Common Stock owned by an officer of the Company pursuant to a pledge
agreement.
In consideration for the above, the Company: (x) issued to ICC (A) 1,716,667
shares of Common Stock and (B) a warrant convertible at no consideration into
775,000 shares of Common Stock; and (y) paid ICC $4,000,000 in cash and assumed
certain obligations. Pursuant to the agreement dated December 30, 1993, the
Company has an option to purchase from ICC up to 2,325,000 shares of Common
Stock at a price of $4.75 per share on or prior to April 1, 1997. Further, ICC
agreed that, prior to the earlier to occur of March 31, 1995 or six months
following the consummation by the Company of a public offering of the Common
Stock, ICC would not sell or transfer any shares of Common Stock held by ICC. As
a result of this transaction with ICC, the Company realized an extraordinary
gain on extinguishment of debt and capital lease obligations in the amount of
$8,498,472 for the year ended December 31, 1993.
In March 1993, Lehman Brothers Inc., a shareholder of PCN and of which a
Director of the Company is a Vice-Chairman, received 129,032 shares of Common
Stock in full payment of an advisory fee in connection with the transactions
with the Investor described above. On December 30, 1993, Lehman Brothers Inc.
exercised warrants to purchase 417,500 shares of Common Stock at an exercise
price of $1.80 yielding gross proceeds of $751,500.
F-24
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
STOCK OPTIONS:
At December 31, 1995 and 1994, the Company had reserved, 6,194,865 and
5,898,245 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.
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. 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 or times when the non-incentive stock option becomes
exercisable, though, pursuant to resolution of the Company's Board of Directors
(the "Board"), no option granted after April 7, 1992 may be exercisable within
six months of the date of grant, and otherwise administers the 1989 Plan.
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 holder's separation from service with the
Company. The 1989 Plan terminates on March 31, 1999.
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 such other 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 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, 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 or times 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 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.
1992 Incentive and Non-Incentive Stock Option Plan: The 1992 Incentive and
Non-Incentive Stock Option Plan which reserved for the issuance of 200,000
shares of Common Stock for incentive and non-incentive purposes was terminated
as a condition of the transactions contemplated by the Securities Purchase
Agreement as approved by the Board.
F-25
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Amended and Restated 1993 Incentive and Non-Incentive Stock Option Plan (the
"Employee Plan"): The Employee Plan, as amended, reserves 2,300,000 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/or any of its
subsidiaries, 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 (unless sooner terminated
by the Board).
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 or officers. The committee has no authority to grant non-qualified
stock options, as, immediately following the Directors Plan's effective date,
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 (unless sooner terminated by the
Board).
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, independent resellers receive 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; 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. Options are granted in total to each independent
reseller on September 30, 1994 or on the effective date such independent
reseller executes an independent reseller agreement with the Company. 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
F-26
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Information System sold to existing customers of the Company (200 shares) and to
new customers (100 shares) during the periods from September 30, 1994 to
December 31, 1994, from January 1, 1995 to June 30, 1995 and from July 1, 1995
to December 31, 1995. 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, 1995, but options theretofore granted may extend beyond that
date. All unvested options shall expire on January 1, 1996. Outstanding options
under the VAR Plan were 1,193,400 at December 31, 1995 and 1994, respectively,
of which 252,625 and 32,250 had vested, respectively. The Company recorded
compensation expense of $130,000 in the fourth quarter of 1995 relating to
options that vested for which the market value of the options on the vesting
date exceeded the exercise price.
During the year ended December 31, 1995, the Company canceled and replaced
666,000 stock options granted to employees of the Company and its subsidiaries
under the Employee Plan with new options having the same vesting dates as the
canceled options and having an exercise price of $4.00 per share. In addition,
such replacement options deleted the provision contained in the canceled options
which provided for an increase in the exercise price of any unexercised option
at a rate of 15% per year. In addition, options to purchase an additional
317,000 shares of Common Stock at an exercise price of $4.00 per share were
granted pursuant to the Employee Plan. The effect of this transaction is not
included in the table below.
On October 27, 1995, pursuant to the acquisition of Versyss, the Company
granted to employees of Versyss options to purchase 483,000 shares at $6.50 per
share of which 20% vested on date of grant with the remainder vesting over the
next four years.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OPTION
OF SHARES PRICE RANGE
---------- -------------
<S> <C> <C>
Balance outstanding, December 31, 1992...................................... 601,012 $0.69-$9.00
Granted................................................................... 830,000 $2.50-$8.30
Forfeited................................................................. (489,072) $0.69-$9.00
Exercised................................................................. (37,575) $0.69-$3.74
----------
Balance outstanding, December 31, 1993...................................... 904,365 $0.69-$8.30
----------
----------
Granted................................................................... 1,565,400 $4.75-$8.30
Forfeited................................................................. (20,845) $0.69-$3.74
Exercised................................................................. (63,460) $0.69-$3.74
----------
Balance outstanding, December 31, 1994...................................... 2,385,460 $0.69-$8.30
----------
----------
Granted................................................................... 800,000 $4.00-$6.50
Forfeited................................................................. (42,800) $0.69-$4.00
Exercised................................................................. (203,380) $2.88-$4.17
----------
Balance outstanding, December 31, 1995...................................... 2,939,280 $2.88-$7.20
----------
----------
</TABLE>
Options to purchase 984,106, 559,012 and 344,192 shares of Common Stock were
exercisable at December 31, 1995, 1994 and 1993, respectively.
STOCK WARRANTS:
The Company reserved 7,305,000, 2,305,000, and 2,205,000 shares of Common
Stock for issuance upon exercise of warrants at December 31, 1995, 1994 and
1993, respectively.
F-27
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Pursuant to the terms of the agreement reached with ICC at December 30,
1993, the Company issued warrants to purchase 775,000 shares of Common Stock to
ICC at no consideration and ICC terminated its warrants to purchase 674,280
shares of Common Stock at a price of $2.50 per share.
On August 2, 1995, the Company entered into a binding financing agreement
with the Investor in order to guarantee the availability of financing for the
acquisition of Versyss (See Note 3). Subsequent to that time, management
determined it was likely that the Company would be able to obtain financing on
terms more favorable to the Company. Therefore, the Company asked the Investor
to terminate the financing agreement, allowing the Company to pursue that
financing. The Investor agreed to do so and, accordingly, the financing
agreement was terminated. In connection therewith, 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 $25,000,000
exercisable beginning September 14, 1997. The proceeds from such warrants 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.
The table below details all warrants granted since 1989 and the exercisable
warrants at December 31, 1995.
<TABLE>
<CAPTION>
WARRANTS
DATE OF EXERCISE WARRANTS EXERCISED/ OUTSTANDING
GRANT PRICE GRANTED CANCELED WARRANTS EXPIRATION DATE
- -------------------------- --------- --------- -------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C>
May 1, 1989............... $ 1.80(b) 417,500 (417,500)(a) -- Exercised December 30, 1993
January 19, 1990.......... $ 7.20(b) 417,500 (417,500) -- Canceled February 28, 1993
November 20, 1990......... $ 1.00(c) 417,500 -- 417,500 February 22, 1998
June 11, 1991............. $ 1.00(c) 19,038 -- 19,038 February 22, 1998
July 1, 1991.............. $ 9.00(b) 10,000 -- 10,000 June 30, 1996
July 29, 1991............. $ 2.50(c) 674,280 (674,280) -- Terminated December 30, 1993
September 17, 1991........ $ 1.00(c) 983,462 -- 983,462 February 22, 1998
December 30, 1993......... $ -- 775,000 -- 775,000 December 30, 2003
February 1, 1994.......... $ 2.50(b) 100,000 -- 100,000(d) February 1, 2004
September 13, 1995........ $ 5.00(b) 5,000,000 -- 5,000,000(e) September 13, 2002
--------- -------------- ------------
8,814,280 (1,509,280) 7,305,000
--------- -------------- ------------
--------- -------------- ------------
</TABLE>
The number of warrants exercisable at December 31, 1995, 1994 and 1993 were
2,265,000, 2,245,000 and 2,205,000, respectively.
- ------------------------
(a) Proceeds from the exercise of the warrant granted on December 30, 1993 were
$751,500.
(b) Represents original exercise price at the date of grant.
(c) Represents adjusted exercise price as the result of a credit restructuring.
(d) In February 1994, Richard Kelsky, a member of the Company's Board of
Directors, received warrants to purchase 100,000 shares of Common Stock at
an exercise price of $2.50 per share, of which 40,000 warrants vested
immediately with the balance vesting in increments of 20,000 over three
years. The Company recorded total compensation expense related to these
warrants of $15,000 and $30,000 for the years ended December 31, 1995 and
1994, respectively.
(e) The Investor warrants, granted on September 13, 1995, are not considered
exercisable as they vest two years from the date they were granted. Vesting
is triggered, however, upon a change in ownership of the Company.
F-28
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
WARRANT VALUATION:
The warrants issued on December 30, 1993 were valued as part of the overall
transaction with ICC as discussed in other significant stock transactions.
13. OTHER FINANCIAL INFORMATION
Accrued expenses and other liabilities at December 31, 1995 and 1994
includes salaries and benefits and payroll taxes payable of $2,632,000 and
$531,000. Included within accrued expenses at December 31, 1995 are $3,130,000
of accrued costs associated with the Versyss acquisition. Also included within
accrued expenses and other liabilities at December 31, 1995 and 1994 is a
liability for restructuring costs of $4,500,000 and $2,025,000 (See Note 3).
Unearned income primarily represents the obligation to perform services
related to system support and software maintenance agreements billed in advance.
As discussed in Note 1, revenue is deferred at the time the agreement is
executed and recognized ratably over the term of the agreement, which typically
does not exceed beyond one year. At December 31, 1995 and 1994, the amounts
outstanding for software maintenance, software support and hardware maintenance
agreements were $15,608,705 and $2,919,676, respectively.
14. EMPLOYEE BENEFIT PLAN
In April 1988, the Company initiated a 401(k) Savings and Investment Plan
(the "401K Plan"). Under the provisions of the 401K Plan, the Company matches a
portion of the employees' contribution. All employees over the age of 21 with at
least six months of continuous service are eligible to participate in the 401K
Plan. The Company's contributions are fully vested after five years of
continuous service. Employee contributions are immediately vested. Contributions
by the Company amounted to $149,000, $86,000, and $52,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
15. INDUSTRY SEGMENT, MAJOR CUSTOMER AND SUPPLIER DATA
The Company's operations are conducted within one business segment. There
are no revenues attributable to foreign customers.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 822,000 $ 150,000 $1,255,000
Cash paid for income taxes................................ 142,000 19,000 --
</TABLE>
F-29
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED)
Supplemental non-cash operating, investing and financing activities were as
follows:
- Capital lease obligations of $453,000 were incurred during the year ended
December 31, 1995. None were incurred for the years ended December 31,
1994 and 1993.
- Series A Preferred Stock of the Company with a liquidation value of
$15,000,000 and an estimated fair value of $17,664,000 was exchanged for
$15,000,000 of indebtedness in connection with the IPO in November 1991.
Pursuant to the December 30, 1993 transaction with ICC, the Series A
Preferred Stock was converted into 2,083,333 shares of Common Stock (see
Note 12).
- In November 1991, the Company issued Series B Preferred Stock with a
liquidation value of $3,000,000 and an estimated fair value of $3,323,000
in exchange for $1,000,000 of subordinated notes payable together with
267,200 shares of Common Stock (for which the Investor paid $2,000,000) in
connection with the IPO. Pursuant to the December 31, 1993 transaction
with the Investor, the Series B Preferred Stock and accrued dividends were
converted into 924,648 shares of Common Stock and 2,838.67 shares of
Series C Preferred Stock which were immediately surrendered to the Company
by the Investor, and the Company issued 5,000,000 shares of Common Stock
to the Investor. (see Note 12).
- Accrued dividends on the Series A Preferred Stock and the Series B
Preferred Stock for the year ended December 31, 1993 were an aggregate of
$2,992,531. The accrued dividends were either forfeited or converted in
connection with transactions described above.
- In connection with the purchases of Calyx and Wallaby in the year ended
December 31, 1993, the Company issued $4,950,000 in notes payable and
$4,500,000 in long-term debt and assumed liabilities in the aggregate of
$2,796,679 (See Note 3).
- In connection with the purchase of the DOM/2 Business in March 1994, the
Company assumed liabilities in the aggregate of $976,000 in recognition of
the obligation to honor and perform under certain software maintenance and
support agreements (See Note 3).
- In connection with the purchase of the Acclaim Business in November 1994,
the Company issued $600,000 in notes payable and assumed liabilities in
the aggregate of $563,000 (See Note 3).
- In connection with the PMS acquisition in April 1995, the Company issued
$2,000,000 in notes payable and assumed liabilities in the aggregate of
$3,009,163 (See Note 3).
- In connection with the Versyss acquisition in October 1995, the Company
issued $11,750,000 in notes payable and assumed liabilities in the
aggregate of $45,797,000 (See Note 3).
17. CONCENTRATION OF CREDIT RISK
The Company's concentration of credit risk with customers is largely
dependent on its revenue mix which, at December 31, 1995 and 1994, was primarily
from independent resellers, who are under contract with the Company, and Carolan
Leasing Corporation, and at December 31, 1993 was principally from office-based
physicians. The Company's customers, in general, are primarily dependent upon
the healthcare economic sector.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments. As of
December 31, 1995, the Company holds approximately $1,592,000 in an investor
account and $10,478,000 in a money market account with two different financial
institutions.
F-30
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT (UNAUDITED)
In January 1996, the Company and Glaxo Wellcome Inc. ("Glaxo Wellcome"),
through wholly-owned subsidiaries, formed HealthPoint G.P. ("HealthPoint"), a
joint venture partnership, to design and market clinical information technology
products and services. These products and services are expected to consist of
computerized patient records software products, clinical network capabilities
and data analysis. Healthpoint is a general partnership owned equally by a
wholly owned subsidiary of the Company and a wholly owned subsidiary of Glaxo
Wellcome and will operate independently of the parent companies. A management
committee comprised of management of the wholly-owned subsidiaries of Glaxo
Wellcome and the Company, as well as a representative of HealthPoint's
management, will oversee the venture's operations. The Company has agreed to,
generally, use its best efforts to exclusively distribute HealthPoint's products
and services to the Company's customers on an exclusive basis. Both the Company
and Glaxo Wellcome have contributed product and development assets to
HealthPoint and will contribute at least $50 million in cash to the venture, of
which $43 million will be contributed by Glaxo Wellcome and $7 million will be
contributed by the Company. Of such amounts, as of March 28, 1996, Glaxo
Wellcome had contributed approximately $13.4 million and the Company had
contributed approximately $2.7 million, with the remainder to be contributed
proportionately by the partners in semi-annual installments as needed by the
venture through December 31, 1998. Losses incurred by HealthPoint will be
allocated between Glaxo Wellcome partner and the Company partner in proportion
to their respective cash contributions (approximately 85% to Glaxo Wellcome and
15% to the Company), while profits will, generally be allocated equally between
the partners.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Versyss, Incorporated
Needham, Massachusetts
We have audited the accompanying consolidated balance sheets of Versyss,
Incorporated and subsidiaries as of December 31, 1992, 1993 and 1994, and the
related consolidated statements of operations, stockholders' deficiency, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Versyss, Incorporated and
subsidiaries as of December 31, 1992, 1993 and 1994, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, the
Company is a defendant in a number of legal actions and subject to certain other
contingencies. Management has provided accruals for its best estimate of the
ultimate outcome of these claims and contingencies.
Deloitte & Touche LLP
Boston, Massachusetts
September 5, 1995
F-32
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
NOTES 1992 1993 1994
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash.................................................................. $ 148 $ 133 $ 328
Accounts receivable, net.............................................. 2,5 13,185 10,687 8,616
Inventories........................................................... 2,6 10,371 6,228 4,842
Prepaid expenses and other............................................ 949 1,443 573
Assets held for sale -- printed products group, net................... 4 -- 637 --
---------- ---------- ----------
Total current assets.......................................... 24,653 19,128 14,359
PROPERTY AND EQUIPMENT, net........................................... 2,7 6,487 5,484 3,542
OTHER ASSETS, NET
Excess cost over net assets acquired................................ 2,4 8,958 6,255 4,525
Capitalized software development costs.............................. 2 3,211 3,192 2,144
Other............................................................... 854 486 240
---------- ---------- ----------
TOTAL ASSETS.................................................. $ 44,163 $ 34,545 $ 24,810
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Revolving lines of credit............................................. 10 $ 6,382 $ 10,454 $ 3,981
Current maturities of long-term debt.................................. 10 8,790 2,512 3,096
Current maturities of other long-term liabilities..................... 11 751 829 950
Accounts payable...................................................... 6,592 5,146 5,132
Accrued expenses...................................................... 3,8 9,858 11,211 6,221
Deferred maintenance revenue.......................................... 2 15,808 13,777 15,307
---------- ---------- ----------
Total current liabilities..................................... 48,181 43,929 34,687
LONG-TERM DEBT, less current maturities............................... 10 2,395 6,082 5,160
OTHER LONG-TERM LIABILITIES, less current maturities.................. 3,11 1,711 3,253 2,509
COMMITMENTS AND CONTINGENCIES......................................... 12
REDEEMABLE PREFERRED STOCK
(Aggregate liquidation preference of $7,432, $7,272 and $7,449 at
December 31, 1992, 1993 and 1994, respectively)...................... 13 5,832 6,826 7,449
REDEEMABLE WARRANT TO ACQUIRE COMMON STOCK............................ 14 -- 500 500
STOCKHOLDER'S DEFICIENCY:
Common stock ($.01 par value: authorized, 23,950,000 shares in 1992,
1993 and 1994; issued and outstanding 7,137,333, 9,031,036, and
9,097,636 shares in 1992, 1993 and 1994, respectively)............... 14 71 90 91
Additional paid-in capital............................................ 2,928 3,145 3,145
Accumulated deficit................................................... (16,955) (29,280) (28,731)
---------- ---------- ----------
Total stockholders' deficiency................................ (13,956) (26,045) (25,495)
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY................ $ 44,163 $ 34,545 $ 24,810
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 1992 1993 1994
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES, net: 2
Systems........................................................... $ 62,263 $ 53,159 $ 38,848
Maintenance and other............................................. 34,029 33,493 27,332
Printed products.................................................. 4 10,856 10,726 666
---------- ---------- ----------
107,148 97,378 66,846
COSTS AND EXPENSES:
Costs of revenue:
Systems......................................................... 34,926 32,712 25,676
Maintenance and other........................................... 16,091 16,096 12,119
Printed products................................................ 4 9,086 9,264 655
Sales and marketing............................................... 22,484 20,210 9,602
General and administrative........................................ 24,764 19,330 13,774
Research and development.......................................... 2 4,988 3,481 4,419
Restructuring charges............................................. 3 3,477 3,121 3,007
(Gain) loss on dispositions of assets............................. 4 -- 1,404 (3,184)
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS....................................... (8,668) (8,240) 778
OTHER INCOME (EXPENSE):
Interest expense.................................................. 10 (2,229) (3,136) (1,517)
Interest income................................................... 317 212 65
---------- ---------- ----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM..................... (10,580) (11,164) (674)
PROVISION FOR INCOME TAXES.......................................... 9 -- -- 115
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM...................................... (10,580) (11,164) (789)
EXTRAORDINARY ITEM:
Gain from restructuring of debt, net of taxes..................... 10 -- -- 1,961
---------- ---------- ----------
NET INCOME (LOSS)................................................... (10,580) (11,164) 1,172
PREFERRED STOCK DIVIDENDS ACCRUED AND ACCRETION OF REDEMPTION
VALUE.............................................................. 13 (940) (1,161) (623)
---------- ---------- ----------
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS........................... $ (11,520) $ (12,325) $ 549
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE: 2
Loss before extraordinary item.................................... $(1.69) $(1.46) $(0.16)
Extraordinary item................................................ -- -- 0.22
----- ----- -----
Net income (loss)................................................. $(1.69) $(1.46) $ 0.06
----- ----- -----
----- ----- -----
Weighted average common and common equivalent shares................ 6,804,933 8,421,415 9,077,746
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992............................. 6,729,000 $ 67 $ 1,640 $ (5,435) $ (3,728)
Purchase and retirement of common stock............ (25,000) -- (8) -- (8)
ESOP stock purchase................................ 433,333 4 1,296 -- 1,300
Net loss........................................... -- -- -- (10,580) (10,580)
Accretion of redeemable preferred stock redemption
value............................................. -- -- -- (940) (940)
---------- --- ----------- ------------ ----------
BALANCE, DECEMBER 31, 1992........................... 7,137,333 71 2,928 (16,955) (13,956)
Issuance of common stock........................... 1,994,303 20 280 -- 300
Purchase and retirement of common stock............ (100,000) (1) (63) -- (64)
Net loss........................................... -- -- -- (11,164) (11,164)
Accretion of redeemable preferred stock redemption
value............................................. -- -- -- (1,161) (1,161)
---------- --- ----------- ------------ ----------
BALANCE, DECEMBER 31, 1993........................... 9,031,636 90 3,145 (29,280) (26,045)
Issuance of common stock........................... 66,000 1 -- -- 1
Net income......................................... -- -- -- 1,172 1,172
Preferred dividends declared....................... -- -- -- (177) (177)
Accretion of redeemable preferred stock redemption
value............................................. -- -- -- (446) (446)
---------- --- ----------- ------------ ----------
BALANCE, DECEMBER 31, 1994........................... 9,097,636 $ 91 $ 3,145 $ (28,731) $ (25,495)
---------- --- ----------- ------------ ----------
---------- --- ----------- ------------ ----------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ (10,580) $ (11,164) $ 1,172
Adjustments to reconcile income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................... 4,350 4,164 4,049
Bad debt expense............................................................ 683 606 118
Stock compensation to officers and directors................................ -- 280 --
Non-cash restructuring charges.............................................. 1,700 -- 1,043
Capitalized software writedown.............................................. 427 20 393
Forgiveness of debt......................................................... -- -- (1,961)
(Gain) loss on disposal of assets........................................... -- 1,404 (3,184)
(Gain) loss on disposal of property and equipment........................... 16 89 (161)
Changes in assets and liabilities:
Accounts receivable....................................................... 46 542 3,303
Inventories............................................................... 1,102 3,173 665
Prepaid expenses and other................................................ 242 471 (1,514)
Accounts payable.......................................................... 1,724 (175) 328
Accrued expenses.......................................................... (349) 1,353 (1,800)
Deferred maintenance revenue.............................................. (344) (2,031) 1,530
Other liabilities......................................................... 2,462 2,481 419
---------- ---------- ---------
Net Cash Provided by Operating Activities............................... 1,479 1,213 4,400
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.................................. 154 270 370
Purchase of property and equipment............................................ (1,535) (1,524) (703)
Capitalized software development costs........................................ (2,207) (1,168) (547)
Notes receivable, net......................................................... 1,309 (2,048) 957
Other long term assets........................................................ (527) 253 37
Proceeds from dispositions of assets.......................................... -- 1,190 3,700
---------- ---------- ---------
Net Cash Provided by (Used in) Investing Activities..................... (2,806) (3,027) 3,814
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock................................................. (34) (138) --
Proceeds from issuance of common stock warrant................................ -- 500 --
Proceeds from issuance of common stock........................................ 1,300 20 1
Purchases of common stock for retirement...................................... (8) (64) --
Proceeds from long term debt.................................................. 1,507 -- 765
Net (repayments)/borrowings under line of credit.............................. 1,851 4,072 (6,473)
Payments of long-term debt.................................................... (3,163) (2,591) (2,312)
---------- ---------- ---------
Net Cash Provided by (Used in) Financing Activities..................... 1,453 1,799 (8,019)
---------- ---------- ---------
INCREASE (DECREASE) IN CASH..................................................... 126 (15) 195
CASH, BEGINNING OF YEAR......................................................... 22 148 133
---------- ---------- ---------
CASH, END OF YEAR............................................................... $ 148 $ 133 $ 328
---------- ---------- ---------
---------- ---------- ---------
CASH FLOW INFORMATION:
Cash payments for income taxes................................................ $ 35 $ 30 $ 26
Cash payments for interest.................................................... 1,936 2,570 1,981
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations..................................................... $ 350 $ -- $ 27
Notes payable issued to supplier.............................................. 1,500 -- --
Assets held for sale.......................................................... -- 637 --
Accrued liability for loss on subleases converted to debt..................... -- -- 1,800
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS -- The Company develops, markets, distributes and
supports business information systems. Prior to 1992, the Company sold
proprietary hardware systems manufactured at its Torrance, California facility.
During 1992, the Company concluded that the manufacture of such systems was not
economical and that industry trends clearly favored open architecture systems.
Accordingly, the Company discontinued manufacturing operations and entered into
an original equipment manufacturing agreement with a major computer manufacturer
to supply the Company's needs for computer hardware. The Company's software
applications address the specific information systems needs of small and medium
sized businesses in various industries including health care, materials
management, construction and others. The Company's application software is
installed on the purchased open architecture systems to meet its customer's data
processing needs. The Company also provides its customers with ongoing training,
support, and systems maintenance.
BASIS OF PRESENTATION -- The consolidated financial statements have been
presented on the assumption that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company incurred significant losses from
operations in the fiscal years ended December 31, 1992 and 1993. At December 31,
1994, the Company had negative working capital of $20.3 million, (including
$15.3 million of deferred revenue from maintenance contracts) and negative
common stockholders' deficiency of $25.5 million. The Company adopted plans in
each of the fiscal years 1992, 1993 and 1994 designed to consolidated
facilities, to reduce duplication in field operations, and to centralize certain
operating functions (see Note 3). In May 1995, the Company adopted a new
operating plan which focuses on reducing administrative costs through the
implementation of strict controls and the further consolidation of decentralized
functions. The 1995 operating plan included conservative revenue assumptions
based on historical trends and current operating performance. As a result of
these actions, management expects that it will be able to meet its financial
obligations at least through fiscal 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of VERSYSS and its wholly owned subsidiaries. All significant
intercompany transactions, balances and profits have been eliminated.
INCOME TAXES -- The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1,
1993. There was no cumulative effect from the adoption of SFAS No. 109 and the
prior periods have not been retroactively restated. SFAS 109 requires the asset
and liability method of accounting for income taxes to be applied. Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. 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 taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION -- Systems revenues are recognized upon delivery. The
cost of insignificant obligations by the Company to provide after sale services,
such as installation and training, are accrued upon delivery. Revenues for sales
subject to contingencies are deferred and recognized only after the
contingencies are resolved. Maintenance revenues are recognized ratably over the
terms of the maintenance contracts (typically one year). Printed products
revenues are recognized when printed products are shipped (see Note 4). Other
revenues consist principally of contract programming and training services and
are recognized when such services are provided. Allowances for estimated product
claims and sales returns are
F-37
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided when systems are sold. Effective January 1992, the Company adopted the
revenue recognition policies established by the AICPA's Statement of Position
No. 91-1, the adoption of which had no material effect on the consolidated
financial statements.
CUSTOMERS -- The Company distributes information systems and services
directly to end users and through independent Value Added Resellers (VARs).
Revenues from sales to VARs were approximately 17% of sales in 1992 and 1993 and
were approximately 29% of sales in 1994. No base of customers in one geographic
area constitutes a significant portion of sales, and no one customer accounts
for more than 10% of sales. Allowances are provided for anticipated doubtful
accounts. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
INVENTORIES -- Inventories are stated at the lower of cost (first in, first
out) or market.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost.
Depreciation and amortization is provided using the straight-line method over
estimated useful lives of the related assets, or the lease term for leased
assets, whichever is shorter, as follows:
<TABLE>
<CAPTION>
CLASSIFICATION LIFE
- --------------------------------------------------------------------------------- -----------
<S> <C>
Buildings and improvements....................................................... 18 years
Leasehold improvements........................................................... 5-10 years
Equipment........................................................................ 3-5 years
Furniture and fixtures........................................................... 10 years
</TABLE>
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS -- Costs to develop application
software products are capitalized from the time technological feasibility of the
product is achieved through general release of the product to customers.
Capitalized software development costs are amortized over estimated product
lives of two to five years beginning when the applicable product is available
for general release. To the extent that the unamortized balance of capitalized
software costs exceeds the net realized value of the related product, the
unamortized balance is written down to the net realizable value. Capitalized
software amortization expense was $1,460, $1,167 and $1,202 in 1992, 1993 and
1994, respectively. Writedowns to net realizable value aggregate $427, $20, and
$393 in 1992, 1993 and 1994, respectively.
EXCESS COST OVER NET ASSETS ACQUIRED -- In 1993 and 1994, the excess of cost
over fair value of net assets acquired ("goodwill") is being amortized using the
straight-line method over 14 years. Accumulated amortization was $2,110, $2,746
and $3,411 at December 31, 1992, 1993 and 1994, respectively. On an annual
basis, the Company compares the carrying value of such excess costs to
projections of undiscounted future cash flows of the related product lines or
businesses to evaluate the propriety of its amortization period, as well as the
recoverability of the unamortized balance of such costs. During 1992, the
Company discontinued the manufacture of proprietary hardware (see Notes 1 and 3)
and began purchasing all of its hardware requirements from other manufacturers.
As a result of this decision, the Company wrote down the carrying value of
goodwill by the amount associated with the 1988 acquisition of the manufacturing
assets and business. This amount, estimated to be $1,700, was charged to expense
in the 1992 statement of operations. In addition, the Company reduced the
aggregate amortization periods for the remaining goodwill from the 20 years
initially used to 14 years, the estimated remaining useful life of the assets.
In March 1995 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 establishes accounting standards for the impairment
F-38
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets. This statement requires that these certain assets be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Where the assets are
expected to be disposed in the future, SFAS No.121 requires an estimate to be
made of future cash flows from the use and eventual disposition of the assets.
An impairment exists if the sum of the undiscounted expected future cash flows
is less than the recorded amount. Where the assets are to be held for use, an
impairment exists when the sum of the undiscounted expected future cash flows is
less than the fair value of the assets. SFAS No. 121 is required to be adopted
by the Company in 1996. The adoption is not expected to have a material effect
upon the Company's consolidated financial position.
INCOME (LOSS) PER COMMON SHARE -- Income (loss) per common share is computed
using the weighted average number of common shares and, when dilutive, common
equivalent shares outstanding during each period presented. Fully diluted and
primary earnings per share are the same for each of the periods presented.
Common Stock equivalents consist of stock options and warrants (using the
modified treasury stock method) and Series B redeemable convertible preferred
stock. The Series B convertible preferred stock was anti-dilutive in all periods
presented and the net loss was adjusted for the related accretion.
3. RESTRUCTURING OF OPERATIONS
In response to a continuing deterioration of operating results, the Company
devised and implemented restructuring plans in September 1992 (related to the
cessation of hardware manufacturing), as well as further plans developed and
implemented through September of 1994. The restructuring plans were designed to
restore the Company to profitability. The plans included the disposition of
assets and businesses that did not fit the Company's long term strategies (see
Note 4), and the consolidation of sales branches and various administrative and
operational functions. The 1992 plan resulted in a total restructuring charge of
$3,477, which included $188 for severance payments, $1,589 for lease settlements
resulting from the facilities consolidation (see Note 12) and $1,700 for the
write off of goodwill. The 1993 plan resulted in a restructuring charge of
$3,121, which included $1,852 in lease settlements also related to facilities
consolidation (see Note 12) and $1,269 for severance payments. The 1994 plan
resulted in a restructuring charge of $3,007, which included $2,623 for lease
settlements and abandoned assets that resulted from the facilities consolidation
(see Note 12).
Included in the 1992 results is a $3,477 charge associated with the
discontinuance of hardware manufacturing, including a reduction in staff of 71
employees from all areas of the Company and related facilities consolidation.
The Company discontinued the manufacturing of proprietary hardware under the
restructuring plan and began to purchase all of its hardware from other
manufacturers. As the direct result of this decision, the Company determined
that goodwill associated with the acquisition of the manufacturing assets and
business in 1988 should be reduced by $1,700. The reduction in staff resulted in
a charge of $188 for severance and benefits, all of which was paid in 1992. The
facilities consolidation resulted in the Company entering into an agreement to
sublease a portion of one of its facilities to a third party resulting in a
charge of $1,589. Payments of $8, $249 and $118 were made in 1992, 1993 and
1994, respectively, in connection with this sublease agreement. The Company
realized $3,671 in annualized savings from the restructuring, comprised of
$2,757 in salaries and benefits, $745 in rent and operating expense, and $170 in
amortization.
Included in the 1993 results is a $3,121 charge associated with a further
restructuring of the business which included a reduction in staff of 172
employees from all areas of the Company and facilities consolidation. The
reduction in staff resulted in a charge of $1,269 for severance and benefits, of
which $622 was paid
F-39
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
3. RESTRUCTURING OF OPERATIONS (CONTINUED)
in 1993 and $230 was paid in 1994. As of December 31, 1994, the outstanding
liability was $417. The facilities consolidation resulted in the Company
entering into an agreement to sublease a portion of one of its facilities to a
third party resulting in a charge of $1,852. Payments of $33 and $283 were made
in 1993 and 1994, respectively, in connection with this sublease agreement. The
Company realized $8,590 in annualized savings from the restructuring, comprised
of $7,899 in salary and benefits, and $691 in rent and operating expense.
Included in the 1994 results is a $3,007 charge associated with a further
restructuring of the business which included a reduction in staff of 158
employees from all areas of the Company and facilities consolidation. The
reduction in staff resulted in a charge of $384 for severance and benefits, all
of which was paid in 1994. The facilities consolidation resulted in the Company
taking a $1,043 charge for abandoned property and inventory and a $1,579 charge
for lease settlements. During 1994, $103 was paid as the result of lease
settlements. The Company estimates $7,599 in annualized savings from the 1994
restructuring, comprised of $6,428 in salary and benefits, $841 in rent and
operating expense, $100 in amortization of property and equipment, and $231
expense for inventory obsolescence.
The 1994 restructuring included modifications to agreements made in
connection with the 1992 and 1993 facilities consolidations. During 1992 and
1993, agreements were made to sublease portions of a facility in Torrance,
California, as noted above. During 1994, the Company defaulted on the prime
lease and sublease agreements and subsequently reached a settlement with the
Torrance landlord which terminated the sublease agreements and established a
payment liability of $2,000, with payments of $100 in December of 1994 and $100
in January of 1995 and a promissory note for $1,800 with equal payments over 36
months beginning in February 1995. As part of the settlement, the Company also
cancelled a promissory note receivable from the landlord with an accrued value
of $1,703. (See Note 11.) The total charges related to the settlement of the
Torrance lease, included in the above restructuring charges, were $4,392
($1,589, $1,852 and $954 in 1992, 1993 and 1994, respectively.)
As part of the 1994 restructuring plan, the Company also abandoned certain
branch sales facilities, which resulted in lease settlements of $625 in excess
of rent expense (of which $3 was paid in 1994) and took a charge of $1,043 for
abandoned property, equipment and inventory. The remaining $622 will be paid
through 1999.
F-40
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
3. RESTRUCTURING OF OPERATIONS (CONTINUED)
The following summarizes the results of the Company's restructuring plans:
<TABLE>
<CAPTION>
WRITE OFF TOTAL
FACILITIES EMPLOYEE WRITE OFF PROPERTY CHARGE TO
CONSOLIDATION SEVERANCE SUB-TOTAL GOODWILL EQUIP/INV OPERATIONS
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1992 charge............................... $ 1,589 $ 188 $ 1,777 $ 1,700 $ 3,477
-----------
-----------
1992 expenditures......................... (8) (188) (196)
------ ----------- -----------
December 31, 1992 balance................. 1,581 -- 1,581
1993 expenditures......................... (249) -- (249)
------ ----------- -----------
December 31, 1993 balance................. 1,332 -- 1,332
1994 expenditures......................... (118) -- (118)
------ ----------- -----------
December 31, 1994 balance................. $ 1,214 $ -- $ 1,214
------ ----------- -----------
------ ----------- -----------
1993 charge............................... $ 1,852 $ 1,269 $ 3,121 $ 3,121
-----------
-----------
1993 expenditures......................... (33) (622) (655)
------ ----------- -----------
December 31, 1993 balance................. 1,819 647 2,466
1994 expenditures......................... (285) (230) (515)
------ ----------- -----------
December 31, 1994 balance................. $ 1,534 $ 417 $ 1,951
------ ----------- -----------
------ ----------- -----------
1994 charge............................... $ 1,580 $ 384 $ 1,964 $ 1,043 $ 3,007
-----------
-----------
1994 expenditures......................... (108) (384) (492)
------ ----------- -----------
December 31, 1994 balance................. $ 1,472 $ -- $ 1,472
------ ----------- -----------
------ ----------- -----------
Total balance due at December 31, 1994.... $ 4,220 $ 417 $ 4,637
------ ----------- -----------
------ ----------- -----------
</TABLE>
The aggregate remaining annual cash flows for the liabilities recorded under
the restructuring agreements ($4,637), including the unsecured note payable (see
Notes 10, 12) and the obligations to the ESOP (see Note 10) as of December 31,
1994 are as follows:
<TABLE>
<CAPTION>
FACILITIES
YEAR ENDING DECEMBER 31: ESOP SEVERANCE CONSOLIDATION TOTAL
- ---------------------------------------------------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
1995...................................................... $ 154 $ 256 $ 718 $ 1,128
1996...................................................... 331 78 387 796
1997...................................................... 367 78 387 832
1998...................................................... 404 5 371 780
1999...................................................... 447 329 776
2000...................................................... 300 300
2001...................................................... 25 25
--------- ----- ------ ---------
Total..................................................... $ 1,703 $ 417 $ 2,517 $ 4,637
--------- ----- ------ ---------
--------- ----- ------ ---------
</TABLE>
4. DISPOSITIONS
LOS ANGELES BRANCH -- In 1992, the Company agreed to acquire all of the
assets and assume certain liabilities of a distributor for an aggregate purchase
price of $5.6 million. In connection with the agreement,
F-41
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
4. DISPOSITIONS (CONTINUED)
the Company advanced the distributor $700. In December 1993, the Company entered
into a second agreement with the distributor which terminated the obligation to
acquire the distributor. Pursuant to this agreement, the Company transferred its
branch in Southern California to the distributor, which acquired the business
and assets of the branch subject to certain liabilities related to the business
in exchange for forgiveness by the Company of certain receivables from the
distributor and a complete release of the Company by the distributor from any
further claims related to the proposed acquisition of the distributor by the
Company. In connection with this transaction, the Company recorded a loss of
$552 in 1993, which was in addition to a $700 reserve against advances to the
distributor recorded in 1992.
ARLINGTON BRANCH -- In December 1993, a wholly owned subsidiary of the
Company sold its business and certain assets to a buyer for a total purchase
price of $1,189 ($385 cash and $804 in notes receivable). In connection with
this transaction, the Company recorded a loss of $852 after writing off $1,723
in goodwill related to the Company's 1991 acquisition of this business. The cash
proceeds from this sale were used to reduce borrowings under the Company's
revolving line of credit. The notes receivable recorded in connection with this
transaction were fully paid in 1994, and the related cash proceeds were also
used to reduce borrowings under the Company's revolving line of credit. Proceeds
from the collection of the subsidiary's accounts receivable were used to reduce
the Company's bank debt (See Note 10).
PRINTED PRODUCTS GROUP -- In December 1993, the Company commenced
negotiations with a potential buyer of its Printed Products Group ("PPG"). At
December 31, 1993, assets held for sale consisted of receivables, inventory, and
certain other assets of PPG. On February 15, 1994, the sale of these assets to a
buyer for a total purchase price of $2,700 ($1,600 cash and $1,100 in
liabilities assumed) was completed, and the Company recorded a gain of $462
after writing off $500 in excess of cost over net assets acquired. The cash
proceeds from this sale were used to reduce borrowings under the Company's
revolving line of credit.
CREDIT UNION BUSINESS -- In June 1994, the Company sold its credit union
business and certain assets related to this business to a buyer. The purchase
price was $2,100 in cash and $1,405 in the assumption of liabilities. A gain of
$2,721 was recorded in connection with this transaction, after writing off $565
in excess of cost over net assets acquired. The cash proceeds from this sale
were used to reduce borrowings under the Company's revolving line of credit.
The results of operations for the businesses sold in the transactions
described above are included in the Company's results of operations through the
dates of disposition.
In July 1995 the Company transferred to a business partner its customer base
in San Antonio, Texas in exchange for 20% of the business partner's future sales
contracts from this region signed through June 1998.
5. ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Trade receivables...................................................... $ 14,881 $ 12,354 $ 9,787
Allowance for doubtful accounts........................................ (1,696) (1,667) (1,171)
--------- --------- ---------
Accounts receivable, net............................................... $ 13,185 $ 10,687 $ 8,616
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-42
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
6. INVENTORIES
Inventories were as follows at December 31:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Raw materials............................................................. $ 2,948 $ 488 $ 215
Work in process........................................................... 162 35 19
Finished goods............................................................ 4,745 3,387 2,746
Customer service parts.................................................... 2,516 2,318 1,862
--------- --------- ---------
Inventories............................................................... $ 10,371 $ 6,228 $ 4,842
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment was as follows at December 31:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Land................................................................... $ 266 $ 266 $ 266
Building and building improvements..................................... 972 972 972
Leasehold improvements................................................. 1,074 1,208 933
Equipment.............................................................. 7,593 7,309 6,937
Furniture and fixtures................................................. 3,670 3,235 2,363
--------- --------- ---------
13,575 12,990 11,471
Accumulated depreciation and amortization.............................. (7,088) (7,506) (7,929)
--------- --------- ---------
Property and equipment, net............................................ $ 6,487 $ 5,484 $ 3,542
--------- --------- ---------
--------- --------- ---------
</TABLE>
The original cost of equipment, furniture and fixtures leased under capital
lease agreements was approximately $2,260, $2,117 and $1,873 at December 31,
1992, 1993 and 1994, respectively. Amortization of capital lease equipment was
$530, $495 and $411 for 1992, 1993 and 1994, respectively.
8. ACCRUED EXPENSES
Accrued expenses were as follows at December 31:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Payroll, payroll taxes and fringe benefits................................ $ 2,284 $ 2,540 $ 2,523
Rent...................................................................... 540 493 86
Product and other claims.................................................. 1,138 1,251 1,402
Interest.................................................................. 1,143 1,725 315
Other..................................................................... 4,753 5,202 1,895
--------- --------- ---------
Total..................................................................... $ 9,858 $ 11,211 $ 6,221
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," effective January 1, 1993. There was no
cumulative effect adjustment for the adoption of the new statement and prior
financial statements have not been restated.
The Company follows the asset and liability method of accounting for income
taxes, under which deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
F-43
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES (CONTINUED)
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
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ -- $ -- $ 115
State............................................................ -- -- --
Foreign.......................................................... -- -- --
--------- --------- ---------
Provision for income taxes......................................... $ -- $ -- $ 115
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of income tax expense before extraordinary item computed at
the statutory federal income tax rates with the Company's effective income tax
rates follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Taxes at federal statutory rate................................. $ (2,263) $ (3,701) $ (106)
Non-deductible goodwill amortization............................ 212 215 226
Other........................................................... 51 106 130
Effect of (utilization) nonutilization of net operating
losses......................................................... 2,000 3,380 (250)
Effect of alternative minimum tax ("AMT")....................... -- -- 115
--------- --------- ---------
Provision benefit for income taxes.............................. $ -- $ -- $ 115
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-44
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets for the date of adoption, January 1, 1993
and subsequent years, December 31, 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
JANUARY 1 --------- ---------
1993
-----------
(DATE OF
ADOPTION)
<S> <C> <C> <C>
Current:
Deferred tax asset
Allowance for doubtful accounts.......................... $ 670 $ 653 $ 586
Inventory obsolescence................................... 2,040 1,909 1,602
Compensation............................................. 245 262 248
Other temporary differences.............................. 952 1,390 2,583
Charitable contributions carryforwards................... 22 26 26
----------- --------- ---------
Total current deferred tax asset........................... $ 3,929 $ 4,240 $ 5,045
----------- --------- ---------
Non-Current:
Deferred tax asset -- net operating loss and AMT
carryforwards............................................. $ 2,619 $ 5,345 $ 3,810
Deferred tax liability -- depreciation..................... (1,734) (998) (584)
----------- --------- ---------
Total deferred tax asset -- non current.................... 885 4,347 3,226
----------- --------- ---------
Total deferred tax asset................................... 4,814 8,587 8,271
Valuation allowance........................................ (4,814) (8,587) (8,271)
----------- --------- ---------
Net deferred tax asset..................................... $ -- $ -- $ --
----------- --------- ---------
----------- --------- ---------
</TABLE>
A valuation allowance is provided against temporary deductible differences,
net operating loss carryforwards and tax credits which are not more likely than
not to be realized. During 1993 and 1994, the net increase (decrease) of the
valuation allowance was $3,773 and $(316).
As of December 31, 1994, the Company had net operating loss carryforwards
for federal income tax purposes of $11,207, which is available to offset future
federal taxable income, if any, through 2009.
F-45
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Years Ended December 31, 1992, 1993 and 1994
(In Thousands, Except Share Data)
10. REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Revolving lines of credit........................................... $ 6,382 $ 10,454 $ 3,981
--------- --------- ---------
--------- --------- ---------
Long-term debt:
Secured notes payable............................................. $ 3,531 $ 2,031 $ 956
Subordinated note payable......................................... 3,471 3,471 2,862
Subordinated lease settlement note................................ -- -- 1,800
Supplier notes payable............................................ 1,500 1,500 1,500
Capitalized lease obligations..................................... 1,325 942 559
Stockholder note.................................................. 500 500 500
Installment notes payable......................................... 858 150 --
Other............................................................. -- -- 79
--------- --------- ---------
11,185 8,594 8,256
Less current maturities............................................. (8,790) (2,512) (3,096)
--------- --------- ---------
Long-term debt, less current maturities............................. $ 2,395 $ 6,082 $ 5,160
--------- --------- ---------
--------- --------- ---------
</TABLE>
REVOLVING LINES OF CREDIT AND SECURED NOTES PAYABLE -- The Company has a
revolving line of credit and a secured note payable agreement which were to
expire on October 31, 1995 (extended from scheduled expirations of September 30,
1992 and October 31, 1993). In April 1995, the lender agreed to extend the due
date of the revolving line of credit to January 1, 1996. The revolving line of
credit provides for borrowings up to the lesser of 70% of domestic accounts
receivable under 90 days old or $9,000. The available borrowing base was $6,523
at December 31, 1994. During 1992, 1993 and 1994, the lender made available to
the Company additional borrowings over this available base of $1,000 (the
"over-advance") until April 1, 1994. From April 1, 1994 through June 30, 1994,
the lender made available an over-advance facility of $500, which was secured by
the personal guarantees of two of the Company's stockholders. No fees were paid
to the stockholders for these guarantees.
Interest on the revolving line of credit and secured note payable borrowings
is payable monthly at prime plus 3.5% (12% at December 31, 1994). A commitment
fee of .625% per annum is charged monthly on the unused portion of the line.
Borrowings are collateralized by substantially all assets of the Company.
During 1992, 1993 and 1994, the Company failed to comply with certain
covenants contained in the agreements, including failure to supply audited
financial statements on a timely basis. In 1994, the Company also failed to meet
other covenants included in the agreements, including failure to meet required
minimum net income for the first and second quarters. The breaches of these
covenants have been either cured by the Company or waived by the lender on
September 1, 1995.
In March 1994, in connection with discussions with the lender to obtain
extensions of the over-advance facilities, the secured note was restructured.
Under this agreement, the lender advanced an additional $500 to the Company
under the secured note payable and increased the monthly repayment obligation
from $125 to $150 beginning May 1, 1994. The final payment was due in June 1995.
In May 1995, the lender agreed to spread the final payment and ending principal
balance, which included a balloon payment, over a three month period ending
August 1, 1995. As of September 5, 1995 no amounts remain outstanding under this
agreement.
F-46
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
10. REVOLVING LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
During 1993, a subsidiary of the Company entered into a secured revolving
line of credit which provided for borrowings of up to 80% of the subsidiary's
eligible receivables and which was secured by a lien on all of the subsidiary's
accounts receivable. In December 1993, certain assets (not including
receivables) and the business of the subsidiary were sold (see Note 4). The
amount outstanding under this line of credit as of December 31, 1993 was $776;
the line was fully paid off during January and February 1994 from the proceeds
of the subsidiary's receivables.
SUBORDINATED NOTE PAYABLE -- At December 31, 1993, the Company had an
unsecured, subordinated note payable to the former owner of Contel Business
Systems ("CBS") in the remaining amount of $3,471, plus accrued interest of
$1,474. The note was issued in connection with the 1988 acquisition of all of
the capital stock of CBS. The Company had begun litigation against the former
owner of CBS for claims which, in the opinion of the Company, would
significantly reduce the subordinated note. Notwithstanding its claims, the
Company had not adjusted the remaining balance of the note and had accrued, but
not paid, interest on the balance of $3,471. The former owner of CBS deemed such
nonpayment of interest to be a default under the subordinated note agreement, an
assertion the Company disputed.
During 1993, discussions with the note holder resulted in settling these
disputes and restructuring the terms of the subordinated note. The settlement
was concluded as of January 1, 1994. The new note is for $2,500, with interest
accruing at 8% per annum. Interest payments began on July 1, 1994, and scheduled
monthly payments of principal and interest totalling $125 were to begin in June
1995. In April 1995, the note holder agreed to postpone the start of monthly
principal and interest payments until August 1995 at which time the Company
commenced making the payments. The note will be fully paid off in 1997. In
accordance with the provisions of SFAS No. 15, the Company in 1994 recognized an
extraordinary gain of $1,961 in connection with this transaction.
The new note is subject to a subordination agreement which provides, among
other things, that the note holder shall not, without written consent of the
Company's senior secured lender, collect, enforce or receive payment upon all or
any portion of the indebtedness represented by the subordinated note or
commence, prosecute or participate in administrative, legal or equitable action
against the Company relating to the subordinated note.
SUBORDINATED LEASE SETTLEMENT AGREEMENT -- As of December 31, 1994, the
Company settled a claim by a landlord for damages alleged in connection with a
lease default (see Notes 3, 11 and 12). The settlement was for $2,000, of which
$100 was paid on each of December 30, 1994 and January 27, 1995. The remaining
amount is evidenced by a subordinated note payable to the former landlord. The
note is payable in 72 equal monthly installments of principal and interest (at
8% per annum) of $32 beginning on March 1, 1995, and is secured by a second
security interest in substantially all of the Company's assets. The note is
subject to a subordination agreement substantially similar to the subordinated
note payable described above.
CAPITAL LEASE OBLIGATIONS -- The Company leases various equipment under
capital lease agreements with interest rates ranging from 10% to 13%. The
agreements require monthly payments of varying amounts and expire through 1998.
INSTALLMENT NOTES PAYABLE -- Installment notes payable at December 31, 1993
consisted of various unsecured notes issued in connection with acquisitions.
Principal repayments were due through February 1994 together with payments for
interest at 10% per annum. These notes have been fully paid in 1994.
F-47
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
10. REVOLVING LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
OTHER -- Other long term debt at December 31, 1994 consisted of notes issued
in connection with claims by former landlords and are generally payable with
interest at 8% per annum in equal monthly payments of varying amounts through
2001.
SUPPLIER NOTES PAYABLE -- The Company purchases inventory and equipment
under the terms of an agreement with a supplier. In connection with this
agreement, the supplier advanced the Company $1,500 to finance inventory, and
the Company gave the supplier two promissory notes totalling that amount. The
notes are secured by a purchase money security interest in the Company's
inventory acquired from the supplier and by a second lien on the Company's
accounts receivable derived from sales of inventory purchased from the supplier.
The notes provide for annual interest payments at an annual rate of prime plus
2.5% (11% at December 31, 1994). Principal is payable upon the maturity of the
notes in 1997. Principal will be forgiven, and a credit against interest
payments provided, according to the provisions of the supply agreement if the
Company exceeds certain annual purchase requirements with the supplier. An
interest credit of $35 was received against the interest payment due in October
1993 and a credit of $65 was received against the interest payment due in July
1994.
Aggregate maturities of long-term debt and other at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
AMOUNTS NET PRESENT VALUE
LONG-TERM CAPITAL REPRESENTING OF MINIMUM
DEBT LEASES INTEREST PAYMENTS
----------- ----------- --------------- -------------------
<S> <C> <C> <C> <C>
1995.............................................. $ 2,826 $ 321 $ 51 $ 270
1996.............................................. 1,764 177 27 150
1997.............................................. 2,077 117 9 108
1998.............................................. 307 32 1 31
1999.............................................. 333 -- -- --
Thereafter........................................ 390 -- -- --
----------- ----- --- -----
Total........................................... $ 7,697 $ 647 $ 88 $ 559
----------- ----- --- -----
----------- ----- --- -----
</TABLE>
In August 1995, the Company received $500 in exchange for signing an unsecured
promissory note to an unrelated party (see Note 17). The note bears interest at
10% and is due in full in August 1996.
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows at December 31:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Facility sublease loss..................................................... $ 1,535 $ 3,151 $ --
Deferred disability benefit................................................ 317 272 272
ESOP (see Note 3).......................................................... -- -- 1,703
Lease settlements (see Note 3)............................................. -- -- 974
Other...................................................................... 610 659 510
--------- --------- ---------
$ 2,462 4,082 3,459
Less current maturities.................................................... (751) (829) (950)
--------- --------- ---------
Other long-term liabilities, less current maturities....................... $ 1,711 $ 3,253 $ 2,509
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-48
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
11. OTHER LONG-TERM LIABILITIES (CONTINUED)
Aggregate annual commitments under other long-term liabilities are as
follows for the years ending December 31:
<TABLE>
<S> <C>
1995........................................................ $ 950
1996........................................................ 753
1997........................................................ 549
1998........................................................ 493
1999........................................................ 488
Thereafter.................................................. 197
---------
Total..................................................... $ 3,430
---------
---------
</TABLE>
FACILITY SUBLEASE LOSS -- During 1992, the Company entered into an agreement
to sublease a portion of one of its facilities to a third party. A loss of
$1,589, representing the net present value of the excess of the Company's future
minimum rental commitments over future minimum sublease revenues for the lease,
was recorded in that year. In 1993, the Company sublet another portion of the
same facility to another third party. A loss of $1,852, computed in the same
manner, was recorded in 1993. The combined net present value of these
obligations was $3,151 at December 31, 1993. During 1994, as a result of
negotiations with the landlord, this lease obligation was terminated and
replaced with a long term note. (See also Notes 3, 10 and 12).
DEFERRED DISABILITY BENEFIT -- In 1992, the Company granted an officer a sum
certain and period certain deferred disability benefit, which provided for
monthly payments of $8 through 1997. The net present value of this obligation
was $272 at December 31, 1993 and 1994. The Company has temporarily suspended
payment of this benefit.
EMPLOYEE STOCK OWNERSHIP TRUST -- During 1991, the Company sold certain
assets for cash and a note receivable. The note receivable was assigned to the
ESOP in partial satisfaction of the 1991 contribution, and the Company
guaranteed performance by the issuer of the note. The note became payable in
April 1994, at which time the Company was in default on certain lease
obligations to the issuer of the note (see Notes 3, 11 and 12). The issuer
exercised a right of offset contained in the note and refused to pay the note.
The ESOP demanded that the Company pay the note, and the Company in June 1994
recorded a provision of $1,597 ($1,200 in principal and $397 in accrued
interest) for payment of the note (see also Note 3). Interest accrues at 10% per
annum. As of December 31, 1994, the Company had accrued $107 in interest since
June 1994. The Company has a memorandum of agreement with the trustee of the
ESOP under which the Company began paying interest at 10% on the obligation in
January 1995, and began paying principal on the obligation in July 1995.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- Aggregate annual facility and equipment rental
commitments under operating leases are as follows for the years ending December
31:
<TABLE>
<S> <C>
1995................................................... $ 1,732
1996................................................... 1,377
1997................................................... 1,066
1998................................................... 908
1999................................................... 728
</TABLE>
F-49
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense was $5,963, $6,220 and $2,673 in 1992, 1993 and 1994,
respectively. Certain operating leases contain escalation and renewal clauses.
During 1994, the Company defaulted on various obligations to pay rent for
leased facilities. These included leases for the Company's headquarters facility
in Westwood, Massachusetts, and for facilities in Torrance, California, where
operations had previously been discontinued and which facilities had been sublet
to third parties, and leases at various branch locations which were closed in
July 1994.
As a result of these defaults, the affected landlords asserted claims
against the Company totalling in excess of $10,000, and certain landlords began
legal action against the Company. The landlord for the Company's headquarters
obtained a judgement for $735 in September 1994, and obtained an order for
possession. In October 1994, the Company paid the judgement and moved its
headquarters to Needham, Massachusetts. Settlements have been reached with all
but two of the claimants as of September 5, 1995, resulting in a charge to 1994
operations of $1,580 (see Note 3). These settlements have been recorded as of
December 31, 1994 as long term debt if they involved payment schedules of more
than one year (see Note 10) or as accrued expenses if the payment schedule was
less than one year (see Note 8).
In April 1995 the landlord for the Company's former headquarters filed a
claim against the Company asserting the Company owed $540 for unpaid back rent.
In June 1995 the Company obtained a summary judgement dismissing the former
landlord's claim. As of September 5, 1995 the former landlord filed an appeal of
the summary judgement which has not been responded to by the courts. Management
believes the outcome of this matter will not have a material effect on the
Company's financial position or results of operations.
EMPLOYMENT AGREEMENTS -- The Company has severance obligations to two former
officers totalling $417 at December 31, 1994. The Company also has contractual
agreements with an officer and director which require the officer and director
to return half of the stock purchased in 1993 (see Note 14) if the officer and
director voluntarily leaves the Company before certain share values are
attained.
ROYALTIES -- The Company pays royalties to the developers of certain
products used in its information systems products. Total royalty expense during
1992, 1993 and 1994 was $964, $884, and $353, respectively.
VERSYSS SOUTHWEST, INC. -- During 1993, VERSYSS Southwest, Inc. ("VSW"), an
independent distributor for the Company, sued the Company for damages related to
the transfer of its distributorship agreement for Arizona to another independent
distributor, Automated Solutions, Inc. ("ASI"). VSW also sued ASI, and ASI sued
the Company alleging that the Company failed to comply with certain agreements
arising out of the same transaction. In early 1995, the Company settled the VSW
suit by agreeing to pay VSW $50 in cash and $126 in 60 equal monthly
installments without interest (see Note 8) and forgave notes and accounts
receivable from VSW aggregating $298. Provision for the cash settlement was
recorded as of December 31, 1993 and the accounts and notes receivable were
fully reserved in 1992. The Company is in negotiations with ASI regarding
resolution of its claims.
BENCHMARK COMPUTER SYSTEMS, INC., of Wisconsin ("BCS") claims that the
Company agreed to purchase the net assets of BCS for an undetermined purchase
price. In December 1994, the Company settled this claim by forgiving notes and
accounts receivable from BCS aggregating $681. The notes and accounts receivable
had been fully reserved by charges to operations of $608 in 1992 and $73 in
1993.
LITIGATION -- The Company is the defendant in a number of other legal
actions for which an accrual aggregating approximately $1,400 has been provided
in the accompanying 1994 consolidated financial
F-50
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
statements. In determining the amount of the accrual, the Company took into
consideration that claims aggregating approximately $3,300 are covered by the
Company's insurance policies. An accrual of $127 has been provided on these
claims, the amount of the Company's aggregate deductibles under such insurance
policies. Management believes, based on the advice of counsel, that the ultimate
resolution of these claims will not have a material effect on the Company's
financial position or results of operations.
INDUSTRIAL DEVELOPMENT BOND -- From 1982 through 1986, the Company's Irish
subsidiary received $693 in government grants for locating in Cork County,
Ireland. The Company is amortizing the grant to income over the life of the
assets acquired with the grant proceeds and as of December 31, 1994, the amount
deferred and included in other liabilities in the consolidated balance sheet was
$287. In October 1994, the Irish government asserted that the Company had not
abided by the terms of the agreement and requested repayment of the full amount
of the grant. Negotiations between the Company and the Irish government have
been postponed until the fall of 1995. As of December 31, 1994, the amount, if
any, that may be repayable by the Company cannot be determined and as such, no
reserve has been recorded.
PENALTIES -- The Company's transaction with the ESOP described in Note 11
may have been prohibited by the Employees Retirement Income Security Act. If the
Company engaged in a prohibited transaction with the ESOP, the Company could be
liable for certain penalties of 5% per year. If the IRS were to determine that
the transaction was prohibited, and so notify the Company, the Company could be
subject to additional penalties as high as 100% of the amount involved in the
transaction if corrective action were not taken. The Company has not received
any notice from the IRS with respect to this transaction. If the IRS does issue
a notice with respect to this transaction, the Company intends to take all
reasonable corrective action and does not believe that any penalties would have
a material effect on the Company's financial position or results of operations.
13. REDEEMABLE PREFERRED STOCK
The Company has authorized 185,000 shares of Series A 6% cumulative
redeemable preferred stock (nonvoting) with a $10 per share par value. Of this
stock, 169,750, 164,750, and 164,750 shares were issued and outstanding at
December 31, 1992, 1993, and 1994, respectively. On December 31, 1993 or
December 31, 1994, the Series A shareholders could notify the Company of their
right to exercise a put option which would require the Company to repurchase the
shares on May 1, 1994 or May 1, 1995, respectively. As of December 31, 1994, the
holders of 81,667 shares of the Series A preferred stock had provided such
notice to the Company which has advised them, due to the Company's negative net
worth, that it is prohibited by statute from redeeming the preferred shares. The
redemption price is $32 per share, payable in cash or, at the Company's option,
in five-year subordinated notes. Series A redeemable preferred stock has a
liquidation preference of $32 per share plus declared but unpaid dividends.
The Company has authorized 130,000 shares of Series B 6% convertible
redeemable preferred stock (nonvoting) with a par value of $10 per share. Of
this stock, 130,000 shares were issued and outstanding at December 31, 1992,
1993, and 1994. In April 1992, each share of Series B preferred stock became
convertible into two shares of common stock. In addition, the shareholders could
put shares to the Company on May 1, 1994 or 1995, at $14 per share payable in
cash or, at the Company's option, in five-year subordinated notes. The Company
may redeem any or all of the Series B preferred stock at any time at $14 per
share, payable in cash, or at the Company's option, in five-year subordinated
notes. Series B Convertible redeemable preferred stock has a liquidation
preference of $14 per share plus declared but unpaid dividends.
F-51
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
13. REDEEMABLE PREFERRED STOCK (CONTINUED)
For each year in which the Company has positive net income, the Company's
Board of Directors must declare a dividend equal to 6% of the par value of the
outstanding Preferred Stock, but not in excess of the positive net income.
Dividends declared on the Series A and Series B preferred stocks are cumulative
and payable upon declaration, redemption, conversion, liquidation, or as
otherwise determined by the Company's Board of Directors. A dividend equal to 6%
of the par value of the outstanding preferred stock, totalling $180 and $177,
was declared in 1990 and 1994, respectively, and remains unpaid. It is
classified with the balance of redeemable preferred stock, and until it is paid,
no dividend may be declared on the common stock (see Note 14).
In the event of liquidation, holders of Series A and Series B preferred
stock are first in the order of liquidation preference. In addition, upon
liquidation, any preferred stock dividends unpaid at that time will be paid to
the holders of these shares.
Series A and Series B preferred stock have been accreted to their mandatory
redemption values from their date of issuance to the earliest mandatory
redemption date which was May 1, 1994.
GENERAL PREFERRED STOCK -- The Company has authorized 300,000 shares, $10
par value, none of which are issued and outstanding.
14. COMMON STOCK
STOCK ISSUANCE -- As of May 11, 1993 the Company's Board of Directors
authorized the sale of common stock totalling 1,899,450 shares to certain
officers and directors of the Company at a price of $.01 per share. As of the
same date, the Company's Board of Directors authorized the sale of 94,478 shares
of common stock to a former officer and director of the Company at a price $.01
per share. Based upon a review of the Company's economic circumstances at the
time of the issuance, the Board concluded that the value of the shares issued
was equal to $.15 per share. The officers and directors purchased the shares at
the par value of $.01 per share for $19 in 1993 resulting in compensation being
recorded by the Company in 1993 of $280.
DIVIDENDS -- No dividends may be declared on common stock so long as any
dividends on any preferred stock have been declared or are required to be
declared and remain unpaid.
AMENDMENT TO ARTICLES OF INCORPORATION -- In July 1992, the Common
Stockholders approved an amendment to the Company's articles of incorporation to
amend the Company's capital structure to combine Class A and Class B common
stock into one class of $0.01 par value common stock with 23,950,000 shares
authorized.
COMMON STOCK PURCHASE WARRANTS -- Warrants to purchase 498,956 shares of
common stock were issued during 1989 in connection with the subordinated note
from CBS and are exercisable at $0.14875 per share. These warrants may be
exercised through January 1, 1999. Warrants to purchase 370,708 shares of common
stock were issued in connection with the secured notes payable, and are
exercisable at $0.2235 per share through January 1, 1999.
REDEEMABLE WARRANT TO ACQUIRE COMMON STOCK -- During 1993, the Company
entered into a related party transaction whereby, $500, representing the
proceeds of an insurance policy on the life of a former officer of the Company,
was transferred to the Company by the widow of the former officer. In exchange,
the Company issued to the former officer's estate a warrant for the purchase of
125,000 shares of common stock at $4 per share. The warrant is exercisable at
any time prior to December 14, 1998. In addition, the holder of the warrant has
the option to require the Company to repurchase the warrant for $500 (in cash
or, at the
F-52
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
14. COMMON STOCK (CONTINUED)
Company's option, for $100 cash, plus four equal annual installments of $100) at
any time upon 60 days notice. The Company also has the right to repurchase the
warrant for $500 in cash at any time during the life of the warrant.
RESERVED SHARES -- The Company has reserved 4,226,867 shares of common stock
for issuance upon the exercise of stock purchase warrants, stock options and
upon the conversion of the Series B preferred stock.
STOCK OPTIONS -- The Company has an employee nonqualified stock option plan
and a nonemployee stock option plan. Under the plans, options to purchase up to
a maximum of 4,000,000 shares of common stock may be granted at exercise prices
of not less than fair market value at the date of grant. Options under both
plans expire 10 years from the date granted or 90 days after date of termination
of employment. The options become exercisable over a three-year period from the
date granted, with 25% becoming exercisable on May 1 in the first year, 50% on
May 1 in the second year, and 25% on May 1 in the third year.
In November 1993, the Company entered into an employment agreement with a
new Vice President of Finance and Chief Financial Officer. Pursuant to the terms
of employment negotiated with him, the Company granted him options to purchase
100,000 shares of common stock at $.01 per share. Of these options, 25,000
vested immediately with his employment, and the balance vest in three equal
installments on each of November 1, 1994, 1995 and 1996. These options were
canceled in 1995 pursuant to a termination agreement negotiated with him. As of
December 31, 1994 the Company had outstanding commitments to grant options to
purchase 200,000 shares to an employee and to an executive. The commitment to
the employee was cancelled in 1995 in connection with the employee's resignation
from the Company. In 1995, the Company and the executive agreed to cancel the
commitment in exchange for the grant of options to the executive to purchase
80,000 shares, of which 50,000 are exercisable at $1.10 per share and 30,000 at
$.01 per share. This settlement resulted in approximately $65 of compensation
being recorded by the Company.
Information for the three years ended December 31, 1994 with respect to
these plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1992............................................... 3,656,241 $1.10 to 1.75
Granted.................................................................. 488,965 1.75
Cancelled................................................................ (345,221)
----------
Outstanding, December 31, 1992............................................. 3,799,985
Granted.................................................................. 100,000 .01
Exercised................................................................ (375) 1.20
Cancelled................................................................ (681,487)
----------
Outstanding, December 31, 1993............................................. 3,218,123 .01 to 1.75
Cancelled................................................................ (445,920) 1.10 to 1.75
----------
Outstanding, December 31, 1994............................................. 2,772,203 .01 to 1.75
----------
----------
Exercisable December 31, 1994.............................................. 2,627,405
----------
----------
</TABLE>
15. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an Employee Stock Ownership
Retirement Plan (the "ESOP") in which all active employees are eligible to
participate. Annual contributions, as determined by the Board of Directors, are
to be made to an employee stock ownership trust. It is expected that the funds
F-53
<PAGE>
VERSYSS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
15. EMPLOYEE BENEFIT PLANS (CONTINUED)
of the trust will be primarily invested in VERSYSS common stock. Allocations of
contributions to participants are to be determined by annual compensation. No
contributions were made in 1992, 1993 and 1994. See Note 11 for discussion of
further transactions with the ESOP.
EMPLOYEE 401(K) PLAN -- The Company has a profit-sharing 401(k) plan which
covers substantially all employees over the age of 21 upon immediate employment.
Under the plan, employees may defer up to 10% of their annual compensation.
Company contributions are made to the plan at the discretion of management. The
Company made no contributions to the plan in 1992, 1993, and 1994.
16. FOREIGN OPERATIONS
The Company has operations in Ireland, the assets and revenues of which were
less than 10% of consolidated assets and revenues, respectively, in 1992, 1993,
and 1994.
17. SUBSEQUENT EVENT
On July 28, 1995 the Company and Physicians Computer Network, Inc. ("PCN")
signed a letter of intent outlining the terms for PCN's acquisition of the
Company's outstanding capital stock. A definitive agreement is expected to be
signed in September 1995.
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Practice Management Systems, Inc.
Needham, Massachusetts
We have audited the accompanying balance sheets of Practice Management
Systems, Inc. (an S corporation) as of December 31, 1994 and 1993 and the
related statements of operations, changes in stockholders' equity and cash flows
for the years ended December 31, 1994, 1993 and 1992. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted accounting
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Practice Management Systems,
Inc. as of December 31, 1994 and 1993 and the results of its operations and its
cash flows for the years ended December 31, 1994, 1993 and 1992 in conformity
with generally accepted accounting principles.
Cooper & Cobb
Certified Public Accountants
February 28, 1995
F-55
<PAGE>
PRACTICE MANAGEMENT SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents............................................................... $ 1,125,394 $ 1,055,889
Accounts receivable, net of allowances of $107,000 in 1994 & $114,000 in 1993......... 1,799,106 1,623,716
Inventories........................................................................... 810,270 888,446
Other current assets.................................................................. 98,392 100,363
------------ ------------
TOTAL CURRENT ASSETS.......................................................... 3,833,162 3,668,414
EQUIPMENT -- at cost:
Computer equipment.................................................................. 350,553 254,885
Furniture and office equipment...................................................... 220,223 214,748
Automobile.......................................................................... 14,252 32,791
------------ ------------
585,028 502,424
Less accumulated depreciation......................................................... 261,609 188,868
------------ ------------
323,419 313,556
DEPOSITS.............................................................................. 47,220 44,631
------------ ------------
$ 4,203,801 $ 4,026,601
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable & accrued expenses................................................... $ 561,643 $ 551,770
Deferred maintenance revenue.......................................................... 1,971,066 1,953,242
Customer deposits..................................................................... 255,671 343,081
Capital lease obligation -- current................................................... 6,890 5,972
------------ ------------
TOTAL CURRENT LIABILITIES..................................................... 2,795,270 2,854,065
CAPITAL LEASE OBLIGATION.............................................................. 19,627 26,517
COMMON STOCK -- $.01 PAR VALUE:
Authorized 300,000 shares, issued and outstanding 221,266 shares...................... 2,213 2,213
Additional paid in capital............................................................ 206,530 206,530
Retained earnings..................................................................... 1,452,661 1,209,776
------------ ------------
1,661,404 1,418,519
Treasury stock, at cost............................................................... (272,500) (272,500)
1,388,904 1,146,019
------------ ------------
$ 4,203,801 $ 4,026,601
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-56
<PAGE>
PRACTICE MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales........................................................... $ 12,109,156 $ 11,870,554 $ 12,220,228
Cost of Sales....................................................... 5,279,962 5,689,682 6,013,451
------------- ------------- -------------
6,829,194 6,180,872 6,206,777
Operating Expenses:
Technology and programming expenses............................... 1,750,485 1,567,655 1,420,604
Selling expenses.................................................. 1,489,171 1,786,351 1,827,867
General and administrative expenses............................... 3,312,928 3,446,485 2,985,896
------------- ------------- -------------
6,552,584 6,800,491 6,234,367
------------- ------------- -------------
Net Earnings (Loss) From Operations................................. 276,610 (619,619) (27,590)
Other Income (Expense), Net......................................... 26,610 24,444 (2,383)
------------- ------------- -------------
Net Earning (Loss).................................................. $ 303,220 $ (595,175) $ (29,973)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-57
<PAGE>
PRACTICE MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss)................................................... $ 303,220 $ (595,175) $ (29,973)
Adjustments to reconcile net earnings (loss) to net cash provided by
operations:
Depreciation........................................................ 91,280 91,066 80,228
Allowance for doubtful accounts..................................... (7,000) -- 26,044
Loss on disposal of equipment....................................... -- -- 38,992
Changes in assets and liabilities:
Accounts receivable............................................... (168,390) (11,663) (351,190)
Inventories....................................................... 78,176 (130,735) 36,377
Other current assets.............................................. 1,971 (4,510) (20,599)
Deposits.......................................................... (2,589) 4,026 (9,981)
Accounts payable and accrued expenses............................. 9,873 15,896 117,144
Deferred maintenance revenue...................................... 17,824 280,362 519,772
Customer deposits................................................. (87,410) 93,084 (7,046)
------------ ------------ ------------
Total adjustments............................................... (66,265) 337,526 429,691
------------ ------------ ------------
Net Cash Provided by (Used in) Operating Activities............. 236,955 (257,649) 399,718
Cash Flows from Investing Activities:
Capital expenditures.................................................. (101,143) (144,032) (140,439)
------------ ------------ ------------
Net Cash Used in Investing Activities........................... (101,143) (144,032) (140,439)
Cash Flows from Financing Activities:
Payments under capital lease obligations.............................. (5,972) (4,373) (1,817)
Distributions to stockholders......................................... (60,335) (11,218) (270,790)
------------ ------------ ------------
Net Cash Used in Financing Activities........................... (66,307) (15,591) (272,607)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents.................... 69,505 (417,272) (13,328)
Cash and Cash Equivalents, beginning of year............................ 1,055,889 1,473,161 1,486,489
------------ ------------ ------------
Cash and Cash Equivalents, end of year.................................. $ 1,125,394 $ 1,055,889 $ 1,473,161
------------ ------------ ------------
------------ ------------ ------------
Supplemental Cash Flow Information:
Cash paid during the year for interest................................ $ 8,829 $ 2,257 $ 70
Capital lease obligation incurred for equipment....................... -- 36,862 --
</TABLE>
See notes to financial statements.
F-58
<PAGE>
PRACTICE MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. BACKGROUND AND ORGANIZATION
Practice Management Systems, Inc. develops, markets, and supports office
automation systems for physicians, dentists, and other related health care
providers. The Company was established in 1983 and has elected under the
Internal Revenue Code to be an S Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows,
the Company considers all short-term debt securities and other financial
instruments with a maturity of three months or less to be cash equivalents.
INVENTORIES -- Inventories consists primarily of computer hardware and third
party software and is stated at the lower of standard cost (which approximates
average cost) or market.
EQUIPMENT -- Equipment is stated at cost. Depreciation is computed by using
the straight line method over the estimated useful lives of the underlying
assets.
INCOME TAXES -- In lieu of corporation taxes the stockholders of an S
Corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for income taxes has been included
in these financial statements.
REVENUE RECOGNITION -- Computer hardware and software license revenue is
recognized upon product delivery. Revenue from customer support agreements is
recognized over the terms of the agreements using the straight line method.
Service revenue is recorded when services are performed.
SOFTWARE DEVELOPMENT COSTS -- All costs associated with the development of
software are charged to expense when incurred.
COMPENSATED ABSENCES -- In accordance with Company policy, vacation and sick
pay cannot be carried over from one calendar year to the next and therefore, no
liability for uncompensated absences is recorded at December 31, 1994 and 1993.
3. PENSION PLAN
The Company has a 401(k) pension plan covering substantially all of its
employees. Provisions are funded currently. The pension expense charged for the
years ended December 31, 1994, 1993 and 1992 is $101,156, $99,363 and $97,271,
respectively. Pension expense is included in the statement of operations as a
component of general and administrative expenses.
4. OPERATING LEASE ARRANGEMENTS
The Company's headquarters and principal training and support facilities are
located in Needham, Massachusetts. This facility is leased under a
non-cancelable operating lease expiring in March, 2001. The rent for this space
is $378,175, $361,268, and $328,626 for the years ended December 31, 1994, 1993
and 1992, respectively.
The future minimum rental payments required under this lease as of December
31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
1995...................................................................................... $ 385,760
1996...................................................................................... 390,734
1997...................................................................................... 406,413
1998...................................................................................... 411,640
Thereafter................................................................................ 968,580
------------
$ 2,563,127
------------
------------
</TABLE>
F-59
<PAGE>
PRACTICE MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
4. OPERATING LEASE ARRANGEMENTS (CONTINUED)
The Company also leases additional space for sales, training, warehousing
and support services in various locations in Connecticut, New York, New Jersey,
Ohio, Pennsylvania and Virginia. The leases for these facilities all have a term
of one year or less and have an aggregate rent of $147,153, $133,563, and
$111,480 in the year ended December 31, 1994, 1993 and 1992, respectively.
5. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment with a lease term through May, 1999.
The obligation under this capital lease has been recorded in the accompanying
financial statements at the present value of future minimum lease payments,
discounted at 14.4%. The capitalized cost of $36,862 less accumulated
depreciation is included in furniture and office equipment in the accompanying
financial statements.
The capital lease obligation consists of the following as of December 31:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Total............................................................................. $ 26,517 $ 32,489
Less current portion.............................................................. 6,890 5,972
--------- ---------
Long-term portion................................................................. $ 19,627 $ 26,517
--------- ---------
--------- ---------
</TABLE>
The future minimum lease payments under the capital lease and the net
present value of the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------------------- ---------
<S> <C>
1995......................................................................................... $ 10,262
1996......................................................................................... 10,262
1997......................................................................................... 10,262
Thereafter................................................................................... 3,421
---------
Total future minimum lease payments.......................................................... 34,207
Less amount representing interest............................................................ 7,690
---------
Present value of future minimum lease payments............................................... $ 26,517
---------
---------
</TABLE>
6. STOCK OPTION PLAN
Under the terms of the Company's Incentive Stock Option Plan, which was
adopted in May of 1985, the Company may issue up to 50,000 shares of common
stock reserved for this purpose. Options are granted at the fair market value at
the date of the grant. A 1991 amendment to the plan gives the Company the right
to pay cash in the amount of the spread between the option price and the fair
market value at the exercise date rather than actually issue stock pursuant to
this plan. As of December 31, 1994 3,475 options at $4.00 per share had been
issued and were outstanding. No options were canceled or exercised during the
year. The Plan, except as to outstanding shares, expires in May of 1995.
7. CONCENTRATIONS OF CREDIT RISK
Nearly all of the Company's cash and cash equivalents are held by one
banking institution. The amount of cash and cash equivalents held by the bank
are in excess of federally insured limits. A possible risk exists for the amount
in excess of $100,000.
F-60
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE U.S.
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---
<S> <C>
Available Information.............................. 2
Prospectus Summary................................. 3
Risk Factors....................................... 6
Use of Proceeds.................................... 11
Dividend Policy.................................... 11
Price Range of Common Stock........................ 12
Capitalization..................................... 13
Dilution........................................... 14
Selected Consolidated Financial Data............... 15
Pro Forma Condensed Consolidated Financial
Statements....................................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 22
Business........................................... 30
Management......................................... 43
Certain Transactions............................... 52
Principal and Selling Shareholders................. 55
Description of Capital Stock....................... 56
Certain United States Tax Consequences to
Non-United States Holders........................ 60
Underwriting....................................... 62
Legal Matters...................................... 65
Experts............................................ 65
Index to Financial Statements...................... F-1
</TABLE>
5,600,000 SHARES
PHYSICIAN
COMPUTER
NETWORK, INC.
COMMON STOCK
-------------------
PROSPECTUS
May 6, 1996
---------------------
LEHMAN BROTHERS
NATWEST SECURITIES LIMITED
VECTOR SECURITIES INTERNATIONAL, INC.
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