SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
August 18, 1999
--------------------------------------------------------------
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)
<PAGE>
ITEM 5. Other Matters.
- ------- ----------------------------------------------------------------------
In April 1998, Physician Computer Network, Inc. (the "Company")
announced, among other things, that the Company's financial statements as of and
for the year ended December 31, 1996 would have to be restated and the Company's
independent auditors at that time, KPMG Peat Marwick ("KPMG"), had withdrawn
their auditors' report on the Company's consolidated financial statements as of
and for the year ended December 31, 1996.
In August 1998, the Company reported that the auditor/client
relationship between the Company and KPMG had been terminated and that the
Company had engaged Arthur Andersen LLP to conduct an audit of the Company's
consolidated financial statements for the years ended December 31, 1998, 1997
and 1996. That audit has recently been completed.
At this time, the Company is in the process of preparing its Annual
Report on Form 10-K for the year ended December 31, 1998. The Company expects to
have its Annual Report completed and filed with the Securities and Exchange
Commission in the near future. However, since completion of the Annual Report is
expected to take at least several weeks, the Company is filing its consolidated
financial statements as of December 31, 1998, 1997 and 1996, together with the
Report of Arthur Andersen LLP thereon (the "Financial Statements"), as part of
this Form 8-K. Other than containing the Financial Statements, this Form 8-K
does not contain any of the information and disclosure required to be included
in the Form 10-K, is not intended to satisfy the requirement that the Company
file a Form 10-K and is not being filed in lieu of the filing of a Form 10-K.
ITEM 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
- ------- -------------------------------------------------------
(c) Exhibits.
---------
Exhibit 1 -- Physician Computer Network, Inc.
Consolidated Financial Statements as of
December 31, 1998, 1997 and 1996,
together with Report of Independent
Public Accountants.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PHYSICIAN COMPUTER NETWORK, INC.
(REGISTRANT)
Date: August 18, 1999 By: /S/ PAUL ANTINORI
Paul Antinori
Vice President
<PAGE>
EXHIBIT INDEX
Exhibit 1 -- Physician Computer Network, Inc.
Consolidated Financial Statements as of
December 31, 1998, 1997 and 1996,
together with Report of Independent
Public Accountants.
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1997 AND 1996
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Physician Computer Network, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Computer Network, Inc. (a New Jersey Corporation) and subsidiaries as of
December 31, 1998, 1997 and 1996 (as restated, see Note 18), and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for the years ended December 31, 1998 and 1997. We were also
engaged to audit the statement of operations, changes in shareholders' equity
(deficit) and cash flows for the year ended December 31, 1996 (as restated, see
Note 18). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to report on these consolidated
financial statements based on our audits.
Except as discussed in the following paragraph, 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.
Because of major inadequacies in the Company's accounting records as of December
31, 1995, it was not practical to extend our auditing procedures to enable us to
express, and we do not express, an opinion on the results of operations, changes
in shareholders' equity (deficit) and cash flows for the year ended December 31,
1996, or on the consistency of application of accounting principles with the
preceding year.
Because we could not extend our audit procedures to the accounting records as of
December 31, 1995 as noted in the preceding paragraph, the scope of our work was
not sufficient to enable us to express, and we do not express, an opinion on the
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for the year ended December 31, 1996. 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, 1998, 1997 and 1996 and the results of their
operations and their cash flows for the years ending December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
<PAGE>
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, a working capital deficiency and is in default under its debt
obligations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Roseland, New Jersey
July 9, 1999
<PAGE>
<TABLE>
<CAPTION>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1998, 1997 AND 1996
<S> <C> <C> <C>
ASSETS 1998 1997 1996
------ ----------- -------------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and 6) $3,597,000 $2,889,000 $27,078,000
Accounts receivable, net of allowance for doubtful accounts of
$500,000 at December 31, 1998, 1997 and 1996, respectively 11,159,000 12,495,000 14,632,000
Inventories (Notes 2 and 4) 1,498,000 3,799,000 3,162,000
Prepaid expenses and other current assets 1,096,000 2,020,000 3,438,000
Restricted cash (Note 6) 1,000,000 0 0
----------- -------------- ------------
Total current assets 18,350,000 21,203,000 48,310,000
INTANGIBLE ASSETS, net (Notes 2 and 3) 25,634,000 36,951,000 63,557,000
PROPERTY AND EQUIPMENT, net (Notes 2 and 5) 2,796,000 6,098,000 6,080,000
INVESTMENTS (Note 6) 200,000 1,657,000 0
INVESTMENT IN JOINT VENTURE (Notes 1 and 6) 0 707,000 964,000
OTHER ASSETS 470,000 888,000 5,910,000
----------- ----------- ------------
Total assets $47,450,000 $67,504,000 $124,821,000
=========== =========== ============
The accompanying notes to financial statements are an integral part of these consolidated balance sheets.
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1998 1997 1996
- ---------------------------------------------- ----------- ----------- -----------
CURRENT LIABILITIES:
Line of credit (Note 8) $15,412,000 $20,500,000 $ 0
Current portion of long-term debt (Note 8) 984,000 861,000 9,088,000
Current portion of obligations under capital leases (Note 9) 478,000 645,000 289,000
Accounts payable 6,662,000 8,468,000 6,537,000
Accrued expenses and other liabilities (Note 3) 18,921,000 11,223,000 10,099,000
Customer deposits 867,000 1,808,000 464,000
Unearned income (Note 2) 10,096,000 15,180,000 21,642,000
---------- ----------- -----------
Total current liabilities 53,420,000 58,685,000 48,119,000
Long-term debt, net of current portion of obligations (Note 8) 392,000 1,874,000 4,672,000
Long-term capital leases, net of current portion (Note 9) 1,251,000 1,450,000 614,000
----------- ----------- -----------
Total liabilities 55,063,000 62,009,000 53,405,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (DEFICIT) (Notes 2 and 13):
Preferred stock, $0.01 par value; 11,000 shares issued and
outstanding at December 31, 1998 and 1,000 shares issued and
outstanding at December 31, 1996 8,998,000 0 0
Common stock, $0.01 par value, 75,000,000 shares authorized;
55,846,918 shares issued and 53,521,918 shares outstanding
at December 31, 1998; 54,426,918 shares issued and 52,101,918
shares outstanding at December 31, 1997; 52,982,484 shares
issued and outstanding at December 31, 1996 558,000 544,000 529,000
Additional paid-in capital 200,507,000 195,861,000 192,618,000
Accumulated deficit (206,981,000) (180,215,000) (121,731,000)
Treasury stock, 2,325,000 shares held at cost in 1998 and 1997 (10,695,000) (10,695,000) 0
------------ ------------ -------------
Shareholders' equity (deficit) (7,613,000) 5,495,000 71,416,000
------------ ------------ -------------
Total liabilities and shareholders' equity (deficit) $47,450,000 $67,504,000 $124,821,000
============ ============ ============
The accompanying notes to financial statements are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
NET REVENUES (Note 2) $86,922,000 $78,082,000 $78,645,000
COST OF REVENUES (Note 4) 56,421,000 56,504,000 44,286,000
----------- ----------- -----------
Gross margin 30,501,000 21,578,000 34,359,000
OPERATING EXPENSES:
Research and development 7,075,000 9,605,000 5,740,000
Selling, general and administrative 41,393,000 37,011,000 40,286,000
Restructuring charges 1,090,000 0 0
Impairment of assets writedown
(Notes 2, 3 and 6) 8,292,000 30,861,000 0
----------- ----------- -----------
Total operating expenses 57,850,000 77,477,000 46,026,000
----------- ----------- -----------
Loss from operations (27,349,000) (55,899,000) (11,667,000)
INTEREST AND OTHER (INCOME)
EXPENSE:
Other income (Note 6) (6,360,000) (2,029,000) 0
Interest income (206,000) (485,000) (679,000)
Interest expense 2,394,000 3,574,000 1,835,000
----------- ---------- -----------
(4,172,000) 1,060,000 1,156,000
----------- ---------- -----------
Loss before income tax benefit, loss on
equity investment and extraordinary
item (23,177,000) (56,959,000) (12,823,000)
INCOME TAX BENEFIT (Note 7) 0 (89,000) 0
----------- ---------- -----------
Loss before loss on equity investment
and extraordinary item (23,177,000) (56,870,000) (12,823,000)
LOSS ON EQUITY INVESTMENT (2,351,000) (2,645,000) (2,408,000)
----------- ----------- -----------
Loss before extraordinary item (25,528,000) (59,515,000) (15,231,000)
EXTRAORDINARY ITEM 0 1,031,000 0
----------- ----------- -----------
Net loss ($25,528,000) ($58,484,000) ($15,231,000)
=========== =========== ===========
<PAGE>
-2-
1998 1997 1996
------------- ------------- ------------
BASIC AND DILUTED LOSS PER SHARE (Notes 2, 10 and 13):
Loss available to common shareholders ($0.48) ($1.14) ($0.31)
Extraordinary item 0 0.02 0
------------- ------------- ------------
Loss per share ($0.48) ($1.12) ($0.31)
Weighted average number of common ============= ============= ============
shares outstanding - Basic and Diluted 55,648,507 52,018,761 49,700,888
============= ============= ============
The accompanying notes to financial statements
are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Additional Shareholders'
---------------- ------------------- Paid-in Accumulated Treasury Equity
Shares Amount Shares Amount Capital Deficit Stock (Deficit)
-------- --------- ---------- --------- ------------ ------------ ----------- --------------
BALANCE, January 1, 1996 15,750 $ 0 42,937,147 $429,000 $129,729,000 ($106,500,000) $ 0 $23,658,000
Proceeds from issuance of common
stock 0 0 4,507,783 45,000 42,001,000 0 0 42,046,000
Conversion of Equifax convertible
note 0 0 1,932,217 19,000 9,981,000 0 0 9,366,000
Exercise of stock options 0 0 563,201 6,000 2,366,000 0 0 2,372,000
Exercise of value added reseller
options 0 0 133,452 1,000 783,000 0 0 784,000
Purchase of value added reseller
shares into treasury stock and
subsequent retirement 0 0 (133,452) (1,000) (1,578,000) 0 0 (1,579,000)
Conversion of preferred stock into
common stock (14,750) 0 2,107,136 21,000 (21,000) 0 0 0
Net loss 0 0 0 0 0 (15,231,000) 0 (15,231,000)
-------- ---------- ---------- --------- ------------ ------------ ---------- ------------
BALANCE, December 31, 1996 1,000 0 52,982,484 529,000 192,618,000 (121,731,000) 0 71,416,000
Exercise of stock options 0 0 29,670 0 126,000 0 0 126,000
Exercise of value added reseller
options 0 0 1,350 0 7,000 0 0 7,000
Conversion of preferred stock into
common stock (1,000) 0 187,424 2,000 (2,000) 0 0 0
Purchase of 2,325,000 shares of
common stock as treasury 0 0 0 0 0 0 (10,695,000) (10,695,000)
Common stock issued for acquisition 0 0 450,990 5,000 3,120,000 0 0 3,125,000
Exercise of warrants 0 0 775,000 8,000 (8,000) 0 0 0
Net Loss 0 0 0 0 0 (58,484,000) 0 (58,484,000)
------- ---------- ---------- -------- ------------ ------------- ------------ ------------
BALANCE, December 31, 1997 0 0 54,426,918 544,000 195,861,000 (180,215,000) (10,695,000) 5,495,000
Issuance of preferred stock 11,000 7,760,000 0 0 3,240,000 0 0 11,000,000
Preferred stock dividend 0 1,238,000 0 0 0 (1,238,000) 0 0
Exercise of warrants 0 0 1,420,000 14,000 1,406,000 0 0 1,420,000
Net loss 0 0 0 0 0 (25,528,000) 0 (25,528,000)
------- ---------- ---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1998 11,000 $8,998,000 55,846,918 $558,000 $200,507,000 ($206,981,000)($10,695,000) ($7,613,000)
======= ========== ========== ======== ============ ============= =========== ============
The accompanying notes to financial statements are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHYSICIAN COMPUTER NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($25,528,000) ($58,484,000) ($15,231,000)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 7,139,000 8,853,000 8,326,000
Write-down of assets and other charges 8,292,000 30,861,000 0
Restructuring 1,090,000 0 0
Gain on sale of assets (6,060,000) 0 0
Loss on equity investment 2,351,000 2,645,000 2,408,000
Extraordinary gain on forgiveness of long-term debt and
other income 0 (3,060,000) 0
(Increase) decrease in assets-
Restricted cash (1,000,000) 0 0
Accounts receivable, net 754,000 3,693,000 2,275,000
Inventories 2,317,000 (392,000) 1,668,000
Prepaid expenses and other assets 1,758,000 6,733,000 (3,936,000)
Increase (decrease) in liabilities, net-
Accounts payable (1,853,000) 1,028,000 (464,000)
Accrued expenses and other liabilities 6,902,000 888,000 (1,423,000)
Customer deposits and unearned income (5,894,000) (5,286,000) 187,000
------------- ------------- -------------
Net cash used in operating activities (9,732,000) (12,521,000) (6,190,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (483,000) (578,000) (545,000)
Acquisition of licensing rights and other intangible assets (320,000) (214,000) (378,000)
Purchase of business, net of cash acquired 64,000 (7,086,000) (11,438,000)
Cash received in sale of business, land and buildings 6,414,000 0 0
Investment in joint venture and related costs (700,000) (4,044,000) (3,372,000)
------------- ------------- -------------
Net cash provided by (used in) investing
activities 4,975,000 (11,922,000) (15,733,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings (payments) of long-term debt, net (6,479,000) 11,547,000 (9,820,000)
Principal payments under capital lease obligations (476,000) (731,000) (319,000)
Net proceeds (payments) from issuance of common stock,
preferred stock and warrants and purchase of treasury stock 12,420,000 (10,562,000) 43,623,000
------------- ------------- -------------
Net cash provided by financing activities 5,465,000 254,000 33,484,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 708,000 (24,189,000) 11,561,000
CASH AND CASH EQUIVALENTS, beginning of year 2,889,000 27,078,000 15,517,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $3,597,000 $2,889,000 $27,078,000
============= ============= =============
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
<PAGE>
PHYSICIAN COMPUTER NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Physician Computer Network, Inc. (PCN or the Company) is a leading
provider of information technology to the office-based physician market.
The Company's flagship practice management software product, the PCN
Health Network Information System (PCN Health Network), is a
multi-functional, advanced system which automates scheduling, billing,
financial reporting and other "back-office" functions, and provides
electronic links to payors and other parties providing services to a
physician's practice. In order to supplement its practice management
product offerings with knowledge-based clinical products and services,
in January 1996, the Company and Glaxo Wellcome, Inc. (Glaxo Wellcome)
formed a joint venture, Healthmatics G.P. (formerly Healthpoint G.P.)
(Healthmatics). The Company's interest in this venture was sold during
1998 (see Note 6).
Beginning in 1993, the Company instituted a strategy of developing and
expanding its business by acquiring practice management software
businesses having an installed base of physician practice customers and
developing a common software platform to which such customers could
migrate over time. In execution of this strategy, the Company made a
series of acquisitions through 1998 in order to expand various software
and support services.
In 1996 and 1997, the Company sold support obligations for various
customer sites using legacy systems in order to concentrate on its three
major software platforms. In 1998, the Company announced the need to
restate financial information previously issued to the public. Instead
of the reported profits during the first three quarters of 1997, the
Company would be reporting a substantial loss and was in default of its
bank agreement. The negative effects of publicity surrounding the
Company's announcements affected operating results in 1998.
During 1998 and 1999, the Company undertook significant restructuring
efforts to mitigate the losses incurred in 1997. Personnel levels around
the Company were reduced, various offices were closed and overall
capital investment and expense spending levels were reduced. Certain
non-core assets and business units were sold.
Although the Company continues to show a negative cash flow as a result
of spending for the issues relating to its financial reporting problems,
management is continuing to control costs and grow the core business.
There is no assurance that such efforts will be successful or that
additional financing can be obtained to meet working capital needs.
These factors raise substantial doubt about the ability of the Company
to continue as a going concern.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses from operations, has a working capital deficiency, is
in default under certain of its debt obligations for which a forbearance
has been obtained (see Note 8) and has an accumulated deficit. The
accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
<PAGE>
-2-
(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, 1998, 1997 and 1996, and its
wholly-owned subsidiaries, Medical Network Systems Corp. (MNS) from May
1998, Solion Corporation (Solion) from September 1997, the business of
Software Banc Incorporated (SBI) from May 1997, the Healthcare Division
of Data Systems of Texas (Data Systems) from April 1997, Wismer-Martin
from September 1996 and the Healthcare business of CUSA Technologies,
Inc. (CTI) from July 1996. All significant intercompany transactions
have been eliminated.
REVENUE RECOGNITION-
The Company recognizes revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition". The Company's revenue includes:
(i) license fees for internally developed and acquired practice
management software products; (ii) support and update agreements on the
practice management software products; (iii) hardware sales and the sale
of hardware service agreements; and, (iv) customer training,
installation and consulting services. Sales of licenses for internally
developed and acquired software products are made to independent
resellers and directly to office based physicians and other healthcare
providers. Revenues from sales of such software packages are primarily
recognized upon shipment of the product, since no significant vendor
and/or post contract support obligations remain outstanding at the time
of revenue recognition. In certain cases, independent resellers 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 since the fee
charged, and payment thereof, is not contractually tied to subsequent
sales by the reseller. The cost to distribute additional copies of the
software is insignificant. Revenue from software support and update and
hardware service agreements is deferred at the time the agreement is
executed and recognized ratably over the term of the agreement, which
typically does not exceed one year. Revenue from peripheral hardware
sales is recognized at the time of shipment. Revenue from customer
training, installation and consulting services is recognized when the
earnings process is substantially completed, which generally coincides
with performance. All costs associated with licensing of software
products, support and update services, and training and consulting
services are expensed as incurred.
Fees from health care institutions and clinical laboratories for
communication links to the Company's systems and physicians are billed
monthly or annually and recognized as revenues over the term of the
related agreements, generally one year.
RESEARCH AND DEVELOPMENT COSTS AND
CAPITALIZED SOFTWARE DEVELOPMENT COSTS -
Research and development costs are expensed as incurred. Such costs
generally include software development costs of new products and
enhancements up to the date upon which technological feasibility is
achieved. Costs incurred to develop new software products after
technological feasibility is achieved are capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed." Capitalized software development costs obtained as part
<PAGE>
-3-
of Company acquisitions are amortized using the straight-line method
over the estimated product lives of three years. Net capitalized
software reflected in intangible assets at December 31, 1998, 1997 and
1996 was $264,000, $501,000 and $711,000, respectively. Capitalized
software amortization expense was $237,000, $211,000 and $171,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. There
were no additional costs capitalized during 1998 and 1997.
CASH AND CASH EQUIVALENTS-
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
INVENTORIES-
Inventories, consisting principally of computer hardware for resale and
computer maintenance parts held to repair customers' hardware under
maintenance contracts between the Company and certain of its customers,
are stated at lower of cost or market with costs determined on a
first-in, first-out basis.
INTANGIBLE ASSETS-
Intangible assets consist primarily of goodwill related to the Company's
acquisitions (see Note 3) and capitalized software development costs.
Amortization is computed using the straight-line method over a period of
three years for computer software and up to 15 years for goodwill.
Amortization expense for computer software and goodwill was $4,758,000,
$7,278,000 and $7,238,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No.
121). The adoption of this statement requires that long-lived assets,
certain identifiable intangible assets and goodwill related to those
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company's policy is to evaluate the realizability of
acquisition-related intangible assets and certain other long-lived
assets at each balance sheet date based upon the expectations of
nondiscounted cash flows and operating income (loss) for each subsidiary
or acquired business. Based upon its analyses, the Company concluded
that no impairment related to any of its long-lived assets had occurred
as of December 31, 1996. For the years ended December 31, 1998 and 1997,
the Company recorded a write-down of certain intangible assets and
investments of $8,292,000 and $30,861,000, respectively (see Note 3).
PROPERTY AND EQUIPMENT-
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
ranging from three to seven years. Equipment under capital leases is
amortized on the straight-line method over the shorter of the useful
lives of the leased assets or the term of the related lease, ranging
from three to five years. Repair and maintenance costs are expensed as
incurred. Gains or losses on disposal of property and equipment are
reflected in operations.
<PAGE>
-4-
FAIR VALUE OF FINANCIAL INSTRUMENTS-
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments"
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. Cash and cash equivalents, accounts receivable, notes
payable, debt, obligations under capital leases, and accounts payable
reported in the consolidated balance sheets equal or approximate fair
value.
INCOME TAXES-
The Company has adopted SFAS No. 109 "Accounting for Income Taxes" (SFAS
No. 109). Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets or liabilities
of a change in tax rates is recognized in the period that the tax change
occurs.
ACCOUNTING FOR STOCK BASED COMPENSATION-
The Company has adopted SFAS No. 123, "Accounting for Stock-based
Compensation" SFAS No. 123). This statement requires companies to make
pro forma disclosures as if the fair value based method of accounting
for stock options, as defined in the statement, had been applied (see
Note 13).
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
LOSS PER SHARE-
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings per Share" (SFAS No. 128). This standard requires the
presentation of basic EPS and diluted EPS. Basic EPS is calculated by
dividing income available to common shareholders by the weighted average
number of shares of common stock outstanding during the period. Diluted
EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to
reflect potentially dilutive securities.
SEGMENT REPORTING-
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information." This statement establishes standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. This statement is
<PAGE>
-5-
effective for the December 31, 1998 financial statements and need not be
applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated.
The Company does not believe it operates in more than one segment.
NEW ACCOUNTING PRONOUNCEMENTS-
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The
Company does not believe that the adoption of SOP 98-1 will have a
material effect on its financial position or results of operations.
(3) ACQUISITIONS AND RESTRUCTURING CHARGES:
ACQUISITIONS-
On May 31, 1998, the Company, through a newly formed wholly-owned
subsidiary, Medical Network Systems Corp. (MNS), acquired the business
of Medical Network Systems Inc., a reseller of the Company's products.
As part of this acquisition, the Company forgave certain accounts
receivable of approximately $585,000 which were recorded as goodwill. In
accordance with SFAS No. 121, the Company determined that an impairment
occurred with respect to this intangible asset as of December 31, 1998.
Accordingly, the goodwill was expensed at December 31, 1998 and is
included in impairment of assets writedown in the accompanying
statements of operations.
On September 23, 1997, the Company acquired Solion. Solion provides
printed products, forms and computer supplies to the healthcare
industry. The purchase price was $6,250,000 and was paid for with
$3,125,000 in cash, 450,990 shares of common stock valued at $3,125,000
and the Company assumed $1,628,000 of liabilities. The resulting
goodwill is being amortized over 15 years.
On May 1, 1997, the Company acquired the assets of SBI. SBI is a
provider of integrated information technology for the healthcare
industry, providing these organizations with hardware, software,
installation, training, software support and hardware maintenance. The
Company paid $2,613,000 in cash and assumed $75,000 of liabilities. The
resulting goodwill was being amortized over 15 years. At December 31,
1997, the Company recorded a writedown as a result of an impairment of
this intangible asset in the amount of $2,186,000.
On April 1, 1997, the Company acquired the assets of the Healthcare
Division of Data Systems of Texas (Data Systems), a value added reseller
of the Company's products. Data Systems is a provider of integrated
information technology for the healthcare and credit union industries,
providing these organizations with hardware, software, installation,
training, software support, and hardware maintenance. The acquisition
agreement with Data Systems was for the purchase of the assets of the
healthcare division only, which is located in Texas. The Data Systems
business was acquired for $1,070,000 in cash, a $600,000 note payable
and the assumption of $168,000 in liabilities. The resulting goodwill
was being amortized over 15 years. At December 31, 1997, the Company
recorded a writedown as a result of an impairment of goodwill in the
amount of $1,344,000.
<PAGE>
-6-
On September 10, 1996, the Company acquired Wismer-Martin, a provider of
practice management systems and healthcare information systems.
Wismer-Martin was acquired for $1,980,000 in cash, 935,000 shares of
common stock valued at $9,366,000 and the assumption of $3,872,000 in
liabilities. The resulting intangible asset was $11,049,000 at the date
of acquisition. At December 31, 1998 and 1997, the Company recorded a
writedown as a result of an impairment of this intangible asset in the
amount of $2,782,000 and $6,661,000, respectively.
On July 2, 1996, pursuant to an asset purchase agreement, the Company,
through a wholly-owned subsidiary, purchased substantially all of the
assets of the medical practice management software business and certain
other software businesses of CTI for $9,200,000 in cash, and the
assumption of $4,131,000 in liabilities and cancellation of outstanding
debt owed by CTI to the Company. The resulting intangible asset was
$10,737,000 at the date of acquisition. At December 31, 1997, the
Company recorded a writedown as a result of an impairment of this
intangible asset in the amount of $4,696,000.
On October 27, 1995, the Company acquired all of the issued and
outstanding capital stock of VERSYSS Incorporated (VERSYSS) a developer
of practice management software products, pursuant to a merger
agreement, for $12,333,000 in cash and $11,750,000 in the form of a two
year promissory note bearing interest at the rate of 11% per annum
issued by VERSYSS, as the surviving corporation of the merger, to the
VERSYSS Liquidating Trust, a liquidating trust formed for the benefit of
the former shareholders of VERSYSS. In addition, the Company assumed
VERSYSS liabilities aggregating $39,686,000 consisting of $14,367,000 in
debt, $14,199,000 in deferred maintenance revenue, and $11,120,000 in
accrued expenses derived from operations. At December 31, 1998 and 1997,
the Company recorded a writedown as a result of an impairment of this
intangible asset of $3,605,000 and $11,128,000, respectively.
In addition to the impairment charges discussed above, the Company
recorded an additional write off of $4,846,000 during 1997 related to
acquisitions made prior to the VERSYSS acquisition in 1995.
The Company's acquisitions have all been accounted for by the purchase
method of accounting and, consistent with the requirements of Accounting
Principles Board No. 16, the tangible assets acquired and liabilities
assumed have been recorded at their fair values at the respective
acquisition dates. The following represents a detail of the Company's
significant acquisitions since January 1, 1996.
Wismer-
CTI Martin Solion
----------- ----------- ----------
Consideration:
Cash $9,200,000 $1,980,000 $3,125,000
PCN common stock 0 9,366,000 3,125,000
Liabilities assumed 4,131,000 3,872,000 1,628,000
Legal and accounting cost 167,000 287,000 73,000
----------- ----------- ----------
Total purchase price $13,498,000 $15,505,000 $7,951,000
=========== =========== ==========
<PAGE>
-7-
Wismer-
CTI Martin Solion
Allocation of Purchase Price: ---------- ---------- ----------
Tangible assets including receivables,
inventories and equipment $2,055,000 $3,340,000 $1,480,000
Profit on support and update
agreements (amortized over one year) 107,000 85,000 0
Profit on future support and update
agreements (amortized over three years
to five years) 599,000 1,031,000 0
Other intangible assets (includes
noncompete agreements, trade name
and goodwill) (amortized over fifteen
years) 10,737,000 11,049,000 6,471,000
----------- ----------- ----------
Total purchase price $13,498,000 $15,505,000 $7,951,000
=========== =========== ==========
RESTRUCTURING CHARGES-
During 1998, as a result of the financial difficulties discussed in Note 1,
the Company announced a restructuring plan (the 1998 Restructuring Plan)
designed to eliminate duplicate facilities and responsibilities in order to
improve operating efficiencies and cash flow. The following is a summary of
the activity in the 1998 Restructuring Plan-
1998 Provision for restructuring $1,365,000
Cash outflows from reductions in workforce,
lease terminations, and moving costs 790,000
----------
Balance at December 31, 1998 $575,000
==========
The balance at December 31, 1998 primarily relates to lease and
relocation costs and is included in accrued expenses and other
liabilities in the accompanying balance sheets.
In the fourth quarter of 1995, after the completion of the VERSYSS
acquisition, management completed a review of the Company's operations
and announced a restructuring plan (the 1995 Restructuring Plan)
designed to eliminate duplicate administrative responsibilities,
consolidate warehousing and distribution of the Company's products and
streamline other core business in order to improve operating
efficiencies and increase shareholder value. The 1995 Restructuring Plan
does not include additional costs associated with the consolidation of
operations such as retraining, consulting, purchases of equipment and
relocation of employees and equipment. These costs were charged to
operations or capitalized, as appropriate, when incurred. Since
implementation of the 1995 Restructuring Plan, the 1995 accrual has
decreased principally due to expenditures related to headcount reduction
and lease termination costs from the consolidation and centralization of
financial and administrative functions to the Company's corporate
headquarters in Morris Plains, New Jersey, the centralization of
purchasing, warehousing and order fulfillment to the Company's Torrance,
California service center and other functional downsizing. The following
is a summary of the activity in the 1995 Restructuring Plan-
<PAGE>
-8-
Balance at January 1, 1996 $1,681,000
Reduction in workforce, lease termination costs,
moving costs and other cash outflows during 1996 842,000
--------
Balance at December 31, 1996 839,000
Lease termination costs during 1997 224,000
--------
Balance at December 31, 1997 615,000
Lease termination costs 195,000
Noncash recovery from change in estimated requirements 275,000
--------
Balance at December 31, 1998 $145,000
========
(4) INVENTORIES:
Inventories were as follows-
1998 1997 1996
---------- ---------- ----------
Computer hardware and peripherals $958,000 $3,234,000 $2,392,000
Customer maintenance parts 540,000 565,000 770,000
---------- ---------- ----------
$1,498,000 $3,799,000 $3,162,000
========== ========== ==========
At December 31, 1996, the Company wrote off approximately $2,000,000
primarily related to slow moving and obsolete spare parts inventory.
(5) PROPERTY AND EQUIPMENT, NET:
1998 1997 1996
----------- ----------- ------------
Land $ 0 $ 146,000 $ 146,000
Building and building improvements 0 1,337,000 1,639,000
Property and equipment 8,837,000 8,702,000 17,969,000
Leasehold improvements 1,230,000 1,226,000 1,202,000
Leased equipment 1,560,000 1,659,000 742,000
----------- ----------- ------------
11,627,000 13,070,000 21,698,000
Less- Accumulated depreciation and
amortization (8,831,000) (6,972,000) (15,618,000)
----------- ----------- ------------
Property and equipment, net $2,796,000 $6,098,000 $6,080,000
=========== =========== ============
Accumulated amortization in connection with equipment under capital leases
included in the above amounts amounted to approximately $626,000, $687,000
and $742,000 as of December 31, 1998, 1997 and 1996, respectively.
Depreciation and amortization for the years ending December 31, 1998, 1997
and 1996 was $2,474,000, $2,743,000 and $1,676,000, respectively.
<PAGE>
-9-
(6) INVESTMENTS:
HEALTHMATICS JOINT VENTURE-
In January 1996, the Company and Glaxo Wellcome, through wholly-owned
subsidiaries, formed Healthmatics, a joint venture partnership, to
design and market clinical information technology products and services.
Healthmatics was a general partnership owned equally by, and operated
independently of, the parent companies. Both the Company and Glaxo
Wellcome agreed to contribute product development assets to Healthmatics
and at least $50 million in cash to the venture, of which $43 million
was contributed by Glaxo Wellcome and $7 million was to be contributed
by the Company. Losses incurred by Healthmatics were allocated between
Glaxo Wellcome and the Company in proportion to their respective cash
contributions (approximately 85% to Glaxo Wellcome and 15% to the
Company).
On December 4, 1998, the Company sold its interest in Healthmatics to
Glaxo Wellcome for gross pRoceeds of $5,000,000. The Company's share of
allocated losses was in excess of its investment at the time of sale
resulting in a funding requirement by the Company. The gain on the sale
is approximately $5,600,000 which represents the gross proceeds plus the
forgiveness of the funding of losses to the date of sale, less
transaction costs. In connection with this transaction, $1,000,000,
reflected as restricted cash, was deposited in escrow with the Company's
Lenders to be returned to the Company if certain events occurred.
Subsequent to year-end, this amount was applied against the outstanding
borrowings under the line of credit.
Purchases by the Company from Healthmatics were considered immaterial
for the years ended December 31, 1998, 1997 and 1996.
INVESTMENT IN HCC COMMUNICATION, INC.-
During 1997, the Company made a 19.9% investment in HCC Communications,
Inc. (HCC) in exchange for $2,000,000. The Company is entitled to elect
one member to HCC's board of directors. The Company accounts for this
investment using the equity method. The Company's share of net losses
was $137,000 and $131,000 for the years ending December 31, 1998 and
1997. Also, during 1997, HCC sold certain assets to which the Company
was entitled to a portion of the proceeds. Approximately $212,000 was
received and recorded as a return on the Company's initial investment.
During 1998, the Company determined that an impairment had occurred with
respect to the value of this investment. As a result, the Company
recorded a writedown of $1,320,000 at December 31, 1998 which is
included in impairment of assets writedown in the accompanying
statements of operations.
<PAGE>
-10-
(7) INCOME TAXES:
Income tax benefit for each year is summarized as follows-
1998 1997 1996
------- ------------ -------
Current-
Federal $0 ($89,000) $0
State 0 0 0
------- ------------ -------
0 (89,000) 0
------- ------------ -------
Deferred-
Federal 0 0 0
State 0 0 0
------- ------------ -------
0 0 0
------- ------------ -------
Income tax benefit $0 ($89,000) $0
======= ============ =======
The income tax benefit differs from applying the Federal income tax rate of
35% for fiscal years 1998, 1997 and 1996 loss before income tax provision,
loss on equity investment and extraordinary item due to the following-
1998 1997 1996
---------- ---------- ---------
Tax benefit at statutory rate (35.0%) (35.0%) (35.0%)
Change in the valuation allowance
for deferred tax assets 35.0% 35.0% 35.0%
Other 0 (0.1%) 0
---------- ---------- ---------
Effective tax rate 0.0% (0.1%) 0.0%
========== ========== =========
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities at December 31, 1998 and December 31, 1997 are as follows-
1998 1997 1996
----------- ----------- -----------
Deferred Tax Assets-
Net operating loss $54,328,000 $45,712,000 $18,044,000
Restructuring provisions 304,000 263,000 336,000
Operating accruals 1,490,000 1,185,000 1,682,000
Allowance for doubtful accounts 215,000 215,000 215,000
SFAS No. 121 writeoffs 16,836,000 13,270,000 0
----------- ----------- -----------
73,173,000 60,645,000 20,277,000
Valuation allowance (73,173,000) (60,645,000) (20,277,000)
------------ ------------ -----------
Net deferred tax asset $ 0 $ 0 $ 0
============ ============ ===========
<PAGE>
-11-
At December 31, 1998, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $125 million which
expire at various dates through 2013. 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 rules. Any reduction of the valuation allowance
attributable to net operating loss carryforwards from VERSYSS and
Wismer-Martin of up to $15,000,000 and $4,500,000, respectively, will be
treated as a reduction of intangible assets. The Company believes it has
previously experienced ownership changes, which under the provisions of
Section 382 of the Internal Revenue Code of 1986, as amended (IRC), have
resulted in certain limitations on the Company's ability to utilize its
net operating losses in the future.
(8) DEBT:
LINE OF CREDIT-
In September 1997, the Company entered into a Credit Agreement (the
Agreement) with Fleet Bank, N.A. as an administrative agent for a
syndicate of banks (the Lenders). The Agreement provided for borrowings
of up to $110,000,000 and was to expire in September 2001. Borrowings
under the agreement bear interest at the bank's base rate or LIBOR, as
applicable, plus the applicable margin, as defined in the Agreement.
On April 22, 1998, as a result of certain events of default, the Company
and the Lenders entered into a forbearance and amendment agreement which
resulted in the Lenders agreeing to forbear their remedies under the
Agreement until September 30, 1998, increased the interest to base rate
plus two percent, terminated availability, charged a restructuring fee
and modified and added covenants and pursuant to which, the Company
repaid $6,000,000 principal from the proceeds of the Series B Preferred
Stock (see Note 13) and the Investor guaranteed $2,000,000 of the
remaining balance (see Note 11).
As of September 30, 1998, the Company and the Lenders entered into a
second forbearance and amendment agreement which extended the
forbearance and which required, among other things, the delivery of
audited financial statements and a commitment to provide either
refinancing of outstanding borrowings, or a definitive purchase
agreement, as defined, by certain dates. In consideration for the second
forbearance agreement, the Company paid $750,000 principal, a
restructuring fee of $250,000 and agreed to an extension fee of
$1,000,000 due on the extended maturity date of the refinancing or sale
of the Company.
On April 26, 1999, the Company and the Lenders entered into a third
forbearance and amendment agreement, which provided the Company with
additional time to meet performance criteria established in the second
agreement. In addition the Lenders agreed to extend the maturity date of
the borrowings to August 15, 1999, and they agreed to release their
security interests in the Commercial Division (see Note 18).
In consideration for the third forbearance agreement the Company agreed
to apply to principal $1,000,000 of the escrowed proceeds from the sale
of Healthmatics in December 1998 and to apply 50% of the net proceeds
from the sale of the Commercial Division against the principal due under
the line of credit. The remaining 50% is available for use by the
Company for working capital and general corporate purposes.
<PAGE>
-12-
Outstanding borrowings under the line of credit were $15,412,000 and
$20,500,000 as of December 31, 1998 and 1997, respectively. The line of
credit is secured by all of the assets of the Company.
<TABLE>
<S> <C> <C> <C>
December 31
--------------------------------------------
LONG-TERM DEBT 1998 1997 1996
- -------------- ----------- ----------- ------------
Term indebtedness payable to VERSYSS Liquidating
Trust due annually in October 1996 and 1997 at 11% (a) $ 0 $ 0 $5,875,000
Term indebtedness payable to IBM due October 1997 at
prime plus 2.5% (10.75% at December 31, 1996)
assumed from VERSYSS acquisition (a) 0 0 1,500,000
Term note due monthly March 1995 through February
2001 at 8% assumed from VERSYSS acquisition (a) 785,000 1,190,000 1,612,000
Debt portion of Equifax Marketing Agreement (see
Note 12) 0 0 3,878,000
Mortgage payable to U. S. Bancorp 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, maturing in November
1998 assumed in connection with the Wismer Martin
acquisition (b) 0 378,000 397,000
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 (b) 0 315,000 330,000
Subordinated promissory note payable to Gordon J.
Romer, President of Solion, with an interest rate of 6%
per annum payable annually, maturing and payable in
full on March 2, 1999, assumed in connection with the
Solion acquisition (c) 188,000 188,000 0
Note Payable to Data Systems in two equal payments on
February 15, 1998 and February 15, 1999, including
interest at a rate of 6% per annum incurred in
connection with the Data Systems acquisition (d) 250,000 500,000 0
Other 153,000 164,000 167,000
----------- ---------- -----------
1,376,000 2,735,000 13,759,000
Less- Current portion of long-term debt 984,000 861,000 9,088,000
----------- ---------- -----------
Long-term debt $392,000 $1,874,000 $4,672,000
=========== ========== ===========
</TABLE>
<PAGE>
-13-
(a)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 (see Note 3). The first installment of
$5,875,000 of term indebtedness to VERSYSS Liquidating Trust was paid
in 1996 and the second installment of $5,875,000 was paid during
1997. Also, as part of the acquisition, the Company assumed a note
payable to a former landlord that was part of a settlement. As
security for the note, the landlord has a lien on substantially all
of VERSYSS' assets. The note had an aggregate outstanding balance of
approximately $785,000 at December 31, 1998 and is due in equal
monthly installments of principal and interest (at 8% per year). In
April 1999, as part of the sale of the commercial assets, a repayment
of $400,000 was made with the balance to be repaid over a one-year
period. Along with the term note payable, the Company also assumed
$1,500,000 in notes payable to IBM Credit Corporation (ICC) for funds
advanced to VERSYSS to finance inventory purchases. The notes were
secured by a purchase money security interest in such inventory
acquired from ICC and by a second lien on such accounts receivable
derived from sales of inventory purchased from ICC. Principal was
payable upon maturity of the notes in 1997 and interest was due
annually at a rate of prime plus 2.5%. Principal would have been
forgiven, and a credit against payments provided, according to
provisions of the supply agreement if the Company exceeded certain
annual purchase requirements with ICC. During 1997, the Company
exceeded certain of these annual purchase requirements. As a result,
approximately $1,031,000 of the notes were forgiven. This amount is
reflected as an extraordinary item in the 1997 consolidated statement
of operations.
(b)In September 1996, from the Wismer-Martin acquisition, the Company
assumed a $402,000 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 $334,000 to the Greater
Spokane Business Development Association and the Small Business
Administration. This note payable was collateralized by substantially
all of Wismer-Martin's property, plant and equipment, subordinated to
the first position of U.S. Bancorp Mortgage Company. Both obligations
were paid in full when the Company sold this land and building during
1998.
(c)In September 1997, as part of the Solion acquisition, the Company
assumed a note payable to Solion's President, Gordon J. Romer. In
March 1999, this note was restructured whereby the Company paid
$68,000 and entered into a new note for the remaining $120,000 which
is payable in monthly installments of principal and interest with a
final maturity in March 2000.
(d)The Note Payable to Data Systems was incurred as part of the
acquisition in 1997. $250,000 of the note was repaid in 1998. The
remaining $250,000, which was due in February 1999 was restructured
whereby the Company paid $90,000 and entered into a new note for the
remaining $160,000 which is payable in monthly installments of
principal and interest with a final maturity in March 2000.
The annual aggregate maturities of long-term debt at December 31, 1998 are
as follows-
1999 $984,000
2000 392,000
<PAGE>
-14-
(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, 1998, are
as follows-
Fiscal Year Ending Capital Operating
December 31, Leases Leases
- --------------------------------------- ------------ -------------
1999 $644,000 $2,958,000
2000 455,000 2,284,000
2001 938,000 1,280,000
2002 69,000 466,000
2003 0 393,000
Thereafter 0 35,000
----------- -------------
Total minimum lease payments 2,106,000 $7,416,000
=============
Less: Amount representing interest 377,000
-----------
Present value of future minimum lease payments 1,729,000
Less: Current portion 478,000
-----------
Long-term portion $1,251,000
===========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately, $4,511,000, $3,639,000 and $2,119,000, respectively.
On December 6, 1994, the Company entered into a rental agreement with a
company wholly-owned by the Company's largest shareholder and Chairman of
the Board of Directors (the Investor). The ten year sublease consists of
44,725 square feet of office space at 1200 The American Road, Morris Plains,
New Jersey, to serve as the Company's corporate headquarters and executive
offices. The Company believes that the terms of the lease were no less
favorable than a lease that could have been obtained by the Company from an
unrelated third party in a transaction negotiated at an arm's length basis.
On September 1, 1996, the Company amended its agreement to sublease an
additional 14,170 square feet of office space. The landlord's interest was
assigned to an unrelated third party partnership on February 27, 1998. By
amendment dated August 2, 1998, the Company relinquished all rights to the
14,170 square feet of office space and increased the remaining 44,725 square
feet to 46,222 square feet. The amendment reduced the term of the lease to
July 31, 2001 and restructured the monthly rent.
In 1990, the Company entered into an operating lease for office space in New
Jersey. 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.
with a payment of $1,500,000.
In conjunction with the Company's various acquisitions, the Company assumed
operating leases for facilities and equipment.
<PAGE>
-15-
(10) LOSS PER SHARE:
In accordance with SFAS No. 128, the following table reconciles net loss
and share amounts used to calculate loss per share-
<TABLE>
<S> <C> <C> <C>
December 31
--------------------------------------------------
1998 1997 1996
Numerator- ------------- ------------- -------------
Loss before extraordinary item ($25,528,000) ($59,515,000) ($15,231,000)
Less- Dividends on preferred stock (1,238,000) 0 0
------------- ------------- -------------
Loss available to common shareholders (26,766,000) (59,515,000) (15,231,000)
Extraordinary item 0 1,031,000 0
------------- ------------- -------------
Net loss - Basic and Diluted ($26,766,000) ($58,484,000) ($15,231,000)
============= ============= =============
Denominator-
Weighted average number of common
shares outstanding - Basic and Diluted 55,648,507 52,018,761 49,700,888
============= ============= =============
Basic and Diluted-Earnings
Loss per share-
Loss available to common ($0.48) ($1.14) ($0.31)
shareholders
Extraordinary item 0 0.02 0
------------- ------------- -------------
Net loss ($0.48) ($1.12) ($0.31)
============= ============= =============
</TABLE>
Outstanding options of 2,338,631, 2,620,231 and 1,933,286 as of December
31, 1998, 1997 and 1996, respectively, have been excluded from the above
calculations as they are antidilutive to loss per share.
(11) TRANSACTIONS WITH RELATED PARTIES:
In April 1998, in connection with a Stock Purchase Agreement, the Investor
guaranteed $2,000,000 of the outstanding debt owed to the Lenders (see
Notes 8 and 13).
(12) COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS-
As of December 31, 1998, the Company has employment arrangements with
several employees which provide for the continuation of salary and other
compensation aggregating approximately $1,052,000 for the year ended
December 31, 1999. Upon the occurrence of certain events, varying
amounts of compensation would be due under these arrangements. In
addition, as part of the 1998 Restructuring Plan, the Company entered
into severance and "stay put" arrangements with certain key personnel.
These programs obligate the Company to pay $1,500,000 in May 1999 to
such personnel. A portion of this balance was paid in May 1999 with the
balance due in December 1999.
<PAGE>
-16-
MARKETING AGREEMENT-
On January 25, 1995, the Company entered into an Exclusive Marketing
Agreement (the Marketing Agreement) with Equifax EDI, an electronic
claims clearinghouse and a wholly-owned subsidiary of Equifax, to
establish "PCN Link", a communication link between Equifax EDI and users
of the Company's practice management software products. On January 12,
1996, the Company and Equifax entered into an amended and restated
Marketing Agreement, which among other things, revised the exclusive
coverage of the services provided by Equifax EDI to claims submission
and related services, on-line eligibility and benefit inquiries for
indemnity plans, credit card and check guarantee and verification
services and electronic remittance services. In connection with such
amendment, which had an initial term of four years, the Company agreed
to share with Equifax EDI certain of the costs and expenses associated
with the further development and enhancement of PCN Link. Further, the
Company agreed to pay Equifax $125,000 per month for forty-eight months
in order to offer, as a marketing incentive, introductory free service
for one year, with certain limitations, to physician practices who
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, and received cash consideration of $4.5 million. The Company
recorded this amount as deferred revenue in 1996 and reduced this amount
as payments were made under the Marketing Agreement. The acquisition of
Equifax EDI by NDC did not result in any changes to the Marketing
Agreement except that the Company and NDC agreed that the Company could,
in its sole unrestricted discretion, terminate the Marketing Agreement,
on not less than ninety days written notice, at any time on or after
July 1, 1997.
The Company terminated the Marketing Agreement effective September 30,
1997. As a result, the Company, in September 1997 recognized $2,029,000
which represents the remaining unamortized deferred revenue amount. This
amount is reflected as other income in the consolidated statement of
operations for the year ended December 31, 1997.
LITIGATION-
Subsequent to the Company's announcements in early 1998 concerning the
delay in its annual audit and its expected restatement of previously
issued reports, numerous purported class actions were filed against the
Company, certain directors and former officers. These matters were
consolidated into one action in the United States District Court for the
District of New Jersey. This Securities Class Action charges the
defendants with various violations of the Federal securities laws and
regulations through the alleged overstatement of corporate earnings.
Although the Securities Class Action is pending and motions to dismiss
have been filed by all defendants, the Company and its directors have
entered into a Memorandum of Understanding (MOU) with the Class Action
Plaintiffs pursuant to which all issues in the case may be resolved, at
the Company's option, for the payment of $25.25 million to the Class
Plaintiffs by August 10, 1999, or at a later date if the Company has
consummated an agreement of sale with an acceptable purchaser by July
31, 1999 for a sale price as defined in the MOU. As a result, the
Securities Class Action Litigation is substantially held in abeyance.
The settlement is contingent upon approval of the Court after notice and
hearing.
<PAGE>
-17-
The Company's former Chief Executive Officer has filed a suit against
the Company alleging among other things, wrongful termination. The
Company is unable to predict the ultimate outcome of the suit at this
time but believes it has meritorious defenses to all claims. The
consolidated financial statements do not reflect any adjustments with
respect to this matter due to its uncertainty.
The Company, during the normal course of business, has become involved
in certain litigation. During 1998, the Company was named in numerous
lawsuits resulting from matters described above related to the
Securities Class Action. The Company is unable to predict the outcome of
these cases at this time. As a result, the consolidated financial
statements do not reflect any adjustments with respect to these matters.
(13) SHAREHOLDERS' EQUITY (DEFICIT):
PUBLIC OFFERINGS-
In May 1996, the Company completed the public offering (the 1996 Public
Offering) of 6,440,000 shares of its Common Stock for $10 per share.
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 a $10 million convertible subordinated
promissory note payable to Equifax. As a result of the sale by the
Company of the remaining 4,507,783 shares sold, the Company received net
proceeds of approximately $42 million.
PLACEMENT OF SECURITIES-
During 1995, the Company completed a placement of securities pursuant to
Regulation S of the Securities Act of 1933. In connection with such
placement, the Company received net proceeds of approximately $25
million through the issuance of 1,902,748 shares of its common stock and
18,500 shares of its Series A non- dividend paying convertible preferred
stock. The preferred stock, which was issued at $1,000 per share was, at
the option of the holder, convertible into shares of common stock at a
conversion price based on certain minimum and maximum conversion prices.
During the years ended December 31, 1997 and 1996, 1,000 and 14,750
shares, respectively, of the Series A non-dividend paying convertible
preferred stock issued pursuant to such offering were converted into
187,424 and 2,107,136 shares, respectively, of common stock. As of
December 31, 1997 there were no shares of the Series A preferred stock
outstanding.
ISSUANCE OF PREFERRED STOCK-
On April 1, 1998, in a single transaction, the Company entered into a
Stock Purchase Agreement (the Agreement) with an affiliate of the
Investor. Under the Agreement, the Company agreed to sell such affiliate
11,000 shares of Series B Cumulative Preferred Stock (the Series B
Preferred Stock) and grant and modify certain warrants in exchange for
$11,000,000 and a $2,000,000 guarantee by the Investor on the Company's
indebtedness to the Lenders. The Series B Preferred Stock accumulates
dividends at a rate of 15% per year through March 31, 1999, increases 1%
per year up to 18% and has a liquidation preference of $1,000 per share
plus accumulated dividends. The Series B Preferred Stock is senior to
all common stock and has no voting rights. It is redeemable at the
Company's option, subject to certain conditions, none of which were met
as of December 31, 1998.
<PAGE>
-18-
In connection with the Agreement, the Company granted a warrant to
purchase 6,000,000 shares of common stock at an exercise price of $1.00.
Also, the Company modified the terms and exercise price of warrants
previously issued in 1995 (see Warrants).
Based upon an independent valuation of the Series B Preferred Stock on
April 1, 1998, the value of the 11,000 shares was determined to be
$7,760,000. As a result, the Series B Preferred Stock is reflected in
the accompanying balance sheet at the fair value of $7,760,000 plus
accumulated dividends of $1,238,000. The remaining $3,240,000 is
attributable to the value of the Warrants described above and has been
reflected as a credit to additional paid in capital. The Company
determined that the Guarantee had terms comparable to outstanding
borrowings of the Company.
STOCK OPTIONS-
At December 31, 1998, 1997 and 1996, the Company had reserved 2,338,631,
2,620,231 and 1,933,286 shares of Common Stock, respectively, for
issuance upon exercise of stock options issued to Directors, officers,
employees of the Company as well as to independent value-added resellers
of the Company's practice management software products.
The following is a summary of each of the Company's stock option plans-
1989 INCENTIVE AND NON-INCENTIVE STOCK OPTION PLAN (THE 1989 PLAN):
Under the 1989 Plan, as amended, 167,000 shares of Common Stock are
reserved for issuance upon exercise of options granted thereunder.
Incentive stock options may be granted to employees and non-incentive
stock options may be granted to employees, directors and such other
persons as the Compensation Committee of the Company's Board of
Directors (the Compensation Committee) determines will assist the
Company's business endeavors, at exercise prices equal to at least
100% of the fair market value of the Common Stock on the date of
grant with respect to incentive stock options (110% of fair market
value in the case of incentive stock options granted to any person
who, at the time the incentive stock option is granted, owns or is
considered as owning within the meaning of Section 425(d) of the IRC
stock possessing more than 10% of the total combined voting powers of
all classes of stock of the Company or any subsidiary (10% Owner)),
and at least 85% of the fair market value of the Common Stock on the
date of grant with respect to non-incentive stock options. Incentive
stock options are granted for a term of five years; those granted
prior to April 30, 1989 may be exercised by their respective holders
two months after the date of grant, while incentive stock options
granted thereafter are exercisable cumulatively at the rate of 50%
per year commencing one year from the date of grant. Generally
options granted under the 1989 Plan prior to April 1992 expire six
months after the holders' separation from service with the Company.
The 1989 Plan terminated on March 31, 1999.
1990 INCENTIVE AND NON-INCENTIVE STOCK OPTION PLAN (THE 1990 PLAN):
Under the 1990 Plan, 167,000 shares of Common Stock are reserved for
issuance upon exercise of options granted thereunder. Incentive stock
options may be granted to employees and non-incentive stock options
may be granted to employees, directors and other such persons as the
Compensation Committee determines will assist the Company's business
endeavors, at exercise prices equal to at least 100% of the fair
market value of the Common Stock on the date of grant with respect to
non-incentive stock options (100% of fair market value in the case of
incentive stock options granted to any person who at the time the
incentive stock option is granted, is a 10% Owner), and at least 50%
of the fair market value of the Common
<PAGE>
-19-
Stock on the date of grant with respect to non-incentive stock
options. In addition to selecting the optionees, the Compensation
Committee determines the number of shares of Common Stock subject to
each option, the term of each non-incentive stock option, the time
when the non-incentive stock option becomes exercisable, though,
pursuant to board resolution, no option granted after April 7, 1992
may be exercisable within six months of the date of the grant, and
otherwise administers the 1990 Plan. Incentive stock options are
granted for a term of five years and are exercisable cumulatively at
the rate of 50% per year commencing one year from the date of grant.
Options expire six months from the date of the holder's termination
of employment with the Company by reason of retirement at age 65,
disability or death, or on the date of termination of employment for
any other reason. The 1990 Plan terminates on March 26, 2000.
AMENDED AND RESTATED 1993 INCENTIVE AND NON-INCENTIVE STOCK OPTION
PLAN (THE EMPLOYEE PLAN): The Employee Plan, as amended, reserves
3,300,000 shares of Common Stock for issuance upon exercise of
options to be granted thereunder. Under the Employee Plan, incentive
stock options qualifying under Section 422 of the IRC, may be granted
to employees of the Company, and non-incentive stock options may be
granted to employees, officers and directors and such other persons
as the Compensation Committee appointed by the Board of Directors
determines will assist the Company's business endeavors. Options to
purchase more than 250,000 shares of Common Stock may not be awarded
to any employee in any calendar year. The Compensation Committee
selects the optionees and determines: (i) whether the respective
option is to be a non-incentive stock option or an incentive stock
option; (ii) the number of shares of Common Stock purchasable under
the option; (iii) the exercise price, which cannot be less than 100%
of the fair market value of the Common Stock on the date of grant
(110% of fair market value in the case of incentive stock options
granted to any person who, at the time the incentive stock option is
granted, is a 10% Owner); (iv) the time or times when the option
becomes exercisable; and (v) its duration, which may not exceed ten
years from the date of grant (or five years for any incentive stock
option granted to a 10% Owner). The Employee Plan terminates on July
13, 2003.
AMENDED AND RESTATED 1993 NON-EMPLOYEE DIRECTORS' NON-INCENTIVE STOCK
OPTION PLAN (THE DIRECTORS' PLAN): The Directors' Plan, as amended,
reserves 200,000 shares of Common Stock for issuance upon exercise of
options to be granted thereunder. Under the Directors' Plan, options
can only be granted to a director of the Company who is not an
employee nor an officer of the Company. Such options are
non-incentive and are non-qualified under Section 422 of the IRC. The
Directors' Plan is administered by a special committee consisting of
employee directors and officers. The committee has no authority to
grant non-qualified stock options, as, immediately following the
effective date of the Directors' Plan, options to purchase 10,000
shares of Common Stock were granted automatically to each
non-employee director and will be granted on the next succeeding
business day following a director's election or appointment to the
Board of Directors'. In addition to the initial option grants,
non-qualified stock options to purchase 10,000 shares of Common Stock
shall be granted automatically to each non-employee director on the
third anniversary date of his initial option grant and every three
years thereafter during the term of the Directors' Plan. The
Directors' Plan terminates on July 13, 2003.
<PAGE>
-20-
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. The VAR Plan was adopted by the
Board to provide incentives to the independent resellers of the
Company to market the PCN Health Network Information System to
current users of the Company's other practice management software
products as well as others, and became effective September 30, 1994.
The VAR Plan is administered by a committee appointed by the Board
consisting of no less than two individuals, and unless otherwise
determined, includes the chief executive officer and chief financial
officer of the Company. Under the VAR Plan on September 30, 1994 and
in January 1995 and January 1996, independent resellers were granted
options based upon the product of: (i) 300; and (ii) the number of
existing licensees of the Company's practice management software
products in the independent reseller's installed base as of such
dates; or, for an independent reseller first becoming an independent
reseller after September 30, 1994, the number of licenses of the
Company's practice management software products in the general
geographic region in which such new independent reseller conducts its
business. The exercise price of options granted under the VAR Plan is
the market value of a share of Common Stock on the business day
immediately preceding the date on which an option is granted. The
terms of options granted under the VAR Plan may not exceed 10 years.
Options vest based upon the number of licenses for the PCN Health
Network Information System sold to existing customers of the Company
(200 shares) and to new customers (100 shares) during 1994, 1995 and
1996. In addition, options vest for an additional 50 shares for each
license sold by the independent reseller during such periods in
excess of the minimum performance standard set forth in the
independent reseller's agreement with the Company. No option shall be
granted pursuant to the VAR Plan after December 31, 1997, but options
theretofore granted may extend beyond that date.
Stock option activity for all option plans is summarized as follows-
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Balance outstanding, January 1, 1996 2,714,739 $ 5.06
------------ --------------
Granted 695,500 11.89
Forfeited (780,300) 6.00
Exercised (696,653) 4.33
------------
Balance outstanding, December 31, 1996 1,933,286 7.64
------------ --------------
Granted 1,159,000 8.22
Forfeited (441,035) 9.98
Exercised (31,020) 4.26
------------
Balance outstanding, December 31, 1997 2,620,231 7.54
------------ --------------
Granted 550,000 1.50
Forfeited (831,660) 8.51
Exercised 0 -
-----------
Balance outstanding, December 31, 1998 2,338,631 $8.07
===========
<PAGE>
-21-
Options to purchase 2,338,631 shares of Common Stock were exercisable
at December 31, 1998 and the weighted average exercise price of those
options was $8.07.
The Company has adopted the disclosure provisions of SFAS No. 123 and
applies APB Opinion 25 in accounting for its plans and, accordingly,
records no compensation cost for stock option plans and stock
purchase plans in its financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated
below-
1998 1997 1996
------------- ------------- -------------
Net loss available to common
shareholders - as reported ($26,766,000) ($58,484,000) ($15,231,000)
Net loss available to common
shareholders - pro forma ($30,976,000) ($62,248,000) ($16,806,000)
Loss per share - as reported ($0.48) ($1.12) ($0.31)
Loss per share - pro forma ($0.56) ($1.20) ($0.34)
The pro forma amounts as noted above may not be representative of the
effects on reported income for future years. Pro forma net loss
reflects only options granted since January 1, 1995. Therefore, the
full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the
options' vesting period of 5 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
The fair value of the stock options granted in 1997 and 1996 is
estimated at grant date using the Black- Scholes option pricing model
with the following weighted average assumptions: for 1997 - expected
dividend yield 0.0%, risk free interest rate of 6.0%, expected
volatility of 75%, and an expected life of 7.5 years; 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. The
weighted average grant date fair value of options granted in 1997 and
1996 was $6.03 and $8.11, respectively.
STOCK WARRANTS-
In September 1995, the Investor purchased from the Company, for
$1,500,000, a warrant to purchase, in a single transaction, 5,000,000
shares of common stock for an aggregate exercise price of $5.00 per
share exercisable beginning September 14, 1997. The proceeds from the
issuance of such warrant were determined to be within the range of
fair value, as determined by an investment banking firm, and
therefore resulted in no expense charge in the consolidated
statements of operations. On April 1, 1998, under a Stock Purchase
Agreement (see Issuance of Preferred Stock) the Company adjusted the
exercise price from $5.00 to $0.70 per share. In addition, the
options are not exercisable until September 2002.
Also, on April 1, 1998, the Company granted to the Investor a warrant
to purchase 6,000,000 shares of common stock at a price of $1.00 per
share. The warrants may be exercised at any time after the first to
occur of (i) April 1, 1999 and (ii) a Trigger Event, as defined in
the warrant agreement. The warrant expires on March 31, 2003.
<PAGE>
-22-
In return for the above warrant grants and modifications and the
11,000 shares of the Series B Preferred Stock, the Company received
$11,000,000 in cash and a $2,000,000 guarantee (Note 11). Based on an
independent valuation of the Series B Preferred Stock, the value of
the 11,000 shares was determined to be $7,760,000. The remaining
$3,240,000 is attributable to the value of the warrants and has been
reflected as a credit to additional paid in capital.
In July 1998, the Company retained and granted a warrant to a
professional services firm. The warrant allows the holder to purchase
250,000 shares of common stock at an exercise price of $1.50 per
share. The warrant vests at various dates through May 31, 1999. The
warrant may become exercisable upon a Trigger Event, as defined
within the agreement. The Company utilized the Black Scholes pricing
model on the date of grant to determine the value of the warrant in
accordance with SFAS No. 123. As a result of the calculation, no
value was ascribed to this warrant in the accompanying consolidated
financial statements. In connection with the retention of this firm,
the Company granted to such firm a lien on substantially all the
assets of the Company.
The table below details all warrants outstanding at December 31,
1998-
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrants
Exercise Warrants Exercised/ Outstanding
Date of Grant Price Granted Canceled Warrants
- ------------------ ---------- --------- ----------- ------------
November 20, 1990 $1.00 417,500 (417,500) 0 Exercised February 20, 1998
June 11, 1991 $1.00 19,038 (19,038) 0 Exercised February 20, 1998
July 1, 1991 $9.00 10,000 (10,000) 0 Terminated June 30, 1996
September 17, 1991 $1.00 983,462 (983,462) 0 Exercised February 20, 1998
December 30, 1993 $1.00 775,000 0 775,000 Expires December 30, 2003
February 1, 1994 $2.50 100,000 0 100,000 Expires February 1, 2004
September 13, 1995 $0.70(a) 5,000,000 0 5,000,000(b) Expires September 13, 2002
April 1, 1998 $1.00 6,000,000 0 6,000,000(c) Expires April 1, 2003
July 22, 1998 $1.50 250,000 0 250,000 Expires March 31, 2003
---------- ----------- ------------
13,555,000 (1,430,000) 12,125,000
========== =========== ============
</TABLE>
The number of warrants exercisable at December 31, 1998 was
1,050,000.
(a) Represents adjusted exercise price due to the amendment on
April 1, 1998 discussed above.
(b) The Investor warrants granted in September 1995, are
not considered exercisable as they vest after the first of
September 12, 2002 or a Trigger Event, as defined.
(c) The Common Stock Purchase Warrants, granted on April 1, 1998,
are not considered exercisable as they vest after the first of
April 1, 2003 or a Trigger Event, as defined.
<PAGE>
-23-
(14) EMPLOYEE BENEFIT PLAN:
The Physician Computer Network, Inc. 401(k) Plan (the Plan), is a
participant directed, defined contribution plan in which eligible
employees, as defined, of the Company may become a participant in the
Plan on the first day of the month immediately following the date on
which they have attained age 21 and after six months following the
employees' employment commencement dates, as defined. Employees who are
eligible under an existing 401(k) plan of an entity that the Company
acquires are automatically eligible to participate in the Plan. Eligible
employees include substantially all employees of the Company. The Plan
is subject to the provisions of the Employee Retirement Income Security
Act of 1974 . Contribution expense amounted to $464,000, $602,000 and
$581,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(15) INDUSTRY SEGMENT DATA:
The Company's operations are conducted within one business segment.
There are no material revenues attributable to foreign customers.
(16) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Year Ended December 31,
------------------------------------
1998 1997 1996
Supplemental Disclosure of ---------- ---------- ----------
Cash Flow Information
- -------------------------------------
Cash paid for interest $2,517,000 $3,125,000 $1,118,000
Cash paid for income taxes 49,000 412,000 150,000
Supplemental non-cash operating, investing and financing activities were
as follows-
- 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).
(17) CONCENTRATION OF CREDIT RISK:
The Company's customers, in general, are primarily dependent upon the
healthcare sector of the economy. The Company's concentration of credit
risk with customers is largely dependent on its revenue mix which, at
December 31, 1998, 1997 and 1996, was primarily from physician practices
and independent resellers.
(18) 1996 RESTATEMENT:
As discussed in Note 1, the Company has announced that it would need to
restate its previously issued consolidated financial statements.
Inappropriate accounting was uncovered during the 1997 audit by the
Company's former auditors. Certain key officers were relieved of their
responsibilities and a professional services firm was retained to help
manage the Company.
<PAGE>
-24-
Subsequently, the Company and its prior auditors terminated their
relationship without concluding the 1997 audit. Arthur Andersen LLP was
retained as accountants to conduct audits for the years 1998 and 1997
and to reaudit 1996. The 1996 financial statements included herein
represent a restatement of previously issued financial statements.
In connection with the above, the following is a summary of key
financial data as previously reported, and as restated for the year
ended December 31, 1996.
As Previously
Reported As Restated
------------- --------------
Total revenues $95,797,000 $78,645,000
Total operating income (loss) 24,198,000 (11,665,000)
Net income (loss) 16,056,000 (15,229,000)
Total assets 150,165,000 124,821,000
Total shareholders' equity $108,907,000 $71,416,000
============= ==============
Earnings (loss) per share $0.30 ($0.31)
============= ==============
The consolidated statement of operations for the year ended December 31,
1996 has been adjusted to reflect, among other things, (i) the deferral
of revenue not earned during the year and the reversal of unsupported
revenue previously recorded in 1996, (ii) the reversal of unsupported
purchase accounting accruals which were recorded as income during 1996,
(iii) the recording of accruals for certain expenses incurred during
1996, and (iv) the write-off of accounts receivable which were deemed
uncollectible.
The consolidated balance sheet as of December 31, 1996 has been adjusted
to reflect, among other things, (i) the write-off of uncollectible
accounts receivable, (ii) the adjustments to the intangible assets to
reflect the reversal of unsupported purchase accounting accruals, and
(iii) the write-off of deferred tax assets.
(19) SUBSEQUENT EVENTS (UNAUDITED):
Subsequent to year-end, the Company sold the assets and liabilities of
one of its non-medical software businesses. The purchase price was $3.6
million. After payment of approximately $600,000 in expenses and $1.7
million of indebtedness, the remaining $1.3 million was retained by the
Company. In connection with the sale, the Company entered into a 3-year
agreement to provide hardware services for the purchaser. Revenues from
this business were approximately $11 million in 1998.
On July 9, 1999, the Company sold substantially all of the assets and
assigned certain of the liabilities of it's wholly-owned subsidiary,
Wismer Martin, Inc., to a third party. In addition, the Company sold
certain other assets related to the Wismer Martin business and assigned
certain other related liabilities to that third party. Contemporaneous
with the consummation of that transaction, the Company entered into an
agreement, (the "Web Agreement"), granting the third party the right to
provide, for a term of 11 months, certain web-based physician portal
services and clinical e-commerce transaction services, to the Company's
customers on an exclusive basis (which services are not currently
offered by the Company).
<PAGE>
-25-
The aggregate consideration received by the Company and its subsidiary
for such sale and for entering into the Web Agreement was $10 million in
cash. The Web Agreement may be terminated early by the Company under
certain circumstances. After payment of certain expenses and $4.0
million of bank indebtedness, the Company retained approximately $5.5
million. Revenues from the Wismer Martin business were approximately
$4.4 million in 1998.
