SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Filed pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
September 14, 1998 (August 25, 1998)
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Date of Report (Date of earliest event reported)
PHYSICIAN COMPUTER NETWORK, INC.
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(Exact name of registrant as specified in charter)
New Jersey
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(State or other jurisdiction of incorporation)
0-19666
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(Commission File Number)
22-2485688
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(IRS Employer Identification No.)
1200 The American Road
Morris Plains, New Jersey 07950
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(Address of principal executive offices)
(973) 490-3100
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(Registrant's telephone number, including area code)
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ITEM 4. Changes in the Company's Certifying Accountant
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On September 10, 1998, Physician Computer Network, Inc. (the
"Company") received the response of its former auditors (the "Response Letter"),
KPMG Peat Marwick LLP ("KPMG"), to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 31, 1998 (the "Form
8-K"), which Form 8-K announced, among other things, the cessation of the
Company's client-auditor relationship with KPMG. The Response Letter, which KPMG
was required to deliver to the Company in accordance with Item 304(a)(3) of
Regulation S-K, is annexed hereto as Exhibit 16.1.
The Company does not agree with the position taken by KPMG in
the Response Letter that certain of the disclosures contained in the Form 8-K
were either factually inaccurate or required supplemental disclosure. The
Company believes that much of the information contained in the Response Letter
has been gratuitously supplied by KPMG and is not responsive to the disclosures
required to be made in the Form 8-K. Further, the Company does not agree with
certain of the factual assertions made by KPMG in the Response Letter, as well
as KPMG's presentation of certain of the events described in the Response
Letter.
In particular, and without limitation, the Company does not
agree with KPMG's presentation of the events surrounding the termination of the
auditor-client relationship or that KPMG informed the Company that internal
controls necessary for the Company to develop reliable consolidated financial
statements do not exist. From the time of the initial identification of certain
possible financial irregularities in late February 1998 through August 17, 1998,
KPMG continued to work with the Company to complete the audit and led the
Company to believe that no circumstances existed which would prevent the
completion of the audit. During this time, the Company identified and made KPMG
aware of many of the transactions and accounting practices referred
to in the Response Letter as having come to KPMG's attention. Further, new
senior management appointed by the Board of Directors reviewed and revised
internal accounting controls which they believed, and continue to believe,
permit the Company to develop reliable consolidated financial statements. In
this regard, the Company is working with Arthur Andersen LLP with respect to the
audit of the Company's financial statements so that they may be completed as
soon as possible.
ITEM 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
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(a) No financial statements or pro forma financial information
are required to be filed as a part of this report. There are no financial
exhibits filed as part of this report.
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(b) Exhibits.
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(i) 16.1 Accountant's letter received by the
Registrant pursuant to Item 304(a)(3) of
Regulation S-K.
PHYSICIAN COMPUTER NETWORK, INC.
(REGISTRANT)
Date: September 14, 1998 By:/s/Paul Antinori
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Paul Antinori
Vice President
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Securities and Exchange Commission
September 10, 1998
Page 4
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
16.1 Accountant's letter
received by the
Registrant pursuant to
Item 304(a)(3)of
Regulation S-K.
Securities and Exchange Commission
September 10, 1998
Page 1
EXHIBIT 16.1
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
September 10, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Physician Computer Network, Inc.
and subsidiaries and, under the date of February 18, 1997, we reported on the
consolidated financial statements of Physician Computer Network, Inc. and
subsidiaries as of December 31, 1996 and 1995 and for the each of the years in
the three-year period ended December 31, 1996. Under the date of March 25, 1998,
we withdrew our auditors' report on the consolidated financial statements of
Physician Computer Network, Inc. and subsidiaries as of and for the year ended
December 31, 1996 and under the date of August 17, 1998, we withdrew our
auditors' report on the consolidated financial statements of Physician Computer
Network, Inc. and subsidiaries as of and for the years ended December 31, 1995
and 1994.
We have read the statements of Physician Computer Network, Inc. ("PCN" or the
"Company") included under Item 4 of its Form 8-K dated August 31, 1998 and we
agree with the statements contained in paragraph (ii), the first two sentences
of paragraph (iv), paragraphs (v)(a), (v)(b), and the first and third sentences
of paragraph (v)(c) and the first sentence of paragraph (vi) of Item 4. We do
not agree with the first sentence of the first paragraph and paragraph (i)
because we believe the first sentence of the first paragraph and paragraph (i)
are not factually correct in providing the information required by Item
304(a)(1)(i) of Regulation S-K. We believe the second sentence of paragraph
(v)(c) needs to be clarified with respect to the date on which KPMG informed the
Company that it could no longer be associated with the Company's 1996
consolidated financial statements. We also believe that the first two sentences
of paragraph (iv) and paragraphs (v)(a), (v)(b) and the first and third
sentences of paragraph (v)(c) while factually correct, are not complete as to
the chronology of events that led to our withdrawal of our auditors' reports on
the 1996, 1995 and 1994 consolidated financial statements.
We are not in a position to agree or disagree with the second and third
sentences of the first paragraph, paragraph (iii), the third sentence of
paragraph (iv) and the second sentence of paragraph (vi) contained therein.
We believe the first sentence of the first paragraph and
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Securities and Exchange Commission
September 10, 1998
Page 2
paragraph (i) of Item 4 should be replaced with the following
paragraph:
(i) On August 18, 1998, KPMG Peat Marwick LLP ("KPMG") met with and
advised the Company through the Chairman of the Board of Directors
("Chairman") that KPMG had determined to resign as auditors of PCN. The
Chairman requested that KPMG delay its resignation in order to permit a
meeting with representatives of KPMG's national office. Such meeting
was arranged for August 25, 1998. Prior to the commencement of the
meeting, KPMG advised the Chairman that KPMG's conclusion as to the
cessation of the client-auditor relationship had not changed and would
not change as a result of the planned meeting. The Chairman then
advised KPMG that attendance at the meeting would not be necessary and
served KPMG with written notice that the audit relationship was
terminated.
We believe paragraph (iv) of Item 4 should be supplemented with the following
chronology of events:
o From the end of January through mid-February 1998, KPMG
raised a number of significant matters with the President
(formerly Chief Operating Officer) and Chief Financial
Officer of PCN in connection with KPMG's audit of the 1997
consolidated financial statements of the Company and with
KPMG's retrospective review of the 1997 quarterly data of
the Company. Such matters dealt, in part, with accounting
principles applied and accounting practices followed by the
Company in preparing its full-year and quarterly 1997
consolidated financial statements, difficulty in obtaining
timely and accurate analyses from accounting personnel,
inability to freely obtain third-party evidential
information, management explanations that were not
consistent with other facts gathered, and general
interference in the audit process. Such matters were not
resolved by February 20, 1998.
o On February 20, 1998, KPMG requested that the President and Chief
Financial Officer inform the Chairman, audit committee and the Company's
outside counsel of the potential for significant year-end adjustments,
the potential for significant adjustments to previously filed quarterly
financial information, and the existence of significant deficiencies in
the operation of internal control, including
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Securities and Exchange Commission
September 10, 1998
Page 3
evidence of intentional override of internal control, evidence of lack of
objectivity by those responsible for accounting decisions, evidence of
falsification of shipping cut-off information, evidence of intentional
misapplication of revenue recognition, capitalized software and other
accounting principles, evidence of failure to perform reconciliations and
account analyses on a timely basis or at all, evidence of significant
accounting entries that lacked supporting analysis, and evidence of the
absence of appropriate segregation of duties. KPMG also requested to meet
with the Chairman and the audit committee.
o On February 25, 1998 KPMG initially met with the President,
Chief Financial Officer and PCN's outside legal counsel to
discuss matters known to date, including identified
irregularities in revenue and expense recognition during
1997, the strong likelihood that previously released 1997
quarterly financial information should be restated by the
Company, the existence of material weaknesses in internal
control described above, and the difficulties encountered in
conducting the audit including gathering competent evidential
information. KPMG then requested a private meeting with the
Chairman and the Company's outside legal counsel to inform
the Chairman of such matters. Due to the magnitude of the
material weaknesses in internal control described above and
the difficulties encountered by KPMG in conducting the audit,
KPMG requested that the President be removed from the
Company's premises through the completion of their audit and
that he be instructed not to interfere with the audit
process. On such date, KPMG also reported these matters to
the Board of Directors ("Board") at a special meeting called
by the Chairman. KPMG was also informed on February 25, 1998
by the then Chief Financial Officer, that certain information
relating to an apparent customer payment that was material to
the 1996 consolidated financial statements had been
intentionally withheld from and misrepresented to KPMG in
connection with both the 1996 and 1997 audits.
o On February 25, 1998, at the request of KPMG, the Board placed the
President on a leave of absence from the Company pending completion of
the 1997 audit.
o On March 1, 1998 KPMG attended a meeting with a board member who had been
assigned temporary operational responsibility at the Company, the Chief
Financial Officer and representatives
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Securities and Exchange Commission
September 10, 1998
Page 4
of the Company's outside legal counsel. The meeting was arranged to
permit the Chief Financial Officer to discuss the magnitude of the
irregularities in the Company's 1997 consolidated financial statements.
The Chief Financial Officer presented restated 1997 quarterly financial
information and full-year 1997 results, and informed all those in
attendance that analyses previously provided by the Company to KPMG in
connection with the on-going 1997 audit were not correct. The Chief
Financial Officer also made the assertion that irregularities did not
occur in periods prior to January 1, 1997 except for the documentation
relating to the apparent customer payment disclosed to KPMG on February
25, 1998.
o On March 2, 1998 the Board appointed a special committee of the Board
("special committee") to investigate the events and circumstances
surrounding the accounting irregularities brought to the attention of the
Board by KPMG.
o On March 3, 1998 the Company issued a press release announcing that KPMG
recently had identified certain instances during 1997 in which the
Company improperly recognized items of revenue and expense and that the
Company would restate its results for each of the first three quarters of
1997 to report a loss form operations for each of those quarters.
o On March 20, 1998 KPMG made a presentation to the Board
regarding the background and status of the 1997 audit and
certain issues identified to date, including the
pervasiveness of the material weaknesses in internal control
as evidenced by more widespread involvement of employees of
the Company, which was beyond the matters communicated to the
Board on February 25, 1998. KPMG also indicated that it was
currently evaluating additional information related to the
1996 transaction underlying the apparent customer payment to
determine if that transaction was properly reported in the
1996 consolidated financial statements.
o On March 25, 1998, in light of the Company's announcement raising
questions relating to the Company's consolidated financial statements,
the ongoing investigation of the special committee, and certain facts
coming to KPMG's attention relating to the 1996 transaction involving an
apparent customer payment, KPMG withdrew its auditors' report
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Securities and Exchange Commission
September 10, 1998
Page 5
on the consolidated financial statements of Physician
Computer Network, Inc. and subsidiaries as of and for the
year ended December 31, 1996.
o From April 1998 through June 1998, KPMG continued its audit procedures
and learned of additional irregularities in the 1996 consolidated
financial statements.
o In early July 1998, KPMG became aware of potential irregularities in the
1995 consolidated financial statements. On July 24, 1998 KPMG advised the
Company of the potential need to withdraw its auditors' report on the
1995 consolidated financial statements because of information that had
recently come to its attention.
o On August 17, 1998, KPMG determined to withdraw its auditors'
report on the consolidated financial statements of Physician
Computer Network, Inc. and subsidiaries as of and for the
years ended December 31, 1995 and 1994 since KPMG had learned
that there were other instances during the 1996 and 1995
periods in which the Company improperly recognized items of
revenue and expense and determined that the representations
obtained from the then Chief Operating Office and Chief
Financial Officer relating to all periods contained in the
1996 annual report on Form 10-K could no longer be relied
upon.
Additionally, we believe that the last sentence of paragraph (iv) is misleading
since the withdrawal of our auditors' reports with respect to the 1994, 1995 and
1996 consolidated financial statements results in those financial statements not
being audited by KPMG.
We believe paragraph (v) of Item 4 should be supplemented with the following
paragraphs:
KPMG advised management on August 18, 1998 internal controls necessary
for the Company to develop reliable consolidated financial statements do
not exist. Material weaknesses in internal control were identified during
the 1997 audit which were communicated as set forth above. The
pervasiveness of such material weaknesses in internal control and the
extent of the irregularities led KPMG to conclude that internal controls
necessary for the Company to develop reliable consolidated financial
statements do not exist.
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Securities and Exchange Commission
September 10, 1998
Page 6
Information came to KPMG's attention such that KPMG informed the Company
in writing that KPMG was no longer able to rely on the representations of
management and was no longer willing to be associated with the
consolidated financial statements prepared by management for the years
1996, 1995 and 1994.
Information came to KPMG's attention and KPMG concluded that (a) such
information had a material impact on the consolidated financial
statements for 1996, 1995 and 1994 and, therefore, its auditor's report
thereon could no longer be relied upon and was withdrawn and (b) such
information had a material impact on the 1997 consolidated financial
statements under audit that, unless resolved to KPMG's satisfaction,
would have prevented KPMG from rendering an unqualified opinion on those
consolidated financial statements. Due to the cessation of the
client-auditor relationship, the issues were not resolved.
We believe the second sentence of paragraph (v)(c), for purposes of
clarification, should read:
On August 18, 1998, KPMG informed the Company that, as a result of KPMG's
determination of the existence of certain instances in which the Company
had improperly recognized items of revenue and expense during the
Company's fiscal 1996 and 1995 fiscal years, and since KPMG could no
longer rely upon the representations previously obtained from the then
Chief Operating Officer and Chief Financial Officer of the Company
(neither of whom are currently employed by the Company) relating to all
periods contained in the 1996 annual report on Form 10-K, it could no
longer be associated with the Company's 1995 and 1994 consolidated
financial statements. Restated financial statements for the Company's
1996 and 1995 fiscal years had not been completed prior to the cessation
of the client-auditor relationship.
Very truly yours,
