SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-19666
PHYSICIAN COMPUTER NETWORK, INC.
New Jersey 22-2485688
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 The American Road
Morris Plains, N.J. 07950
(Address of principal executive offices)
Registrant's telephone number, including area code:
(201) 490-3100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
This aggregate market value of the voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant was approximately $222,563,000
on March 27, 1997 based on the closing sales price of the Common Stock on such
date.
The aggregate number of outstanding shares of Common Stock, $.01 par
value, of Registrant was 52,985,554 on March 27, 1997.
Exhibit Index on Page 43
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PHYSICIAN COMPUTER NETWORK, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I Page
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ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 17
ITEM 3. Legal proceedings................................................................. 17
ITEM 4. Submission of Matters to Vote of Security Holders................................. 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 18
ITEM 6. Selected Financial Data........................................................... 19
ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition...................................................................... 21
ITEM 8. Financial Statements and Supplementary Data....................................... 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................... 31
ITEM 11. Executive Compensation........................................................... 34
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................... 40
ITEM 13. Certain Relationships and Related Transactions................................... 41
PART IV
ITEM 14. Exhibits, Consolidated Financial Statement Schedule, and Report on Form 8-K...... 42
EXHIBIT INDEX............................................................................. 43
SIGNATURES................................................................................ 52
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE................................................ F-1
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PART I
ITEM 1. 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 eight practice management software
businesses which, along with new system sales, 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 95,000,
making the Company one of the largest providers of practice management software
products in the United States. The Company plans to migrate a substantial
majority of all of its customers to the PCN Health Network Information System
during the next several years. In an effort to rapidly and cost-effectively
supplement its practice management software product offerings with
knowledge-based clinical products and services, in January 1996, the Company and
Glaxo Wellcome, Inc. ("Glaxo Wellcome") formed a joint venture. The joint
venture, HealthPoint G.P. ("HealthPoint"), was formed to develop and market
clinical information technology products and services that will provide the
clinical information needed at the point of patient care and assist physicians
and other health care providers 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 first became commercially available in December 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 agreement 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 a substantial majority 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
there are over 350,000
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office-based physicians in the United States, and that in excess of 800
businesses are marketing practice management software products to them. 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 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 are also 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 has and will
continue to 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 have increased 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 have and will continue to 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 has and will continue to
include: (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
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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 (as well as recognize approximately 15% of the losses)
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, based on the product offerings, can migrate
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
completed eight acquisitions which, along with new system sales, has increased
the number of physicians who are associated with sites which have purchased its
practice management software products from approximately 2,000 to 95,000,
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 Results of Operations and Financial Condition -- Overview."
The Company's most significant acquisition to date occurred in October
1995 when it acquired Versyss Incorporated ("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 1996, the Company completed two acquisitions. On September 10, 1996,
the Company acquired Wismer-Martin, Inc. ("Wismer-Martin"), a provider of
practice management and healthcare information systems located in Mead,
Washington. On July 2, 1996, the Company acquired substantially all of the
assets of the medical practice management software business and certain other
software businesses of CUSA Technologies, Inc. (the "CTI Business").
Wismer-Martin, through a direct sales force of approximately 10 employees, has
sold its "SM*RT Practice" and "SM*RT Link" practice management software products
to sites having an aggregate of approximately 4,000 physicians and provides
maintenance and support of such products. In addition, Wismer-Martin, through
its wholly-owned subsidiary, Integrated Health Systems, Inc. ("IHS"), develops
and licenses software products for hospitals and related entities. Its
ADDvantage Hospital Information System has been sold to approximately 70
hospitals ranging in size up to 400 beds. The CTI Business, through a direct
sales force of approximately 25 employees, had been a reseller of Versyss' MENDs
product, as well as certain other proprietary practice management software
products, to sites having an aggregate of approximately 4,000 physicians.
The Company expects to continue to pursue its acquisition strategy.
However, given, among other
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factors, the rapid consolidation that has taken place in the industry, 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.
Migration Strategy. Through its independent resellers and the direct
sales force, 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 eight 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 customer's
new PCN Health Network Information System in an efficient, cost-effective
manner. The Company has developed the software for electronic migration of users
of its Resident, MDX, DOM/2, original PCN software, Acclaim, System III Gold and
MENDs 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 SM*RT Practice practice management software
products. See "Sales and Marketing."
Clinical Information Product Strategy. The Company and Glaxo Wellcome,
through wholly-owned subsidiaries of each (the "Company Partner" and the "Glaxo
Wellcome Partner," respectively) 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. HealthPoint ACS, which first
became commercially available in December 1996, is 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 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.
The Company's strategy is to market HealthPoint ACS, as well as
HealthPoint's other products and services, to both new business opportunities
and 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, larger group practices. See "Products" and "HealthPoint."
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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
computerization 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 a substantial
majority of users of its other practice management software products to the PCN
Health Network Information System product 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.
Patient Registration. The PCN Health Network Registration Module
is designed to permit patients to be registered into a central patient
file which can be accessed across the physician organization. The
registration workflow is designed to support an efficient, complete
record of patient demographic data. Integration with other areas of the
system eliminates the need for redundant data entry. The registration
system can be tied to the PCN Health Network master patient index, a
hospital demographics database, or other patient data repositories -
which can be accessed during patient registration.
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 & Insurance Billing. The PCN Health Network Billing
Module is designed to improve the cash flow and collection performance
of offices ranging from solo practitioners to multi-specialty groups
with a large number of 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.
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Electronic Patient Records. The PCN Health Network is designed
to interface with (and is expected to be integrated with) HealthPoint
ACS, which is designed to provide advanced clinical patient records
functionality. See "Clinical Products" below.
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 benefiting 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. The Company
provides such electronic claims clearing services through National Data
Corporation ("NDC") which acquired the claims clearing business of
Equifax Healthcare EDI Service, Inc. ("Equifax EDI"), a subsidiary of
Equifax, Inc. See "NDC Relationship."
In addition to NDC, 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
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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 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 eight
different practice management software products: MENDS, SM*RT Practice, 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.
Full Risk Managed Care (Mcare) Software Product. The Company's "Mcare"
product is a full risk managed care application that is designed to benefit
large group practices or provider groups that are entering into risk-sharing
arrangements. Mcare provides practices that are entering into risk-sharing
contracts with one or more health plans with the ability to manage and monitor
contractual performance. Functions include: (i) health plan contract/benefit
management; (ii) membership enrollment/eligibility tracking; (iii) provider
network contracting and reimbursement; (iv) referral authorization tracking, (v)
pre-certification tracking; and (vi) claims/encounter processing and utilization
reporting. Mcare is expected to be made commercially available in the second
quarter of 1997.
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, first became commercially available in December 1996. Under
its
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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. It 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.
The product incorporates a problem oriented, structured database and integrated
medical knowledge with features such as: (i) traditional SOAP methodology; (ii)
customizable, user-defined lists and templates based upon a broad, built-in
database; (iii) a knowledge base including SNOMED, ICD-9, CPT, Medi-Span,
LifeArt, and Clinical Reference System; (iv) a linear problem-based encounter
approach; and, (v) alerts and drug reactions. 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.
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,
International Business Machines Corp. ("IBM") agreed to 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 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. The
Company operates 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,
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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
consist of computerized 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 sets its own business strategy and objectives independently from the
objectives and strategies adopted by the Company.
Both the Company and Glaxo Wellcome have committed to contribute a total
of 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 31, 1997, the Glaxo Wellcome Partner had
contributed approximately $30.7 million and the Company Partner had contributed
approximately $5.5 million, with the remainder to be contributed proportionately
by the partners in semi-annual installments as needed by HealthPoint, but in no
event later than December 31, 1998.
Any 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 profits will, generally, be
allocated equally between the partners.
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 aggregate
patient and provider data.
Distribution of Products and Services. HealthPoint's products and
services have been and are expected to continue 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 will be performed by a number of independent resellers,
the primary one of which is the Company. In its capacity as a reseller of
HealthPoint's software products, the Company generates 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
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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 Patient Records
Product."
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. 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.
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 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."
NDC Relationship
In connection with the Company's goal of expanding the services provided
by Connecting Service Providers, on January 25, 1995, Equifax EDI 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 the third quarter of
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1996, NDC acquired Equifax EDI.
Pursuant to the Marketing Agreement, the Company generally promotes NDC
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, NDC agrees 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 NDC for
providing such services.
The Marketing Agreement designates NDC, generally, as the exclusive
source of all 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, the
Company has agreed to share with NDC certain of the costs and expenses
associated with the further development and enhancement of PCN Link, as well as
to partially compensate NDC for offering certain free one-year introductory
services to physician practices who subscribe for PCN Link. The Marketing
Agreement has an initial term of four years, but may be terminated by PCN on not
less than ninety days written notice at any time on or after July 1, 1997. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition Liquidity and Capital Resources."
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, 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
The Company markets and distributes its products through a direct sales
force and through value-added independent resellers. Independent resellers
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. Since 1995, the Company has acquired a significant direct sales
force which markets and distributes practice management software products, as
well as computer hardware, maintenance and other services. The Company utilizes
the direct sales forces to focus on national accounts and larger new business
sales opportunities.
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
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<PAGE>
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.
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.
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 100 systems analysts and
programmers to develop and enhance its products.
Research and development expenses were $5,739,518, $2,219,223 and
$1,838,823 in 1996, 1995 and 1994, respectively. The Company expects research
and development expenses to continue to increase significantly in 1997 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 SM*RT Practice product, as well as products acquired in the future, (iv)
develop interfaces between each of the PCN Health Network Information System,
MENDS and SM*RT Practice, 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 NDC certain
development costs associated with enhancing the PCN Link services. See "NDC
Relationship." 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. 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
Results of Operations and Financial Condition."
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
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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.
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.
Competition
The practice management software industry is highly competitive. The
Company's principal competitors include other physician practice management
software companies, software distributors which sell off-the-shelf programs and
compatible hardware to practices where competition is based primarily on price,
certain large 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.
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 Heath 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
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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. 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, 1997, the Company had approximately 725 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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ITEM 2. 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 and warehouse 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.
The Company's subsidiary, Wismer-Martin, owns approximately 35,000
square feet of office space in Mead, Washington.
In addition, the Company, primarily through its subsidiaries, leases a
number of other operating offices through 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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 1995:
PRICE
------------------
High Low
---- ---
1995
First Quarter .................................. 5 3/4 3 5/8
Second Quarter ................................. 5 1/8 3 11/16
Third Quarter .................................. 6 3/4 3 3/4
Fourth Quarter ................................. 9 1/8 5 1/8
1996
First Quarter .................................. 14 7/8 8 1/2
Second Quarter ................................. 14 7/8 8 3/4
Third Quarter .................................. 11 15/16 6 7/8
Fourth Quarter ................................. 11 1/4 7 1/4
1997
First Quarter (through March 27, 1997) ......... 9 5/8 7 1/2
There were approximately 16,000 holders of record of Common Stock, as
of March 28, 1997. The last reported sales price of a share of Common Stock on
March 27, 1997 was 7 1/2.
Dividends
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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to the years ended
1996, 1995, 1994, 1993 and 1992 (in thousands, except per share data) is derived
from the Company's audited Consolidated Financial Statements which as to the
years ended 1996, 1995 and 1994 are included elsewhere in this report. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition," the
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996(1) 1995(2) 1994(3) 1993(3) 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................................ $95,797 $41,805 $20,504 $ 6,109 $ 3,124
Costs and expenses:
Cost of revenues ..................................... 38,562 16,289 6,076 10,255 7,850
Research and development ............................. 5,740 2,219 1,839 898 678
Selling and marketing ................................ 9,116 3,038 2,145 1,717 1,441
General and administrative ........................... 10,990 10,354 5,529 6,454 7,877
Amortization of acquired intangible
assets ............................................. 7,192 2,884 1,857 239 --
Acquired technology in process ....................... -- 14,516 -- 10,633 --
Restructuring ........................................ -- 3,072 -- 3,165 --
Write-down of assets and other charges ............... -- 1,477 -- 3,300 --
Interest expense, net of interest
income ............................................. 1,156 875 1,709 942 1,242
------- ------- ------- ------- -------
Income (loss) before income tax expense
(benefit), loss on equity investment ................. 23,041 (12,919) 1,349 (31,494) (15,964)
and extraordinary item
Income tax expense (benefit) ............................ 4,818 (1,419) 102 -- --
------- ------- ------- ------- -------
Income (loss) before loss on equity
investment and extraordinary item ....................... 18,223 (11,500) 1,247 (31,494) (15,964)
Loss on equity investment, net of
taxes ................................................ (2,167) -- -- -- --
------- ------- ------- ------- -------
Income (loss) before extraordinary ...................... 16,056 (11,500) 1,247 (31,494) (15,964)
items
Extraordinary items:
Gain (loss) from the extinguishment
of capital lease obligations and
debt ............................................... -- (180) -- 8,498 --
------- ------- ------- ------- -------
Net income (loss) ....................................... 16,056 (11,680) 1,247 (22,996) (15,964)
Forfeited (accrued) dividends on
preferred stock ...................................... -- -- -- 2,957 (2,896)
------- ------- ------- ------- -------
Net income (loss) available to common
shareholders ......................................... $16,056 $(11,680)(4) $ 1,247 $(20,039) $(18,860)
======= ======= ======= ======= =======
Net income (loss) per common share:
Before extraordinary items ........................... $ .30 $ (0.29) $ .04 $ (1.38) $ (2.19)
Extraordinary items .................................. -- -- -- 0.41 --
------- ------- ------- ------- -------
Net income (loss) .................................... $ .30 $ (0.29) $ .04 $ (0.97) $ (2.19)
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding (5) ...................................... 54,308 40,068 35,634 20,688 8,601
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............................... 34,291 $15,517 $ 2,512 $ 9,671 $ 1,472
Working capital (deficit) ............................... 31,126 (9,006) (3,971) (2,675) (790)
Current assets .......................................... 67,100 42,326 8,731 11,890 4,141
Intangible assets, net .................................. 69,076 53,701 8,342 6,707 1,612
Total assets ............................................ 150,165 100,260 18,233 20,504 15,604
Current liabilities ..................................... 35,974 51,332 12,702 14,565 4,931
Long-term liabilities ................................... 5,285 19,730 14,105 15,807 16,204
Shareholders' equity (deficiency) ....................... 108,907 29,198 (8,574) (9,868) (5,531)
</TABLE>
(footnotes on following page)
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(footnotes for preceding page)
- ----------------
(1) Includes the operations of the CTI Business from July 2, 1996 and
Wismer-Martin from September 10, 1996.
(2) The year ended December 31, 1995 includes the operations of the Practice
Management Systems Corp. business (the "PMS Business") from April 24, 1995 and
Versyss from October 27, 1995. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Company's Consolidated
Financial Statements included elsewhere in this report.
(3) 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 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. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Company's Consolidated Financial Statements included elsewhere in this
report.
(4) The year ended December 31, 1995 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 Results of Operations and Financial Condition" and
the Company's Consolidated Financial Statements included elsewhere in this
report.
(5) 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 years ended
December 31, 1996 and 1994 and would be anti-dilutive in the calculation of the
loss per common share for December 31, 1995, 1993 and 1992. As of December 31,
1996, warrants and options to purchase 10,003,586 shares of Common Stock were
outstanding, of which warrants and options to purchase 2,954,252 shares were
exercisable on such date. Weighted average shares used in per share calculation
did not include shares issuable upon conversion of 15,750 shares of Series A
Convertible Preferred Stock outstanding as of December 31, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Consolidated Financial Statements of the
Company and related notes included elsewhere herein. The following discussion
and analysis, as well as the discussion and analysis contained in the "Business"
above, includes certain forward-looking statements. Forward-looking statements
in this report are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Persons reading this report are
cautioned that such forward-looking statements involve risks and uncertainties
that could cause the Company's actual results to differ materially from the
forward-looking statements. Factors that could cause actual results to differ
materially from the forward-looking statements include, without limitation, the
effect of the Company's acquisition strategy on future operating results; the
uncertainty of acceptance of the Company's new product and migration strategy;
the Company's relationship with HealthPoint; the effects of government
regulation on the Company's business; competition; and other matters referred to
in this report.
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.
Through HealthPoint, the Company also offers a product designed to enable
physicians to automate the patient medical record and manage the clinical
information required for treatment at the point of care.
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. As a result, 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 95,000,
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 has developed and 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 liabilities. On December
31, 1993, the Company acquired Wallaby, a company which has developed and 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 (the "DOM/2 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 practice management software business (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 has developed 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. On October 27, 1995,
the Company acquired Versyss, a business which has developed 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
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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.
On July 2, 1996, the Company acquired the CTI Business, a reseller of
the Versyss MENDS product and a direct provider of certain other practice
management systems and equipment to sites having an aggregate of approximately
4,000 physicians, for $9,200,000 in cash, the assumption of approximately
$4,130,000 in liabilities and the cancellation of debt owed by CTI to PCN. The
CTI Business also provides other industry specific information systems and
equipment through a direct sales force. Most recently, on September 10, 1996,
the Company acquired Wismer-Martin, a provider, through a direct sales force, of
practice management and healthcare information systems, and related equipment,
to sites having an aggregate of approximately 4,000 physicians for $1,980,000 in
cash, 935,000 shares of PCN Common Stock valued at approximately $9,366,000 and
the assumption of approximately $4,733,000 in liabilities.
In connection with certain of its 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 charged, 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.
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, 1997, the Company Partner has contributed approximately
$5.5 million, with the remainder to be contributed in semi-annual installments
as needed by HealthPoint, but in no event later than December 31, 1998. Any
losses incurred by HealthPoint are 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 profits will generally be allocated equally between the
partners.
In March 1996, HealthPoint introduced its first product, HealthPoint
ACS, which first became commercially available in December 1996. HealthPoint
ACS, which interfaces (and is expected to be integrated) with the PCN Health
Network Information System, enables physicians to, among other things, manage
the clinical information required for treatment at the point of care.
Certain Historical Financing Arrangements. In order to finance certain
payments required to be made by the Company to IBM Credit Corporation ("ICC"),
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 Jeffry
M. Picower (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
prepaid in full out of the net proceeds of the February 15, 1995 public offering
(the "February 1995 Offering") pursuant to which the Company sold 6,250,000
shares of its Common Stock at a price of $4.00 per share.
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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 "October 1995 Offering"), the Company raised 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 paying convertible preferred stock.
The Company used a substantial majority of the proceeds received from the
October 1995 Offering to finance the acquisition of Versyss.
In connection with the execution of the Marketing Agreement by Equifax
EDI and the Company on February 12, 1995, Equifax Inc., the parent of Equifax
EDI, purchased a $10 million, five year convertible subordinated promissory note
of the Company which bore interest at a rate of 6% per annum and was convertible
into shares of Common Stock at a conversion price of $5.175 per share (the
"Equifax Note"). On May 10, 1996, in accordance with the terms of the Equifax
Note purchase agreement, Equifax converted the Equifax Note in full into
1,932,217 shares of Common Stock.
On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock for $10.00 per share and, on May 24, 1996, issued an
additional 840,000 shares of Common Stock for $10.00 per share upon the exercise
in full of the underwriters' over-allotment option (the "1996 Public Offering).
Included within the shares of Common Stock sold pursuant to the 1996 Public
Offering were 1,932,217 shares issued by the Company to Equifax upon the
conversion in full of the Equifax Note. As a result of the sale by the Company
of the remaining 4,507,783 shares of Common Stock sold as part of the 1996
Public Offering, the Company received net proceeds of approximately $41 million.
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<PAGE>
Results of Operations
The following chart provides a break-down of the Company's Revenues,
Cost of revenues, and Operating expenses for the years ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software license fees ........................................ $29,396,612 $15,450,897 $ 6,302,181
Hardware ..................................................... 25,301,761 9,721,559 2,592,713
Software support and maintenance fees ........................ 21,015,952 8,823,507 4,507,388
Hardware maintenance fees .................................... 15,461,911 3,508,552 --
Communication fees and other ................................. 4,621,256 4,300,827 7,101,524
----------- ----------- -----------
Revenues .............................................. 95,797,492 41,805,342 20,503,806
----------- ----------- -----------
Cost of revenues:
Hardware ..................................................... 15,213,697 7,336,196 2,057,763
Software, maintenance, support,
communication fees and other ............................. 23,347,900 8,952,757 4,018,189
----------- ----------- -----------
Cost of Revenues ...................................... 38,561,597 16,288,953 6,075,952
Gross margin ..................................................... 57,235,895 25,516,389 14,427,854
As a % of Revenues ........................................... 59.7% 61.0% 70.4%
Operating expenses:
Research and development ..................................... 5,739,518 2,219,223 1,838,823
Selling and marketing ........................................ 9,115,683 3,038,069 2,144,464
General and administrative ................................... 10,990,028 10,354,611 5,528,738
Amortization of acquired intangible assets ................... 7,192,551 2,883,658 1,857,054
Acquired technology in process ............................... -- 14,516,000 --
Restructuring ................................................ -- 3,072,450 --
Write-down of assets and other charges ....................... -- 1,477,000 --
----------- ----------- -----------
Operating expenses ....................................... $33,037,780 $37,561,011 $11,369,079
</TABLE>
Year Ended December 31, 1996 Compared to the
Year Ended December 31, 1995
Revenues. Revenues for the year ended December 31, 1996 were
$95,797,492, an increase of $53,992,150 or 129% over revenues of $41,805,342 for
1995.
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 $13,945,715 or 90% from $15,450,897 in 1995 to $29,396,612 in 1996,
as a result of (i) increased sales of licenses for the PCN Health Network
Information System; (ii) the effect on 1996 of a full year of sales of licenses
for the Versyss and PMS Business software
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<PAGE>
products; and, (iii) the acquisitions of Wismer-Martin and the CTI Business
during 1996.
Hardware revenues increased by $15,580,202 or 160% from $9,721,559 in
1995 to $25,301,761 in 1996, primarily due to (i) increased PCN Health Network
Information System sales; (ii) the effect on 1996 of a full year of Versyss and
the PMS Business product sales; and, (iii) the acquisitions of Wismer-Martin and
the CTI Business during 1996. Versyss, the PMS Business, Wismer-Martin and the
CTI Business all sell computer hardware, peripherals and complete systems
(hardware and practice management software) directly, and in the case of
Versyss, through resellers, to physician practices and hospitals.
Software support and maintenance fees increased by $12,192,445 or 138%
from $8,823,507 in 1995 to $21,015,952 in 1996, primarily due to (i) increased
sales of software and hardware systems; (ii) the effect on 1996 of a full year
of Versyss and the PMS Business product sales; and, (iii) the acquisitions of
Wismer-Martin and the CTI Business during 1996.
Hardware maintenance revenue increased by $11,953,359 or 341% from
$3,508,552 in 1995 to $15,461,911 in 1996, primarily due to (i) increased system
sales; (ii) the effect on 1996 of a full year of Versyss and the PMS Business
product sales; and, (iii) the acquisitions of Wismer-Martin and the CTI Business
during 1996.
Communication fees increased by $320,429 or 7% from $4,300,827 in 1995
to $4,621,256 in 1996, primarily as a result of increased fees paid for
communications links to the PCN Health Network Information System as well as to
other acquired practice management software systems by clinical laboratories,
insurance companies, claims clearinghouses and hospitals partially offset by a
decline in fees generated from users of certain PCN legacy systems as they
migrate to the PCN Health Network Information System.
Cost of revenues. Cost of software, maintenance, support,
communication fees and other revenue increased by $14,395,143 or 161% from
$8,952,757 in 1995 to $23,347,900 in 1996, primarily as a result of the
increased sales of the PCN Health Network Information System, the full year
effect of the Versyss and PMS Business acquisitions and the acquisitions of the
practice management software products and services of Wismer-Martin and the CTI
Business during 1996. These costs include the costs of labor for software
support, hardware maintenance and training.
Cost of hardware, including installation costs, increased by $7,877,501
or 107% from $7,336,196 in 1995 to $15,213,697 in 1996 as a result of (i)
increased system sales; (ii) the effect on 1996 of a full year of Versyss and
the PMS Business product sales; and, (iii) the acquisitions of Wismer-Martin and
the CTI Business during 1996.
Total cost of revenues increased as a percentage of total revenues from
39.0% in 1995 to 40.3% in 1996 primarily as a result of the higher mix of
hardware sales caused by the full year effect of the Versyss and PMS Business
acquisitions and the acquisitions of Wismer-Martin and the CTI Business during
1996.
Research and Development. Research and development costs increased by
$3,520,295 or 159% from $2,219,223 in 1995 to $5,739,518 in 1996, primarily as a
result of (i) the investment in new technology and product development, (ii) the
effect on 1996 of a full year of Versyss and the PMS Business product sales;
and, (iii) the acquisitions of Wismer-Martin and the CTI Business during 1996.
Increases in expenditures related to core products was partially offset by
savings realized from the elimination of development charges associated with
non-core products. The Company expects research and development costs to
continue to increase in 1997. See "Liquidity and Capital Resources."
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<PAGE>
Selling and Marketing. Selling and marketing expenses increased by
$6,077,614 or 200% from $3,038,069 in 1995 to $9,115,683 in 1996 as a result of
the full effect of the increased headcount attributable to the Versyss and PMS
Business acquisitions, and the acquisitions of Wismer-Martin and the CTI
Business during 1996, all of which employ a direct sales force, partially offset
by continued efficiency savings realized from the elimination of duplicate print
advertising and trade show costs.
General and Administrative. General and administrative expenses
increased by $635,417 or 6% from $10,354,611 in 1995 to $10,990,028 in 1996 as a
result of additional headcount and increased facilities and occupancy costs
attributable to the acquisitions of Versyss and the PMS Business in 1995, and
Wismer-Martin and the CTI Business in 1996, mostly offset by savings resulting
from the centralization of certain operations, the elimination of duplicate
responsibilities and other functional downsizings.
Amortization of acquired intangible assets. Amortization of acquired
intangible assets increased by $4,308,983 or 149% from $2,883,658 in 1995 to
$7,192,551 in 1996 as a result of the full year effect in 1996 of the Versyss
and PMS Business acquisitions, completed in 1995, and the acquisitions of
Wismer-Martin and the CTI Business during 1996.
Interest Income/Expense. Interest income increased by $101,362 or 18%
from $577,039 in 1995 to $678,401 in 1996, primarily due to the investment by
the Company of the net proceeds from the 1996 Public Offering.
Interest expense increased by $383,487 or 26% from $1,451,604 in 1995
to $1,835,091 in 1996 primarily due to the full effect of the increase in debt
service related to the Versyss acquisition, as well as debt service related to
the acquisition of Wismer-Martin, partially offset by the conversion of the
Equifax Note and the payment of debt associated with the PMS Business and
Wallaby acquisitions.
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 were 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 $11,951,000 of increased sales of
licenses for the PCN Health Network Information System and sales of licenses for
the Versyss and PMS 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 certain lease financing
arrangements between the Company and Carolan Leasing Corporation (the
"Alternative Financing Strategy").
Software support and maintenance fees increased by $4,316,119 or 96%
from $4,507,388 in 1994
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<PAGE>
to $8,823,507 in 1995, primarily as a result of the acquisition 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 fees generated from
users of certain PCN legacy systems as they 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 the
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.
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 and Amortization of Acquired Intangible
Assets. General and administrative expenses and amortization of acquired
intangible assets 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.
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
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<PAGE>
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. 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 was substantially completed by the end of 1996. 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 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.
Liquidity and Capital Resources
At December 31, 1996, the Company had available cash and cash
equivalents of $34,291,000. In addition, the Company had consolidated net
accounts receivable of $21,103,000. For the years ended December 31, 1996 and
1995, net cash provided from operating activities was $7,641,000 and $1,815,000,
respectively as compared to net cash used in operating activities of $464,000
for the year ended December 31, 1994. 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, 1996, partially offset by payments
of accrued expenses related to the Versyss acquisition and the 1995
Restructuring. At December 31, 1996, the Company had working capital of
approximately $31,126,000 compared to a working capital deficit $9,006,000 at
December 31, 1995, primarily as a result of: (i) increased cash generated from
the improved results of operations in 1996, as compared to 1995, (ii) a decrease
in accrued expenses and other liabilities due to the pay down of accrued
charges, and, (iii) the net proceeds of the 1996 Public Offering.
Historically, the Company has funded its working capital requirements
and acquisitions through external financing sources, including borrowing and/or
the sale of equity securities as well as, in 1996, from cash generated from
operations. In the year ended December 31, 1996, the Company raised financing
proceeds, net of fees and expenses, of $42,824,000 primarily related to (i)
$41,248,000 in net proceeds from the 1996 Public Offering; and, (ii) $1,576,000
in net proceeds from the exercise of options to purchase Common Stock. 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 February 1995 Offering, (ii) $9,853,000 from the issuance of
the Equifax Note in February 1995; (iii) $24,689,000 in net proceeds from the
October 1995 Offering; (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
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<PAGE>
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, 1996, the Company used $20,323,000 for
investing activities, which consisted primarily of $11,670,000 related to the
purchases of the CTI Business and Wismer-Martin and $4,759,000 related to the
investment in HealthPoint. The Company also used approximately $11,052,000 for
the paydown of debt associated with the Wallaby, PMS Business and Versyss
acquisitions. 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 related to the
Wallaby and Versyss acquisitions and the 1995 Investor Note. 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.
Significant payment obligations of the Company during 1997 include: (i)
repurchasing 2,325,000 shares of Common Stock held by ICC for $4.60 a share by
March 31,1997; (ii) the payment in October 1997 of $5,875,000 in principal
amount under the promissory note issued in connection with the Versyss
acquisition, together with accrued and unpaid interest thereon; (iii) capital
contributions required to be made by the Company to HealthPoint; and (iv) the
payment of $125,000 per month to NDC, as successor to Equifax EDI under the
Amended and Restated Marketing Agreement. See "Business - NDC Relationship."
Research and development expenses were $5,739,518, $2,219,223 and
$1,838,823 in 1996, 1995 and 1994, respectively. The Company expects that its
research and development expenses will continue to increase significantly in
1997 as a result of ongoing efforts to: (i) enhance the PCN Health Network
Information System including its integration and interface with HealthPoint
products; (ii) develop a full risk managed care software product and a graphical
user interface ("GUI") Windows version of the PCN Health Network Information
System; (iii) develop additional modules for, as well as maintain, certain of
the Company's other acquired practice management software products; (iv)
continue the development of electronic migration software for the SM*RT Practice
acquired software product, as well as products acquired in the future; and (v)
share development costs incurred by NDC to enhance the PCN Link products.
The Company expects that its operating cash flow will be sufficient to
fund the Company's working capital requirements (including research and
development) through at least 1998 and permit the Company to continue its
acquisition strategy. However, the Company's ability to continue to pursue its
acquisition strategy 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. No assurances can be given that any such additional sources of financing
will be available on acceptable terms or at all.
At December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $66,000,000 which expire in
1999 through 2009. This includes approximately $15,000,000 of net operating loss
carryforwards from Versyss and $4,500,000 from Wismer-Martin 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, the Company is limited each year as
to the amount of pre-ownership change net operating losses that can be utilized.
However, it is the opinion of management that the losses will be fully utilized
prior to expiration of the rollforward period.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedule on page F-1.
See Exhibit 11.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
Company's directors and executive officers as of March 27, 1997:
Executive Officers and Directors
Name Age Office
Jeffry M. Picower 54 Chairman of the Board and Director
Henry Green 54 President, Chief Executive Officer and Director
John F. Mortell 54 Executive Vice President, Chief Operating Officer
and Director
James R. Bailey 43 Senior Vice President
Steven E. Kelsky 46 Senior Vice President
William S. Edwards 51 Senior Vice President
Kenneth W. Ernsting 43 Senior Vice President
Thomas F. Wraback 36 Senior Vice President and Chief Financial Officer
Jerry Brager 48 Director
Frederick Frank 64 Director
Frederic Greenberg 56 Director
Richard B. Kelsky 41 Director
Russell J. Ricci, M.D. 50 Director
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. 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 a Director of the Company since September 1996
and has been the Executive Vice President and Chief Operating Officer since
March 1995. Prior thereto, Mr. Mortell was the Company's Chief Financial Officer
from May 1992 until September 1996. 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
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<PAGE>
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
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 and in February 1997 was appointed a Senior Vice President of the Company.
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 and in July 1996 was appointed a Senior Vice President of the
Company. Prior to that, Mr. Ernsting was the Senior Vice President and General
Manager of the Healthcare Systems Division of Versyss, a position he held since
1993. Prior to his appointment as Senior Vice President of Versyss, Mr. Ernsting
held various marketing positions at Versyss since March 1983.
Thomas F. Wraback has been Vice President, Finance since March 1995 and
in September 1996 was promoted to Senior Vice President and Chief Financial
Officer. 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. 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 Inc. and successor
firms since 1969, and is currently Vice-Chairman 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 and 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 merger
acquisitions and valuation analyses of some of the leading health care
organizations. In 1989, Mr. Greenberg
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<PAGE>
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 Systems
For Business, Inc. ("Monroe"), a worldwide office equipment distribution and
service organization 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.
Russell J. Ricci, M.D. has been a Director of the Company since
September 1996. Dr. Ricci is currently the General Manager of IBM WorldWide
Healthcare Industries. From June 1994 to September 1996, Dr. Ricci was President
of the New Health Ventures Division of Blue Cross/Blue Shield of Massachusetts.
Prior to joining Blue Cross/Blue Shield, Dr. Ricci worked with a number of
for-profit healthcare companies in the financing, planning, development,
marketing, and management of their healthcare businesses. These included
positions as Chief Executive Officer of Winchester Health Care Enterprises from
1991 to 1994 and founder and director of VHA Enterprises, an affiliate of
Voluntary Hospitals of America, from 1983 to 1990. Dr. Ricci has been an
assistant clinical professor at Boston University School of Medicine.
-33-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes for the last three fiscal years certain
information regarding the Company's compensation of its chief executive officer
or an individual acting in a similar capacity and its other most highly
compensated executive officers (other than the chief executive officer) whose
total annual salary and bonus (excluding unusual and nonrecurring items) for
fiscal year 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------- ---------------------- ---------------------
Restricted
Other Annual Stock Options/ LTIP All Other
Name And Principal Position Year Salary Bonus Compensation(1) Awards(s) SARS Payouts Compensation
- --------------------------- ---- ------ ----- --------------- --------- ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry Green (2) ................ 1996 $229,750 $125,000 $ 6,694 -- -- -- --
President and CEO .............. 1995 $213,860 $110,000 $ 3,500 -- 90,000(3) -- --
1994 $213,860 $ 75,000 $ 38,085(4) -- 125,000(5) -- --
John F. Mortell ................ 1996 $225,315 $100,000 $ 2,030 -- 90,000(6) -- --
Executive Vice ................. 1995 $203,860 $ 85,000 $ 8,400 -- 75,000(7) -- --
President and Chief ............ 1994 $185,400 $ 55,000 $ 8,400 -- 85,000(8) -- --
Operating Officer
Steven E. Kelsky (9) ........... 1996 $187,250 $ 70,000 $ 6,000 -- 50,000(10) -- --
Senior Vice President .......... 1995 $183,490 $ 50,000 $ 6,000 -- 50,000(11) -- --
1994 $ 56,667 $ 30,000 $ 2,000 -- 85,000(12) -- --
James R. Bailey (13) ........... 1996 $188,083 $ 40,000 $ 6,000 -- 40,000(14) -- --
Senior Vice President .......... 1995 $188,860 $ 40,000 $ 6,000 -- 40,000(15) -- --
1994 $166,088(16) $ 30,000 $ 11,294 -- 45,000(17) -- --
Kenneth W. Ernsting (18) ....... 1996 $166,651 $ 60,000 $ 36,700(19) -- 40,000(20) -- --
Senior Vice President .......... 1995 $ 23,076 $ 40,000 -- -- 50,000(21) -- --
</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 and appointed him Chief Executive Officer in June 1994.
(3) 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.
(4) Represents relocation expenses of $35,321 and $2,764 for a vehicle
leased by the Company on behalf of Mr. Green.
(5) In January 1994, the Company granted options under the Employee Plan to
purchase 75,000 shares of Common Stock, of which 45,000 were exercised
as of December 31, 1996 and the remaining 30,000 of which vest over the
next two year period. In March 1995, the Company granted additional
options to purchase 50,000 shares of Common Stock, of which 10,000 were
exercised as of December 31, 1995 and 10,000 were exercisable as of
December 31, 1996 and the remaining 30,000 of which vest over the next
three year period. Such options were granted in 1995 with respect to
1994.
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<PAGE>
(6) In February 1997, the Company granted options to purchase 90,000 shares
of Common Stock under the Employee Plan, of which 18,000 were
exercisable as of February 1997 and the remaining 72,000 of which vest
over the next four year period. Such options were granted in 1997 with
respect to 1996.
(7) 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, 1996 and the remaining 60,000 of which
vest over the next four year period. Such options were granted in 1996
with respect to 1995.
(8) In January 1994, the Company granted options to purchase 50,000 shares
of Common Stock under the Employee Plan, of which 30,000 were exercised
as of December 31, 1996 and the remaining 20,000 of which vest over a
two year period. In March 1995, the Company granted additional options
to purchase 35,000 shares of Common Stock, of which 7,000 were exercised
as of December 31, 1996 and 7,000 were exercisable as of December 31,
1996, the remaining 21,000 of which vest over the next three year
period. Such options were granted in 1995 with respect to 1994.
(9) Mr. Kelsky became a Vice President in September 1994 and a Senior Vice
President of the Company in March 1995.
(10) In February 1997, the Company granted options to purchase 50,000 shares
of Common Stock under the Employee Plan, of which 10,000 were
exercisable as of February 1997 and the remaining 40,000 of which vest
over the next four year period. Such options were granted in 1997 with
respect to 1996.
(11) 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, 1996 and the remaining 40,000 of which
vest over the next four year period. Such options were granted in 1996
with respect to 1995.
(12) In September 1994, the Company granted options to purchase 75,000 shares
of Common Stock under the Employee Plan, of which 12,000 were exercised
as of December 31, 1996 and 33,000 were exercisable as of December 31,
1996, the remaining 30,000 of which vest over the next two year period.
In March 1995, the Company granted additional options to purchase 10,000
shares of Common Stock, of which 2,000 were exercised as of December 31,
1996 and 2,000 were exercisable as of December 31, 1996, the remaining
6,000 of which vest over the next three year period. Such options were
granted in 1995 with respect to 1994.
(13) Mr. Bailey became a Vice President of the Company in April 1994 and a
Senior Vice President in March 1995.
(14) In February 1997, the Company granted options to purchase 40,000 shares
of Common Stock under the Employee Plan, of which 8,000 were exercisable
as of February 1997 and the remaining 32,000 of which vest over the next
four year period. Such options were granted in 1997 with respect to
1996.
(15) 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, 1996 and the remaining 32,000 of which vest over the
next four year period. Such options were granted in 1996 with respect to
1995.
(16) Represents his salary as an employee from January through March of 1994,
which was $59,918, plus his salary as Vice President from April through
December 31, 1994 of $106,170.
(17) In January 1994, the Company granted options to purchase 20,000 shares
of Common Stock under the Employee Plan, of which 12,000 were exercised
as of December 31, 1996 and the remaining 8,000 of which vest over a two
year period. In March 1995, the Company granted additional options to
purchase 25,000 shares of Common Stock, of which 5,000 were exercised as
of December 31, 1996 and 5,000 were exercisable as of December 31, 1996,
the remaining 15,000 of which vest over the next three year period. Such
options were granted in 1995 with respect to 1994.
(18) Mr. Ernsting became a Vice President of the Company in October 1995 and
a Senior Vice President in January 1996.
(19) Represents relocation expenses of $33,700 and $3,000 for automobile
allowance.
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<PAGE>
(20) In February 1997, the Company granted options to purchase 40,000 shares
of Common Stock under the Employee Plan, of which 8,000 were exercisable
as of February 1997, and the remaining 32,000 of which vest over the
next four year period. Such options were granted in 1997 wth respect to
1996.
(21) In February 1996, the Company granted options to purchase 15,000 shares
of Common Stock under the Employee Plan, of which 3,000 were exercisable
as of December 31, 1996 and the remaining 12,000 of which vest over the
next four year period. Such options were granted in 1996 with respect to
1995. In October 1995, the Company granted options to purchase 35,000
shares of Common Stock, of which 7,000 were exercised as of December 31,
1996 and 7,000 were exercisable as of December 31, 1996, the remaining
21,000 of which vest over the next three year period.
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<PAGE>
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 executive officers pursuant to the
Company's stock option plans during fiscal year 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Individual Grants Term
-------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise Exercise
Options Employees in Price Expiration
Name Granted(1) Fiscal Year (Per Share)(2) Date 5% 10%
- ---- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry Green ........................ 90,000(3) 15.0% $ 12.625 1/1/06 714,150 1,811,250
John F. Mortell .................... 75,000(4) 12.5% $ 12.625 1/1/06 595,125 1,509,375
Steven E. Kelsky ................... 50,000(5) 8.3% $ 12.625 1/1/06 396,750 1,006,250
James R. Bailey .................... 40,000(6) 6.7% $ 12.625 1/1/06 317,400 805,000
Kenneth W. Ernsting ................ 15,000(7) 2.5% $ 12.625 1/1/06 119,100 301,875
</TABLE>
- -----------
(1) Includes options granted in 1996 with respect to 1995, but does not
include options granted in 1997 with respect to 1996. In February 1997,
the Company granted Messrs. Mortell, Kelsky, Bailey and Ernsting
additional options to purchase 90,000, 50,000, 40,000 and 40,000 shares
of Common Stock, respectively, at an exercise price of $9.188 per share.
Twenty percent of the 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. 22,500
options vest over the next 4 years succeeding the initial grant on the
anniversary date.
(4) Options are subject to a maximum exercise period of 10 years. 15,000
options vest on the date of the grant and 15,000 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. 10,000
options vest on the date of grant and 10,000 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. 8,000
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.
(7) Options are subject to a maximum exercise period of 10 years. 3,000
options vest on the date of grant 3,000 options vest in each of the 4
years succeeding the initial grant on the anniversary date.
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<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
1996 and information concerning the number and value of unexercised stock
options at December 31, 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 31, December 31, 1996
1996
------------------------------------------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry Green .................. 225,000 2,160,000 50,000 190,000 225,000 450,000
John F. Mortell .............. 77,000 712,250 42,000 121,000 125,000 254,500
Steven E. Kelsky ............. 20,000 182,500 45,000 80,000 157,500 180,000
James R. Bailey .............. 47,000 423,000 23,000 65,000 67,500 148,500
Kenneth W. Ernsting........... 7,000 34,125 10,000 33,000 14,000 42,000
</TABLE>
Compensation of Directors
Directors who are not executive officers of the Company, are reimbursed
for their expenses and receive a fee of $2,500 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.
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 by the Company, other than
for death, disability or cause, equal to one year's base salary, less applicable
deductions. The Agreement permits either Mr. Green or the Company to terminate
Mr. Green's employment upon ninety (90) days prior written notice and, if such
termination is effected, Mr. Green will, from the time of such termination
through March 19, 1999, 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 on termination by the
Company, other than for death, disability or cause, equal to one year's base
salary, less applicable
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<PAGE>
deductions. The Agreement permits Mr. Mortell to terminate the employment
agreement in the event of a change of control of the Company and, if such
termination is effected, the Company will pay Mr. Mortell a severance payment
equal to one year's compensation, less applicable deductions.
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 $185,000 and a
severance payment of six months base salary if Mr. Bailey's employment is
terminated without cause.
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 $185,000 and a severance payment of four months
base salary if Mr. Kelsky's employment is terminated without cause.
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 $175,000 and a severance payment of
four months base salary if Mr. Ernsting's employment is terminated without
cause.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
ownership of Common Stock of the Company, as of March 31, 1997, 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 chief executive
officer and the Company's four most highly paid executive officers other than
its chief executive officer; and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name and Address Percent
of Beneficial Owners Number of Class
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Jeffry M. Picower (1)....................................... 22,951,522 (2) 42.19%
State of Wisconsin Investment Board (3)..................... 3,868,800 7.30%
Jerry Brager................................................ 1,592,999 (4) 3.01%
Henry Green................................................. 97,500 (5) *
John F. Mortell............................................. 92,000 (6) *
James R. Bailey............................................. 48,000 (7) *
Steven E. Kelsky............................................ 69,000(8) *
Kenneth W. Ernsting......................................... 21,000(9) *
Frederick Frank............................................. 111,870(10) *
Frederic Greenberg.......................................... 94,087(11) *
Richard B. Kelsky........................................... 110,000(12) *
Russell Ricci............................................... 4,000(13) *
All Directors and Executive Officers as a group (13 persons) 25,245,978(14) 45.97%
</TABLE>
- -----------------
* Less than 1%
(1) Address is South Ocean Blvd., Palm Beach, FL 33480.
(2) Includes 1,420,000 shares currently purchasable upon exercise of
warrants. The shares of Common Stock and such warrants are owned by J A
Special Limited Partnership ("J A Special"). Mr. Picower is the sole
general partner of J A Special and, as such, has the power to vote or
direct the vote of and to dispose or direct the disposition of such
shares of Common Stock and the warrants and, accordingly, may be deemed
to be the beneficial owner of such shares and warrants. Does not include
warrants to purchase 5,000,000 shares granted September 13, 1995, which
become exercisable two years from the date granted.
(3) Address is P.O. Box 7842, Madison, WI 53707.
(4) Includes 150,000 shares held by the wife of Mr. Brager and
87,500 shares held by the minor children of Mr. Brager, the
beneficial ownership of which Mr. Brager disclaims.
(5) Includes 97,500 shares currently purchasable upon exercise of
stock options.
(6) Includes 92,000 shares currently purchasable upon exercise of
stock options.
(7) Includes 48,000 shares currently purchasable upon exercise of
stock options.
(8) Includes 69,000 shares currently purchasable upon exercise of
stock options.
(9) Includes 21,000 shares currently purchasable upon exercise of
stock options.
(10) Includes 10,000 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.
(11) Includes 71,574 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, and
3,333 shares currently purchasable by Mr. Greenberg upon
exercise of stock options.
(12) Includes 10,000 shares currently purchasable upon exercise of
stock options and 100,000 shares currently purchasable upon
exercise of warrants issued February 1, 1994.
(13) Includes 4,000 shares currently purchasable upon exercise of
stock options.
(14) Includes 415,499 shares currently purchasable upon exercise of
stock options and 1,520,000 of warrants inclusive of those
described in notes (2), (5), (6), (7), (8), (9), (10), (11),
(12), and (13).
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 6, 1994, the Company entered into an agreement with Monroe
Systems For Business, Inc., a company wholly-owned by the Investor, Jeffry M.
Picower, 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. On
September 1, 1996, the Company amended its agreement with Monroe Systems For
Business, Inc. to sublease 14,170 square feet of additional office space at 1200
The American Road, Morris Plains, New Jersey. The provisions of the amended
lease require the Company to make lease payments of $73,257 per month increasing
to $78,165 per month in March 1997, and every other year thereafter an
additional $1.00 per square foot per year. 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."
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.
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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<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
A. and D. See Index to Financial Statements and Schedule on page F-1 and
Exhibits Index on page E-1.
B. Reports on Form 8-K.
None.
-42-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Description Page
- -------- ----------- ------------
<S> <C> <C>
3.1(a) Amended and Restated Certificate of Incorporation, dated as of
March 27, 1995. (Filed as Exhibit 3.1(c) to the Company's report
on Form 10-K for the year ended December 31, 1995 (the "1995
10-K") and incorporated herein by reference.)
3.1(b) Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Company, dated as of October 6, 1995,
authorizing new Series A Convertible Preferred Stock. (Filed as
Exhibit 3.1(d) to the 1995 10-K and incorporated herein by
reference.)
3.1(c) Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Company, dated as of October 18, 1995,
amending the rights, preferences and limitations of Series A
Convertible Preferred Stock. (Filed as Exhibit 3.1(e) to the 1995
10-K and incorporated herein by reference.)
3.2 Copy of By-Laws of the Company. (Filed as Exhibit 3.2 to the
Company's report on Form 10-K for the year ended December 31,
1992.)
4.1 Registration Rights Agreement dated as of February 22, 1993
between the Company and Jeffry M. Picower. (Filed as Exhibit 15 to
Amendment No. 7 to Schedule 13D by Jeffry M. Picower).
4.2 Copy of Warrant Purchase Agreement between the Company and Jeffry
M. Picower, together with conformed copy of warrant to purchase
350,000 shares of Common Stock issued pursuant thereto. (Filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-1
(Reg. No. 33-42935) and incorporated herein by reference.)
4.3 Copy of Amended and Restated Warrant Purchase Agreement dated as
of February 22, 1993 between the Company and Jeffry M. Picower,
together with copy of Amended and Restated Warrant to purchase
350,000 shares issued pursuant thereto. (Filed as Exhibit 3 to the
Company's report on Form 8-K dated March 8, 1993 and incorporated
herein by reference.)
4.4 Copy of Amended and Restated Warrant Purchase Agreement dated as
of February 22, 1993 between the Company and Jeffry M. Picower,
together with copy of
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Description Page
- -------- ----------- ------------
<S> <C> <C>
Amended and Restated Warrant to purchase 633,462 shares issued
pursuant thereto. (Filed as Exhibit 4 to the Company's report on
Form 8-K dated March 8, 1993 and incorporated herein by
reference.)
4.5 Copy of Second Amended and Restated Warrant Purchase Agreement
dated as of February 22, 1993 between the Company and Jeffry M.
Picower, together with copy of Amended and Restated Warrant to
purchase 436,538 shares issued pursuant thereto. (Filed as Exhibit
5 to the Company's report on Form 8-K dated March 8, 1993 and
incorporated herein by reference.)
4.6 Copy of Convertible Subordinated Note Purchase Agreement, dated
January 25, 1995, between Equifax Inc. and the Company (filed as
Exhibit 2 to the Company's report on Form 8-K dated January 26,
1995 and incorporated herein by reference).
4.7 Form of Convertible Subordinated Promissory Note, dated February
15, 1995 (Filed as Exhibit 1 to the Company's report on Form 8-K
dated February 28, 1995 and incorporated herein by reference.)
4.8 Form of Promissory Note, dated April 24, 1995, from PMSI
Acquisition Corp. to Practice Management Systems, Inc. in the
amount of $2,000,000. (Filed as Exhibit 2 to the Company's report
on Form 8-K dated May 1, 1995 and incorporated herein by
reference.)
4.9 Copy of Common Stock Purchase Warrant, dated September 13, 1995.
(Filed as Exhibit 3 to the Company's report on Form 8-K dated
September 18, 1995 and incorporated herein by reference.)
4.10 Copy of Promissory Note, dated October 27, 1995, from VERSYSS
Incorporated to VERSYSS Liquidating Trust in the amount of
$11,750,000. (Filed as Exhibit 1 to the Company's report on Form
8-K dated November 8, 1995 and incorporated herein by reference.)
10.1 Copy of the Company's 1989 Stock Option Plan, including forms of
option agreements. (Filed as Exhibit 10.1 to the 1991 Form S-1 and
incorporated herein by reference.)
10.2 Copy of the Company's 1990 Stock Option Plan, including forms of
option agreements. (Filed as Exhibit 10.2 to the 1991 Form S-1 and
incorporated herein by reference.)
10.3 Copy of Letter Agreement between the Company and Jeffry
</TABLE>
-44-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Description Page
- -------- ----------- ------------
<S> <C> <C>
M. Picower dated April 14, 1993. (Filed as Exhibit 10.38 to the
1992 10-K and incorporated herein by reference.)
10.4 Letter Agreement between the Company and Jeffry M. Picower dated
December 31, 1993. (Filed as Exhibit 10.7 to the Company's report
on Form 8-K dated January 13, 1994 and incorporated herein by
reference.)
10.5 Agreement dated December 30, 1993 between the Company and IBM
Credit Corporation. (Filed as Exhibit 10.9 to the Company's report
on Form 8-K dated January 13, 1994 and incorporated herein by
reference.)
10.6 The Company's Amended and Restated 1993 Incentive and
Non-Incentive Stock Option Plan. (Filed as Exhibit 10.30 to the
1995 S-1 and incorporated herein by reference).
10.7 The Company's Amended and Restated 1993 Non-Employee Directors
Non-Incentive Stock Option Plan. (Filed as Exhibit 10.31 to the
1995 S-1 and incorporated herein by reference).
10.8 Employment Letter dated April, 1994 between the Company and James
R. Bailey. (Filed as Exhibit 10.32 to the 1995 S-1 and
incorporated herein by reference).
10.9 Employment Letter dated September 1, 1994, between the Company and
Steven E. Kelsky. (Filed as Exhibit 10.33 to the 1995 S-1 and
incorporated herein by reference).
10.10 Lease Agreement for the Company's headquarters in Morris Plains,
New Jersey. (Filed as Exhibit 10.34 to the 1995 S-1 and
incorporated herein by reference).
10.11 Exclusive Marketing Agreement, dated January 25, 1995, by and
between Equifax Healthcare EDI Services, Inc. and the Company
(filed as Exhibit 1 to the Company's report on Form 8-K dated
January 26, 1995 and incorporated herein by reference).
10.12 Amended and Restated Exclusive Marketing Agreement, dated as of
January 12, 1996, by and between the Company and Equifax
Healthcare EDI Services, Inc. (Filed as Exhibit 1 to the Company's
report on Form 8-K dated February 2, 1995 and incorporated herein
by reference.)
10.13 Guaranty, dated October 27, 1995, by the Company and V Holding
Corp. to VERSYSS Liquidating Trust. (Filed as Exhibit 2 to the
Company's report on Form 8-K dated November 8, 1995 and
incorporated herein by reference.)
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Description Page
- -------- ----------- ------------
<S> <C> <C>
10.14 Pledge Agreement, dated October 27, 1995, by and among the
Company, V Holding Corp. and VERSYSS Liquidating Trust. (Filed as
Exhibit 3 to the Company's report on Form 8-K dated November 8,
1995 and incorporated herein by reference.)
10.15 Employment Letter, dated August 17, 1995 between VERSYSS and
Kenneth W. Ernsting. (Filed as Exhibit 10.42 to the 1995 10-K and
incorporated herein by reference.)
10.16 Employment Letter, dated August 17, 1995 between VERSYSS and
William S. Edwards. (Filed as Exhibit 10.43 to the 1995 10-K and
incorporated herein by reference.)
10.17 Partnership Agreement, dated as of January 25, 1996, between PCN
HP Venture Corp. and Intelligent Medical Systems, Inc. (Filed as
Exhibit 10.44 to the 1995 10-K and incorporated herein by
reference.)
10.18 Transaction Agreement, dated as of January 25, 1996, between the
Company, Glaxo Wellcome Inc., and HealthPoint G.P.
10.19 Copy of Physician Computer Network, Amended and Restated Value
Added Reseller Stock Option Plan, dated as of January 1996. (Filed
as Exhibit 10.46 to the 1995 10-K and incorporated herein by
reference.)
10.20 Copy of Employment Agreement, dated as of March 29, 1996 between
the Company and John Mortell. (Filed as Exhibit 10-47 to the 1995
10-K and incorporated herein by reference.)
10.21 Copy of Employment Agreement, dated as of March 29, 1996 between
the Company and Hank Green. (Filed as Exhibit 10.48 to the 1995
10-K and incorporated herein by reference.)
10.22 Agreement and Plan of Merger, dated June 20, 1996, by and among
Physician Computer Network, Inc., Wismer-Martin, Inc. and
Northwest Acquisition Corp. (Filed as Exhibit 1 to the
Registrant's Current Report on Form 8-K dated June 25, 1996 and
incorporated herein by reference.)
10.23 Asset Purchase Agreement, dated as of July 2, 1996, by and among,
CUSA Technologies, Inc. and certain of its subsidiaries, Physician
Computer Network, Inc. and PCN Services Corp. (Filed as Exhibit 1
to the Company's
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Description Page
- -------- ----------- ------------
<S> <C> <C>
Current Report on Form 8-K dated July 10, 1996 and incorporated
herein by reference).
11* Statement Regarding Computation of Earnings Per Share.
21* List of Subsidiaries of Registrant.
24* Consent of KPMG Peat Marwick LLP.
</TABLE>
- ------------
* Filed herewith
-47-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Physician Computer Network, Inc. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PHYSICIAN COMPUTER NETWORK, INC.
By:/s/ Henry Green
---------------------------
Henry Green, President and
Chief Executive Officer
Dated: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
- ---- -------- ----
/s/ Jeffry M. Picower Chairman and Director March 31, 1997
- ------------------------
Jeffry M. Picower
/s/ Henry Green President and Chief March 31, 1997
- ------------------------- Executive Officer and
Henry Green Director
/s/ John F. Mortell Executive Vice President and March 31, 1997
- ------------------------- Chief Operating Officer and
John F. Mortell Director
/s/ Jerry Brager Director March 31, 1997
- -------------------------
Jerry Brager
/s/ Frederick Frank Director March 31, 1997
- -------------------------
Frederick Frank
/s/ Richard B. Kelsky Director March 31, 1997
- -------------------------
Richard B. Kelsky, Esq.
/s/ Frederic Greenberg Director March 31, 1997
- -------------------------
Frederic Greenberg
/s/ Russell J. Ricci Director March 31, 1997
- -------------------------
Russell J. Ricci, M.D.
/s/ Thomas Wraback Senior Vice President and March 31, 1997
- ------------------------- Chief Financial Officer
Thomas Wraback
-48-
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
in This Report
--------------
<S> <C>
Independent Auditors' Report........................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995.................................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994............................................................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for
the years ended December 31, 1994, 1995 and 1996..................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994............................................................................................. F-6
Notes to Consolidated Financial Statements............................................................. F-7 to F-35
Financial Statements Schedule:
Schedule II-Valuation and Qualifying
Accounts............................................................................................ S-1
All other schedules are omitted because they are not required, inapplicable or the information is
otherwise shown in the Consolidated Financial Statements or notes thereto.
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Physician Computer Network, Inc.:
We have audited the consolidated financial statements of Physician Computer
Network, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Short Hills, New Jersey
February 18, 1997
F-2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................................ $ 34,291,166 $ 15,516,883
Accounts receivable, net of allowance for doubtful
accounts of $3,428,000 at December 31, 1996, and
$764,000 at December 31, 1995 ...................................................... 21,102,878 19,466,446
Inventories .......................................................................... 5,798,153 4,598,954
Prepaid expenses and other ........................................................... 2,974,490 1,093,306
Deferred tax asset ................................................................... 2,933,000 1,650,000
------------- -------------
Total current assets ............................................................. 67,099,687 42,325,589
Intangible assets, net of accumulated amortization
of $14,826,000 at December 31, 1996
and $6,840,000 at December 31, 1995 ................................................ 69,076,020 53,701,055
Property and equipment, net .......................................................... 6,234,295 3,976,195
Investment in joint venture .......................................................... 2,015,888 --
Other assets ......................................................................... 5,739,428 256,998
------------- -------------
Total assets ..................................................................... $ 150,165,318 $ 100,259,837
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other .............................................................................. $ 7,934,518 $ 9,080,000
Related party ...................................................................... -- 750,000
Current portion of long term-debt .................................................... 1,153,413 100,160
Current portion of obligations under capital leases .................................. 289,229 327,770
Accounts payable ..................................................................... 6,183,103 4,935,601
Accrued expenses and other liabilities ............................................... 6,301,576 17,024,828
Customer deposits .................................................................... 1,043,072 3,504,980
Unearned income ...................................................................... 13,068,726 15,608,705
------------- -------------
Total current liabilities ............................................... 35,973,637 51,332,044
Long-term debt, net of current portion ............................................... 4,672,118 18,924,000
Obligations under capital leases, net of
current portion .................................................................... 612,650 806,255
------------- -------------
Total liabilities ................................................................ 41,258,405 71,062,299
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized:
Series A convertible preferred stock, 1,000 shares outstanding
at December 31,1996 and 15,750 shares outstanding at December 31,1995 .............. 10 157
Common stock, $.01 par value, 75,000,000 shares authorized,
52,982,484 shares issued and outstanding at
December 31,1996 and 42,937,147 shares issued
and outstanding at December 31, 1995 ............................................... 529,825 429,371
Additional paid-in capital ........................................................... 193,281,643 129,728,821
Accumulated deficit .................................................................. (84,904,565) (100,960,811)
------------- -------------
Shareholders' equity ................................................................. 108,906,913 29,197,538
------------- -------------
Total liabilities and shareholders' equity ....................................... $ 150,165,318 $ 100,259,837
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Software license fees ........................................................ $ 29,396,612 $ 15,450,897 $ 6,302,181
Hardware revenue ............................................................. 25,301,761 9,721,559 2,592,713
Maintenance, communication fees and other .................................... 41,099,119 16,632,886 11,608,912
------------ ------------ ------------
95,797,492 41,805,342 20,503,806
Cost of Revenues:
Hardware ..................................................................... 15,213,697 7,336,196 2,057,763
Software, maintenance, communication fees
and other .................................................................. 23,347,900 8,952,757 4,018,189
------------ ------------ ------------
38,561,597 16,288,953 6,075,952
------------ ------------ ------------
Gross margin ................................................................. 57,235,895 25,516,389 14,427,854
Operating expenses:
Research and development ..................................................... 5,739,518 2,219,223 1,838,823
Selling and marketing ........................................................ 9,115,683 3,038,069 2,144,464
General and administrative ................................................... 10,990,028 10,354,611 5,528,738
Amortization of acquired intangible assets ................................... 7,192,551 2,883,658 1,857,054
Acquired technology in process ............................................... -- 14,516,000 --
Restructuring ................................................................ -- 3,072,450 --
Write-down of assets and other charges ....................................... -- 1,477,000 --
------------ ------------ ------------
33,037,780 37,561,011 11,369,079
------------ ------------ ------------
Interest (income) expense:
Interest income .......................................................... (678,401) (577,039) (88,817)
Interest expense ......................................................... 1,835,091 1,451,604 1,798,053
------------ ------------ ------------
1,156,690 874,565 1,709,236
------------ ------------ ------------
Income (loss) before income tax expense (benefit),
loss on equity investment and extraordinary item ........................ 23,041,425 (12,919,187) 1,349,539
Income tax expense (benefit) ................................................. 4,817,999 (1,419,000) 102,320
------------ ------------ ------------
Income (loss) before loss on equity investment and extraordinary item ........ 18,223,426 (11,500,187) 1,247,219
Loss on equity investment, net of income tax benefit ......................... (2,167,180)
------------ ------------ ------------
Income (loss) before extraordinary item ...................................... 16,056,246 (11,500,187) 1,247,219
Extraordinary item - loss on extinguishment of debt ......................... -- (180,000) --
------------ ------------ ------------
Net income (loss) available to common shareholders ........................... $ 16,056,246 $(11,680,187) $ 1,247,219
============ ============ ============
Primary and fully diluted earnings (loss) per common share:
Before extraordinary item .................................................... $ 0.30 $ (0.29) $ 0.04
Extraordinary item ........................................................... -- -- --
------------ ------------ ------------
Net earnings (loss) .......................................................... $ 0.30 $ (0.29) $ 0.04
============ ============ ============
Weighted average number
of common shares outstanding ............................................... 54,308,147 40,068,406 35,634,106
============ ============ ============
</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, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ............................... -- $ -- 34,115,660 $ 341,156
Exercise of stock options ........................... -- -- 63,460 635
Net Income .......................................... -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 1994 ............................... -- -- 34,179,120 341,791
Common Stock issued ................................. -- -- 6,250,000 62,500
Preferred Stock issued .............................. 18,500 185 -- --
Issue of warrants to purchase Common Stock .......... -- -- -- --
Common Stock issued ................................. -- -- 1,902,748 19,027
Exercise of stock options ........................... -- -- 203,380 2,034
Compensatory value added reseller options ........... -- -- -- --
Conversion of Preferred Stock into Common Stock ..... (2,750) (28) 401,899 4,019
Net Loss ............................................ -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 1995 ............................... 15,750 157 42,937,147 429,371
Common Stock issued: public offering ................ -- -- 4,507,783 45,078
Conversion of Equifax convertible note .............. -- -- 1,932,217 19,322
Common Stock issued: Wismer-Martin .................. -- -- 935,000 9,350
Exercise of stock options ........................... -- -- 563,201 5,632
Tax benefit of stock options exercised .............. -- -- -- --
Exercise of value added reseller options ............ -- -- 133,452 1,335
Purchase of value added reseller shares into treasury
stock and subsequent retirement .................... -- -- (133,452) (1,335)
Conversion of Preferred Stock into Common Stock ..... (14,750) (147) 2,107,136 21,072
Net income ......................................... -- -- -- --
============= ============= ============= =============
Balance, December 31, 1996 ............................... 1,000 $ 10 52,982,484 $ 529,825
============= ============= ============= =============
</TABLE>
PHYSICIAN COMPUTER NETWORK, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Additional Shareholders'
Paid-in Accumulated Equity
Capital Deficit (Deficiency)
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1993 ............................... $ 80,318,757 $ (90,527,843) $ (9,867,930)
Exercise of stock options ........................... 45,701 -- 46,336
Net Income .......................................... -- 1,247,219 1,247,219
------------- ------------- -------------
Balance, December 31, 1994 ............................... 80,364,458 (89,280,624) (8,574,375)
Common Stock issued ................................. 22,277,458 -- 22,339,958
Preferred Stock issued .............................. 18,499,815 -- 18,500,000
Issue of warrants to purchase Common Stock .......... 1,482,500 -- 1,482,500
Common Stock issued ................................. 6,170,299 -- 6,189,326
Exercise of stock options ........................... 808,282 -- 810,316
Compensatory value added reseller options ........... 130,000 -- 130,000
Conversion of Preferred Stock into Common Stock ..... (3,991) -- --
Net Loss ............................................ -- (11,680,187) (11,680,187)
------------- ------------- -------------
Balance, December 31, 1995 ............................... 129,728,821 (100,960,811) 29,197,538
Common Stock issued: public offering ................ 41,203,121 -- 41,248,199
Conversion of Equifax convertible note .............. 9,980,678 -- 10,000,000
Common Stock issued: Wismer-Martin .................. 9,356,545 -- 9,365,895
Exercise of stock options ........................... 2,365,991 -- 2,371,623
Tax benefit of stock options exercised .............. 1,463,000 -- 1,463,000
Exercise of value added reseller options ............ 782,696 -- 784,031
Purchase of value added reseller shares into treasury
stock and subsequent retirement .................... (1,578,284) -- (1,579,619)
Conversion of Preferred Stock into Common Stock ..... (20,925) -- --
Net income ......................................... -- 16,056,246 16,056,246
============= ============= =============
Balance, December 31, 1996 ............................... $ 193,281,643 $ (84,904,565) $ 108,906,913
============= ============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) ................................................. $ 16,056,246 $(11,680,187) $ 1,247,219
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Acquired technology in process .................................. -- 14,516,000 --
Depreciation and amortization ................................... 9,663,594 4,121,992 2,988,766
Write-down of assets and other charges .......................... -- 1,477,000 --
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 --
Provision for inventory obsolescence ............................ 1,478,238 162,000 --
Gain on sale of assets .......................................... (146,334) (54,083) (168,558)
Provision for doubtful accounts ................................. 3,725,000 225,703 376,487
Non-cash compensation expense ................................... 15,000 15,000 30,000
Non-cash provision for income tax ............................... 4,284,494 -- --
Loss on equity investment ....................................... 2,167,180 -- --
Extraordinary loss on extinguishment of capital
lease obligations and long-term debt ........................ -- 180,000 --
(Increase) decrease in assets:
Restricted cash ............................................ -- -- 206,500
Accounts receivable ........................................ (4,158,304) (5,659,700) (4,343,847)
Inventories ................................................ (2,527,838) 378,441 (62,163)
Prepaid expenses and other assets .......................... (2,223,288) (1,258,227) 77,221
Increase (decrease) in liabilities, net
Accounts payable ........................................... (818,608) (2,009,162) 303,541
Accrued expenses and
other liabilities ...................................... (14,251,476) (1,776,793) (1,804,759)
Customer deposits and unearned income ...................... (5,622,368) (118,612) 205,492
------------ ------------ ------------
Net cash provided by (used in) operating activities: ............ 7,641,536 1,815,155 (464,101)
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of equipment ............................................. (1,589,908) (1,481,548) (280,694)
Disposal of equipment ............................................. (392,551) 54,083 168,558
Acquisition of licensing rights
and other intangible assets ..................................... (1,910,905) (575,885) (17,033)
Purchase of businesses, net of cash acquired ...................... (11,670,082) (19,383,616) (1,674,601)
Investment in joint venture and related costs ..................... (4,759,154) -- --
------------ ------------ ------------
Net cash used in investing activities: .......................... (20,322,600) (21,386,966) (1,803,770)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Principal payments of
long-term debt .................................................. (11,052,247) (26,349,000) (5,060,577)
Net proceeds from issuance of
notes payable and long-term debt ................................ -- 9,852,649 176,250
Principal payments under
capital lease obligations ....................................... (316,640) (249,102) (52,761)
Net proceeds from issuance
of common stock, preferred stock and
warrants and purchase of treasury stock ........................... 42,824,234 49,322,100 46,336
------------ ------------ ------------
Net cash provided by (used in) financing activities ............. 31,455,347 32,576,647 (4,890,752)
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents ......................................... 18,774,283 13,004,836 (7,158,623)
Cash and cash equivalents,
beginning of year ................................................. 15,516,883 2,512,047 9,670,670
------------ ------------ ------------
Cash and cash equivalents,
end of year ....................................................... $ 34,291,166 $ 15,516,883 $ 2,512,047
============ ============ ============
</TABLE>
See Note 17 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. In order to supplement
its practice management product offerings with knowledge-based clinical products
and services, in January 1996, the Company and Glaxo Wellcome, Inc. ("Glaxo
Wellcome") formed a joint venture. The joint venture, HealthPoint G.P.
("HealthPoint"), released its first product offering, HealthPoint ACS, in
December 1996.
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 this 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. On March 11, 1994, the Company purchased substantially all of the
assets of the practice management business (the "DOM/2 Business") of IBAX
Healthcare Systems. On November 15, 1994, the Company purchased the Acclaim
software maintenance and support business (the "Acclaim Business") from Sentient
Systems, Inc. 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"). On October 27, 1995, the
Company acquired VERSYSS Incorporated ("Versyss") which developed and sold
practice management software products and related equipment, service and support
and provided integrated information systems to certain industries other than
health care, through the merger of a wholly-owned subsidiary of the Company with
and into Versyss, with Versyss as the surviving corporation of such merger. On
July 2, 1996, the Company acquired substantially all of the assets of the
medical practice management software business and certain other software
businesses of CUSA Technologies, Inc. (the "CTI Business"). On September 10,
1996, the Company acquired Wismer-Martin, Inc. ("Wismer-Martin"), a provider of
practice management systems and hospital information systems, through a merger
of a wholly-owned subsidiary of the Company with and into Wismer-Martin, with
Wismer-Martin as the surviving corporation of such merger (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, 1996, 1995, and 1994 inclusive of the
results of the DOM/2 Business from March 11, 1994, the Acclaim Business from
November 15, 1994, PMSC from April 24, 1995, Versyss from October 27, 1995, the
CTI Business from July 2, 1996 and Wismer-Martin from September 10, 1996. All
significant intercompany transactions have been eliminated. Certain
reclassifications have been made to the 1994 and 1995 consolidated financial
statements to conform with the December 31, 1996 presentation.
F-7
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Revenue Recognition:
The Company's revenue stream includes: (i) license fees for internally
developed practice management software products; (ii) support and update service
agreements on the practice management software products; (iii) hardware sales
and the sale of hardware service agreements and (iv) customer training and
consulting services. Sales of licenses for internally developed software
products are made to independent resellers and 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 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 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. All costs associated with licensing of software products,
support and update services, and training and consulting services are expensed
as incurred (see Note 10).
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, 1996 and 1995 was $876,000 and $469,000,
respectively. Capitalized software amortization expense was $170,000 and $43,000
for the years ended December 31, 1996 and 1995, respectively. There was no
capitalized software amortization expense for the year ended December 31, 1994
as there were no software development costs capitalized in 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, with
the help of an appraiser, the Company allocated a portion of the purchase price
of the Versyss acquisition to acquired technology in process which amount of
$14,516,000 was recorded as an expense in the year ended December 31, 1995.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-8
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 as of December 31, 1996
consist primarily of the current unamortized portion of a prepaid marketing
agreement between the Company and National Data Corporation ("NDC") as successor
to Equifax Healthcare EDI Services, Inc. ("Equifax EDI") (See Note 12) and the
current portion of notes receivable from resellers. Prepaid expenses and other
current assets as of December 31, 1995 consisted 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 $2,720,000 and $1,624,000 as of December 31, 1996 and 1995 respectively, are
recorded at cost of acquisition. Amortization is computed using the
straight-line method over a period of four to five years. The associated
amortization expense was $495,000, $274,000 and $206,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Intangible assets related to the excess purchase price of acquired
businesses were $79,262,000 and $57,912,000 as of December 31, 1996 and 1995
respectively, with total amortization expense of $7,193,000, $2,884,000, and
$1,858,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
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. 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." The adoption of this statement, which did not have
any impact on the Company's financial position or results of operations,
requires that long-lived assets, certain identifiable intangible assets and
goodwill related
F-9
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. Consistent with SFAS No. 121, the Company's policy is 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 analyses in 1996,
the Company concluded that no impairment to acquisition related assets had
occurred as of December 31, 1996. For the year ended December 31, 1995, the
Company recorded a charge to write-down acquisition-related intangible assets by
$500,000 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:
The Company follows the asset and liability method of accounting for
income taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). 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, 1994 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. Since the fourth quarter of 1995, the acquisitions completed and
the earnings generated from operations have given the Company the basis to
believe it is more likely than not that the results of future operations have
generated, and will continue to generate, sufficient taxable income to realize
the deferred tax asset. As a result, the Company reduced the valuation allowance
recorded against previous years' net operating loss carryforwards and recorded a
net deferred tax asset of $2,933,000 and $1,650,000 at December 31, 1996 and
1995, respectively, with a corresponding deferred tax benefit realized of
$1,283,000 and $1,650,000 for the years ended December 31, 1996 and 1995,
respectively (See Note 7).
Accounting for Stock Based Compensation:
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. (See Note
13).
F-10
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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) by
the weighted average number of shares of Common Stock outstanding during the
periods. For the year ended December 31, 1995 common stock equivalents and other
dilutive securities were not included in the calculation as they were
anti-dilutive on the loss per share. For the years ended December 31, 1996 and
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 September 10, 1996, the Company acquired Wismer-Martin, a provider
of practice management systems and healthcare information systems located in
Mead, Washington, pursuant to a merger agreement, for: (i) $1,980,000 in cash;
(ii) 935,000 shares of PCN Common Stock valued at $9,365,895; and (iii) the
assumption of $4,733,154 in liabilities.
On July 2, 1996, pursuant to an asset purchase agreement, the Company,
through a wholly-owned subsidiary, purchased substantially all of the assets of
the medical practice management software business and certain other software
businesses of CUSA Technologies, Inc. for: (i) $9,200,000 in cash; and (ii) the
assumption of $4,130,526 in liabilities and cancellation of debt owed by CTI to
PCN.
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, bearing interest at a 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.
F-11
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 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 IBM
Corporation 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.
The Wismer-Martin, CTI Business, Versyss, PMS, Acclaim, and DOM/2
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-12
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The specific intangible assets acquired in the PMS, Versyss, CTI
Business and Wismer-Martin transactions have been identified by and valued at
their fair values, in certain cases 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>
CTI Wismer-
PMS Versyss Business Martin
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consideration:
Cash ......................................................... $ 2,861,003 $12,333,000 $ 9,200,000 $ 1,980,000
PCN Common Stock ............................................ -- -- -- 9,365,895
Notes payable ................................................ 2,000,000 11,750,000 -- --
Liabilities assumed .......................................... 3,009,163 45,797,000 4,130,526 4,733,154
Legal and accounting costs ................................... 79,371 702,629 254,274 611,558
----------- ----------- ----------- -----------
Total purchase price .................................... $ 7,949,537 $70,582,629 $13,584,800 $16,690,607
=========== =========== =========== ===========
Allocation of Purchase Price:
Tangible assets including receivables, inventories,
and equipment ................................................ $ 2,206,150 $13,985,000 $ 2,054,572 $ 3,340,148
Acquired technology in process ............................... -- 14,516,000 -- --
Physician supplier base (amortized over seven years) ......... 483,151 -- -- --
Profit on support and update agreements (amortized
over one year) ............................................... 123,785 852,602 107,000 85,000
Acquired software products (amortized over three to
five years) .................................................. 179,089 3,101,000 -- 494,000
Profit on future support and update agreements
(amortized over three years to five years) ................... 267,750 820,281 599,000 537,000
Other intangible assets (includes non-compete
agreements, trade name and goodwill) (amortized over
seven years to fifteen years) ................................ 4,689,612 37,307,746 10,824,228 12,234,459
----------- ----------- ----------- -----------
Total purchase price ................................... $ 7,949,537 $70,582,629 $13,584,800 $16,690,607
=========== =========== =========== ===========
</TABLE>
The Consolidated Statement of Operations for the year ended December
31, 1996, includes the results of operations of the CTI Business from July 2,
1996 and Wismer-Martin from September 10, 1996. 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
Company charged operations $14,516,000 in 1995 for the acquired technology in
process cost. The acquired technology in process cost consists of 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 use and was therefore charged against operations in the period of
incurrence.
The following unaudited pro forma financial information represents the
combined results of operations of the Company, Wismer-Martin, CTI Business,
Versyss, and PMSC as if the Wismer-Martin and CTI Business acquisitions had
occurred as of January 1, 1995 and as if the Versyss and PMSC acquisitions had
occurred as of January 1, 1994, after giving effect to certain financing
transactions completed in the second and third quarters of 1996 and 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 the Versyss and PMSC acquisitions. The unaudited pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company, Wismer-Martin,
F-13
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
CTI Business, Versyss, and PMSC 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating revenues ............................................. $ 106,827,191 $ 109,092,618 $ 99,458,962
Net income (loss) before extraordinary item .................... $ 13,932,841 $ (909,284) $ (7,706,759)
Loss per common share before extraordinary item ................ $ .24 $ (.02) $ (.18)
</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 increase shareholder value. The
Company recorded a restructuring charge aggregating $3,922,450, for which no tax
benefit was available, 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 were charged to operations or capitalized, as
appropriate, when incurred. The implementation of this plan commenced
immediately and was substantially completed by the end of 1996. Since
implementation of the 1995 Restructuring Plan, the 1995 accrual has decreased by
$3,836,294 principally due to expenditures related to headcount reduction and
lease termination costs from the consolidation and centralization of financial
and administrative functions at the Company's corporate headquarters in Morris
Plains, NJ, the centralization of purchasing, warehousing and order fulfillment
at the Company's Torrance, CA service center and other functional downsizings.
<TABLE>
<CAPTION>
1995 Restructuring Plan
- -----------------------
<S> <C>
1995 Provision and Balance at December 31, 1995 ........................................................... $3,922,450
Cash outflows from reduction in workforce and lease termination costs ..................................... 3,836,294
----------
Balance at December 31, 1996 .............................................................................. $ 86,156
==========
</TABLE>
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
F-14
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Restructuring Plan, the 1993 accrual has been decreased fully by $3,165,000, of
which $2,315,000 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 at the Brookfield, Wisconsin
location. 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
1996 Activity:
Reduction in workforce, lease termination costs and other cash outflows ................................. 576,000
----------
Balance at December 31, 1996 ............................................................................... $ --
==========
</TABLE>
F-15
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. Inventories
Inventories were as follows:
December 31, December 31,
1996 1995
---------- ----------
Computer hardware and peripherals ............ $3,377,694 $3,120,969
Customer maintenance parts ................... 2,420,459 1,477,985
---------- ----------
$5,798,153 $4,598,954
========== ==========
5. Property and Equipment, Net
December 31, December 31,
1996 1995
---------- ----------
Land ....................................... $ 146,000 $ 266,000
Building and Building Improvements ......... 1,337,059 585,000
Computer equipment ......................... 18,072,525 15,761,541
Furniture and fixtures ..................... 938,297 683,512
Leasehold improvements ..................... 713,107 605,989
Equipment under capital lease .............. 1,098,362 1,072,857
------------ ------------
22,305,350 18,974,899
Less: accumulated depreciation and
amortization ............................. (16,071,055) (14,998,704)
============ ============
$ 6,234,295 $ 3,976,195
============ ============
Accumulated amortization in connection with equipment under capital
leases amounted to approximately $760,000 and $715,000 as of December 31, 1996
and 1995, respectively.
F-16
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6. HealthPoint Joint Venture
In January 1996, the Company and Glaxo Wellcome, through wholly- owned
subsidiaries, formed 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 December 31, 1996, the Company had contributed
approximately $4.8 million, with the remainder to be contributed proportionately
by the partners in semi-annual installments as needed by the venture through
December 31, 1998. Any losses incurred by HealthPoint will be allocated between
Glaxo Wellcome and the Company 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.
Summarized financial information for the Company's investment in
HealthPoint, which is accounted for under the equity method of accounting, for
the year ended and as of December 31, 1996 is as follows:
HealthPoint G.P.
----------------
Net sales ............................... $ 832,076
Gross profit ............................ 538,863
Net loss ................................ $(17,903,303)
============
PCN's share of net loss, net
of income tax benefit ................... $ (2,167,180)
============
Current assets .......................... $ 5,389,630
Noncurrent assets ....................... 2,832,602
------------
Total assets ............................ $ 8,222,232
============
Current liabilities ..................... $ 2,959,535
Equity .................................. 5,262,697
============
Total liabilities and equity ............ $ 8,222,232
============
Purchases by the Company from HealthPoint were considered immaterial for the
year ended December 31, 1996.
F-17
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. Income Taxes
Income tax expense (benefit) for each year is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal .......................................... $ 4,638,000 $ 150,000 $ 53,000
State ............................................ 1,462,999 81,000 49,320
----------- ----------- -----------
6,100,999 231,000 102,320
----------- ----------- -----------
Deferred:
Federal .......................................... (1,091,000) (1,450,000) --
State ............................................ (192,000) (200,000) --
----------- ----------- -----------
(1,283,000) (1,650,000) --
----------- ----------- -----------
Total income tax expense (benefit) ................. $ 4,817,999 $(1,419,000) $ 102,320
=========== =========== ===========
</TABLE>
The income tax expense (benefit) differs from applying the federal
income tax rate of 35% for fiscal years 1996 and 1995 (34% for fiscal year 1994)
to income (loss) before income tax expense (benefit), loss on equity investment
and extraordinary item due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate ............ $ 8,064,499 $(4,522,000) $ 459,000
Change in beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense .................. (6,377,660) (2,607,000) (1,042,680)
Amortization of goodwill and acquired technology in
process .......................................... 2,292,300 5,806,000 612,000
Adjustment for deferred tax assets and liabilities
for enacted changes in tax laws and rates ........ -- 614,000 --
State income tax, net of federal benefit ........... 838,860 (710,000) 74,000
----------- ----------- -----------
$ 4,817,999 $(1,419,000) $ 102,320
=========== =========== ===========
</TABLE>
F-18
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1996 and December 31, 1995 are as
follows:
December 31, December 31,
1996 1995
------------ ------------
Deferred Tax Assets:
Net operating loss .................... $ 26,411,000 $ 30,295,000
Restructuring provisions .............. 983,000 7,320,000
Operating accruals ..................... 3,611,800 5,194,000
Allowance for doubtful accounts ........ 1,371,000 1,087,000
Depreciation and amortization .......... 1,152,000 1,126,000
Tax credits ............................ 489,000 186,000
Valuation allowance .................... (31,085,000) (42,538,000)
------------ ------------
2,933,000 2,670,000
Deferred Tax Liabilities:
Software Maintenance Income ............ -- 37,000
Amortization .......................... -- 983,000
------------ ------------
Net Deferred Tax Asset ................... $ 2,933,000 $ 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
1996, the deferred tax asset valuation allowance decreased by $11,453,000 due
primarily to payment of restructuring costs, operating accruals and other
temporary differences, and the Company's estimate of its ability to utilize net
operating losses in the future. Any reduction of the valuation allowance
attributable to net operating loss carryforwards from Versyss and Wismer-Martin
of $15,000,000 and $4,500,000, respectively, will be treated as a reduction of
intangible assets. In 1996, the reduction to intangible assets was $3,550,000.
At December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $66,000,000 which expire in
1999 through 2009. This includes approximately $15,000,000 of net operating loss
carryforwards from Versyss and $4,500,000 from Wismer-Martin 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, the Company is limited each year as
to the amount of pre-ownership change net operating losses that can be utilized.
However, it is the opinion of management that the losses will be fully utilized
prior to expiration of the rollforward period.
F-19
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. Notes Payable and Long-Term Debt
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Term indebtedness payable to Versyss Liquidating Trust due annually in
October 1996 and 1997 at 11% (See Note 3) ..................................... $5,875,000 $11,750,000
Convertible subordinated note payable to Equifax, Inc. due February
2000 at 6% (see Notes 2, 12, and 13) ......................................... -- 10,000,000
Subordinated term notes due monthly March 1995 through February 2001 at
8% assumed from Versyss acquisition (See Note 3) .............................. 1,611,747 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 October 1997 at prime plus 2.5%
(10.75% at December 31, 1996) assumed from Versyss acquisition (See Note 3) ... 1,500,000 1,500,000
Debt portion of Equifax Marketing Agreement (See Note 12) ..................... 3,878,466 --
Mortgage payable to U.S. Bancorp Mortgage Company in monthly
installments of $4,536, including interest at 3.0% over the average
discount rate of 26-week U.S. Treasury bills adjusted semi-annually (9%
at December 31, 1996), maturing in November, 1998
assumed from Wismer-Martin acquisition (See Note 3) ........................... 397,003 --
Note payable to the Greater Spokane Business Development Association and
the Small Business Administration in monthly installments of $4,162,
including interest at 9.896%, maturing in October, 2008 assumed from
Wismer-Martin acquisition (See Note 3) ........................................ 330,176 --
Subordinated term notes due annually July 1998 at 9.0% assumed from
Wismer-Martin acquisition (See Note 3) ........................................ 10,694 --
Term indebtedness payable to non-employee Wallaby selling stockholders,
due January 1996 at 7% ........................................................ -- 750,000
Other ......................................................................... 156,963 100,160
---------- -----------
13,760,049 28,104,160
Less: notes payable-current ................................................... 7,934,518 9,080,000
---------- -----------
5,825,531 19,024,160
Less: current portion of long-term debt ....................................... 1,153,413 100,160
---------- -----------
Long-term debt ................................................................ $4,672,118 $18,924,000
========== ===========
Long-term debt, related party:
Term indebtedness payable to Wallaby selling stockholders employed at
the Company, due January 1996 at 7% ........................................... -- $ 750,000
---------- -----------
-- 750,000
Less: current portion of long-term debt, related party ........................ -- 750,000
---------- -----------
Long-term debt, related party ................................................. -- $ --
========== ===========
</TABLE>
F-20
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In January 1996, the Company and Equifax EDI amended and restated their
exclusive marketing agreement signed on January 25, 1995. The amended and
restated agreement obligated the Company to pay $125,000 per month to Equifax
EDI (now NDC) over a period of four years. The obligation was recorded at the
net present value of the payments discounted at 11.5% per annum (See Note 12).
In September 1996, from the Wismer-Martin acquisition, the Company
assumed $401,608 in mortgage payable to U.S. Bancorp Mortgage Company. The
mortgage payable is collateralized by a deed of trust on Wismer-Martin's
headquarters, land and building. Also assumed from the acquisition was a note
payable for $333,812 to the Greater Spokane Business Development Association and
the Small Business Administration. This note payable is collateralized by
substantially all of Wismer-Martin's property, plant and equipment, subordinated
to the first position of U.S. Bancorp Mortgage Company.
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%. The first installment of $5,875,000 of term indebtedness to Versyss
Liquidating Trust was paid on October 29, 1996. 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 $1,611,747 at
December 31, 1996 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.
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 bore interest at a rate of 6% per annum, payable quarterly, was
convertible into shares of the Company's common stock at a conversion price of
$5.175 per share. On May 10, 1996, in accordance with the terms of the Note
Purchase Agreement, Equifax converted the Equifax Note in full into 1,932,217
shares of Common Stock and sold all such shares as part of the 1996 Public
Offering (See Note 13).
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 bore interest at 10% per year. The term indebtedness to
PMSI was paid in full on April 24, 1996.
Three of the previous Wallaby stockholders were employees of the
Company. As such, a total of $750,000 of the indebtedness to Wallaby selling
shareholders referred to in the table above was due to these individuals at
December 31, 1995 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 Mr. Jeffry M. Picower, the largest shareholder
and Chairman of the Board of Directors of the Company ("the Investor"), a
$16,050,000 principal amount promissory note (the "1995 Investor Note") in
F-21
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
exchange for $3,210,000 in cash and the cancellation of a $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 pursuant
to which the Company sold 6,250,000 shares of its common stock at a price of
$4.00 per share (see Note 13). 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 for the year ended December 31, 1995.
The annual aggregate maturities of long-term debt at December 31, 1996
are as follows:
Fiscal year ending December 31,
1997 ................................................... $ 9,087,931
1998 ................................................... 1,692,921
1999 ................................................... 1,829,990
2000 ................................................... 530,454
2001 ................................................... 82,189
Thereafter ............................................. 536,564
-----------
$13,760,049
===========
9. Leasing Transactions
Future minimum lease payments under all leases with initial or
remaining non-cancelable lease terms, in excess of one year at December 31,
1996, are as follows:
Capital Operating
Leases Leases
----------- -----------
Fiscal year ending December 31,
1997 ............................................. $ 383,158 $ 3,660,418
1998 ............................................. 486,147 3,190,522
1999 ............................................. 154,632 3,094,931
2000 ............................................. 45,020 2,956,436
2001 ............................................. -- 3,008,418
Thereafter ....................................... -- 3,461,055
----------- -----------
Total minimum lease payments ....................... 1,068,957 $19,371,780
===========
Less: amount representing interest ................. 167,078
-----------
Present value of future net minimum
lease payments ................................... 901,879
Less: current portion of obligations
under capital lease .............................. 289,229
-----------
Capital lease obligations, net of current portion .. $ 612,650
===========
Rent expense, net of certain lease costs accrued as part of the 1995
Restructuring charge (See Note 3), for the years ended December 31, 1996, 1995
and 1994 was approximately, $1,807,000, $1,209,000 and $554,000, respectively.
F-22
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 1200 The
American Road, Morris Plains, New Jersey, to serve as the Company's corporate
headquarters and executive offices. The monthly base rent for such space was
initially $44,352, escalating to $59,260 in 2003. The Company believes that the
terms of such lease were no less favorable than a lease that could have been
obtained by the Company from an unrelated third party in a transaction
negotiated on an arm's-length basis. On September 1, 1996, the Company amended
its agreement with Monroe Systems For Business, Inc., to sublease 14,170 square
feet of additional office space at 1200 The American Road, Morris Plains, New
Jersey. The provisions of the amended lease requires the Company to make lease
payments of $73,257 per month increasing to $78,165 per month in March 1997, and
every other year thereafter an additional $1.00 per square foot per year.
In June 1990, the Company entered into an operating lease for office
space in Laurence Harbor, New Jersey. 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. On November 21, 1994, an action was filed by
Aon Reinsurance, Inc., the lessor of such space. The plaintiff alleged that the
Company had defaulted in its obligations under its lease of the premises in
question and sought $1,600,000 of rent and approximately $700,000 of other
charges and damages through the end of the term of the lease on December 29,
1996. On October 17, 1996, the Company settled its litigation with Aon
Reinsurance, Inc. for $1,500,000.
In conjunction with the acquisitions of the PMS Business , Versyss, CTI
Business, and Wismer -Martin, the Company assumed operating leases for
facilities and equipment.
10. Revenues
Revenues for the years ended December 31, 1996, 1995, and 1994 consist
of the following:
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
Software license fees ............... $29,396,612 $15,450,897 $ 6,302,181
Hardware revenue .................... 25,301,761 9,721,559 2,592,713
Maintenance, communication fees
and other:
Software support and
maintenance fees .................. 21,015,952 8,823,507 4,507,388
Hardware maintenance ............. 15,461,911 3,508,552 --
Communication fees and other ..... 4,621,256 4,300,827 7,101,524
----------- ----------- -----------
Total maintenance,
communication fees and other ...... 41,099,119 16,632,886 11,608,912
----------- ----------- -----------
Total revenues ...................... $95,797,492 $41,805,342 $20,503,806
=========== =========== ===========
For the years ended December 31, 1996, 1995 and 1994, multi-copy sales
transactions were entered into with resellers of PCN Health Network software
products for aggregate amounts of $10,787,000, $4,521,000 and $1,000,000,
respectively. Such transactions are typically characterized by granting these
resellers an inventory of software licenses with initial credit terms extending
up to 12
F-23
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
months. To the extent that payment terms are extended beyond 12 months,
significant business risk may arise.
Communication fees primarily include fees paid for communication links
to the PCN Health Network Information System and to acquired practice management
software systems by clinical laboratories, insurance companies, claims
clearinghouses and hospitals.
11. Transactions with Related Parties
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
(See Note 13). The proceeds from such warrant were determined to be within the
range of fair value, as determined by an investment banker, and thereby resulted
in no expense charge in the Consolidated Statement of Operations.
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 1200 The
American Road, Morris Plains, New Jersey, to serve as the Company's corporate
headquarters and executive offices. The monthly base rent for such space was
initially $44,352, escalating to $59,260 in 2003. The Company believes that the
terms of such lease were no less favorable than a lease that could have been
obtained by the Company from an unrelated third party in a transaction
negotiated on an arm's-length basis. On September 1, 1996, the Company amended
its agreement with Monroe Systems For Business, Inc., to sublease 14,170 square
feet of additional office space at 1200 The American Road, Morris Plains, New
Jersey. The provisions of the amended lease requires the Company to make lease
payments of $73,257 per month increasing to $78,165 per month in March 1997, and
every other year thereafter an additional $1.00 per square foot per year.
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 (See Note 13).
12. Commitments and Contingencies
Employment Agreements:
As of December 31, 1996, the Company has employment arrangements with
several employees which provide for the continuation of salary and other
compensation aggregating approximately $777,000. Upon certain events of
termination, varying amounts of severance would be due under these arrangements.
F-24
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 1996, 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 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.
During the third quarter of 1996, NDC acquired all of the outstanding
capital stock of Equifax EDI. On September 3, 1996, the Company, Equifax EDI,
Equifax and NDC entered into an agreement whereby, among other things, the
Company waived its right to terminate the Marketing Agreement, pursuant to its
terms, as a result of the change of control of Equifax EDI, and received cash
consideration. The acquisition of Equifax EDI by NDC will not result in any
changes to the Marketing Agreement except that the Company and NDC agreed that
PCN may, in its sole unrestricted discretion, terminate the Marketing Agreement,
on not less than ninety days written notice, at any time on or after July 1,
1997.
F-25
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. Shareholders' Equity
Public Offerings:
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 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 8). The Equifax
Note was 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).
On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock for $10 per share and, on May 24, 1996, issued an
additional 840,000 shares for $10 per share upon the exercise in full of the
underwriters over-allotment option (the "1996 Public Offering"). Included within
the shares of Common Stock sold pursuant to the 1996 Public Offering, were
1,932,217 shares issued by the Company to Equifax upon the conversion in full of
the Equifax Note. As a result of the sale by the Company of the remaining
4,507,783 shares sold as part of the 1996 Public Offering, the Company received
net proceeds of approximately $41 million.
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 paying 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. During the years ended December 31, 1996
and 1995, 14,750 and 2,750 shares, respectively, of the Series A non-dividend
paying convertible preferred stock issued pursuant to such offering were
converted into 2,107,136 and 401,899 shares, respectively, of Common Stock.
On September 10, 1996, as part of the acquisition of Wismer-Martin, the
Company issued 935,000 shares of its Common Stock at a price of $10.017 (See
Note 3).
Other Significant Shareholders' Equity Transactions:
Effective December 30, 1993, the Company entered into an agreement with
IBM Credit Corporation ("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 financing agreement it had
entered into with the Company in 1989 (as modified, the "Restructured
F-26
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. The Company has agreed to repurchase 2,325,000 shares
of its Common Stock from ICC at a price of $4.60 per share on or before March
31, 1997.
Stock Options:
At December 31, 1996 and 1995, the Company had reserved, 7,172,930 and
6,194,865 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
F-27
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
Amended and Restated 1993 Incentive and Non-Incentive Stock Option Plan
(the "Employee Plan"): The Employee Plan, as amended, reserves 3,300,000 shares
of Common Stock for issuance upon exercise of options to be granted thereunder.
Under the Employee Plan, incentive stock options qualifying under Section 422 of
the IRC, may be granted to employees of the Company and/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
F-28
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 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. No options pursuant to
the VAR Plan were granted during 1996. All unvested options expired 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.
During 1996, options to purchase an additional 550,000 shares of Common
Stock at exercise prices ranging from $10.88 to $12.63 were granted pursuant to
the Employee Plan. In addition, options to purchase an additional 50,000 shares
of Common Stock at exercise prices ranging from $9.75 to $11.38 were granted
pursuant to the Directors Plan.
F-29
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and applies APB Opinion 25 in
accounting for its plans and, accordingly, cost for stock option plans and stock
purchase plans in its financial statements. Had the Company determined
compensation cost based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
1996 1995
-------------- --------------
Net income (loss) - as reported ........... $ 16,056,246 $ (11,680,187)
Net income (loss) - pro forma ............ 15,238,898 (12,244,048)
Earnings (loss) per share - reported ...... $ 0.30 $ (0.29)
Earnings (loss) per share - pro forma ..... 0.28 (0.31)
The pro forma amounts as noted above may not be representative of the
effects on reported income for future years. Pro forma net income reflects only
options granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation cost is
reflected over the options' vesting period of 5 years and compensation cost for
options granted prior to January 1, 1995 is not considered.
The fair value of the stock options granted in 1996 and 1995 is
estimated at grant date using the Black-Scholes option pricing model with the
following weighted average assumptions: for 1996 - expected dividend yield 0.0%,
risk free interest rate of 6.5%, expected volatility of 49%, and an expected
life of 7.5 years; for 1995 - expected dividend yield 0.0%, risk free interest
rate of 6.5%, expected volatility of 49%, and an expected life of 5 years. The
weighted average grant date fair value of options granted in 1996 and 1995 was
$7.52 and $2.81, respectively.
Stock option activity is summarized as follows:
Weighted
Average
Number of Exercise
Shares Price
--------- ---------
Balance outstanding, December 31, 1993 .......... 904,365 $ 4.30
Granted ....................................... 1,565,400 5.43
Forfeited ..................................... (20,845) 6.24
Exercised ..................................... (63,460) 0.93
---------
Balance outstanding, December 31, 1994 .......... 2,385,460 5.11
Granted ....................................... 800,000 5.51
Forfeited ..................................... (42,800) 4.00
Exercised ..................................... (203,380) 3.78
---------
Balance outstanding, December 31, 1995 .......... 2,939,280 5.33
Granted ....................................... 600,000 12.23
Forfeited ..................................... (134,000) 6.61
Exercised ..................................... (696,694) 4.53
---------
Balance outstanding, December 31, 1996 .......... 2,708,586 $ 7.00
=========
F-30
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Options to purchase 679,252, 984,106 and 559,012 shares of Common Stock
were exercisable at December 31, 1996, 1995 and 1994, respectively and the
weighted average exercise price of those options was $6.07, $4.65 and $4.02,
respectively.
At December 31, 1996, the range of exercise prices and remaining
contractual life of outstanding options was as follows:
Range of Weighted Average Remaining
Exercise Prices Number Outstanding Contractual Life
$2.50 - $6.50 2,134,586 8.2
$9.75 - $12.63 574,000 9.6
------------------------------------------------
2,708,586 8.5
Stock Warrants:
The Company reserved 7,295,000, 7,305,000, and 2,305,000 shares of
Common Stock for issuance upon exercise of warrants at December 31, 1996, 1995
and 1994, respectively.
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 (which will be exercised as part of the Company's
agreement to repurchase all of the shares of the Company's Common Stock owned by
ICC - See Other Significant Shareholders' Equity Transactions) 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.
F-31
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The table below details all warrants outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Warrants
Date of Exercise Warrants Exercised/ Outstanding
Grant Price Granted Canceled Warrants Expiration Date
- ----- ----- ------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
November 20, 1990.... $1.00(b) 417,500 -- 417,500 February 22, 1998
June 11, 1991........ $1.00(b) 19,038 -- 19,038 February 22, 1998
July 1, 1991......... $9.00(a) 10,000 (10,000) -- Terminated June 30, 1996
September 17, 1991... $1.00(b) 983,462 -- 983,462 February 22, 1998
December 30, 1993.... $ --(c) 775,000 -- 775,000 December 30, 2003
February 1, 1994..... $2.50(a) 100,000 -- 100,000(d) February 1, 2004
September 13, 1995... $5.00(a) 5,000,000 -- 5,000,000(e) September 13, 2002
------------ ----------- ------------
7,305,000 (10,000) 7,295,000
============ =========== ============
</TABLE>
The number of warrants exercisable at December 31, 1996, 1995 and 1994
were 2,275,000, 2,265,000 and 2,245,000, respectively.
(a) Represents original exercise price at the date of grant.
(b) Represents adjusted exercise price as the result of a credit
restructuring.
(c) The warrants issued on December 30,1993 were valued as part of the
overall transaction with ICC as discussed in other significant stock
transactions.
(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, $15,000 and $30,000 for the years
ended December 31, 1996, 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-32
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
14. Other Financial Information
Accrued expenses and other liabilities at December 31, 1996 and 1995
includes salaries and benefits and payroll taxes payable of $1,657,000 and
$2,632,000, respectively. Included within accrued expenses at December 31, 1996
and at December 31, 1995, are $494,000 of accrued costs associated with the
Wismer Martin acquisition and $3,130,000 of accrued costs associated with the
Versyss acquisition, respectively. Also included within accrued expenses and
other liabilities at December 31, 1996 and 1995 is a liability for restructuring
costs of $86,000 and $4,500,000 (See Note 3). During the fourth quarter of 1996,
the Company provided $2.8 million to its allowance for doubtful accounts which
was partially offset by adjustments to liabilities.
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, 1996 and 1995, the amounts
outstanding for software maintenance, software support and hardware maintenance
agreements were $13,068,726 and $15,608,705, respectively.
15. 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 $571,000, $149,000, and $86,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
16. Industry Segment Data
The Company's operations are conducted within one business segment.
There are no material revenues attributable to foreign customers.
F-33
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. Supplemental Disclosures of Cash Flow Information
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
Supplemental disclosure of
cash flow information:
Cash paid for interest ........ $2,391,000 $ 822,000 $ 150,000
Cash paid for income taxes .... 261,000 142,000 19,000
Supplemental non-cash operating, investing and financing activities
were as follows:
o In January 1996, the Company and Equifax EDI amended and restated the
Marketing Agreement. Pursuant to the amended and restated Marketing Agreement,
the Company was obligated to pay $125,000 per month to Equifax EDI over a period
of four years. As a result, the Company recorded an asset and obligation of
$4,791,290, equal to the net present value of the payments discounted at 11.5%
per annum. The acquisition of Equifax EDI by NDC, during the third quarter of
1996, will not result in any changes to the Marketing Agreement except that the
Company and NDC agreed that PCN may, in its sole unrestricted discretion,
terminate the Marketing Agreement, on not less than ninety days written notice,
at any time on or after July 1, 1997 (See Notes 8 and 13).
o On May 10, 1996, in accordance with the terms of the Note Purchase
Agreement, Equifax converted the Equifax Note in full into 1,932,217 shares of
Common Stock and sold all such shares as part of the 1996 Public Offering (See
Note 8).
o In connection with the CTI Business acquisition in July 1996, the
Company assumed liabilities in the aggregate of $4,130,526 (See Note 3).
o On September 10, 1996, the Company pursuant to a merger agreement
with Wismer Martin, issued 935,000 shares of PCN Common Stock valued at
$9,365,895 and assumed liabilities in the aggregate of $4,733,154. (See Note 3).
o Capital lease obligations of $453,000 were incurred during the year
ended December 31, 1995. None were incurred for the years ended December 31,
1996 and 1994.
o 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).
o 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).
o 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).
F-34
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
o 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).
18. Concentration of Credit Risk
The Company's customers, in general, are primarily dependent upon the
healthcare economic sector. The Company's concentration of credit risk with
customers was largely dependent on its revenue mix which, at December 31, 1996
and 1995, was primarily from independent resellers, who are under contract with
the Company (See Note 10 with respect to information pertaining to revenue and
credit terms).
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments. As of
December 31, 1996, the Company holds approximately $5,650,000 in an investor
account and $19,788,000 in a money market account with two different financial
institutions.
F-35
<PAGE>
Schedule II
PHYSICIAN COMPUTER NETWORK, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Charged End of
of Year To Expenses Deductions Year
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996
Allowance for doubtful accounts ....... $ 764,000 $3,725,000 $1,061,000 (a) $3,428,000
For the year ended December 31, 1995
Allowance for doubtful accounts ....... $ 577,000 $ 225,703 $38,703 (a) $ 764,000
For the year ended December 31, 1994
Allowance for doubtful accounts ....... $ 275,000 $ 376,487 $74,487 (a) $ 577,000
</TABLE>
- ------------
(a) Represents direct write-offs of accounts balances.
S-1
EXHIBIT 11
PHYSICIAN COMPUTER NETWORK, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
INCOME (LOSS)
Net income (loss) before extraordinary item ...... $16,056,246 $(11,500,187) $ 1,247,219
Extraordinary loss ............................... -- (180,000) --
----------- ------------ -----------
Primary and fully diluted net income (loss) ....... $16,056,246 $(11,680,187) $ 1,247,219
=========== ============ ===========
SHARES
Weighted average Common Stock outstanding ........ 49,700,888 40,068,406 34,163,928
Common Stock issuable upon the exercise
of outstanding options and warrants ......... 4,243,963 (a) 1,470,178
Common Stock issuable upon the
conversion of Preferred Stock ............... 363,296 (a) --
----------- ------------ -----------
Weighted average Common Stock
outstanding as adjusted ...................... 54,308,147 40,068,406 35,634,106
=========== ============ ===========
PRIMARY AND FULLY DILUTED:
Income (loss) before extraordinary item per share $ 0.30 ($ 0.29) $ 0.04
Gain/(loss) from extraordinary item per share ... -- -- --
----------- ------------ -----------
Net Income (loss) available to Common
shareholders per share ....................... $ 0.30 $ (0.29) $ 0.04
=========== ============ ===========
</TABLE>
(a) For 1995, common stock equivalents and other dilutive securities were
not included as they were anti-dilutive on loss per share.
Note: Fully diluted calculation results in no material dilution for 1996 and
1994 and antidilution of loss per share in 1995.
Exhibit 21
Subsidiaries of Registrant
1. Wallaby Software Corporation - A New Jersey Corporation
2. Calyx Acquisition Corp. - A Delaware corporation.
3. Calyx Corporation - A Wisconsin corporation.
4. V Holding Corp. - A Delaware corporation.
5. Versyss Incorporated - A Delaware corporation.
6. Practice Management Corp. - A Delaware corporation.
7. Wismer-Martin, Inc. - A Washington corporation.
8. PCN Service Corp. - A Delaware corporation.
9. PCN HP Venture Corp. - A Delaware corporation
10. Integrated Health Systems, Inc. - A California corporation
Exhibit 24
Accountants' Consent
The Board of Directors
Physician Computer Network, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 33-70222, 70224, 70226, 70280) each on Form S-8 of Physician Computer
Network, Inc. of our report dated February 18, 1997, with respect to the
consolidated balance sheets of Physician Computer Network, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity (deficiency), and cash flows and
related schedule for each of the years in the three-year period ended December
31, 1996, which report appears in the December 31, 1996, annual report on Form
10-K of Physician Computer Network, Inc.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 34,291,166
<SECURITIES> 0
<RECEIVABLES> 24,530,878
<ALLOWANCES> 3,428,000
<INVENTORY> 5,798,153
<CURRENT-ASSETS> 67,099,687
<PP&E> 22,305,350
<DEPRECIATION> 16,071,055
<TOTAL-ASSETS> 150,165,318
<CURRENT-LIABILITIES> 35,973,637
<BONDS> 13,760,049
0
10
<COMMON> 529,825
<OTHER-SE> 108,377,078
<TOTAL-LIABILITY-AND-EQUITY> 150,165,318
<SALES> 95,797,492
<TOTAL-REVENUES> 95,797,492
<CGS> 38,561,597
<TOTAL-COSTS> 38,561,597
<OTHER-EXPENSES> 33,037,780
<LOSS-PROVISION> 3,725,000
<INTEREST-EXPENSE> 1,156,690
<INCOME-PRETAX> 23,041,425
<INCOME-TAX> 4,817,999
<INCOME-CONTINUING> 16,056,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,056,246
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
