As filed with the Securities and Exchange Commission on July 2, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
IOWA 7379 42-1297992
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
1025 ASHWORTH ROAD
WEST DES MOINES, IOWA 50265
(515) 222-1717
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MARK J. EMKJER
CHIEF EXECUTIVE OFFICER
PACE HEALTH MANAGEMENT SYSTEMS, INC.
1025 ASHWORTH ROAD
WEST DES MOINES, IOWA 50265
(515) 222-1717
TELECOPY: (515) 222-0570
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
David J. Lubben, Esq. Julia L. Davidson, Esq.
Dorsey & Whitney LLP Cooley Godward Castro Huddleson & Tatum
Pillsbury Center South Five Palo Alto Square
220 South Sixth Street 3000 El Camino Real
Minneapolis, Minnesota 55402 Palo Alto, California 94306-2155
(612) 340-2600 (415) 843-5000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. \_\
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. \_\
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. \_\
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. \_\
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) OFFERING PRICE PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value 2,599,000 shares $6.250 $16,243,750 $5,601
</TABLE>
(1) Includes a maximum of 339,000 shares of Common Stock which may be purchased
by the Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
FORM S-1
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
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FORM S-1 ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges Prospectus Summary; Risk Factors
4. Use of Proceeds Prospectus Summary; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Certain Transactions
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Principal and Selling Shareholders
8. Plan of Distribution Outside Front Cover Page; Underwriting; Back Cover
9. Description of Securities to be Registered Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Outside Front Cover Page; Prospectus Summary; Risk
Factors; The Company; Use of Proceeds; Dividend
Policy; Capitalization; Dilution; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Shareholders;
Description of Capital Stock; Securities Eligible
for Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 2, 1996
2,260,000 SHARES
[PACE LOGO]
COMMON STOCK
Of the 2,260,000 shares of common stock, no par value (the "Common Stock"),
offered hereby, 2,200,000 shares are being sold by PACE Health Management
Systems, Inc. ("PACE" or the "Company") and 60,000 shares are being sold by a
certain selling shareholder (the "Selling Shareholders"). The Company will not
receive any of the proceeds from the sale of the Common Stock by the Selling
Shareholder. See "Principal and Selling Shareholder." The Common Stock is
currently traded on the Nasdaq SmallCap Market under the symbol "PCES," and
application has been made for quotation of the Common Stock on the Nasdaq
National Market. On July 2, 1996, the closing bid price of the Common Stock as
reported by the Nasdaq SmallCap Market was $7.50 per share. See "Price Range of
Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-11.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
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(1) The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $500,000.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 339,000 additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
that option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be approximately $ ,
$ and $ , respectively.
See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that the
certificates for the shares of Common Stock will be available for delivery at
the offices of Volpe, Welty & Company, One Maritime Plaza, San Francisco,
California on or about , 1996.
VOLPE, WELTY & COMPANY
The date of this Prospectus is , 1996
GATEFOLD FLAP GRAPHIC
PACE Care Management System
A system that provides the essential clinical record keeping, workflow
automation and decision support needs required by hospitals and integrated
delivery systems, at the point-of-care.
Graphic reflects products divided in categories supporting 1) workflow
enhancement 2) process automation and 3) real time advanced clinical decision
support.
Graphic then depicts integration of these products throughout the continuum of
care.
______________
*Under development
Trademarks and trade names referred to in this Prospectus are the property of
their respective owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMPANY'S COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH
RULE 10(B)-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
(Gatefold Spread Graphic)
The PACE SOLUTION
Graphic includes three pictures depicting point of care access to systems.
Graphic then reflects various screen views (from the point-of-care) supporting
1) data collection/documention, 2) decision support, 3) pathway
management/integration and 4) instructive clinic presentation.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY TO THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE INFORMATION DISCUSSED UNDER "RISK FACTORS." EXCEPT AS SET FORTH IN THE
FINANCIAL STATEMENTS AND UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
SEE "UNDERWRITING."
THE COMPANY
PACE develops and markets advanced patient care management software systems that
enable health care providers to standardize the delivery of care, maximize
resource utilization and improve clinical outcomes. The Company's
enterprise-wide, client/server applications automate charting, clinical workflow
processes and the clinical pathways that are increasingly being incorporated
into health care practices. The Company's core system, PACE CMS, is a modular
suite of advanced software applications that provides hospitals and integrated
delivery systems a comprehensive system for interdisciplinary documentation,
nursing care planning, clinical pathway management and enterprise-wide order
management, all at the point-of-care. The Company believes that its systems
increase productivity of nurses and ancillary labor resources, improve the
accuracy and legibility of documentation, reduce clerical tasks such as entering
orders for tests, services, consultations and treatments, enhance communications
and coordination of care among members of the patient care team, provide
real-time access to detailed patient data at the point-of-care, facilitate
integration of appropriate clinical pathways into patient care plans and
treatment regimes, integrate critical patient care information into
enterprise-wide, computer-based patient record systems, and, ultimately, improve
the quality of care.
Intense pressure to reduce costs of health care delivery has increased the need
to manage the delivery of care in a more cost effective manner and has led to an
increased demand for clinical information systems that enable providers to
measure, monitor and improve clinical processes. The current use of paper-based
hospital records is inherently inefficient due to the difficulty of
disseminating information, the inability to immediately incorporate changes in a
patient's status into the patient record and the likelihood of transcription
errors arising from the amount of redundant data entry. In addition, there is
increasing pressure to implement advanced patient care management systems from
managed care organizations, accrediting bodies such as the Joint Commission on
Accreditation of Health Care Organizations ("JCAHO"), policy-making
organizations such as the National Academy of Sciences and the Institute of
Medicine, and various federal and state regulatory bodies. Health care providers
are also beginning to adopt the use of clinical pathways that employ best
practices and continuous quality improvement. By utilizing clinical pathways,
caregivers can begin to standardize the provision of care and provide more
consistent, higher-quality outcomes.
The Company's system and services address the industry's need for advanced
point-of-care applications which automate and standardize charting functions,
clinical workflow processes and clinical pathways. The Company's open systems
architecture allows PACE CMS to be integrated with a health care provider's
existing information systems, including financial management, admissions,
pharmacy, laboratory and other ancillary systems. One such health care provider
which is integrating its existing information system with a portion of the
Company's system to provide point-of-care systems, initially to 20 sites over
three years, is Continental Medical Systems, Inc., a health care provider with a
nationwide network of 37 rehabilitation hospitals.
The Company markets its systems through both a direct sales force and through
strategic alliances with vendors of complementary products. In May 1996, the
Company entered into one such alliance with Sunquest Information Systems, Inc.
("Sunquest"), a leading supplier of clinical information systems with an
installed base of over 600 hospitals. The Company believes that strategic
alliances such as that with Sunquest will play an important role in its future
success in sales of information systems to larger hospitals, integrated delivery
systems and multi-entity purchasing groups.
PACE's objective is to become a leading supplier of health care information
systems for hospitals, rehabilitation care facilities and other long-term care
facilities. PACE's strategy includes: (i) providing technologically advanced
point-of-care systems; (ii) forging strategic relationships with joint marketing
partners; (iii) increasing its investment in sales and marketing; (iv)
delivering a total solution to customers; and (v) developing and introducing the
PACE Critical Pathway Analyzer.
THE OFFERING
Common Stock offered by
the Company 2,200,000 shares
Common Stock offered by the
Selling Shareholder 60,000 shares
Common Stock to be outstanding 6,352,199 shares (1)
after the offering
Use of Proceeds To fund research and development,
expansion of sales and marketing,
working capital and general corporate
purposes.
Current Nasdaq SmallCap symbol PCES
Proposed Nasdaq National Market PCES
symbol
(1) Excludes (i) 868,433 shares of Common Stock issuable upon exercise of
certain outstanding warrants issued by the Company at a weighted average
exercise price of $3.38 per share and (ii) 545,494 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Compensation Plan (the
"Plan"). As of May 31, 1996, options for 284,421 shares of Common Stock were
outstanding under the Plan at a weighted average exercise price of $3.00 per
share. See "Management -- Stock Compensation Plan" and "Underwriting."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
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STATEMENT OF OPERATIONS
DATA:
Net revenues $ 373 $ 965 $ 697 $ 378 $ 2,081 $ 402 $ 805
Costs and expenses 777 1,395 1,697 3,989 4,620 740 1,460
Net loss (391) (421) (1,024) (3,623) (2,412) (348) (630)
Loss per common and
common equivalent share (0.38) (0.41) (0.98) (3.39) (0.78) (0.34) (0.15)
Pro forma loss per common
and common equivalent
share(1) (0.65) (0.12)
Weighted average number of
common and common
equivalent shares
outstanding 1,026 1,034 1,043 1,069 3,092 1,028 4,152
</TABLE>
DECEMBER 31, 1995 MARCH 31, 1996
ACTUAL ACTUAL AS ADJUSTED(2)
BALANCE SHEET DATA:
Working capital $2,295 $1,635 $16,480
Total assets 5,680 4,566 19,411
Long-term obligations 48 44 44
Total liabilities 1,274 736 736
Total shareholders' equity 4,406 3,830 18,675
(1) Computed based upon common and common equivalent shares outstanding after
giving effect to the conversion of all outstanding Preferred Stock as of
January 1, 1995.
(2) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$7.50 per share less underwriting discounts and commissions and
estimated expenses. See "Use of Proceeds" and "Capitalization."
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS WHICH COULD CAUSE OR CONTRIBUTE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS
ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS AND ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY.
QUARTERLY FLUCTUATIONS OF OPERATING RESULTS. The Company believes that its
future operating results will be subject to annual and quarterly fluctuations
due to a number of factors, some of which are outside the control of the
Company. These factors include market acceptance of, and fluctuations in, the
average selling prices of, the Company's systems and those of its competitors,
the timing of significant orders and the duration of the implementation of those
orders, the Company's relatively long sales cycle, loss of customers due to
consolidation in the health care industry, customers' procurement cycles and
changes in customer budgets, investments by the Company in research and
development and sales and marketing and other corporate resources, timing of the
introduction by the Company and its competitors of new systems and enhancements
to existing systems, the relative mix of software, hardware and services sold by
the Company, changes in the Company's strategic alliances, changing customer
requirements, changes in the regulatory environment and general economic
conditions. Historically, a disproportionately large number of sales contracts
have been entered into in the second half of the year as a consequence of
hospital procurement cycles. Because of the manner in which the Company
recognizes revenue, substantial portions of the revenues from such sales
contracts are not likely to be recorded in the Company's financial statements
until periods subsequent to those in which such contracts are signed. In
addition, the Company plans to increase its operating expenses to fund greater
levels of research and development, increase its sales and marketing operations,
develop new distribution channels and broaden its customer support capabilities.
To the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be materially, adversely affected. Further, due to the relatively
fixed nature of most of the Company's costs, an unanticipated shortfall in
revenue in any fiscal quarter would have a material adverse effect on the
Company's results of operations in that quarter and could have a material
adverse effect on the Company's business and financial condition. As a result of
the foregoing, and because PACE CMS has only recently been introduced and only a
limited number of systems sold, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. From its inception in 1987
through March 31, 1996, the Company had accumulated net losses of approximately
$9.5 million. Losses have resulted principally from costs incurred in research
and development of the Company's technologies and from general and
administrative costs. These costs have significantly exceeded the Company's
revenues which, from the Company's inception through December 1994, were derived
primarily from the sale of systems no longer being marketed by the Company.
Since January 1995, the Company has focused on the development and marketing of
PACE CMS. There can be no assurance that the Company will ever generate
substantial revenues or achieve profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
LIMITED INSTALLATION AND USE OF THE COMPANY'S PRODUCTS; MARKET ACCEPTANCE RISK;
DEPENDENCE ON THIRD PARTIES. The Company's ability to generate revenues will be
dependent upon its success in marketing and selling its systems to hospitals,
integrated delivery systems and multi-entity purchasing groups. During 1995, the
Company discontinued the marketing and sale of PACE/CIS, the product from which
the Company previously had derived substantially all of its revenues, and
introduced PACE CMS, a comprehensive care management system representing a
significant enhancement to PACE/CIS. PACE CMS, the system from which the Company
derives substantially all of its revenues, is currently being further enhanced
through the addition of a graphical user interface and a three-tier,
client/server, open-system architecture ("Graphical PACE CMS"). Graphical PACE
CMS is currently undergoing beta testing and is expected to be available for
commercial implementation in early 1997. To date, the Company has successfully
marketed and sold only a limited number of PACE systems. There can be no
assurance that the Company will be able to successfully implement additional
PACE systems or that the delivery of Graphical PACE CMS will occur on a timely
basis, or at all. The Company's systems frequently contemplate deployment to
large numbers of personnel, many of whom have not previously used software
systems such as PACE CMS, and there can be no assurance of such end-users'
acceptance of the system. Further, there can be no assurance that PACE systems
will achieve market acceptance. Failure of the Company to achieve market
acceptance of its systems would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company intends to develop strategic alliances with leading providers of
health care information systems in order to increase the Company's presence in
the larger hospital and integrated delivery system market segment. The Company's
ability to generate revenues from such markets is therefore dependent on the
success of its strategic alliances, including the alliance with Sunquest. The
amount and timing of resources devoted to marketing the Company's systems by
these strategic partners are not within the control of the Company. These
strategic partners independently could make material marketing and other
commercial decisions that could adversely affect the Company's future revenues.
Failure of these partners to market the Company's systems successfully could
have a material adverse effect on the Company's business, financial conditions
and results of operations. There can be no assurance that the Company will be
successful in its efforts to market its systems to additional customers. See
"Business -- Sales and Marketing" and "-- Strategic Alliances."
PRODUCT DEVELOPMENT RISKS. The market for the Company's systems is characterized
by frequent new product introductions and enhancements, rapid technological
advances and rapid changes in customer requirements and preferences.
Accordingly, the Company's future success will depend on its ability to enhance
its existing systems, and to develop and market new products on a timely basis
that respond to evolving customer requirements, achieve market acceptance and
keep pace with technological developments. In particular, the Company believes
it is extremely important to complete and commercially implement Graphical PACE
CMS, which is currently undergoing beta testing, as well as the PACE Critical
Pathway Analyzer ("CPA"), which is in development stages. There can be no
assurance that the Company will be successful in developing, introducing on a
timely basis and marketing such systems or enhancements, that its software will
not contain errors that would delay system introduction, shipment or
implementation, or that any such new systems or enhancements will be accepted by
the market. The Company is actively marketing Graphical PACE CMS at this time
for commercial implementation in early 1997, and there can be no assurance that
commercial implementation of Graphical PACE CMS will not be delayed. Software
systems as internally complex as those offered by the Company (such as Graphical
PACE CMS) frequently contain errors or failures, especially when first
introduced or when new versions are released. Although the Company conducts
extensive market testing during product development, the Company could be forced
to delay commercial implementation of systems to correct software problems or
provide enhancements to correct errors in released products. The Company's
business, financial condition and results of operations could be negatively
impacted as a result of software errors or defects or delays in introduction to
the market. Further, errors or delays in system development and enhancement may
have a material adverse effect on the market acceptance of the Company's systems
and may expose the Company to claims from customers and third parties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Products" and "-- Product Development."
DEPENDENCE UPON SINGLE PRODUCT LINE. The Company currently derives substantially
all of its revenues from licensing PACE CMS and providing associated
implementation, modification, support and consulting services to its customers.
There can be no assurance that the Company will be able to broaden or enhance
its systems successfully, and any factor adversely affecting the market for the
Company's current systems would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Products."
LONG SALES AND IMPLEMENTATION CYCLE. How and when to replace paper-based health
care information systems or substantially modify an existing information system
are major, discretionary decisions for a health care provider, involving
extended review and approval processes and substantial capital commitments.
Accordingly, the sales cycle for the Company's systems has historically been 12
to 18 months from initial contact to contract execution. During this period, the
Company expends substantial time, effort and funds demonstrating the system,
preparing a contract proposal and negotiating the contract. In general, the
Company does not recognize revenues from sales of systems until after a sales
contract has been signed and is being implemented. Any significant failures by
the Company to achieve signed contracts, or effectively implement systems, after
expending such time, effort and funds would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Sales and Marketing."
DEPENDENCE ON BACKLOG. Due to the long sales cycle for its systems, the Company
is unable to predict with certainty whether a contract proposal will be
accepted, when an accepted proposal will result in an executed contract and what
the implementation schedule will be for the executed contract. Therefore, the
Company's future results of operations depend in large part on maintaining an
adequate backlog. As of March 31, 1996, the Company had eight contracts under
which some or all implementation work remained in backlog for an aggregate of
approximately $3.0 million. One of these contracts represents approximately 73%
of the total amount in backlog. Generally, backlog includes signed contracts
with ongoing implementation obligations and revenues yet to be recognized by the
Company. Any significant failure by the Company to manage effectively the
introduction of new systems or the sales process in order to maintain an
adequate backlog, or the failure of the Company to realize fully the benefits of
its backlog with Continental Medical Systems, Inc., could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Backlog."
INTENSE COMPETITION. The market for health care information systems is intensely
competitive, highly fragmented and rapidly changing. The Company believes that
the principal competitive factors in this market include the breadth and quality
of product offerings, pricing, the stability of the information systems
provider, the features and capabilities of the information systems, availability
of technical support and resources for the system, the potential for
enhancements and compatibility with existing information systems. Many of the
Company's competitors have greater financial, technical, research and
development and sales and marketing resources than the Company, and some of
these competitors offer products or features, such as financial, billing and
collection systems, not offered by the Company. The Company believes that its
key competitors include Cerner Corp., Keane Inc., HBO & Company which purchased
CliniCom Inc. in 1995, Meditech Management, Inc., PHAMIS, Incorporated, SMS
Technologies, Inc., Hewlett-Packard Co., SpaceLabs Medical Inc., CliniComp, and
Emtek Health Care Systems Inc., a subsidiary of Motorola, Inc. In addition,
other companies, including hospitals, claims-processing agents, third party
administration providers and other entities, all with significant technological,
financial and other resources, may enter the market in which the Company
competes. Any failure of the Company to develop systems that compete favorably
in the marketplace would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."
DEPENDENCE ON LARGE LICENSE FEE CONTRACTS AND CUSTOMER CONCENTRATION. To date, a
relatively small number of customers have accounted for a significant percentage
of the Company's revenues. During 1995, the Company had two customers that
accounted for 12.1% and 11.3% of net revenues, respectively, and for the first
quarter of 1996, one customer accounted for 63.2% of net revenues. The Company
expects that sales of its systems to a limited number of customers will continue
to account for a significant percentage of revenues for the foreseeable future.
The loss of any major customer or any reduction or delay in orders by any such
customer, or the failure of the Company to market successfully its systems to
new customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Customers."
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has sold its
systems primarily through its direct sales force and has supported its customers
with its technical and customer support staff. The Company's ability to achieve
significant revenue growth in the future will depend in large part on its
success in recruiting and training sufficient direct sales, technical and
customer support personnel and establishing and maintaining relationships with
its strategic partners. Although the Company is currently investing, and plans
to continue to invest, significant resources to expand its direct sales force
and its technical and customer support staff, and to develop strategic
alliances, the Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel and in establishing necessary
third-party relationships. There can be no assurance that the Company will be
able to expand successfully its direct sales force or joint marketing
relationships or that any such expansion will result in an increase in revenues.
The Company believes the complexity of its products and the large-scale
deployments anticipated by its customers will require a number of highly trained
customer support personnel. There can be no assurance that the Company will
expand successfully its technical and customer support staff to meet customer
demands. Any failure by the Company to expand its direct sales force or other
distribution channels, or to expand its technical and customer support staff,
could materially and adversely affect the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing."
MANAGEMENT OF GROWTH; RECENT MANAGEMENT CHANGES. The Company has experienced a
period of rapid operational growth that has placed, and could continue to place,
a significant strain on the Company's financial, management and other resources.
The Company's ability to manage its growth effectively will require it to
continue to improve its manufacturing, operational and financial control systems
and infrastructure and management information systems, and to attract, train,
motivate, manage and retain key employees. As part of its business strategy, the
Company intends to continue to pursue rapid growth in the sale of health care
management systems to larger hospitals, integrated delivery systems and
multi-entity purchasing groups. To support this effort, the Company also expects
to continue to hire additional management, sales and marketing, implementation
and support personnel. In addition, the Company may expand its business by
acquiring other businesses or product lines, or by entering into additional
strategic alliances with other vendors. There can be no assurance that such
efforts will be successful. Inability of the Company's management to control and
manage these efforts effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
Three of the Company's four executive officers have joined the Company since
April 1995, including the Chief Executive Officer, the Vice President of
Technology and the Vice President of Sales and Marketing. The Company's success
depends to a significant extent upon the ability of its new executive officers
to operate effectively. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Management."
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
The Company's future performance is substantially dependent upon the retention
of key senior management, sales and marketing and technical personnel. As of the
date hereof, the Company does not have employment agreements with any of these
employees. The Company's success will also depend on its ability to attract,
retain and motivate highly skilled managerial, sales and marketing, and
technical personnel, including project managers, software programmers and
systems architects skilled in the environments in which the Company's systems
operate. Competition for such personnel in the software and information services
industries is intense and is likely to remain so for the foreseeable future. The
loss of one or more of its key management, sales and marketing and technical
personnel or the inability to attract, retain and motivate other qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Employees" and
"Management."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes factors such as
quarterly fluctuations in results of operations, announcements of new products
by the Company or by its competitors, changes in financial estimates by
securities analysts, changes in the stock prices of its competitors or
technology companies generally or other events or factors may cause the market
price of the Common Stock to fluctuate, perhaps substantially. In addition, in
recent years the stock market in general, and the shares of technology companies
in particular, have experienced extreme price fluctuations that have not been
directly related to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the market price of the
Common Stock regardless of the Company's operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation often has been instituted against such
company. If instituted, any such litigation could result in substantial costs
and a diversion of management's attention and resources and may have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROPRIETARY RIGHTS. The Company's success is dependent, in part, on its ability
to maintain the confidential and proprietary nature of the software incorporated
in its systems. The Company currently relies on a combination of trade secret
and copyright laws, software security measures, license agreements and
nondisclosure agreements to establish and protect its proprietary rights.
However, there can be no assurance that the legal protections and the
precautions taken by the Company will be adequate to prevent misappropriation of
the Company's technology. In addition, these protections and precautions do not
prevent independent third-party development of competitive technology or
products. The Company's practice of providing certain of its customers with the
source code to the Company's software may increase the risk of unauthorized use
of such software. Any infringement or misappropriation of the Company's
proprietary software could adversely affect the Company's ability to retain and
attract new customers could cause the Company to lose revenues or incur
substantial litigation expense to enforce the Company's proprietary rights.
There can be no assurance that the Company will not become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products and that such claims or proceedings will not have a
material adverse effect on the Company's business, financial condition or
results of operations. An adverse outcome in litigation or similar adversarial
proceedings could subject the Company to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others or require the
Company to cease the marketing or use of certain products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. As the number of software products in the industry
increases and the functionality of these products further overlaps, the Company
believes that software developers may become increasingly subject to
infringement claims. To the extent the Company wishes or is required to obtain
licenses to patents or proprietary rights of others, there can be no assurance
that any such licenses will be made available on terms acceptable to the
Company, or at all. See "Business -- Intellectual Property."
CHANGES IN THE HEALTH CARE INDUSTRY. The health care industry is currently
undergoing significant changes, including consolidation of health care providers
to form larger health care delivery enterprises as well as market-driven and
government initiatives to reform health care. The increased bargaining power of
these combined enterprises may lead to a reduction in the gross margins of the
Company's systems, which could have a material adverse effect on the Company's
business, financial condition and results of operations. As the number of health
care delivery enterprises decreases due to further industry consolidation,
competition for each sale increases. The Company's business, financial condition
and results of operations may be materially and adversely affected in the event
that the Company is unable to make sales of PACE CMS to health care providers
that are combining, or replacing or substantially modifying their health care
information systems. The Company cannot predict what impact, if any, such market
or government initiatives might have on its business, financial condition and
results of operations. See "Business -- Industry Overview."
GOVERNMENT REGULATION. Under the federal Food, Drug and Cosmetic Act (the "FDC
Act"), the Food and Drug Administration (the "FDA") has extensive authority to
regulate the development, manufacture and sale of medical devices, which
generally must receive regulatory clearance or approval prior to
commercialization in the United States. In 1989, the FDA promulgated a draft
policy addressing the regulation of certain computer products as medical devices
under the FDC Act. The Company believes that under that draft policy, the PACE
CMS core system either would not be considered to be a medical device subject to
FDA regulation or, for those modules that might be deemed medical devices, would
be exempt from significant regulatory requirements, including the requirement of
premarket clearance or approval, although there can be no assurance that the
policy will not be interpreted to cover the Company's systems or that new
policies or regulations covering the Company's systems will not be adopted.
Certain extensions of the PACE product line currently in development, such as
the PACE Critical Pathway Analyzer (the "CPA"), however, may satisfy the FDC Act
medical device definition. Certain computer software products, while considered
medical devices, are exempt from particular FDA regulatory requirements,
including the requirement of FDA premarket clearance or approval. The Company
believes that to the extent that any component of the PACE product line is a
medical device, it would be exempt from regulation under the draft policy.
Nevertheless, such products may still be subject to the FDC Act's general
prohibition against adulterated and misbranded devices.
The Company expects that the FDA is likely to become increasingly active in
regulating computer software intended for use in the health care setting.
Furthermore, there can be no assurance that any final FDA policy governing
computer products, once issued, or other future laws and regulations concerning
the manufacture or marketing of medical devices or health care information
systems will not increase the cost and time to market new or existing products.
If the FDA chooses to regulate any of the Company's systems as medical devices
not exempt from regulation, it can impose extensive requirements upon the
Company, including the requirement that the Company seek either FDA clearance of
a premarket notification submission demonstrating the device's substantial
equivalence to a legally marketed predicate device or approval of a premarket
approval application establishing the safety and effectiveness of the device.
FDA regulations also govern, among other things, the preclinical and clinical
testing, manufacture, distribution, labeling and promotion of medical devices.
In addition, the Company would be required to comply with the FDC Act's general
controls, including establishment registration, device listing, compliance with
good manufacturing requirements, reporting of certain device malfunctions and
adverse device events. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or service of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or approval of products, withdrawal of clearances
and approvals, and criminal prosecution. See "Business -- Government
Regulation."
RISK OF PRODUCT LIABILITY CLAIMS; LIMITED LIABILITY INSURANCE. The Company's
systems provide information that relates to health care enterprise operations,
but do not provide diagnosis of conditions. However, the Company faces an
inherent business risk of exposure to product liability claims in the event that
the use of its technology or systems is alleged to have failed to have provided
adequate and timely clinical information or otherwise resulted in adverse
effects. The Company currently maintains product liability insurance, including
a $1.0 million per occurrence and a $2.0 million aggregate limit on coverage.
There can be no assurance that liability claims will not exceed the coverage
limits of such policy or that such insurance will continue to be available at
commercially reasonable rates or at all. If the Company does not or cannot
maintain sufficient liability insurance, its ability to market its products may
be significantly impaired. The Company has not experienced any product liability
claims to date. There can be no assurance, however, that the Company will not
become subject to such claims, which, if made, could have a material adverse
effect on the Company's business, financial condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company believes
that the net proceeds to the Company from this offering, combined with its
currently available funds, will meet its cash requirements at least through
1997. Thereafter, or sooner if necessary or appropriate, the Company may need to
raise additional funds through public or private financings, including equity
financings, which may be dilutive to shareholders. There can be no assurance
that the Company will be able to raise additional funds if or when its capital
resources are exhausted, or that funds will be available on terms attractive to
the Company. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs or projects, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
NATURE OF IMPLEMENTATION CONTRACTS. Contracts to implement the Company's systems
generally provide that the customer may terminate its contract upon a material
breach by the Company. Occasionally, however, the customer may negotiate
termination provisions that do not relate to the Company's performance or that
allow the customer to delay certain aspects of implementation. Certain contracts
may contain provisions that allow the customer to reassess and renegotiate the
amount or configuration of systems to be purchased after implementation by a
customer. Although no customer has acted to terminate an implementation contract
to date, there can be no assurance that the Company's customers will not
terminate an implementation contract in the future or that any such termination
would not have a material adverse effect on the Company's reputation or its
business, financial condition and results of operations. The Company's software
maintenance contracts are generally renewable at the option of the customer
every three to five years and are subject to renegotiation upon renewal. There
can be no assurance that the Company's customers will renew their maintenance
contracts or that renewal terms will be as favorable to the Company as existing
terms. See "Business -- Sales and Marketing."
CERTAIN EXISTING CONTRACTS. Certain of the Company's existing customer contracts
for PACE systems do not contain specific provisions relating to fees for certain
obligations to be provided by the Company. While the Company is working with
these customers to better define these obligations, there can be no assurance
that the Company will be able to reach satisfactory results in these
discussions. The inability of the Company to do so could result in the Company
continuing to provide resources to projects for which the Company receives
little or no additional compensation. See "Business -- Client Services."
LIMITATIONS ON DIRECTOR LIABILITY; INDEMNIFICATION. The Articles of
Incorporation of the Company provide that a director shall not be personally
liable to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, to the fullest extent permitted under the Iowa
Business Corporation Act. As a result of these and similar provisions in the
Company's Bylaws, the Company's directors may not be liable to the shareholders
for negligence or even gross negligence in the performance of their duties as
directors. The Articles of Incorporation and Bylaws of the Company also provide
that all directors and officers and certain other persons shall be indemnified
to the fullest extent permitted by applicable law in connection with each such
person's service to the Company. See "Description of Capital Stock --
Indemnification and Limitation of Liability."
CONTROL BY DIRECTORS AND AFFILIATES; ANTI-TAKEOVER PROVISIONS. As of May 31,
1996 and assuming the completion of this offering, the Company's officers,
directors and principal shareholders, in the aggregate, beneficially owned
approximately 32.5% of the Company's outstanding shares of Common Stock (34.7%
if stock options and warrants held by officers, directors and principal
shareholders were exercised). See "Principal Shareholders." As a result, these
shareholders acting together would be able to effectively control matters
requiring approval by the shareholders of the Company, including the election of
directors. The Company's charter provides for 5,000,000 shares of authorized but
unissued Preferred Stock, the terms of which may be fixed by the Board of
Directors who also have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders of the Company. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of such Preferred Stock could have the effect of making it
more difficult for a third party to acquire control of the outstanding voting
stock of the Company. Accordingly, such provisions could have the effect of
delaying, deterring or preventing a change of control of the Company. See
"Description of Capital Stock."
SECURITIES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the Common
Stock in the public market following this offering could have an adverse effect
on the price of the Common Stock. In addition to the 2,260,000 shares offered
hereby, approximately 1,753,000 shares will be eligible for sale in the public
market without restriction upon completion of this offering. Approximately
1,962,000 shares will be eligible for sale in the public market beginning 120
days after the date of this Prospectus upon the expiration of certain lock-up
agreements with the Company or the Underwriters, subject to the provisions of
Rule 144 under the Securities Act of 1933, as amended. Following this offering,
the holders of approximately 2,366,000 shares will be entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales may have an adverse effect on the market
price for the Common Stock. See "Description of Capital Stock -- Registration
Rights" and "Securities Eligible for Future Sale."
NO DIVIDENDS CONTEMPLATED. The Company does not anticipate that it will pay
any dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain earnings, if any, to fund the development and
growth of its business. See "Dividend Policy."
DILUTION. Investors in this offering will incur immediate and substantial
dilution in the net tangible book value of the shares of the Common Stock of
approximately $4.553 per share based on an assumed public offering price of
$7.50. Additional dilution could result from the exercise of certain
outstanding options and warrants. See "Dilution."
THE COMPANY
The Company was incorporated in 1987 as an Iowa corporation and changed its name
from Health Care Expert Systems, Inc. to PACE Health Management Systems, Inc. in
March 1995. The Company's executive offices are located at 1025 Ashworth Road,
Suite 420, West Des Moines, Iowa 50265; its main switchboard telephone number is
(515) 222-1717; its fax number is (515) 222-0570; its e-mail address is
pacesystems.com. The Company maintains an Internet home page.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company, at an assumed public offering price of $7.50 after
deducting estimated expenses payable in connection with this offering and
underwriting discounts and commissions, are estimated to be approximately $14.8
million ($17.2 million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any of the proceeds from the sale of the
Common Stock by the Selling Shareholder.
The Company intends to use the net proceeds of this offering as working capital
to finance general corporate purposes, certain anticipated capital expenditures
necessary to meet expected growth needs of the Company and to recruit and retain
key employees. The primary purposes of this offering are to: accelerate and
increase research and development efforts primarily with respect to Graphical
PACE CMS and the CPA, expand sales and marketing efforts, expand internal client
services staff and to fund general working capital needs. A portion of the net
proceeds may also be used for the acquisition of complementary businesses or
products. Although the Company frequently evaluates potential acquisitions, the
Company currently has no agreements or commitments with respect to any
acquisition.
Pending application of the net proceeds as described above, the net proceeds of
this offering will be placed in interest-bearing bank accounts or invested in
United States government securities or other short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain any future earnings to fund operations
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March 31,
1996, on an actual basis and as adjusted for the sale of 2,200,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$7.50 per share after underwriting discounts and commissions and estimated
expenses. This table should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in this Prospectus.
See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
(IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Current maturities of long-term obligations $ 15 $ 15
Long-term obligations, less current maturities 44 44
Shareholders' equity:
Preferred Stock, convertible, no par value; 5,000,000; none
issued or outstanding, actual or as adjusted -- --
Common Stock, no par value; 20,000,000 shares authorized;
4,152,199 shares issued and outstanding, actual;
6,352,199 shares issued and outstanding, as adjusted(1) 13,300 28,145
Additional paid-in capital 54 54
Accumulated deficit (9,524) (9,524)
Total shareholders' equity 3,830 $18,675
Total capitalization $ 3,874 $18,719
</TABLE>
(1) Excludes, as of March 31, 1996, (i) an aggregate of 868,433 shares of Common
Stock issuable upon exercise of outstanding warrants, and (ii) 545,494
shares of Common Stock reserved for issuance under the Company's 1995 Stock
Compensation Plan. As of March 31, 1996, options to purchase 284,421 shares
of Common Stock were outstanding under the Plan. See "Compensation of
Executive Officers and Directors -- Stock Compensation Plan" and
"Underwriting."
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
approximately $3.8 million, or $0.922 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's net tangible assets
less total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,200,000 shares
of Common Stock offered hereby at an assumed offering price of $7.50 per share,
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's net tangible book value
at March 31, 1996 would have been approximately $18.7 million, or $2.947 per
share. This represents an immediate increase in net tangible book value of
$2.025 per share to existing shareholders and an immediate dilution of $4.553.
per share to new investors purchasing shares in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share $7.50
Net tangible book value per share before the offering $0.922
Increase in net tangible book value per share attributable to
new investors 2.025
Pro forma net tangible book value per share after the offering 2.947
Dilution per share to new investor(s) $4.553
</TABLE>
The following table summarizes, as of March 31, 1996, the differences between
the number of shares of Common Stock owned by existing shareholders and to be
purchased by new investors, the effective cash cost therefor, and the average
price per share. The table assumes that no shares of Common Stock are purchased
in the offering by existing shareholders. To the extent such persons purchase in
this offering, their percentage ownership, total consideration, and average
consideration per share will be greater than that shown. The following gives
effect to the issuance of shares of Common Stock offered hereby, but does not
give effect to any other exercise or conversion events relating to the Common
Stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing
Shareholders 4,152,199 65.4% $14,418,992 46.6% $3.473
New Investors 2,200,000 34.6 16,500,000 53.4 7.500
Total 6,352,199 100.0% $30,918,992 100.0% $4.867
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants. At
March 31, 1996, there were options and warrants outstanding to purchase
1,152,854 shares of Common Stock at a weighted average exercise price of $3.290
per share. As of such date, options and warrants to purchase 571,151 shares of
Common Stock were immediately exercisable. To the extent these or additional
outstanding options or warrants are exercised, there will be further dilution to
new investors.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq SmallCap Market under the
symbol "PCES" on April 27, 1995. Prior to that date, there was no public market
for the Company's Common Stock. Application has been made for quotation of the
Common Stock on the Nasdaq National Market upon completion of this offering.
The following table sets forth the high and low bid quotations for the Company's
Common Stock as reported on the Nasdaq SmallCap Market for the periods
indicated.
HIGH LOW
1995
Second Quarter (from April 27) $5-3/8 $4-7/8
Third Quarter 5-1/2 4-7/8
Fourth Quarter 5-3/8 2-1/2
1996
First Quarter $6 $2-3/4
Second Quarter (through May 31,
1996) 9-3/8 5-1/4
On July 2, 1996, the last sale price of the Common Stock, as reported on the
Nasdaq SmallCap Market, was $7.50 per share.
As of April 2, 1996, there were approximately 900 shareholders of record of the
Company's Common Stock.
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for each of the
years in the four-year period ended December 31, 1995 have been derived from
financial statements audited by McGladrey & Pullen, LLP, independent public
accountants. The information set forth below is qualified in its entirety by and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
related notes thereto as of December 31, 1994 and 1995 and for each of the years
in the three-year period ended December 31, 1995, and the independent auditor's
report thereon, and other financial information included in this Prospectus. The
selected financial data for 1991, as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are derived from unaudited financial statements of
the Company and include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three month periods are not necessarily indicative of the
results that may be expected for the entire year. The Company has never declared
or paid any cash dividends on shares of its capital stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Systems revenues $ 349,337 $ 836,905 $ 435,416 $ 52,346 $ 1,730,705 $ 320,022 $ 705,052
Customer support services 23,631 128,445 262,003 325,487 350,091 81,806 100,144
372,968 965,350 697,419 377,833 2,080,796 401,828 805,196
Costs and expenses:
Cost of systems revenues 137,451 476,258 163,432 64,101 621,023 56,992 114,083
Client services 20,686 171,088 253,682 436,384 868,382 149,560 168,918
Product development 131,436 229,421 139,623 2,131,616 980,144 119,542 338,950
Sales and marketing 209,895 269,458 480,916 622,302 865,105 155,243 321,047
General and administrative 277,296 249,155 659,387 734,934 1,285,617 258,917 517,403
776,764 1,395,380 1,697,040 3,989,337 4,620,271 740,254 1,460,401
Loss from operations (403,796) (430,030) (999,621) (3,611,504) (2,539,475) (338,426) (655,205)
Other income (expense), net 13,184 9,460 (24,511) (11,657) 126,987 (9,295) 25,085
Loss before income taxes (390,612) (420,570) (1,024,132) (3,623,161) (2,412,488) (347,721) (630,120)
Provision for income taxes -- -- -- -- -- -- --
Net loss $ (390,612) $ (420,570) $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120)
Loss per common and common
equivalent share $ (0.38) $ (0.41) $ (0.98) $ (3.39) $ (0.78) $ (0.34) $ (0.15)
Pro forma loss per common
and common equivalent share $ (0.65) $ (0.12)
Weighted average number of
common and common equivalent
shares outstanding 1,025,937 1,033,716 1,042,591 1,069,337 3,091,560 1,028,139 4,152,199
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $482,613 $ 8,986 $ (467,715) $ (23,323) $2,294,560 $1,635,377
Total assets 755,380 910,510 1,377,727 3,784,863 5,679,748 4,565,535
Current maturities of
long-term obligations -- -- 30,103 806,733 761,932 14,544
Long-term obligations, less
current maturities 122,208 133,207 136,489 854,731 47,663 43,554
Shareholders' equity 583,537 162,967 411,611 1,169,920 4,406,239 3,830,130
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS WHICH COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTIONS ENTITLED
"RISK FACTORS" AND "BUSINESS."
GENERAL
PACE was organized in 1987 as a computer systems consulting firm. In 1989, the
Company began to develop and market a nursing station care plan management
system built around a knowledge base or "Clinical Library" developed over a
period of 20 years at Carnegie-Mellon and Creighton Universities. In late 1992,
the Company recognized what it believed to be a significant opportunity for
software applications integrated with the Clinical Library to address the
point-of-care clinical information systems market and began to develop the PACE
Clinical Information System ("PACE/CIS"). In early 1993, the Company
discontinued marketing the nursing station care plan management system as a
stand-alone product and focused on development of PACE/CIS. As a result, no new
systems were installed during 1994, and no license fee revenues were recorded
during that year. The Company discontinued the marketing and sale of PACE/CIS,
the system from which the Company had derived substantially all of its revenues
in 1995, and introduced PACE CMS, a comprehensive care management system
representing a significant enhancement to PACE/CIS. PACE CMS, the system from
which the Company derives substantially all of its revenues, is currently being
further enhanced through the addition of a graphical user interface and a
three-tier, client/server, open-systems architecture ("Graphical PACE CMS").
Graphical PACE CMS is currently undergoing beta testing and is expected to be
available for commercial implementation in early 1997. To date, the Company has
successfully marketed and sold only a limited number of the PACE systems. There
can be no assurance that the Company will be able successfully to implement
additional PACE systems or that the delivery of Graphical PACE CMS will occur on
a timely basis, or at all. Furthermore, there can be no assurance that PACE
systems will achieve market acceptance.
From its inception in 1987 through March 31, 1996, the Company has accumulated
net losses of approximately $9.5 million. Losses have resulted principally from
costs incurred in research and development of the Company's technologies and
from general and administrative costs. These costs have significantly exceeded
the Company's revenues which, from the Company's inception through December
1994, were derived primarily from the sale of systems no longer being marketed
by the Company.
Prior to April 1995, the Company financed operations with capital contributed by
private investors. In April 1995, the Company completed its initial public
offering, selling 1,300,000 shares of Common Stock at $5.00 per share for net
proceeds to the Company of approximately $5.5 million. Effective as of the
closing of the initial public offering, all outstanding shares of the Company's
preferred stock (the "Preferred Stock") issued during previous rounds of private
financing were converted to Common Stock on a one-to-one basis.
Since April 1995, the Company has added several new members in key positions
of its management team. They include Matthew Terstriep, Vice President of
Sales and Marketing, Ronald Wunder, Vice President of Technology and, most
recently, Mark J. Emkjer as Chief Executive Officer. Mr. Emkjer is also a
director of the Company. The Company is continuing to expand its sales,
marketing and customer support organizations and is increasing its investment
in research and development efforts. See "Business -- Sales and Marketing"
and "Management."
The Company derives substantially all of its revenues from the sale of PACE
systems including: (a) software license fees, (b) implementation fees and (c)
hardware sales. Software license fees are generated from contracts that grant
clients the right to use the Company's software. These contracts typically
provide a one-time software license fee to be paid during implementation.
Implementation fees include revenues derived from the installation of hardware
and the implementation and training services related to the sale of software
licenses. Hardware sales are generated from the sale of third-party manufactured
hardware, typically sold in conjunction with the Company's software. Following
implementation of the software, the Company also generally receives monthly
revenues for customer support services. Customer support services includes
revenue from maintenance and support services, miscellaneous customization
following implementation and consulting services. The Company recognizes
revenues in accordance with Statement of Position 91-1, "Software Revenue
Recognition," which requires that systems be delivered, collectibility be
probable and there be no significant uncertainty about acceptance. The Company
generally records software license fees and implementation fees over the period
of implementation. Revenues from hardware sales are recorded at the time of
delivery and customer support services revenue is recorded monthly. Revenues are
not recorded at the time of contract signing, and because of the Company's
revenue recognition policy, there is frequently a period of time between the
contract signature date and the actual recording of revenues.
The Company capitalizes software development costs that relate primarily to
either the development of new software or significant enhancements to existing
software. Software costs are capitalized in accordance with Statement of
Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," which requires
capitalization of expenses following determination of technical feasibility and
until the software is ready for general release. The capitalized costs are
amortized by the greater of (a) the ratio that current gross revenues for
software sales bear to the total of current and anticipated future gross
revenues for such software sales, or (b) the straight-line method over the
estimated economic life of the software, usually three to seven years. In 1994,
the Company capitalized $1.5 million related to software acquired from a third
party developer.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's statements of income expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Net revenues:
Systems revenues 62.4% 13.9% 83.2% 79.6% 87.6%
Customer support services 37.6 86.1 16.8 20.4 12.4
100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of systems revenues 23.4 17.0 29.8 14.2 14.2
Client services 36.4 115.5 41.7 37.2 21.0
Product development 20.0 564.2 47.1 29.7 42.1
Sales and marketing 69.0 164.7 41.6 38.6 39.9
General and administrative 94.5 194.5 61.8 64.4 64.3
243.3 1,055.9 222.0 184.1 181.5
Loss from operations (143.3) (955.9) (122.0) (84.1) (81.5)
Other income (expense), net (3.5) (3.1) 6.1 (2.3) 3.1
Loss before income taxes (146.8) (959.0) (115.9) (86.4) (78.4)
Provision for income taxes 0.0 0.0 0.0 0.0 0.0
Net loss (146.8)% (959.0)% (115.9)% (86.4)% (78.4)%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
NET REVENUES: Net revenues include systems revenues and customer support
services. Net revenues were $401,828 and $805,196 for the three months ended
March 31, 1995 and 1996, respectively, representing an increase of 100.4%.
Systems revenues comprised 79.6% and 87.6%, of net revenues for the three months
ended March 31, 1995 and 1996, respectively. This increase was partially
attributable to the sale of larger systems incorporating increased
functionality. The Company also began to recognize systems revenues on a 20-site
license agreement in the three months ended March 31, 1996, following acceptance
of a pilot project from a healthcare provider with a nationwide network of 37
rehabilitation hospitals. Revenue from this healthcare provider accounted for
approximately 63.2% of net revenues for the three months ended March 31, 1996.
COSTS AND EXPENSES.
COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
commissions and royalties payable to third parties. Cost of systems revenues was
$56,992 and $114,083 in the three months ended March 31, 1995 and 1996,
respectively, representing an increase of 100.2%, primarily as a result of costs
associated with increased net revenues. Cost of systems revenues totaled 14.2%
of net revenues for each of the three months ended March 31, 1995 and 1996. Cost
of systems revenues as a percentage of net revenues is expected to fluctuate in
the future, depending on the relative mix of software and hardware.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation and support. Client services expenses were $149,560 and
$168,918 in the three months ended March 31, 1995 and 1996, respectively,
representing an increase of 12.9%. The increase was primarily due to an increase
in implementation personnel required to support the increase in systems sold.
The Company expects that client services expenses will increase in the future,
although client services expenses as a percentage of net revenues may fluctuate
from period to period.
PRODUCT DEVELOPMENT: Product development expenses include salaries and expenses
related to development and documentation of software systems, net of capitalized
software development costs. Product development expenses were $119,542 and
$338,950 in the three months ended March 31, 1995 and 1996, respectively,
representing an increase of 183.5%. This increase was primarily due to increases
in personnel and payroll-related expenses related to the Company's expanded
development efforts and an increase in amortization of capitalized costs. The
Company capitalized $81,144 and $94,217 of product development costs and
amortized $13,560 and $60,048 in the three months ended March 31, 1995 and 1996,
respectively. The Company expects that product development expenses will
increase in the future, although product development expenses as a percentage of
revenues may fluctuate from period to period.
SALES AND MARKETING: Sales and marketing expenses include salaries, advertising,
trade show costs and travel expenses related to the sale and marketing of the
Company's systems. Sales and marketing expenses were $155,243 and $321,047 for
the three months ended March 31, 1995 and 1996, respectively, representing an
increase of 106.8%. This increase was primarily due to increases in personnel
and payroll-related expenses as the Company expanded its sales and marketing
efforts. The Company expects the level of sales and marketing expenses will
increase in the future, although sales and marketing expenses as a percentage of
net revenues may fluctuate from period to period.
GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries
and expenses for the corporate administration and finance, legal, insurance,
rent and depreciation expenses. General and administrative expenses were
$258,917 and $517,403 for the three months ended March 31, 1995 and 1996,
respectively, representing an increase of 99.8%. The increase was primarily due
to one-time costs of approximately $250,000 associated with the recruiting and
hiring of the Company's new Chief Executive Officer in March 1996. The Company
expects the level of general and administrative expenses to increase in the
future, although general and administrative expenses as a percentage of net
revenues may fluctuate from period to period.
OTHER INCOME (EXPENSE), NET: Other income (expense), net is comprised of
interest income and expenses. Other income (expense), net was $(9,295) and
$25,085 for the three months ended March 31, 1995 and 1996, respectively,
representing a change of $34,380, primarily as a result of interest income
associated with higher cash balances following the Company's initial public
offering. In addition, interest expense was reduced following the repayment of
$500,000 in bridge notes in April 1995, with proceeds from the initial public
offering.
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
NET REVENUES: Net revenues were $377,833 and $2.1 million in 1994 and 1995,
respectively, representing an increase of 450.7%. During 1994, the Company was
focused primarily on the development of PACE CMS, which was introduced to the
marketplace in 1995, and the Company does not expect this rate of revenue growth
to continue. Systems revenues as a percentage of net revenues were 13.9% and
83.2% of net revenues in 1994 and 1995, respectively. Customer support services
revenues were 86.1% and 16.8% of net revenues in 1994 and 1995, respectively.
COSTS AND EXPENSES.
COST OF SYSTEMS REVENUES: Cost of systems revenues was $64,101 and $621,023 in
1994 and 1995, respectively. The increase was primarily a result of costs
associated with increased systems revenue. Cost of systems revenues as a
percentage of net revenues was 17.0% and 29.8% in 1994 and 1995, respectively.
This increase was a result of a shift in product mix to include a higher
percentage of hardware sales, which typically have lower gross margins.
CLIENT SERVICES: Client services expenses were $436,384 and $868,382 in 1994 and
1995, respectively, representing an increase of 99.0%. The increase was
primarily due to increases in personnel and payroll-related expenses as client
services were expanded to support the implementation of new sites in 1995.
PRODUCT DEVELOPMENT: Product development expenses were $2.1 million and $980,144
in 1994 and 1995, respectively, representing a decrease of 46.0%. The decrease
was attributable to a one-time expenditure in 1994 of $1.5 million related to
the development of software by a third party. This decrease was partially offset
by an increase in 1995 of personnel and payroll-related expenses attributable to
the addition of personnel related to Graphical PACE CMS and, to a lesser extent,
an increase in amortization expense. The Company capitalized $191,305 and
$147,861 of software development costs, and amortized $198,253 and $247,610 in
1994 and 1995, respectively.
SALES AND MARKETING: Sales and marketing expenses were $622,302 and $865,105 in
1994 and 1995, respectively, representing an increase of 39.0%. This increase
was primarily due to increases in personnel and payroll-related expenses and
increases in fees for consulting services paid to a third party.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $734,934
and $1.3 million in 1994 and 1995, respectively, representing an increase of
74.9%. The increase was primarily due to an increase in professional services,
an additional allowance for doubtful accounts, an increase in rent expense
following the Company's expansion of its office space, and an increase in
insurance expense related to the Company's director's and officer's liability
coverage.
OTHER INCOME (EXPENSE), NET: Other income (expense), net was $(11,657) and
$126,987 for 1994 and 1995, respectively, representing a change of $138,644,
primarily due to higher invested cash balances resulting from the Company's
initial public offering.
FOR THE YEARS ENDED 1993 AND 1994
NET REVENUES: Net revenues were $697,419 and $377,833 in 1993 and 1994,
respectively, representing a decrease of 54.2%. This decrease was primarily the
result of the Company's decision in 1993 to discontinue marketing the nursing
station care plan management system as a stand-alone product and focus the
Company's efforts on developing and marketing PACE/CIS. Due to the long sales
cycle for the Company's systems, the first contracts for PACE/CIS were not
executed until late 1994, and the Company did not begin to recognize revenue on
those contracts until 1995. Systems revenues as a percentage of net revenues
were 62.4% and 13.9% in 1993 and 1994, respectively. Customer support services
were 37.6% and 86.1% of net revenues in 1994 and 1995, respectively.
COSTS AND EXPENSES.
COST OF SYSTEMS REVENUES: Cost of systems revenues was $163,432 and $64,101 in
1993 and 1994, respectively, representing a decrease of 60.8%. This decrease was
primarily a result of lower cost of sales associated with decreased system
sales. Cost of systems revenues as a percentage of net revenues was 23.4% and
17.0% in 1993 and 1994, respectively. This decrease was primarily a result of
the Company's decision to discontinue the marketing and sale of the nursing
station care plan management system and focus on developing and marketing
PACE/CIS.
CLIENT SERVICES: Client services expenses were $253,682 and $436,384 in 1993 and
1994, respectively, representing an increase of 72.0%. The increase was
primarily due to an increase in implementation personnel to support anticipated
systems sales.
PRODUCT DEVELOPMENT: Product development expenses were $139,623 and $2.1 million
in 1993 and 1994, respectively, representing an increase of 1,426.7%. This
increase was primarily attributable to an expenditure of $1.5 million in 1994
related to the development of software by a third party. Product development
expenditures increased to a lesser extent due to higher personnel and payroll
related expenses and an increase in amortization expense. The Company
capitalized $260,508 and $191,305 of software development costs and amortized
$81,859 and $198,253 in 1993 and 1994 respectively.
SALES AND MARKETING: Sales and marketing expenses were $480,916 and $622,302 in
1993 and 1994, respectively, representing an increase of 29.4%. This increase
was primarily due to increases in personnel and payroll-related expenses
attributable to increases in the Company's sales and marketing personnel.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $659,387
and $734,934 in 1993 and 1994 respectively, representing an increase of 11.5%.
This increase was primarily due to increases in personnel and payroll-related
expenses.
OTHER INCOME (EXPENSE), NET: Other income (expense), net was $(24,511) and
$(11,657) for 1993 and 1994, respectively, representing a change of $12,854,
primarily as a result of a reduction in notes payable as a result of application
of proceeds from sales of Preferred Stock.
PROVISION FOR INCOME TAXES
As of March 31, 1996, no provision for income tax benefit has been recorded due
to the Company recording a valuation allowance on the deferred tax assets.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, the Company had net operating loss ("NOL") carryforwards
of approximately $7.2 million to offset future federal taxable income, if any.
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
a change in ownership of the Company of greater than 50% within a three-year
period results in an annual limitation of the Company's ability to utilize its
NOL carryforwards which accrued during the tax periods prior to the change in
ownership. The Company has NOL carryforwards of approximately $4.9 million which
are subject to an annual limitation of approximately $1.4 million due to a
change in ownership resulting from the Company's initial public offering. The
Company has an NOL carryforward of approximately $2.3 million which is not
subject to any limitation. The Company does not anticipate that this offering
will result in a change of ownership under Section 382 of the Code and
accordingly does not anticipate any further NOL carryforward limitation at this
time. However, there can be no assurance that any subsequent issue of capital
stock by the Company or transfer of capital stock by an existing shareholder
would not cause a change in ownership.
QUARTERLY RESULTS OF OPERATIONS
The following table contains quarterly operating results for the fiscal years
ended December 31, 1994 and 1995 and the three month period ended March 31,
1996. This quarterly information is unaudited, has been prepared on the same
basis as the annual financial statements and, in the opinion of the Company's
management, reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the information for the period presented.
Operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1994 1994 1994 1995 1995 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Systems revenues $ 11,152 $ 16,298 $ 20,464 $ 4,432 $ 320,022 $ 403,158 $ 479,134
Customer support services 80,337 84,204 81,955 78,991 81,806 100,337 91,676
91,489 100,502 102,419 83,423 401,828 503,495 570,810
Costs and expenses:
Cost of systems revenues 9,408 10,408 20,012 24,273 56,992 134,829 192,918
Client services 75,572 90,721 113,845 156,246 149,560 204,212 267,330
Product development 100,313 111,789 81,443 1,782,140 119,542 209,574 267,922
Sales and marketing 133,921 159,226 183,397 145,758 155,243 214,280 233,416
General and administrative 186,009 195,610 207,874 201,372 258,917 232,087 297,216
505,223 567,754 606,571 2,309,789 740,254 994,982 1,258,802
Loss from operations (413,734) (467,252) (504,152) (2,226,366) (338,426) (491,487) (687,992))
Other income (expense), net (2,635) (4,510) (2,117) (2,395) (9,295) 37,971 54,169
Loss before income taxes (416,369) (471,762) (506,269) (2,228,761) (347,721) (453,516) (633,823)
Provision for income taxes -- -- -- -- -- -- --
Net loss $ (416,369) $ (471,762) $ (506,269) $(2,228,761) (347,721) (453,516) (633,823)
Loss per common and common
equivalent share $ (0.40) $ (0.46) $ (0.49) $ (3.39) $ (0.34) $ (0.14) $ (0.15)
Weighted average number of
common and common
equivalent shares 1,047,215 1,028,252 1,028,251 1,069,337 1,028,139 3,140,026 4,152,199
[Wide table continued from above]
DEC. 31, MARCH 31,
1995 1996
Net revenues:
Systems revenues $ 528,391 $ 705,052
Customer support services 76,272 100,144
604,663 805,196
Costs and expenses:
Cost of systems revenues 236,284 114,083
Client services 262,338 168,918
Product development 389,232 338,950
Sales and marketing 262,165 321,047
General and administrative 476,214 517,403
1,626,233 1,460,401
Loss from operations (1,021,570) (655,205
Other income (expense), net 44,142 25,085
Loss before income taxes (977,428) (630,120
Provision for income taxes -- --
Net loss (977,428) (630,120
Loss per common and common
equivalent share $ (0.78) $ (0.15
Weighted average number of
common and common
equivalent shares 4,152,199 4,152,199
</TABLE>
The Company believes that its future operating results will be subject to annual
and quarterly fluctuations due to a number of factors, some of which are outside
the control of the Company. These factors include market acceptance of, and
fluctuations in, the average selling prices of the Company's systems and the
products of its competitors, the timing of significant orders and the duration
of the implementation of those orders, the Company's relatively long sales
cycle, loss of customers due to consolidation in the health care industry,
customers' procurement cycles and changes in customer budgets, investments by
the Company in research and development and sales and marketing and other
corporate resources, timing of the introduction by the Company and its
competitors of new systems and enhancements to existing systems, the relative
mix of systems and services sold by the Company, changes in the Company's
strategic alliances, changing customer requirements, changes in the regulatory
environment and general economic conditions. Historically, a disproportionately
large number of sales contracts have been entered into in the second half of the
year as a consequence of hospital procurement cycles. Because of the manner in
which the Company recognizes revenue, substantial portions of the revenues from
such sales contracts are not likely to be recorded in the Company's financial
statements until periods subsequent to those in which such contracts are signed.
In addition, the Company plans to increase its operating expenses to fund
greater levels of research and development, increase its sales and marketing
operations, develop new distribution channels and broaden its customer support
capabilities. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be materially, adversely affected. Further, due to the
relatively fixed nature of most of the Company's costs, any unanticipated
shortfall in revenue in any fiscal quarter would have a material adverse effect
on the Company's results of operations in that quarter and could have a material
adverse effect on the Company's business and financial condition. As a result of
the foregoing, and because PACE CMS has only recently been introduced and a
limited number of systems sold, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock could be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception in 1987, the Company's primary source of funding for working
capital needs, capital expenditures and its operating losses has been from the
sale of common and convertible preferred stock. During this time, the Company
completed seven private placements, receiving approximately $7.8 million in
aggregate net proceeds and also completed its initial public offering in April
1995, receiving approximately $5.5 million in net proceeds.
For the three years ending December 31, 1993, 1994 and 1995, the Company
reflected net losses of $1.0 million, $3.6 million and $2.4 million,
respectively, resulting in net cash used in operations for each of the years of
$768,251, $2.5 million and $2.5 million, respectively. During the three months
ended March 31, 1995 and 1996, the Company reflected net losses of $347,721 and
$630,120, respectively, resulting in net cash used in operations of $346,189 and
$345,170, respectively.
Net cash used in investing activities totaled $846,463, $292,670 and $483,237
for the years ending December 1993, 1994 and 1995, respectively, and $166,153
and $178,968 for the three months ended March 31, 1995 and 1996, respectively.
Cash used in investing activities was primarily for the purchase of furniture
and equipment and capitalized software development costs.
Cash provided by financing activities totaled $1.6 million, $2.9 million and
$5.6 million for the three years ending December 31, 1993, 1994 and 1995,
respectively, and $1.0 million for the three months ended March 31, 1995. For
the three months ended March 31, 1996, the Company used net cash of $751,497,
primarily for the repayment of notes payable and long-term obligations.
As of March 31, 1996, the Company had working capital of $1.6 million, including
a cash balance of $1.6 million. At that date, the Company did not have material
long-term obligations or commitments for capital expenditures. As of May 31,
1996, the Company entered into a $1.0 million unsecured line of credit at a
variable interest rate (8.25% as of May 31, 1996) under which no amount was
outstanding as of June 15, 1996. The line of credit expires on April 30, 1997.
At March 31, 1996, the Company had net accounts receivable of $678,007. Included
in accounts receivable are unbilled accounts receivable that were recognized in
revenue prior to when payments were due to the Company under the customer
contracts. Accounts payable, customer deposits and accrued expenses totaled
$677,307 as of March 31, 1996.
The Company believes that the net proceeds to the Company from this offering,
combined with its currently available funds, will meet its requirements at least
through 1997. Thereafter, or sooner if necessary or appropriate, the Company may
need to raise additional funds through public or private financings, including
equity financings, which may be dilutive to shareholders. There can be no
assurance that the Company will be able to raise additional funds if or when its
capital resources are exhausted, or that funds will be available on terms
attractive to the Company. If adequate funds are not available, the Company may
be required to delay, reduce the scope of or eliminate one or more of its
research or development programs or projects, which could have a material
adverse effect on the Company's business, financial condition and results of
operation.
Although increases in salaries and prices of materials can adversely affect the
Company's results of operations, the Company generally believes it will be able
to increase its selling prices to offset such increased costs. The Company does
not believe that inflation has had a material impact on its results of
operations over the past several years.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a new financial
accounting and reporting standard for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to acquire
goods and services from non-employees. The new measurement standard prescribed
by SFAS No. 123 is optional for employee awards, and the Company is permitted to
account for its employee stock incentive and stock purchase plans under a
previously issued accounting standard. The Company does not expect to adopt the
new accounting standard; consequently, SFAS No. 123 will not have an impact on
the Company's financial condition or results of operations. However, the Company
will be subject to certain disclosure requirements imposed by SFAS No. 123.
BUSINESS
INTRODUCTION
PACE develops and markets advanced patient care management software systems that
enable health care providers to standardize the delivery of care, maximize
resource utilization and improve clinical outcomes. The Company's
enterprise-wide, client/server applications automate charting, clinical workflow
processes and the clinical pathways that are increasingly being incorporated
into health care practices. The Company's core system, PACE CMS, is a modular
suite of advanced software applications that provides hospitals and integrated
delivery systems a comprehensive system for interdisciplinary documentation,
nursing care planning, clinical pathway management and enterprise-wide order
management, all at the point-of-care. The Company believes that its systems
increase the productivity of nurses and ancillary labor resources, by improving
the accuracy and legibility of documentation, reducing clerical tasks such as
entering orders for tests, services, consultations and treatments, enhancing
communications and coordination of care among members of the patient care team,
providing real-time access to detailed patient data at the point of care,
facilitating integration of appropriate clinical pathways into patient care
plans and treatment regimes, integrating critical patient care information into
enterprise-wide, computer-based patient record systems, and, ultimately,
improving the quality of care.
INDUSTRY OVERVIEW
Over the past two decades, health care costs have risen dramatically relative to
the overall rate of inflation. Historically, reimbursement for health care
organizations has been based on a fee-for-service model of payment. With
increasing pressure to reduce costs, managed care organizations and other payors
are shifting the economic risk for the delivery of care to providers through
alternative reimbursement models, including capitation and fixed fees. This
pressure has forced providers to deliver more cost-effective services, while at
the same time maintaining or improving the quality of care. The need to manage
the delivery of care in a more cost-effective manner has led to an increased
demand for clinical information systems that enable providers to measure,
monitor and improve clinical processes.
The availability of complete, accurate, timely and cost-effective patient
information is essential to controlling health care costs while providing high
quality patient care. Today, most essential clinical patient care documentation
is still stored on paper. The current use of paper-based hospital records is
inherently inefficient due to the difficulty of disseminating information
throughout an organization, the inability to immediately incorporate changes in
a patient's status into the record and the likelihood of transcription errors
arising from the redundant data entry. These inefficiencies are driving the
growth of point-of-care electronic medical record systems that allow integration
from disparate information systems and automate the entry and management of
essential patient care data.
In addition, the health care industry is moving towards the adoption of
computer-based, standardized nursing care plans and clinical pathways. Nursing
care plans include the basic steps required in the daily process of delivering
patient care including, among others, the routine documentation of vital
statistics, administration of medications and patient education. The Company
believes that there is increasing pressure to implement these systems from many
managed care organizations, accrediting bodies such as the Joint Commission on
Accreditation of Health Care Organizations ("JCAHO"), policy making
organizations such as the National Academy of Sciences and the Institute of
Medicine, and various federal and state regulatory bodies. Clinical pathways
include essential elements of daily care required through the entire episode of
care, regardless of their impact on outcomes. By utilizing clinical pathways,
caregivers can begin to standardize the provision of care and seek to ensure
more consistent outcomes. To develop a clinical pathway, health organizations
generally appoint a multi-disciplinary committee to analyze the treatment plans
and clinical outcomes of many similarly diagnosed patients in order to determine
the statistically significant treatment factors necessary to deliver more
consistent, higher-quality outcomes. The development of a clinical pathway in
such a manner for each diagnosis typically requires up to one year to complete.
Once a clinical pathway has been developed, hospitals often experience
difficulty implementing the pathway due to the complexities associated with
dissemination of such procedures and differing physician practices.
In light of these fundamental changes in the health care industry, a need exists
for a health care information system that assists clinicians in the management
of patient care from hospital admission to follow-up assessment. A comprehensive
patient care management system must be able to manage patient information,
nursing care plans and clinical pathways for providers. In order to assist
providers in improving the delivery of care, a patient care management system
must also be able to produce valuable benchmark data and outcomes analyses for
health care administrators.
THE PACE SOLUTION
The Company's systems and services address the industry's need for advanced
point-of-care applications which automate and standardize charting functions,
clinical workflow processes and clinical pathways. The Company's open systems
architecture allows PACE CMS to be integrated with a health care provider's
existing information systems, including financial management, admissions,
pharmacy, laboratory and other ancillary systems. Key attributes of PACE CMS
include:
* PACE CMS begins to build a point-of-care electronic medical record during
the admissions assessment. PACE CMS provides an extensive reference source
for assisting clinicians in establishing nursing care plans for patients
based on the physician's diagnosis. PACE CMS also increases clinical
workflow efficiency by automating and standardizing the documentation of
patient care, including the recording of vital signs, fluid balances,
daily care plan flow sheets, medication administration and patient
eduction. Once an initial physician diagnosis has been established, a
clinical pathway can be assigned by the physician.
* PACE CMS's point-of-care technology replaces traditional charting and data
entry systems, resulting in more accurate, complete and timely patient
records. PACE CMS reduces the time required to record patient information,
eliminates certain documentation redundancies and errors, reduces
medication errors, and improves the general quality, accuracy and
availability of patient records. All patient charting can be performed at
the point-of-care with automatic updating of the clinical database.
Patient data is available on a real-time basis at the point-of-care or at
any work station throughout the institution.
* Using PACE CMS, health care providers can concurrently monitor the clinical
pathway, chart patient care against the clinical pathway, note variances to
the clinical pathway and address outcomes from the clinical pathway. The
clinical pathway is updated immediately while the clinician is on-line, and
reports are generated automatically. In addition, multi-disciplinary clinical
pathways may then be integrated with charting and order management components
of patient care.
* Using PACE CMS to maintain point-of-care electronic medical records and
clinical pathways, a health care provider can continually monitor patient
outcomes against clinical pathways. This capability allows health care
providers to continually update and refine clinical pathways with a goal of
improving patient outcomes and increasing clinical efficiencies.
The Company believes that PACE systems are differentiated from other health care
decision support systems by their breadth of functionality and flexibility in
use. The PACE Clinical Library, which is part of the PACE CMS core system,
provides an extensive reference source for assisting clinicians in establishing
nursing care plans. The modular nature of PACE CMS provides flexibility to
tailor the system to the specific needs of the customer. The ability of PACE CMS
to provide point-of-care decision support and pathway management from within the
system and on a real-time basis is a key advantage of PACE CMS. The Company
expects that the user-friendly nature of Graphical PACE CMS, once completed,
will further differentiate the Company's systems from its competitors.
BUSINESS STRATEGY
PACE's objective is to become a leading supplier of health care information
systems that provide technologically advanced clinical decision support,
workflow enhancement and process automation at the point-of-care. The principal
elements of this business strategy include the following:
PROVIDE TECHNOLOGICALLY ADVANCED POINT-OF-CARE SYSTEMS. The Company has invested
significant resources in the development of its open-system, three-tier,
client/server architecture, which allows PACE CMS to be marketed either as a
comprehensive solution to health care information needs or as a product
complementary to existing information systems. This advanced architecture
enables enhanced flexibility and scalability in application and utilizes a
graphical user interface, client/server architecture and a relational database.
Graphical PACE CMS is currently in beta testing and is expected to be available
for commercial implementation in early 1997. The Company is committed to staying
at the forefront of technological advances in the health care information area
and to applying new computer software technologies to the development,
implementation and support of its point-of-care systems.
FORGE STRATEGIC ALLIANCES WITH JOINT MARKETING PARTNERS. To increase its market
share with large hospitals, integrated health care providers and multi-entity
purchasing groups, the Company intends to leverage its direct sales and
marketing efforts through the development of strategic alliances with vendors of
complementary health care information products. The Company's advanced
architecture allows PACE CMS to be interoperable with other health care
information systems. The Company believes that relationships such as the one
developed with Sunquest, which has an installed customer base of approximately
600 hospitals, will play a significant role in determining the future success of
PACE CMS sales to these larger hospitals, integrated delivery systems and
multi-entity purchasing groups.
INCREASE INVESTMENT IN SALES AND MARKETING. In conjunction with the introduction
of Graphical PACE CMS, the Company intends to make significant investments in
implementing a comprehensive sales and marketing program to accelerate market
penetration. The Company intends to significantly increase the size of its
direct sales and client services staff and establish selected numbers of premier
sites where a full implementation of Graphical PACE CMS can be demonstrated to
prospective customers. In addition, the Company seeks to expand market awareness
of PACE CMS through industry forums, trade advertising and directed mailings.
DELIVER A TOTAL SOLUTION TO CUSTOMERS. The Company is committed to delivering a
total solution to its customer's patient care management system and clinical
decision support needs. PACE provides technologically advanced systems, as well
as high quality, value-added consulting services to best utilize PACE CMS
applications. To that end, the Company intends to augment the expertise of its
current customer service staff and offer customers fee-based consultation on
methodologies, workflow improvement, and clinical pathway generation and
analysis.
DEVELOP AND INTRODUCE THE PACE CRITICAL PATHWAY ANALYZER. The Company is
developing, in conjunction with Iowa State University, the PACE Critical Pathway
Analyzer ("CPA"). The CPA analyzes clinical data stored within a provider's
medical records and suggests a critical pathway for a given diagnosis. Using
advanced statistical algorithms to develop a critical pathway based on an
enterprise's actual practice significantly reduces the time clinical staff spend
performing the research and analysis required for pathway development.
PRODUCTS
The modular configuration of PACE CMS addresses the needs of both large and
small hospitals, integrated delivery systems and multi-entity purchasing groups.
While PACE CMS has been designed as a comprehensive information system, because
of its advanced architecture, it can be easily integrated with products of other
leading providers of health care information systems.
PACE CMS is comprised of a core system which includes fundamental patient care
management functionalities, as well as clinical specialty and companion modules
that contain value enhancing applications that may be applicable to a particular
provider's system. Clinical specialty and companion modules may be purchased on
an add-on basis by PACE clients subsequent to initial implementation of the PACE
CMS core system.
PACE CARE MANAGEMENT SYSTEM
<TABLE>
<CAPTION>
<S> <C> <C>
CORE SYSTEM
+ Medical/Surgical System + Flow Sheets + Clinical Library
+ Admission Assessments + Vital Signs + On-Line Policies &
+ Care planning + Intake & Output Procedures
+ Nursing Assessments + Management + Patient Education
+ Daily Cares/Nursing + Neuro Check + Physician View Screen
Interventions + Patient Control + Screen & Forms Builder
+ Kardex Analgesic
+ Patient Acuity Capture + Hemodialysis
+ Dietary
CLINICAL SPECIALTY COMPANION
MODULES MODULES
+ Critical Care/ICU + Clinical Database
+ Emergency Department + Order Management/Results
+ Maternal/Child Reporting
+ Pediatrics + Clinical Pathway Manager
+ Peri-Operative + Critical Pathway Analyzer*
+ Rehabilitation Therapies + Medication Charting
+ Respiratory Therapy
</TABLE>
_________
*Under development
CORE SYSTEM. The PACE CMS core system provides the essential clinical
record-keeping, workflow automation and clinical decision support functionality
required by most hospitals and integrated delivery systems at the point-of-care.
The core system provides point-of-care charting from the admissions assessment
stage through post-discharge follow-up. Its functions include more than 1,000
proposed nursing care plans, automatic calculations such as fluid intake and
output totals, as well as a variety of flow sheets and other JCAHO care planning
standards that are supported throughout the system. The core system helps reduce
errors through the use of certain prompts or alerts that appear on the screen
upon entry of data, reducing the risk of improper clinical decisions and
improving both the quality of care and its documentation. The PACE CMS core
system reduces documentation inefficiencies and enhances the standardization of
clinical notations and assessments. In addition, using the Screen and Forms
Builder, PACE clients can customize data entry screens, files, reports as well
as the workflow of the PACE CMS system to meet their specific needs and business
practices.
PACE CMS clinical specialty and companion modules provide additional, enhanced
applications and advanced functionalities to the core system, allowing PACE CMS
to cover a broad spectrum of patient care. The Company's companion modules have
been designed to be quickly and efficiently integrated with the PACE CMS core
system and with other health care information systems.
CLINICAL SPECIALTY MODULES. The Company's clinical specialty modules are
designed to meet the specific enterprise-wide documentation and functionality
needs of various clinical specialties. For example, the Peri-Operative Module
has been designed to meet the specific information management needs of the
operating room. This module allows for peri-operative data to be efficiently
integrated with the charting functions of other clinical disciplines. As a
result, patient data collected by other disciplines is readily available to the
clinician at the time of surgery, greatly assisting the surgical team in routine
as well as emergency situations. Specific prompts and alerts have been designed
to reduce risks and improve standards compliance during pre-operative
preparation.
The Emergency Department Module has been designed to meet the documentation
requirements of the emergency room. Critical information obtained at the
accident scene by paramedics or others can be entered into the system for
immediate access upon the patient's arrival at the hospital. Any previous charts
or clinical data relating to the patient are immediately available on-line.
Allergies, medical/surgical history and other vital information is available in
the system, eliminating the need to contact the medical records department and
wait for a response.
COMPANION MODULES. The Company's companion modules are designed to provide
additional multi-disciplinary functionality to the core system and the clinical
specialty modules. For example, the Clinical Pathway Manager Module assists
clinicians in managing and monitoring a clinical pathway based upon the patient
diagnosis, administration assessment, contract payor or practitioner's pathway
preference. Once in place, all clinical disciplines granted the requisite
security access, including designated physicians, nurses, therapists and
technicians, can concurrently monitor the clinical pathway, chart against the
clinical pathway, note variances from the clinical pathway and address outcomes.
The clinical pathway is updated immediately while the clinician is on-line and
reports are generated automatically. The Clinical Pathway Manager Module
provides immediate outcomes analysis and variance documentation, integrates with
order management systems and allows for enterprise-wide involvement in clinical
pathway charting and monitoring.
The Company's On-Line Medication Charting Module allows for point-of-care
documentation of medication administration. This module, which can interface
directly with a health care provider's existing pharmacy system and provide
verification levels for a pharmacist's review and signature, includes procedures
for allergy checks and alerts prior to the administration of medication. The
On-Line Medication Charting Module also provides a schedule of medication to be
administered during each clinician shift, thereby assisting in workflow
organization and providing guidance and alerts for past due medication, all of
which help improve the quality of patient care.
Pricing of PACE CMS systems is based on the size of the project and the number
of clinical specialty or companion modules added to the PACE CMS core system.
The Company derives revenue from software license fees from PACE CMS purchasers,
as well as implementation fees and, to a lesser extent, computer hardware sales.
The average price of a PACE CMS system has been approximately $320,000. The
Company expects this average price to rise as the size and complexity of the
systems increases.
TECHNOLOGY
The Company has made a significant investment in recent years in modifying and
enhancing its system architecture and product line. The most recent enhancement
is Graphical PACE CMS, which is currently in beta testing and expected to be
available for commercial implementation in early 1997. Anticipating the
evolution of emerging standards and products in the rapidly changing computer
software environment, the Company believes that its investment in developing an
advanced, three-tier, client/server, open-systems architecture will enable the
Company to remain flexible to enhance its systems and take advantage of these
emerging standards. The Graphical PACE CMS architecture consists of a client
tier interface implemented in Microsoft Visual C++; a middle tier comprised of
applications and program logic written in C and C++; a server tier comprised of
a relational database; and an on-line transaction processor. The addition of the
middle tier improves application processing speed, thereby increasing
performance and allowing greater flexibility than a two-tier architecture. This
allows PACE CMS the flexibility to grow to meet client needs. The graphical
interface of Graphical PACE CMS has been developed in conjunction with experts
specializing in human cognition and graphical artwork, which the Company
believes will enhance the intuitive nature of its system. PACE CMS utilizes
Windows 95 or NT for the client operating system and Unix or NT for the server
operating system.
PACE CMS has been designed to operate on hand-held computers, laptop computers
and other computer hardware. PACE CMS has been configured for implementation
through the establishment of a local area network, or LAN, thereby allowing for
wireless technology and ease of use and mobility throughout an entire health
care enterprise. The Company currently supports Proxim, Inc. wireless networks.
(Technology Graphic)
Three-Tier Architecture for managing change
Graphic depicts the three-tier architecture design, reflecting 1) Tier 1 -
Presentation Chart, 2) Tier 2 - Application Server(s) and 3) Tier 3 - Data base
server(s).
SALES AND MARKETING
There are approximately 6,500 hospitals and other health care facilities, such
as rehabilitation centers and long-term care facilities, in the United States.
The majority of these entities have not yet invested in point-of-care, clinical
information management systems. The Company believes that the need for health
care providers to control costs, document care, adopt standards of care while
maintaining or improving the quality of care will require health care providers
to invest in new point-of-care, clinical information systems, such as PACE CMS.
The Company markets its systems using both its direct sales force and through
strategic alliances with vendors of complementary products. The Company markets
PACE CMS to larger health care providers principally through its strategic
partners and to small-to-mid-sized health care providers principally through its
direct sales force. The Company has recently emphasized the recruitment of
experienced health care management system professionals to improve the quality
of its internal sales force. Sales efforts are actively supported by a marketing
communications program targeted to health care providers, their chief
executives, chief information officers, chief financial officers, nursing
management, information systems managers and physicians. The Company's
communications program includes trade show displays newsletters and videos as
well as advertising in trade publications, direct mail campaigns, press
releases, speaking engagements, and published articles. In addition, PACE is
actively pursuing the establishment of a selected number of premier sites that
will allow the Company to better demonstrate to prospective clients the full
functionality of Graphical PACE CMS. The Company believes that the establishment
of such arrangements will enhance significantly its sales and marketing efforts.
The sales cycle for point-of-care health care management systems from an initial
sales contact to contract signature is typically twelve to eighteen months,
depending on the size and governing structure of the prospective customer.
During this period, the Company expends substantial time, effort and funds
demonstrating the system, preparing a contract proposal and negotiating the
contract. In general, the Company does not recognize revenues from sales of
systems until after a sales contract has been signed and implemented.
To make health care management systems decisions, prospective customers
generally form a committee comprised of personnel from several departments, such
as administrative, clinical and information systems. The health care provider
may also use industry consultants to assist in the evaluation of the health care
management system. This committee (or consultant) identifies vendors who meet
the health care provider's requirements by issuing requests for information or
requests for proposals. This process requires the Company to write in-depth
proposals and conduct demonstrations at the prospective customer's site. The
Company must also arrange and conduct a prospective customer's visits to current
customer sites. In addition, a prospective customer may also visit Company
headquarters for corporate overviews and product presentations. This process
typically leads to the selection of a vendor of choice. Contract negotiation and
signature completes the sales cycle.
Although the Company is currently investing, and plans to continue to invest,
significant resources to expand its direct sales force and its technical and
customer support staff, and to develop strategic alliances, the Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel and in establishing necessary third-party relationships. There can be
no assurance that the Company will be able to expand successfully its direct
sales force or joint marketing relationships or that any such expansion will
result in an increase in revenues.
The Company maintains a worldwide web address (the "Web"). Its e-mail address is
http:www.pacesystems.com. Information contained on the Company's Web site shall
not be deemed a part of this Prospectus.
STRATEGIC ALLIANCES
The Company intends to develop strategic relationships with leading providers of
health care information systems in order to increase the Company's presence in
the larger hospital and integrated delivery system market segment. The Company
anticipates that these relationships will allow PACE to leverage the
significantly larger sales forces of such companies, while providing them with a
value-added product to sell into their customer base. In May 1996, the Company
entered into a three-year, non-exclusive joint marketing and referral agreement
with Sunquest pursuant to which each company is allowed to market to each
other's current customer base and sell jointly to prospective new clients.
Pursuant to this agreement, the Company is obligated to pay to Sunquest a
referral fee based on an agreed upon rate for sales of PACE products effected
through referrals from Sunquest. The Company is actively engaged in discussions
to develop additional joint marketing relationships. To the extent that the
Company determines that other marketing agreements, business acquisitions,
partnerships or joint venture business relationships will further its business
strategies, it will consider entering into such additional relationships. The
amount and timing of resources devoted to marketing the Company's systems by
these strategic partners are not within the control of the Company. These
strategic partners independently could make material marketing and other
commercial decisions that could adversely affect the Company's future revenues.
CLIENT SERVICES
Since early 1996, PACE has utilized a project manager approach to providing a
full range of product and support service capabilities to its customers. New
customers are assigned a Project Manager who will oversee the implementation of
PACE CMS and will have primary customer service responsibility and
accountability for the successful implementation of the PACE system. Project
managers work closely with the Company's internal sales force, as well as with
PACE technicians who specialize in product implementation. The Company's Client
Services group is focused on client project management, long-term client
service, client satisfaction and, in that way, generally assisting in the
successful marketing of the Company's products. PACE's Client Services group
provides clients with access to 24-hour, 7-day-a-week technical support, on-line
service and on-site service for critical problems. In addition, the Company uses
newsletters, user groups and electronic mail to communicate current, new and
future product capabilities to its clients. The Company sells hardware and
software maintenance services typically for an initial term of at least three
years. For software support services, the Company charges an annual fee of
approximately 15% of the list price of each software module maintained. For
hardware maintenance services, the Company charges the third party hardware
manufacturer's list price and receives a fee from the manufacturer for
coordinating hardware service.
BACKLOG
As of March 31, 1996, the Company had eight contracts under which some or all
implementation work remained in backlog for an aggregate of approximately $3.0
million. The contract with Continental Medical Systems, Inc., represents
approximately 73% of the total amount in backlog. Generally, backlog includes
signed contracts with ongoing implementation obligations and revenues yet to be
recognized by the Company. Any significant failure by the Company to effectively
manage the introduction of new systems or the sales process in order to maintain
an adequate backlog, or the failure of the Company to fully realize the benefits
of its backlog contract with Continental Medical Systems, Inc., could have a
material adverse effect on the Company's business, financial condition and
results of operations. At March 31, 1996, the Company had support and
maintenance backlog of approximately $400,000, which represents contract support
and maintenance services for a period of twelve months. The Company's backlog is
not necessarily indicative of future revenues or earnings.
Due to the long sales cycle for its systems, the Company is unable to predict
with certainty whether a contract proposal will be accepted, when an accepted
proposal will result in an executed contract, and what the implementation
schedule will be for the executed contract. Therefore, the Company's future
results of operations depend in large part on maintaining an adequate backlog.
Any significant failure by the Company to effectively manage the introduction of
new systems or the sales process in order to maintain an adequate backlog could
have a material adverse effect on the Company's business, financial condition
and results of operations.
CUSTOMERS
The Company's customers include health care providers located throughout the
United States, but primarily in the Midwest to date. As of June 15, 1996, the
Company had 55 health care provider customers using one or more of its systems.
Maria Parham Hospital accounted for 12.1%, and Continental Medical Systems, Inc.
accounted for 11.3%, of the Company's net revenues in 1995. For the three months
ended March 31, 1996, Continental Medical Systems, Inc. accounted for 63.2% of
net revenues.
Historically, the Company has focused its marketing efforts on the smaller
hospital market, which comprises the substantial majority of its customer base
to date. More recently, the Company has expanded its marketing efforts to
include larger hospitals, integrated delivery systems and multi-entity
purchasing groups. Because the Company has limited experience in such markets,
it may find that further modifications to its systems are necessary before they
become fully funcational.
RESEARCH AND DEVELOPMENT
The Company has made a substantial commitment in research and product
development essential to the long-term success of its business. The Company is
developing applications internally, as well as purchasing certain applications
from third party vendors. One such purchased application is the Logical Data
Integrator ("LDI") which enables PACE applications to interface to one or more
data sources in any format and presents the information from these sources to
the PACE application in a consistent format. Through a business alliance with
Mentor Systems, Inc., the Company was able to further enhance its systems
architecture by purchasing rights to the LDI.
PACE's current research and development efforts are focused primarily on
enhancing PACE CMS through the development and introduction of its graphical
user interface client presentation, along with its open-systems, three-tier
architecture (i.e., the development and introduction of Graphical PACE CMS).
Graphical PACE CMS is currently being marketed for commercial implementation in
early 1997.
There can be no assurance that the Company willl be successful in developing,
introducing on a timely basis and marketing such systems or enhancements, that
its software will not contain errors that would delay system introduction,
shipment or implementation, or that any such new systems or enhancements will be
accepted by the market. Software systems as internally complex as those offered
by the Company (such as Graphical PACE CMS) frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive market testing during product
development, the Company could be forced to delay commercial implementation of
systems to correct software problems or provide enhancements to correct errors
in released products.
The Company also is developing, in conjunction with Iowa State University, the
PACE Critical Pathway Analyzer ("CPA"). The CPA evaluates the clinical data
stored within a provider system's medical records and suggests a critical
pathway for a given medical diagnosis, group of symptoms, DRG's, or any other
selection made for the defined patient population. The suggested pathway is
based upon interventions from best practice models of physicians inclinations
that have lead to successful outcomes for patients and the provider system. The
CPA uses advanced statistical algorithms to analyze aggregated data captured by
PACE products and suggests the elements that are necessary to construct a
"critical pathway." Critical pathways are a subset of clinical pathways. While a
clinical pathway contains essential elements of daily care required through the
entire episode of care, regardless of their impact on outcomes, a critical
pathway contains only the vital elements in a treatment regimen that have been
proven to influence the clinical and financial outcomes of care. Using
traditional approaches, a typical clinical pathway for one diagnosis currently
takes an organization's committee of multi-disciplinary clinicians up to one
year to develop. Using the CPA to develop a clinical pathway based on a
facility's actual practice is expected to significantly reduce the time clinical
staff spend performing the research and analysis required for pathway
developments.
COMPETITION
The market for clinical information management systems is extremely competitive
and rapidly changing. Most of the Company's revenues are derived from lengthy,
time-consuming and competitive RFP processes managed by sophisticated
purchasers. The Company believes that the principal competitive factors
influencing sales decisions in the health care information market include vendor
and product reputation, product architecture, functionality and features, ease
of use, quality of client support, product performance and price. While the
Company believes that it can compete effectively in these areas, there can be no
assurance that it will be able to do so with respect to any of such factors.
The Company's competitors, which include other providers of clinical support
systems, vary in size and in the scope of the products and services they offer.
Many such competitors are larger and more established and have substantially
more resources than the Company. Many of them have, or may develop or acquire,
substantial, installed customer bases in the health care industry. Among the
Company's principal competitors are traditional HIS vendors and clinical
information systems vendors. These companies include Cerner Corp., Keane Inc.,
HBO & Company which purchased CliniCom, Inc. in 1995, Meditech Management, Inc.,
PHAMIS, Incorporated, SMS Technologies, Inc., Hewlett-Packard Co., SpaceLabs
Medical Inc., CliniComp, and Emtek Health Care Systems Inc., a subsidiary of
Motorola, Inc.
INTELLECTUAL PROPERTY
The Company currently relies, in part, on a combination of trade secret and
copyright laws, software security measures, license agreements and nondisclosure
agreements to establish and protect its proprietary rights. Despite the
Company's precautions, it may be possible for unauthorized third parties to copy
aspects of, or otherwise obtain and use, the Company's software products and
technology without authorization. The Company's practice of providing its
customers with the source code to the Company's software may increase this risk.
In addition, the Company cannot be certain that others will not develop
substantially equivalent or superior proprietary technology, or that equivalent
systems will not be marketed in competition with PACE CMS, thereby substantially
reducing the value of the Company's proprietary rights. Furthermore, there can
be no assurance that any confidentiality agreements between the Company and its
employees and consultants or any license agreements with its customers will
provide meaningful protection for the Company's proprietary information in the
event of any unauthorized use or disclosure of such proprietary information.
The Company is not aware that any of its systems infringes the intellectual
property rights of third parties. Nonetheless, there can be no assurance that
the Company will not become the subject of infringement claims or legal
proceedings by third parties with respect to current or future systems and that
such claims or proceedings will not have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, an
adverse outcome in litigation or similar adversarial proceedings could subject
the Company to significant liabilities to third parties, require expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the marketing
or use of certain products any of which events could have a material adverse
effect on the company's business, operating results and financial condition. As
the number of software systems in the industry increases and the functionality
of these systems further overlaps, the Company believes that software developers
may become increasingly subject to claims based on intellectual property rights.
To the extent the Company wishes or is required to obtain licenses to patents or
proprietary rights of others, there can be no assurance that any such licenses
will be made available on terms acceptable to the Company.
GOVERNMENT REGULATION
Under the FDC Act, the FDA has extensive authority to regulate the development,
manufacture and sale of medical devices, which generally must receive regulatory
clearance or approval prior to commercialization in the United States. To the
extent that computer software products are intended to affect the diagnosis and
treatment of patients, they likely will be considered medical devices by the
FDA. The Company believes that the PACE CMS core system either would not be
considered to be a medical device subject to FDA regulation or, for those
modules that might be deemed medical devices, would be exempt from significant
regulatory requirements, including the requirement of premarket clearance or
approval.
Certain extensions of the PACE product line currently in development, such as
the PACE CPA however, may satisfy the FDC Act medical device definition. In
1989, the FDA issued a draft policy for the regulation of computer products. The
particular regulatory requirements applicable to a computer software product
under that draft policy depend on the nature and use of the specific product.
Certain computer software products, while considered medical devices, are exempt
from particular FDA regulatory requirements, including the requirement of FDA
premarket clearance or approval. The Company believes that to the extent that
any component of the PACE product line is a medical device, it would be exempt
from regulation under the draft policy. Nevertheless, such products may still be
subject to the FDC Act's general prohibition against adulterated and misbranded
devices.
The Company expects, however, that the FDA is likely to become increasingly
active in regulating computer software intended for use in the health care
setting. Furthermore, there can be no assurance that any final FDA policy
governing computer products, once issued, or other future laws and regulations
concerning the manufacture or marketing of medical devices or health care
information systems will not increase the cost and time to market new or
existing products. If the FDA chooses to regulate any of the Company's systems
as medical devices not exempt from regulation, it can impose extensive
requirements upon the Company, including the requirement that the Company seek
either FDA clearance of a premarket notification submission demonstrating the
device's substantial equivalence to a legally marketed predicate device or
approval of a premarket approval application establishing the safety and
effectiveness of the device. FDA regulations also govern, among other things,
the preclinical and clinical testing, manufacture, distribution, labeling and
promotion of medical devices. In addition, the Company would be required to
comply with the FDC Act's general controls, including establishment
registration, device listing, compliance with good manufacturing requirements,
reporting of certain device malfunctions and adverse device events.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or service of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or approval of products, withdrawal of clearances and approvals, and
criminal prosecution.
EMPLOYEES
As of June 27, 1996, the Company employed 50 full-time personnel and two
part-time persons of which four are executives, 21 are research and product
development employees, 12 are client services employees, 11 are sales and
marketing personnel, and four are administrative and clerical personnel.
None of the Company's employees are covered by a collective bargaining agreement
and the Company believes that its relationship with its employees is excellent.
FACILITIES
The Company occupies approximately 11,500 square feet of space at its
headquarters in West Des Moines, Iowa, under a lease expiring in May 1997. In
addition, the Company occupies approximately 700 square feet in Charlotte, North
Carolina. The Company believes that its facilities are adequate to satisfy its
currently anticipated business requirements through May 1997.
LEGAL PROCEEDINGS
The Company is not currently subject to, and none of its property is subject to,
any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
Mark J. Emkjer 40 Chief Executive Officer and Director
Roger D. Huseman 43 Vice President of Finance & Administration, Chief
Financial Officer, Secretary and Treasurer
Ronald F. Wunder 46 Vice President of Technology
Matthew E. Terstriep 43 Vice President of Sales and Marketing
Carl S. Witonsky(2) 58 Chairman of the Board of Directors
William W. Childs(2) 56 Director
John G. Pappajohn(1) 67 Director
R. David Spreng(1) 34 Director
Gordon M. Derzon(2) 61 Director
__________
(1) Audit Committee member
(2) Compensation Committee member
MARK J. EMKJER joined the Company in March 1996 as Chief Executive Officer and
Director. From 1991 through February 1996 Mr. Emkjer worked for Hospital Cost
Consultants Inc. ("HCC"), an international provider of managed care solutions,
where he initially served as Vice President of Sales and was promoted to
President and Chief Executive Office in 1992. Prior to joining HCC, Mr. Emkjer
held positions with Tecxel Hospital Service Corporation as an Executive Vice
President from September 1988 through December 1990 and with Foster Medical from
June 1984 through August 1988.
ROGER D. HUSEMAN joined the Company as Chief Financial Officer in July 1994 and
was appointed Secretary and Treasurer of the Company on January 31, 1995. From
1990 through June 1994 Mr. Huseman operated a financial consulting firm
specializing in assisting businesses with financial restructuring and financing
needs. For four years prior to that he served as President and Director for
NonInvasive Monitoring Systems, Inc., a public company located in Sarasota,
Florida.
RONALD F. WUNDER joined the Company in July 1995 as Vice President of
Technology. From 1989 through 1995 Mr. Wunder worked for First Data Corporation,
Health Systems Group, a healthcare information system company, located in
Charlotte, North Carolina where he served most recently as Vice President of
Systems Architecture and New Development. For the 10 years prior to that time he
was employed by McDonnell Douglas Health Systems Company in St. Louis which
acquired First Data Corporation in 1989.
MATTHEW E. TERSTRIEP joined the Company in April 1995 as Vice President of Sales
and Marketing. From 1990 to 1995 Mr. Terstriep worked for Continental Health
Systems, a health care information system company, located in Overland Park,
Kansas, where he served most recently as Vice President of Sales and Marketing.
Prior to his employment with Continental, Mr. Terstriep worked for Shared
Medical Systems ("SMS") between 1978 and 1988 where he held a variety of
positions in sales management, installation management and customer support.
CARL S. WITONSKY has been a director of the Company since April 1994, and
Chairman of the Board of Directors since March 15, 1995. From 1992 to date, he
has been an independent consultant to investment bankers and health care
organizations on health care information matters. He was the Chairman and Chief
Executive Officer of Gabrieli Medical Information Systems ("GMIS") from 1989 to
1992. Prior to GMIS, Mr. Witonsky served as Vice President of Systems &
Operations of Shared Medical Systems from 1975 to 1988. He is a director of
Medicode, a Salt Lake City-based clinical informatics company, and of
HealthWorks Alliance, a Wayne, Pennsylvania based health care informatics
company.
WILLIAM W. CHILDS has been a director of the Company since February 1990. He has
been a Senior Vice President of CyCare, an information systems company providing
physicians' office software, since April 1995. Prior to that, he was the
President and CEO of Health Data Analysis, Inc. from 1984 until May 1995. Mr.
Childs was the founder and Editor-in-Chief of HEALTHCARE INFORMATICS, a leading
hospital information systems magazine published by Health Data Analysis, Inc. He
also is the founder or co-founder of several other magazines, including
COMPUTERS IN HEALTHCARE, HEALTHCARE COMPUTING COMMUNICATIONS CANADA, and R.F.
DESIGN. He was also one of the founders of Continental Healthcare Systems and
TDS Healthcare Systems Corp.
JOHN G. PAPPAJOHN has been a director of the Company since January 1994. Since
1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a
venture capital fund and President of Equity Dynamics, Inc., a financial
consulting firm, both located in Des Moines, Iowa. Mr. Pappajohn also serves as
a Director of a number of private companies and of the following public
companies: GalaGen, Inc.; Drug Screening Systems, Inc.; CORE, Inc.; BioCryst
Pharmaceuticals, Inc.; OncorMed, Inc.; Fuisz Technologies Ltd.; and United
Systems Technology Inc.
R. DAVID SPRENG has been a director of the Company since January 1994. He is
the President of IAI Ventures, Inc., the venture capital arm of Investment
Advisers, Inc., a $15 billion asset management firm based in Minneapolis,
Minnesota. Prior to joining IAI in 1989, Mr. Spreng was a member of the
Corporate Finance Departments of Salomon Brothers Inc, New York and Dain
Bosworth Incorporated, Minneapolis. Mr. Spreng also serves as a director of
GalaGen Inc. and a number of privately held companies.
GORDON M. DERZON has been a director of the Company since July 1995. Since 1974,
Mr. Derzon has been a faculty member at the University of Wisconsin and
Superintendent of the University of Wisconsin Hospital and Clinics. Prior to
that time he had served in several hospital Executive Director positions,
including seven years at Kings County Hospital in Brooklyn, New York. Mr. Derzon
serves on various committees and is currently on the Executive Board for the
University Hospital Consortium. He has also served as past Chairman of both the
Governing Council of the Public-General Hospital Section and past Chairman of
the University Hospital Consortium Service Board.
ELECTION OF DIRECTORS
The Bylaws and Restated Articles of the Company were amended by the shareholders
at the Company's 1995 Annual Meeting to establish a staggered term for the Board
of Directors, such that one third of the total number of directors are elected
at each annual meeting of shareholders, for a term of three years. All directors
hold office until the election and qualification of their successors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee and a Compensation Committee that
meet regularly during the year. The Compensation Committee proposes, reviews and
approves executive management compensation and administers the 1995 Stock
Compensation Plan. It met three times during 1995. The Compensation Committee is
comprised solely of non-employee directors -- Mr. Childs, Mr. Derzon and Mr.
Witonsky. The Audit Committee advises the Board of Directors on questions,
policies and general matters of accounting, financing and operating controls and
reviews the audit of the Company's financial statements, and selects auditors
subject to approval of the full Board and ratification by the shareholders. It
met once during 1995. The Audit Committee is made up of Mr. Pappajohn and Mr.
Spreng.
The Board of Directors as a whole acts as a nominating committee for candidates
for the Board of Directors.
The Board of Directors of the Company held eight meetings in 1995. Mr. Emkjer
was not a director during 1995. All other directors except Mr. Pappajohn and
Mr. Childs attended at least 75% of the aggregate number of meetings of the
Board of Directors and the Board Committees on which they served.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION
The following table sets forth certain information concerning the compensation
paid or to be paid to the Chief Executive Officer of the Company during the
fiscal years ended December 31, 1993, 1994 and 1995 (the "Named Executive
Officer"). No executive officer of the Company had a total annual salary and
bonus in the year ended December 31, 1995 that exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
FISCAL OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) UNDERLYING OPTIONS
<S> <C> <C> <C> <C>
Michael J. Vasquez, 1995 $98,250 $4,747 --
President and Chief 1994 90,000 1,608 40,912(3)
Executive Officer (2) 1993 83,300 1,908 --
</TABLE>
_________
(1) Constitutes costs for insurance and automobile allowance.
(2) Mr. Vasquez was President and Chief Executive Officer of the Company
until March 15, 1996.
(3) All such options were voluntarily terminated as of April 25, 1995.
STOCK OPTIONS
No stock options or SARs were granted to any Named Executive Officer during the
fiscal year ended December 31, 1995. No stock options or SARs were exercised
during 1995 by any Named Executive Officer and no stock options or SARs owned by
any Named Executive Officer remained unexercised at December 31, 1995. No long
term incentive plan awards were made during 1995 to any Named Executive Officer.
EMPLOYMENT AGREEMENTS
Effective March 15, 1996, Michael J. Vasquez resigned his positions as
President, Chief Executive Officer, Director and as an employee of the Company.
On April 7, 1996, Mr. Vasquez entered into a consulting agreement with the
Company, effective as of March 15, 1996, and also received an option to purchase
40,912 shares of Common Stock of the Company at an exercise price of $3.75 per
share. Pursuant to the consulting agreement, for the period ending March 15,
1997, Mr. Vasquez is obligated to provide up to 400 hours of consulting services
as requested by the Company. The Company has agreed to pay Mr. Vasquez a
consulting fee of $8,250 per month, plus reimbursement for out-of-pocket
expenses for the term of the agreement. Pursuant to the option agreement, Mr.
Vasquez has the immediate right to exercise 20% of the option for 8,182 shares
and the right in one year to exercise an additional 20% of the option for 8,182
shares. The right to exercise any portion of the option, including the vested
portion, terminates on June 15, 1997, unless a change of control of the Company
occurs before March 15, 1997, in which event Mr. Vasquez would be entitled to
purchase all 40,912 shares subject to the option.
Effective as of March 15, 1996, Mark J. Emkjer was appointed Chief Executive
Officer and was appointed to the Board of Directors of the Company. Mr. Emkjer
was elected to a three year term on the Board of Directors of the Company. It is
anticipated that Mr. Emkjer will enter into an employment agreement with the
Company. The employment agreement is expected to provide for base compensation
of $165,000 per year, a signing bonus of $10,000, and an annual bonus of up to
50% of base compensation based on attainment of goals determined by the Board of
Directors with respect to financial performance, stock price appreciation and
operating objectives. Mr. Emkjer also received a nonqualified option to purchase
100,000 shares of Common Stock of the Company which vest 20% on the first
anniversary date of the grant and 20% on each of the next four anniversary dates
of the grant, all of which are exercisable at the price of $2.50 per share. Mr.
Emkjer also received a nonqualified option to purchase 110,000 shares of Common
Stock of the Company at an exercise price of $1.00 per share, with the option to
purchase 35,000 shares vesting upon purchase by Mr. Emkjer of a house and
relocation of his family to the Des Moines area, and the balance vesting at the
rate of 15,000 per year for five years. In addition, Mr. Emkjer's employment
agreement is expected to provide for payment of the selling commission with
respect to his existing home in California and moving expenses, estimated to be
between $40,000 and $50,000. Mr. Emkjer's employment agreement is also expected
to contain severance, change of control and noncompete provisions.
COMPENSATION OF DIRECTORS
Directors presently receive no compensation for serving on the Board of
Directors other than reimbursement of reasonable expenses incurred in attending
meetings. However, during 1995, Carl S. Witonsky, currently Chairman of the
Board of Directors, was a party to a month-to-month agreement with the Company
to provide executive management and consulting services to the Company for a
monthly payment of $3,000. Such agreement was approved by the disinterested
members of the Board on January 31, 1995. Non-employee directors not affiliated
with principal shareholders (only Mr. Childs and Mr. Witonsky) have received
nonqualified warrants to purchase Common Stock. Mr. Childs and Mr. Witonsky were
each granted warrants to purchase 27,274 shares of Common Stock of the Company
granted prior to 1995 as consideration for serving on the Board of Directors.
The warrants have an exercise price of at least 85% of the fair market value of
the Common Stock, as determined by the Board of Directors, on the date of grant.
Subsequent to February 10, 1995, under the 1995 Stock Compensation Plan (the
"Plan"), new non-employee directors receive a nondiscretionary grant of
nonqualified stock options for 21,820 shares of Common Stock upon their election
or appointment to the Board. The Plan provides for automatic grants of
nonqualified stock options to new non-employee directors at an exercise price
equal to 100% of the fair market value of the shares on the date of grant.
One-fifth of such options vest over each of five years from the date of election
or appointment of the new non-employee director. The non-employee director
options are exercisable for ten years from the date of grant. The Compensation
Committee has no discretion regarding the grant or terms of non-employee
director options. Mr. Derzon received a nonqualified option to purchase 21,820
shares of Common Stock under the Plan upon appointment as a director in 1995.
1995 STOCK COMPENSATION PLAN
On February 10, 1995, the Company's shareholders approved the 1995 Stock
Compensation Plan (the "Plan") that had been previously adopted by the Board on
December 16, 1994. Awards granted under the Plan ("Awards") are designated as
incentive stock options ("ISOs") within the meaning of Section 422 of the Code,
non-qualified options, bonus stock, restricted stock or stock appreciation
rights ("SARs"). Awards may be granted to consultants, directors (whether or not
they are employees of the Company), employees and officers of the Company. No
Awards will be granted after February 10, 2005 under the Plan.
The Plan is administered by the Compensation Committee made up of disinterested
members of the Board as that term is defined by Section 16(b) under the
Securities Exchange Act. The Compensation Committee, within the limitations of
the Plan, determines the persons to whom Awards will be granted, the number of
shares to be covered by each Award, whether the Awards granted are intended to
be ISOs, the duration and rate of exercise of each Award, the option purchase
price per share and the manner of exercise, the time, manner and form of payment
upon exercise of an Award, and whether restrictions such as repurchase rights of
the Company are to be imposed on shares subject to Awards except for the
non-discretionary grants automatically made to non-employee directors. All stock
options granted under the Plan have an exercise price no less than 85% of the
fair market value of the Common Stock on the date of grant, except for the
automatic grants to non-employee directors which have an exercise price equal to
100% of the fair market value. The Compensation Committee also has the authority
to interpret the Plan and any instrument or agreement entered into under the
Plan, to establish such rules and regulations relating to the administration of
the Plan as it deems appropriate, and to make all other determinations which may
be necessary or advisable for the administration of the Plan. With the approval
of the Board, the Compensation Committee may terminate, amend, or modify the
Plan in a manner consistent with the Plan's provisions, provided such changes do
not violate the federal or state securities laws.
The Plan provides that 545,494 shares of Common Stock are available for grant
under the Plan. If any Award terminates, expires, or lapses, the underlying
stock shall again become available for grant. In the event of a change in the
Company's corporate structure that affects the shares (for example, a merger,
recapitalization, or stock dividend), the Compensation Committee shall make
adjustments to the number of shares available to the Plan and to the number
and/or price of outstanding Awards to prevent dilution or enlargement of rights.
The Plan provides for automatic grants of nonqualified stock options to new
non-employee directors at an exercise price equal to 100% of the fair market
value of the shares on the date of grant. One-fifth of such options vest over
each of five years from the date of election or appointment of the new
non-employee director. The non-employee director options are exercisable for ten
years from the date of grant. Non-employee directors will receive automatic
grants of options to purchase 21,820 shares of Common Stock upon their
appointment or election to the Board. The Compensation Committee will have no
discretion regarding the grant or terms of non-employee director options. No
options under the Plan have been granted to date to non-employee directors.
The Plan allows the Compensation Committee to determine whether the Company will
accept payment for options in the form of cash or shares of the Company. The
Compensation Committee is also empowered to authorize the Company to withhold
shares for the payment of income taxes on the exercise of options. The Company
may also make loans to Plan participants to allow them to exercise options
subject to specified terms, and secured by a pledge of shares.
In order to protect all of the participants' rights in the event of a Change in
Control (as defined below) of the Company, the Plan provides for the immediate
vesting of all outstanding Awards upon the occurrence of a Change in Control. A
Change in Control of the Company will be deemed to have occurred if any one or
more of the following conditions are fulfilled: (i) any person or entity
acquires 35% or more of the voting securities of the Company; (ii) during any
period of two consecutive years, a majority of the members of the Board are
replaced; (iii) the shareholders approve a materially dilutive merger or
consolidation of the Company; or (iv) the shareholders approve a plan of
complete liquidation or an agreement for sale of substantially all of the
Company's assets. Stock options, SARs, and restricted stock granted to officers
or employees of the Company, particularly with terms regarding the effect of a
Change of Control of the Company on the rights of holders, may affect the extent
to which and the means by which a potential acquiror of the Company may be able
to acquire control of the Company and may discourage potential acquirors from
making proposals which certain of the Company's shareholders might find
attractive due to the increased percentage of ownership of the Company by
executive officers and directors.
As of March 31, 1996, ISOs for the purchase of a total of 262,601 shares, each
with terms of ten years and exercise prices ranging between $2.75 and $3.25 per
share, have been granted to 47 employees of the Company. As of March 31, 1996, a
total of 21,820 non-qualified non-employee director options have been gradited
to one director at a price of $3.00 per share. A total of 261,073 shares are
presently available for grant as additional Awards under the Plan. Approximately
15,000 ISOs were exercisible as of March 31, 1996. To date, no grants of SARs,
or restricted stock have been made under the Plan. See "Compensation of
Executive Officers and Directors."
NONQUALIFIED EXECUTIVE STOCK COMPENSATION PLAN
On March 25, 1996, the Board of Directors adopted a Nonqualified Executive Stock
Option Plan which grants executive officers of the Company nonqualified options
to purchase shares of Common Stock of the Company. The Board of Directors
reserved 200,000 shares for issuance pursuant to the Nonqualified Executive
Stock Option Plan. Options may be granted at prices determined by the Board of
Directors, which may not be less than 85% of the fair market value of the shares
subject to the options as of the date of grant. On March 26, 1996, options for
21,816 shares were granted to certain officers of the Company pursuant to the
Nonqualified Executive Stock Option Plan. Options vest at the rate of 20% on the
first anniversary date of the grant and 20% on each of the next four anniversary
dates of grant, and are exercisable at the price of $2.75 per share.
WARRANTS GRANTED TO EMPLOYEES
As of March 31, 1996, seventeen employees and former employees of the Company
hold warrants to purchase Common Stock in the nature of non-qualified stock
options granted for services to the Company prior to the adoption of the Plan.
The warrants have an exercise price of at least 85% of the fair market value of
the Common Stock, as determined by the Board of Directors, on the date of grant.
One group of warrants has a ten-year expiration date and was exercisable
one-third annually on a cumulative basis from the anniversary date of the
warrant. The second group of warrants vested over five years, with 20% of the
warrants vesting each year, starting on the date of grant and expires in five
years. As of March 31, 1996, warrants to purchase a total of 115,188 shares were
outstanding, having an average exercise price of approximately $3.21 per share.
Approximately 112,000 of those warrants are exercisable as of March 31, 1996.
WARRANTS GRANTED TO NON-EMPLOYEE DIRECTORS
The Company has issued warrants to purchase 54,548 shares of Common Stock to
current non-employee directors William W. Childs and Carl S. Witonsky, and
warrants to purchase 38,184 shares to former non-employee directors of the
Company. Such warrants were granted as consideration for service on the Board of
Directors and in lieu of payment of directors' fees. The warrants were issued at
an average exercise price of $3.41 per share. The warrants have an exercise
price of at least 85% of the fair market value of the Common Stock, as
determined by the Board of Directors, on the date of grant. One group of
warrants has a ten-year expiration date and was exercisable one-third annually
on a cumulative basis from the anniversary date of the warrant. Mr. Childs and
all former non-employee directors agreed to amend such warrants to provide for
an expiration date ten years after the initial date of the grant. The second
group of warrants vests over five years, with 20% of the warrants vesting each
year, starting on the date of grant and expires in five years. As of March 31,
1996 warrants to purchase approximately 82,914 shares of Common Stock are
exercisable on the effective date of this Prospectus. All current directors of
the Company have entered into written lock-up agreements with the Company and
the Representative not to sell, transfer or otherwise dispose of, or agree to
sell, transfer or otherwise dispose of, any shares of Common Stock that may be
acquired upon exercise of such warrants for a period of 120 days after the date
of this Prospectus.
CERTAIN TRANSACTIONS
During 1995, Mr. Witonsky had a month-to-month consulting agreement with the
Company to provide executive management and consulting services to the Company
for which he received annual compensation of $36,000. The agreement was
terminated effective December 31, 1995.
Mr. Spreng is President of IAI Ventures, Inc., the venture capital arm of
Investment Advisers Inc., which provides investment management services to
certain funds which, in the aggregate, beneficially own 785,501 shares of the
Common Stock of the Company, and shares voting and investment power with respect
thereto, and may be deemed to beneficially own such shares. Investment Advisers
Inc. has a one-year consulting agreement with the Company which commenced on
August 31, 1995. As consideration for this agreement, certain funds to which
Investment Advisers Inc. provides investment management services received
warrants to purchase a total of 70,000 shares of Common Stock exercisable at
$3.00 per share.
The Company's management believes that the terms of the transactions set forth
herein were no less favorable to the Company than would have been obtained from
unaffiliated third parties. Future transactions with officers, employees,
directors, five percent shareholders or affiliates of the Company will be on
terms no less favorable to the Company than those that are generally available
from unaffiliated third parties, and will be ratified by a majority of the
independent outside members of the Board of Directors who do not have an
interest in the transactions.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company on May 31, 1996, by (i) each person
or entity known to the Company to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) a
shareholder of the Company who is expected to sell Common Stock in the Company,
(iv) each Named Executive Officer of the Company, and (v) all of the Company's
executive officers and directors as a group. Unless otherwise indicated, the
person or entity listed in the table is the beneficial owner of the shares and
has sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES
SHARES BEING OFFERED PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) FOR SALE OFFERING OFFERING
<S> <C> <C> <C> <C>
DIRECTORS AND OFFICERS:
R. David Spreng(2) 715,501(3) -- 17.1% 11.2%
John G. Pappajohn(4) 353,325 -- 8.5 5.6
Mark J. Emkjer(4) 35,000(5) -- * *
Carl S. Witonsky(4) 25,365(6) -- * *
William W. Childs(4) 22,365(6) -- * *
Gordon Derzon(4) 3,000 -- * *
All directors and executive officers as a group
(9 persons) 1,177,666 -- 27.3 18.1
OTHER FIVE PERCENT OR MORE SHAREHOLDERS:
IAI Investment Funds 715,501(3) -- 17.1 11.2
Mutual Ventures of South Dakota(7) 423,825 -- 10.2 6.7
Michael J. Vasquez(8)(9) 261,444(10) 60,000 6.3 3.2
Simon Casady(11) 259,879 -- 6.2 4.1
Edgewater Private Equity Fund, LP(12) 212,096 -- 5.1 3.3
</TABLE>
__________
*Less than one percent.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
after May 31, 1996, have been exercised.
(2) The address for R. David Spreng and each of the IAI Funds is 3700 First
Bank Place, P.O. Box 357, Minneapolis, Minnesota 55402-0357.
(3) Includes 297,140 shares beneficially owned by IAI Investment Fund IV,
297,140 shares beneficially owned by IAI Investment Fund VI and 121,221
shares beneficially owned by IAI Investment Fund VII.
(4) Except as noted, the address of each officer and director of the Company is
1025 Ashworth Road, Suite 240, West Des Moines, Iowa 50265.
(5) Consists of options granted in 1996 in connection with the employment of
Mr. Emkjer as Chief Executive Officer of the Company.
(6) Includes 22,365 shares issuable upon the exercise of warrants.
(7) Address: 5400 University Avenue, West Des Moines, Iowa 50266. Does not
include shares which may be deemed to be owned indirectly by Mutual
Ventures of South Dakota as a 7.5% shareholder of Iowa Business Development
Finance Corp., which owns approximately 4.3% of the outstanding shares of
the Company.
(8) Mr. Vasquez was President and Chief Executive Officer of the Company
until March 15, 1996.
(9) Address: 2909 Southern Hill Circle, Des Moines, Iowa 50321.
(10) Includes 8,182 shares issuable upon exercise of warrants and the 60,000
shares being offered by the Selling Shareholder hereby.
(11) Address: 1238 Fulton, Indianola, Iowa 50125.
(12) Address: 666 Grand Avenue, Suite 200, Des Moines, Iowa 50309 Attention:
James A. Gordon.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description does not purport to be complete and is qualified in
its entirety by this reference to the Company's Restated Articles of
Incorporation, as amended (the "Articles"), a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 20,000,000 shares of
common stock, no par value (the "Common Stock"), and 5,000,000 shares of
preferred stock, no par value (the "Preferred Stock"). As of April 2, 1996,
there were 4,152,199 shares of Common Stock issued and outstanding, held by
approximately 900 holders of record, and no shares of Preferred Stock
outstanding. In addition, 1,152,855 shares of Common Stock were reserved for
issuance under outstanding options and warrants as of March 31, 1996.
Effective March 6, 1995, all outstanding shares of Common Stock were split on an
approximately 1-for-1.8 reverse basis. All previously outstanding shares of the
Company's preferred stock, no par value per share, designated as Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, and Series
H Preferred Stock, were also split on the same basis and were converted into
shares of Common Stock on April 27, 1995, upon the completion of the Company's
initial public offering. Following the closing of this offering there will be
6,352,199 shares of Common Stock outstanding, excluding warrants and options to
acquire shares of Common Stock, and no shares of Preferred Stock will be
outstanding.
ELECTION OF DIRECTORS
The Bylaws and Restated Articles of the Company were amended by the shareholders
at the Company's 1995 Annual Meeting to establish a staggered term for the Board
of Directors, such that one third of the total number of directors are elected
at each annual meeting of shareholders, for a term of three years. All directors
hold office until the election and qualification of their successors.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, no par
value. The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the Common Stock voted for the election of directors
can elect all directors nominated. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no conversion, preemptive or other subscription rights, and there
are no redemption provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby when issued for the consideration set forth in this Prospectus will be,
fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock
with such designation, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. Such transactions could be made more difficult to accomplish even if
favorable to the interests of the shareholders. The Company is not aware of any
person seeking to gain control of the Company.
REGISTRATION RIGHTS
Following the Company's initial public offering, holders of approximately
2,000,000 shares of Common Stock, which were converted from Preferred Stock,
received certain limited rights to require the Company to register their shares
of Common Stock under the Securities Act pursuant to the terms of the
Stockholder Rights Agreement or the Series H Preferred Stock Stockholder Rights
Agreement (the "Rights Agreements") relating to the former of Preferred Stock.
In addition, holders of Class A Warrants, Class B Warrants, Agent's Warrants and
a warrant granted to the managing underwriter of the Company's initial public
offering (collectively the "Warrants") possess certain limited rights to have
387,785 shares issuable upon exercise of such warrants registered by the Company
under the Securities Act. (The shares under the Rights Agreements and such
warrants are collectively referred to as the "Registrable Securities.") All such
holders of Registrable Securities have waived their registration rights in
connection with this offering. Under the terms of the Rights Agreements and
Warrants, whenever the Company proposes to register any of its securities under
the Securities Act, other than pursuant to employee benefit or incentive plans
of the Company, the holders of Registrable Securities may require the Company,
subject to certain limitations, to include all or part of the Registrable
Securities in such registration, with the Company bearing expenses of such
registration (other than underwriting discounts and commissions) and subject to
certain other limitations.
If and when the Company is entitled to register shares of Common Stock on a Form
S-3 registration statement, or its equivalent, a specified number of holders of
shares under each of the Rights Agreements or holders of the Warrants can
require the Company, subject to certain limitations, to file such a registration
statement under the Securities Act covering all or part of the Registrable
Securities, with the Company bearing the expenses of such registration (other
than underwriting discounts and commissions) and subject to certain other
limitations.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Iowa Business Corporation Act provides that officers and directors of the
Company have the right to indemnification from the Company for liability arising
out of certain actions.
The Company has adopted in its Articles of Incorporation a provision which
limits personal liability for breach of fiduciary duty to its directors, to the
extent allowed by the Iowa Business Corporation Act. Such provision eliminates
the personal liability of directors for monetary damages occasioned by breach of
fiduciary duty, except for liability based on a breach of the director's duty of
loyalty to the Company, acts or omissions not made in good faith, acts or
omissions involving intentional misconduct or a knowing violation of law or a
transaction from which the director derives an improper personal benefit,
payments of improper dividends and acts occurring prior to the date such
provision was adopted.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock of the Company is Norwest
Bank Minnesota, N.A.
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, and based on the number of shares of Common
Stock outstanding as of March 31, 1996, the Company will have 6,352,199 shares
of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). The 2,260,000 shares sold in this offering will be
freely tradable without restriction or registration under the Securities Act,
except any shares subject to lock-up agreements as described below or purchased
by an "affiliate of the Company." The "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under Sections 3(b) and 4(2) of the Securities Act, and may not be
resold unless they are registered, or sold pursuant to an applicable exemption
from registration, such as Rule 144 or Rule 701 under the Securities Act.
All of the Company's officers and directors and certain other shareholders of
Common Stock holding an aggregate of 2,233,883 shares of Common Stock have
agreed in writing with the Company and Volpe, Welty & Company not to sell,
transfer, or otherwise dispose of, or agree to sell, transfer or otherwise
dispose of, any shares of Common Stock during the 120-day period commencing on
the date of this Prospectus without the prior written consent of Volpe, Welty &
Company. These 120-day lock-up agreements take precedence over the limitations
on sale under the Securities Act. Upon expiration of these lock-up agreements, a
total of 1,997,958 shares of Common Stock would become eligible for sale in the
public market pursuant to Rule 144 approximately 120 days after the date of this
Prospectus. See "Underwriting."
The Company has previously issued warrants and options to officers, directors,
employees and certain shareholders of the Company, all 635,446 shares of which
are also subject to 120-day lock-up agreements. Beginning 120 days after the
date of this Prospectus, 121,404 of such warrants and options will be
exercisable and the shares acquired upon exercise will become eligible for sale
in the public market, pursuant to Rule 144 or Rule 701. In the event Volpe,
Welty & Company would consent in writing to a sale of any such shares prior to
the expiration of the 120-day lock-up agreements, a total of 102,640 shares
issuable upon the exercise of outstanding warrants to purchase Common Stock
would become eligible for sale in the public market pursuant to Rule 144 or Rule
701.
In addition, an aggregate of 2,280,848 Restricted Shares and warrants to
purchase Common Stock previously issued to shareholders and the Representative
in the initial public offering which have limited registration rights may be
entitled to exercise such rights and sell their shares in the public market,
subject to all qualifications for such exercise being satisfied including that
the Company's ability to use Form S-3 to register shares of stock under the
Securities Act. See "Underwriting" and "Description of Capital Stock."
In general, under Rule 144 as currently in effect, subject to the satisfaction
of certain other conditions, a person, including an affiliate of the Company (or
persons whose shares are aggregated), who has beneficially owned "restricted
securities" (as such term is defined in Rule 144) for at least two years is
entitled to sell, within any three-month period, a number of shares of Common
Stock that does not exceed the greater of one percent of the total number of
then outstanding shares of the Company's Common Stock (6,352,199 shares
immediately after this offering) or, the average weekly trading volume in the
Company's Common Stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain restrictions relating to the manner
of sale, notice and the availability of current public information about the
Company. A person who has not been an affiliate of the Company at any time
during the 90 days immediately preceding the sale and who has beneficially owned
shares of Common Stock for at least three years is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, notice or other requirements of Rule 144. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 prior to effecting a transfer of such shares. Such
opinion, if appropriate, will be provided at the expense of the Company. Under
Rule 701, shares issued under certain compensatory stock based plans, such as
the Company's 1995 Stock Compensation Plan, may, commencing 90 days after the
date of this Prospectus, be resold under Rule 144 by non-affiliates, subject
only to the manner of sale requirements and by affiliates, subject to all of the
requirements other than the two-year holding period.
No prediction can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Sales of substantial numbers of shares of Common Stock could
adversely affect prevailing market prices.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the Company
and the Selling Shareholder have agreed to sell to each of the underwriters
named below (the "Underwriters"), and each of such Underwriters, for whom Volpe,
Welty & Company is acting as representative (the "Representative"), has agreed
to purchase from the Company and the Selling Shareholder the respective number
of shares of Common Stock set forth opposite its name below. The Underwriters
are committed to purchase and pay for all shares, if any shares are purchased.
NUMBER
UNDERWRITER OF SHARES
Volpe, Welty & Company
Total 2,260,000
The Representatives have advised the Company and the Selling Shareholder that
the Underwriters propose to offer the shares of Common Stock to the public at
the offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not in excess of $ per share, of
which $ may be reallocated to other dealers. After the offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reductions shall change the amount of proceeds to be
received by the Company and the Selling Shareholder as set forth on the cover
page of this Prospectus.
The Company has granted the Underwriters an option for thirty days after the
date of this Prospectus to purchase, at the offering price, less the
underwriting discounts and commissions as set forth on the cover page of this
Prospectus, up to an aggregate amount of 339,000 additional shares of Common
Stock at the same price per share as the Company and the Selling Shareholder
receive for the 2,260,000 shares of Common Stock offered hereby, solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them, as shown in the foregoing
table, bears to the 2,260,000 shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover the over-allotments in
connection with the sale of 2,260,000 shares of Common Stock offered hereby.
Each of the directors and officers, and certain other holders of outstanding
shares of Common Stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of Common Stock or securities convertible into or exchangeable
for, or any rights to purchase or acquire, Common Stock for a period of 120 days
following the date of this Prospectus, without the prior written consent of
Volpe, Welty & Company. The Company also has agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for, any rights to purchase or acquire, Common
Stock or any securities convertible into or exchangeable for, or any rights to
purchase or acquire, Common Stock for a period of 120 days following the date of
this Prospectus without the prior written consent of Volpe, Welty & Company,
except for the granting of options or the sale of stock pursuant to the
Company's Option Plan. Volpe, Welty & Company, in its discretion, may waive the
foregoing restrictions in whole or in part, with or without a public
announcement of such action.
The Representative has informed the Company that the Underwriters do not intend
to confirm sales to accounts over which the Underwriters have discretionary
authority.
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the Common
Stock during the "cooling off" period immediately preceding the commencement of
sales in the offering. The Commission has, however, adopted exemptions from
these rules that permit passive market making under certain conditions. These
rules permit an underwriter to continue to make a market subject to the
conditions, among others, that its bid not exceed the highest bid by a market
maker not connected with the offering and that its net purchases on any one
trading day not exceed prescribed limits. Pursuant to these exemptions, certain
Underwriters, selling group members (if any) or their respective affiliates may
have engaged in passive market making in the Company's Common Stock during the
cooling off period.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
this offering, including liabilities under the Securities Act, or to contribute
payments that the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters will be passed upon for the Underwriters by Cooley Godward Castro
Huddleson & Tatum, Palo Alto, California.
EXPERTS
The financial statements of PACE Health Management Systems, Inc. as of December
31, 1994 and 1995, and for each of the three years in the period ended December
31, 1995, included in this Prospectus and Registration Statement have been
audited by McGladrey and Pullen, LLP, independent auditors, as stated in their
report thereon appearing elsewhere herein, and have been so included in reliance
upon the report given upon their authority as experts in accounting and
auditing.
In December 1994, the Company's Board of Directors decided to retain McGladrey &
Pullen, LLP as its independent public accountants and dismissed the Company's
former auditors, Ernst & Young, LLP. There were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at the time of the change or
with respect to the Company's financial statements for fiscal year 1993. The
report of the former auditors for the year ended December 31, 1993, was
unqualified. Prior to retaining McGladrey & Pullen, LLP, the Company had not
consulted with McGladrey & Pullen, LLP regarding any issue.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby, of which this Prospectus forms a part. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
offering, reference is made to the Registration Statement, including the
exhibits filed therewith, which may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
New York Regional Office, 7 World Trade Center, New York, New York 10048; and
Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed as
an exhibit to the Statement, each such statement is qualified in all respects by
reference to the applicable document filed with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files
annual and quarterly reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the regional offices maintained by the Commission at 7 World Trade Center, 13th
Floor, New York, New York 10048, and 500 West Madison Street, Room 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N/W., Room 1024, Washington, D.C. 20549. The Common Stock of the
Company is traded on the Nasdaq SmallCap Market. Reports, proxy statements and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington D.C.
10006.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7-11
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PACE Health Management Systems, Inc.
West Des Moines, Iowa
We have audited the accompanying balance sheets of PACE Health Management
Systems, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PACE Health Management Systems,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Des Moines, Iowa
January 19, 1996
PACE HEALTH MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash (Note 7) $ 112,203 $ 2,831,658 $ 1,556,023
Cash, restricted (Note 3) 500,000 -- --
Accounts receivable, less allowance for doubtful
accounts 1994 none; 1995 $80,000 (Note 10) 172,813 628,699 678,007
Stock subscriptions receivable 881,285 -- --
Inventories, primarily computer equipment 49,798 22,993 50,690
Prepaid expenses 20,790 37,056 42,508
Total current assets 1,736,889 3,520,406 2,327,228
Furniture and Equipment, net of accumulated
depreciation 1994 $158,680; 1995 $282,939 (Note 3) 167,762 378,879 423,675
Computer Software Development Costs:
Purchased 1,516,860 1,516,860 1,548,240
Internally developed 658,197 806,058 868,895
2,175,057 2,322,918 2,417,135
Less accumulated amortization 294,845 542,455 602,503
1,880,212 1,780,463 1,814,632
$ 3,784,863 $ 5,679,748 $ 4,565,535
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank (Note 3) $ 500,000 $ -- $ --
Current maturities of long-term obligations (Note 3) 806,733 761,932 14,544
Accounts payable 165,161 191,899 188,907
Accrued expenses 95,323 210,142 298,178
Deposits 192,995 61,873 190,222
Total current liabilities 1,760,212 1,225,846 691,851
Long-Term Obligations, less current maturities (Note
3) 854,731 47,663 43,554
Commitments and Contingencies (Note 8)
Shareholders' Equity (Note 9):
Series A-H preferred stock, no par value; authorized 5,000,000 shares; issued
and outstanding 1994 1,720,370 shares; 1995 None; subscribed for
but not issued 1994 213,660 shares; 1995 None 7,401,455 -- --
Common stock, no par value; authorized 20,000,000
shares; issued and outstanding 1994 874,136 shares;
1995 4,152,199 shares (Note 4) 250,219 13,300,481 13,300,481
Additional paid-in capital -- -- 54,011
Accumulated deficit (6,481,754) (8,894,242) (9,524,362)
1,169,920 4,406,239 3,830,130
$ 3,784,863 $ 5,679,748 $ 4,565,535
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Systems revenues $ 435,416 $ 52,346 $ 1,730,705 $ 320,022 $ 705,052
Customer support services 262,003 325,487 350,091 81,806 100,144
697,419 377,833 2,080,796 401,828 805,196
Costs and expenses (Note 11):
Cost of systems revenues 163,432 64,101 621,023 56,992 114,083
Client services 253,682 436,384 868,382 149,560 168,918
Product development
(Note 12) 139,623 2,131,616 980,144 119,542 338,950
Sales and marketing 480,916 622,302 865,105 155,243 321,047
General and administrative 659,387 734,934 1,285,617 258,917 517,403
1,697,040 3,989,337 4,620,271 740,254 1,460,401
Loss from operations (999,621) (3,611,504) (2,539,475) (338,426) (655,205)
Other income (expense):
Interest income 3,765 4,939 149,783 5,890 25,305
Interest expense (28,276) (16,596) (22,796) (15,185) (220)
(24,511) (11,657) 126,987 (9,295) 25,085
Loss before income taxes (1,024,132) (3,623,161) (2,412,488) (347,721) (630,120)
Provision for income taxes (Note 6) -- -- -- -- --
Net loss $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120)
Loss per common and common
equivalent share (Note 1) $ (0.98) $ (3.39) $ (0.78) $ (0.34) $ (0.15)
Weighted average number of
common and common equivalent shares
outstanding (Note 1) 1,042,591 1,069,337 3,091,560 1,028,139 4,152,199
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
THROUGH H COMMON ADDITIONAL
PREFERRED STOCK PAID-IN ACCUMULATED
STOCK ISSUED CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 1,747,209 $ 250,219 $ -- $(1,834,461) $ 162,967
Issuance of Series F Preferred Stock 745,962 -- -- -- 745,962
Issuance of redeemable Series G
Preferred Stock 526,814 -- -- -- 526,814
Net loss -- -- -- (1,024,132) (1,024,132)
Balance, December 31, 1993 3,019,985 250,219 -- (2,858,593) 411,611
Issuance of 851,001 shares of redeemable
Series G Preferred Stock 3,507,185 -- -- -- 3,507,185
213,660 shares of redeemable Series H
Preferred Stock subscribed for 874,285 -- -- -- 874,285
Net loss -- -- -- (3,623,161) (3,623,161)
Balance, December 31, 1994 7,401,455 250,219 -- (6,481,754) 1,169,920
Issuance of 44,033 shares of redeemable
Series H Preferred Stock 148,084 -- -- -- 148,084
Conversion of 1,978,063 shares of Series
B through H Preferred Stock to Common
Stock (Note 9) (7,549,539) 7,549,539 -- -- --
Issuance of 1,200,000 shares of Common
Stock (Note 9) -- 5,065,120 -- -- 5,065,120
Issuance of 100,000 shares of Common
Stock (Note 9) -- 435,603 -- -- 435,603
Net loss -- -- -- (2,412,488) (2,412,488)
Balance, December 31, 1995 -- 13,300,481 -- (8,894,242) 4,406,239
Compensation expense related to stock
option (unaudited) -- -- 54,011 -- 54,011
Net loss (unaudited) -- -- -- (630,120) (630,120)
Balance, March 31, 1996 (unaudited) $ -- $13,300,481 $54,011 $(9,524,362) $ 3,830,130
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 35,977 62,258 124,259 22,185 39,955
Amortization 81,859 198,253 247,610 13,560 60,048
Compensation expense recognized upon grant of option -- -- -- -- 54,011
Provision for doubtful accounts -- -- 80,000 -- --
Change in assets and liabilities:
(Increase) decrease in accounts receivable 236,886 143,089 (535,886) (98,684) (49,308)
(Increase) decrease in inventories 15,294 (27,185) 26,805 (77,146) (27,697)
(Increase) in prepaid expenses (6,314) (10,758) (16,266) (231,344) (5,452)
Decrease in deposit with software developer -- 500,000 -- -- --
Increase (decrease) in accounts payable and
accrued expenses (107,821) 15,960 155,443 345,579 85,044
Increase (decrease) in deposits -- 192,995 (131,122) 27,382 128,349
Net cash (used in) operating activities (768,251) (2,548,549) (2,461,645) (346,189) (345,170)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized computer software development costs (260,508) (191,305) (147,861) (81,144) (94,217)
Proceeds from payments on notes receivable 3,016 13,403 -- -- --
Purchase of furniture and equipment (88,971) (114,768) (335,376) (85,009) (84,751)
Deposit with software developer (500,000) -- -- -- --
Net cash (used in) investing activities (846,463) (292,670) (483,237) (166,153) (178,968)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for expenses of issuing capital stock (27,224) (9,939) (447,864) -- --
Proceeds from notes payable 673,000 -- 500,000 500,000 --
Proceeds from sale of Preferred Stock 1,300,000 3,510,124 71,971 38,434 --
Proceeds from sale of Common Stock -- -- 5,915,050 -- --
Proceeds from collection of subscriptions receivable -- -- 881,285 881,285 --
Principal payments on long-term obligations (346,604) (5,128) (756,105) (376,818) (751,497)
Payments on notes payable -- (555,000) (500,000) -- --
Net cash provided by (used in) financing
activities 1,599,172 2,940,057 5,664,337 1,042,901 (751,497)
Net increase (decrease) in cash (15,542) 98,838 2,719,455 530,559 (1,275,635)
CASH
Beginning 28,907 13,365 112,203 112,203 2,831,658
Ending $ 13,365 $ 112,203 $ 2,831,658 $ 642,762 $1,556,023
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash payments of interest $ 14,681 $ 6,185 $ 22,796 $ 15,185 $ 220
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Series H Preferred Stock for release of
note payable to shareholder $ -- $ -- $ 109,650 $ 109,650 $ --
Computer software development costs financed with
long-term obligation -- 1,500,000 -- -- --
Proceeds from note payable assigned as collateral -- 500,000 -- -- --
Subscriptions receivable for Series H Preferred Stock -- 881,285 -- -- --
Accrued interest converted to long-term obligation 11,989 -- 13,886 13,886 --
Repayment of notes payable with proceeds assigned as
collateral -- -- 500,000 500,000 --
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
1995 AND 1996 IS UNAUDITED.)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company develops, markets and supports advanced clinical
software which automates the recording, storage and management of patient care
information. The software provides complete care management solutions to
physicians, nurses and other clinicians in multiple settings at the point of
care. The Company extends credit to its customers, located throughout the United
States, on an unsecured basis on terms that it establishes for individual
customers. One customer accounted for 11.3% of net revenues for 1995 (none in
1994).
In 1995, the Company's Board of Directors approved changing its name from Health
Care Expert Systems, Inc. to PACE Health Management Systems, Inc.
A summary of the Company's significant accounting policies is as follows:
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
FURNITURE AND EQUIPMENT: Furniture and equipment are stated at cost.
Depreciation of furniture and equipment is computed by straight-line and 200%
declining-balance methods over five to seven-year lives.
COMPUTER SOFTWARE DEVELOPMENT COSTS: Computer software development costs are
capitalized and amortized by the greater of (a) the ratio that current gross
revenues for software sales bear to the total of current and anticipated future
gross revenues for such software sales or (b) the straight-line method over the
estimated economic life, usually three to seven years, of the software. It is
reasonably possible that those estimates of anticipated future gross revenues,
the estimated economic life of the software, or both will be reduced
significantly in the near term. Amortization expense was $81,859, $198,253 and
$247,610 in 1993, 1994 and 1995, respectively.
REVENUE RECOGNITION:
SYSTEMS REVENUES: The Company recognizes revenue from sales of software
systems (primarily software license fees, implementation fees and hardware
sales) upon installation and implementation of the system to a customer,
unless the Company has significant related obligations remaining. When
significant obligations remain after the system has been implemented,
revenue is not recognized until such obligations have been completed or are
no longer significant. Revenues from software systems that require
significant customization are recognized on a percentage of completion
method, with progress-to-completion measured based upon labor costs incurred
or achievement of contract milestones.
CUSTOMER SUPPORT SERVICES: Revenue from customer support services,
including system updates, is recognized over the period the services are
provided. Other customer support services revenue is recognized as services
are performed.
INCOME TAXES: Deferred taxes are provided for on a liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
ACCOUNTING 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 COMMON AND COMMON EQUIVALENT SHARE: Loss per common and common
equivalent share is based on the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive, except that, pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, stock options and warrants granted with exercise
prices below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Registration Statement have been
included in the computation as if they were outstanding for all years presented.
RECENTLY ISSUED ACCOUNTING STANDARD: In October 1995, the FASB Issued SFAS No.
123, Accounting for Stock-Based Compensation, which establishes a fair value
based method for financial accounting and reporting for stock-based employee
compensation plans and for transactions in which an entity issues its equity
instruments to acquire goods and services from non-employees. However, the new
standard allows compensation to continue to be measured by using the intrinsic
value based method of accounting prescribed by APB No. 25, Accounting for Stock
Issued to Employees, but requires expanded disclosures. SFAS No. 123 is
effective in fiscal year 1996. The Company has elected to continue to apply the
intrinsic value based method of accounting for stock options issued to
employees.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and notes
related thereto as of March 31, 1996, and for the three month periods ended
March 31, 1995 and 1996, are unaudited, but in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations. The
operating results for the interim periods are not indicative of the operating
results to be expected for a full year or for other interim periods. Not all
disclosures required by generally accepted accounting principles necessary for a
complete presentation have been included.
NOTE 2. ROYALTY AGREEMENT
In December 1989, the Company entered into an agreement with Creighton
University (Creighton) to purchase certain software programs in consideration
for payment of a five percent royalty on software program sales, up to a maximum
amount of $300,000. Cumulative royalty expense to Creighton through December 31,
1995 was approximately $112,800.
NOTE 3. PLEDGED ASSETS AND LONG-TERM OBLIGATIONS AT DECEMBER 31, 1995
The Company's long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
PAYMENTS
DUE WITHIN
TOTAL ONE YEAR
<S> <C> <C>
Unsecured note payable, shareholder, due in monthly
installments of $824 beginning in June 1996 plus interest at 9%,
through May 2001 $ 49,431 $ 5,767
Note payable, financial institution, collateralized by computer
equipment with a depreciated cost of approximately $5,200, due
in monthly installments of $572 including interest at 9%,
through
August 1997 10,164 6,165
Unsecured non-interest bearing payable to software developer,
balance due January 31, 1996 750,000 750,000
$809,595 $761,932
</TABLE>
Approximate aggregate maturities of long-term obligations are as follows as of
December 31, 1995:
Year ending December 31,
1996 $761,900
1997 13,900
1998 9,900
1999 9,900
2000 9,900
2001 4,095
$809,595
Based on the borrowing rates currently available to the Company for long-term
obligation with similar maturities, the fair value of long-term obligations
approximates their carrying value at December 31, 1995.
At December 31, 1994, the Company had a $500,000 promissory note payable to a
bank. The note payable was secured by assignment of a savings account with a
balance of $500,000 at December 31, 1994. The note payable was paid in full in
January 1995 with funds from the savings account.
NOTE 4. COMMON STOCK OPTIONS AND WARRANTS
The Company has issued Common Stock purchase warrants to various shareholders,
directors, employees, and certain accredited investors. One group of warrants
expires ten years after the date of issuance, and is exercisable one-third
annually on a cumulative basis from the anniversary date of the warrant. The
second group of warrants expires five years after the date of issuance and is
20% exercisable on the date issuance and 20% annually thereafter. The third
group of warrants expires five or ten years after the date of issuance and is
exercisable in 4 months to one year after the date of issuance. At December 31,
1995, warrants to purchase an aggregate of 292,920 shares were outstanding, and
warrants to purchase 207,102 shares were exercisable. The warrants provide for
reductions in the exercise price under certain terms and conditions and are
exercisable at prices ranging from $.37 to $5.91 per share with an average price
per share of approximately $3.16.
The Company has issued Class A and Class B warrants to former serial preferred
shareholders and certain accredited investors. The warrants were exercisable
beginning in April 1995 and expire in January, 2000. The exercise price of the
warrants is $3.75. The Class A and Class B warrant holders were granted certain
limited piggyback and Form S-3 registration rights with respect to the shares
issuable upon exercise of the warrants. At December 31, 1995, Class A warrants
to purchase 128,236 shares and Class B warrants to purchase 59,105 shares were
outstanding and exercisable.
For nominal consideration, the Company has issued a warrant to the underwriter
of the initial public offering to purchase 115,445 shares of common stock at an
exercise price of $6.00 per share. The warrant is exercisable in April 1996 and
expires in April 2000.
In addition, in December 1994, the Board of Directors adopted the Health Care
Expert Systems, Inc. 1995 Stock Compensation Plan (the "Stock Compensation
Plan"). The Stock Compensation Plan provides for the grant of incentive stock
options, nonqualified stock options, restricted stock, stock bonuses and stock
appreciation rights. The Stock Compensation Plan is administered by the Board of
Directors which has the authority and discretion to determine: the persons to
whom the options will be granted; when the options will be granted; the number
of shares subject to each option; the price at which the shares subject to each
option may be purchased; and when each option will become exercisable. Options
under the Stock Compensation Plan generally expire on the earlier of the tenth
anniversary of the date the options were granted or the end of the 30 day period
following termination of employment. As of December 31, 1995, the Company had
granted options to purchase 218,421 shares with option prices ranging from $2.75
to $3.00 per share, and options to purchase 14,809 shares were exercisable. The
Company has reserved 545,494 shares of Common Stock for future issuance under
the Stock Compensation Plan described above.
NOTE 5. OPERATING LEASES
The Company leases its office facilities under an operating lease expiring in
May 1997. The lease requires monthly payments of approximately $10,500. The
total remaining commitment at December 31, 1995 is approximately $179,000. Rent
expense for 1993, 1994 and 1995 was approximately $45,000, $82,000 and $123,000,
respectively.
NOTE 6. INCOME TAX MATTERS
Approximate net deferred tax assets were as follows:
DECEMBER 31,
1994 1995
Deferred tax assets:
Net operating loss carryforwards $ 1,516,000 $ 2,825,900
Computer software development
costs 446,100 164,700
Deferred revenue 285,000 163,300
Research and development credits 83,100 92,300
Allowance for doubtful accounts -- 31,200
Accrued vacation 10,800 17,600
Deferred interest income 35,400 17,000
2,376,400 3,312,000
Less valuation allowance (2,376,400) (3,312,000)
$ -- $ --
The Company recorded valuation allowance of approximately $2,376,400 and
$3,312,000 on deferred taxes at December 31, 1994 and 1995, respectively, to
reduce the total to an amount that management believes will ultimately be
realized. Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. The net
change in the valuation allowance for deferred tax assets was an increase of
approximately $374,000, $1,447,400 and $935,600 during 1993, 1994 and 1995,
respectively.
At December 31, 1995, the Company had approximately $7,246,000 of net operating
loss carryforwards to offset future federal taxable income. This net operating
loss carryforward will, if unused, expire in the years 2006 through 2011.
Approximately $4,945,000 of the total net operating loss carryforwards available
to offset future federal taxable income is annually limited to approximately
$1,400,000.
NOTE 7. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
NOTE 8. CONSULTING SERVICES AGREEMENT
The Company is a party to a joint employer agreement with Merit Resources, Inc.
(Merit), a professional employer organization, whereby Merit provides payroll
administration and employee benefits services to the Company for all the
Company's employees. As compensation for the above services, the Company is
obligated to pay Merit an enrollment set-up fee of $40 per employee and an
administrative charge of $41 per employee per month. The term of the agreement
is for one year, beginning on the effective date of January 1, 1995, and will be
automatically renewed from year to year, unless either party terminates the
agreement upon thirty days written notice. Expense for the years ended December
31, 1993, 1994 and 1995 was $12,288, $17,671 and $23,646, respectively.
NOTE 9. INITIAL PUBLIC OFFERING, REVERSE STOCK SPLIT, CONVERSION OF PREFERRED
STOCK, SUPPLEMENTARY EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
AND STOCK SUBSCRIPTION RECEIVABLE
In April 1995, the Company sold, through an underwritten initial public
offering, 1,200,000 shares of Common Stock at $5.00 per share, which provided
the Company with proceeds of approximately $5,065,120, net of offering expenses.
In June 1995, an additional 100,000 shares of Common Stock were sold at $5.00
per share, pursuant to the underwriters' over-allotment provision. Cash provided
from the over-allotment sale totaled approximately $435,603, net of offering
expenses.
As part of the initial public offering, Common Stock and Preferred Stock were
adjusted for an approximate 1-for-1.8 reverse stock split and all Preferred
Stock outstanding as of the date of the public offering was converted to Common
Stock on a 1-for-1 basis. If all Preferred Stock converted to Common Stock would
have been converted at the beginning of the year, loss per common and common
equivalent share would have been $(0.65) for 1995.
In January 1995, the stock subscriptions receivable balance of $881,285 was
collected in full.
NOTE 10. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1995 included $100,688 (none at December 31,
1994) in unbilled accounts receivable which, in accordance with generally
accepted accounting principles, was recognized in revenue prior to when payments
were due to the Company under the sales agreements.
NOTE 11. RECLASSIFICATION
Certain costs and expenses on the Statements of Operation for the fiscal years
ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995
(unaudited) have been reclassified with no effect on income.
NOTE 12. RESEARCH AND DEVELOPMENT COSTS
Total research and development costs charged to product development were
approximately $54,500, $1,998,000 and $732,500 for 1993, 1994 and 1995,
respectively.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, NOR IN WHICH THE PERSON
MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE OF THIS PROSPECTUS.
PAGE
Prospectus Summary 3
Risk Factors 5
The Company 12
Use of Proceeds 12
Dividend Policy 12
Capitalization 13
Dilution 14
Price Range of Common Stock 15
Selected Financial Data 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Business 25
Management 36
Compensation of Executive Officers and
Directors 38
Certain Transactions 42
Principal and Selling Shareholders 43
Description of Capital Stock 44
Securities Eligible for Future Sale 45
Underwriting 47
Legal Matters 48
Experts 48
Additional Information 48
Index to Financial Statements F-1
2,260,000 SHARES
[PACE Logo]
COMMON STOCK
PROSPECTUS
, 1996
VOLPE, WELTY & COMPANY
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable in connection with the sale of the Common
Stock being registered hereby.
ITEM AMOUNT
SEC registration fee $ 5,601
NASD filing fee *
Nasdaq National Market Listing Fee 33,380
Blue Sky fees and expenses 15,000
Printing and engraving expenses 55,000
Legal fees and expenses *
Auditors' accounting fees and expenses *
Transfer Agent and Registrar fees *
Miscellaneous expenses *
Total $500,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 490.850 through 490.858 of the Iowa Business Corporation Act provide
for the indemnification of officers and directors in terms sufficiently broad to
indemnify officers and directors under certain circumstances for liabilities
arising under the Securities Act of 1933, as amended. The Restated Articles of
Incorporation, as amended, and amended Bylaws of the Company provide for
indemnification and limit the liability of the Company's directors and officers
to the fullest extent permitted under Iowa law. Liability under Federal
Securities Law is not limited by the Restated Articles of Incorporation, as
amended, or action by the Company's Board of Directors.
The Company presently carries no directors and officers liability insurance, but
may in the future provide such insurance for the benefit of its officers and
directors.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
EXHIBIT
DOCUMENT NUMBER
Underwriting Agreement 1.1*
Registrant's Restated Articles of Incorporation, as
amended 3.1
Registrant's Restated Bylaws 3.2
__________
*To be supplied by amendment.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of the transactions by Registrant during the last
three years involving sales of Registrant's securities that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"):
Except as noted, there were no underwriting discounts or commissions paid
in connection with the issuance of any of these securities.
A. On March 25, 1993, the Company sold an aggregate of 181,832 shares
of Preferred Stock designated as Series F Preferred Stock to
various individuals at a purchase price of $4.12 per share for an
aggregate purchase price of $750,002, including: Edgewater Private
Equity Fund, L.P. ("Edgewater"), 60,610 shares; IASD Health
Services Corp. ("IASD"), 36,367 shares; Iowa Business Development
Finance Corp. ("IBDFC"), 36,367 shares; Mutual Ventures of South
Dakota ("MVSD"), 36,366 shares; and John Pappajohn, 12,122 shares.
B. Between November 15, 1993, and October 14, 1994, the Company sold
984,343 shares of preferred stock designated as Series G Preferred
Stock to various individuals at a purchase price of $4.12 per share
for an aggregate cash consideration of $4,060,121, including:
Edgewater, 60,610 shares; IASD, 24,244 shares; IBDFC, 36,366 shares;
MVSD, 72,732 shares; John Pappajohn, 60,610 shares, Iowa Product
Development Corporation ("IPDC") 24,244 shares, and IAI
Investment Funds IV, VI, and VII, 181,832, 181,831, and 121,221,
shares respectively. Holders of Series G Preferred Stock were granted
nontransferable Class A Warrants pro rata at the rate of one warrant
to acquire 109 shares of Common Stock per every $1,000 previously
invested at no additional cost as of February 10, 1995, in part as
consideration for their agreement to certain modifications in the
terms of the Series G Preferred Stock. The Class A Warrants are
exercisable at the lesser of 75% of the per share public offering
price, a subsequent private placement price in a single private
placement in which the Company receives at least $3,000,000 in gross
proceeds, or $4.12 per share. Class A Warrant holders were granted
certain limited piggyback and Form S-3 registration rights with
respect to the shares issuable upon exercise of the warrants. As of
April 25, 1995, holders of Class A Warrants to acquire 430,680 shares
of Common Stock voluntarily relinquished all rights to such Warrants.
That relinquishment was the result of a request by the Company to all
holders of Series G Preferred Stock to voluntarily surrender such
rights. Class A warrants to acquire 12,274 shares of Common Stock
remained outstanding as of April 25, 1995.
C. On December 31, 1994, the Company held subscriptions receivable of
$881,285 for the purchase of Series H Preferred Stock at the purchase
price of $4.12 per share on substantially the same terms and rights as
the Series G Preferred Stock, including nontransferable Class A
Warrants to purchase Common Stock at the rate of warrants for 109
shares of Common Stock per every $1,000 invested. Subsequently, the
Company received additional subscriptions for the purchase of 44,033
shares of Series H Preferred Stock for $71,971 in cash and for the
release of $109,650 in debt owed by the Company to Simon Casady. The
Company then issued a total of 257,693 shares of Series H Preferred
Stock and Class A Warrants to purchase 115,962 shares of Common Stock
for aggregate cash consideration of $1,062,906 as of February 6, 1995,
to various individuals, including: Edgewater, 31,639 shares; IBDFC,
17,449 shares; MVSD, 31,639 shares; John Pappajohn, 31,639 shares, IAI
Investment Funds IV and VI, 48,488 shares each, and Simon Casady,
26,584 shares.
D. On February 8, 1995, the Company issued subordinated notes in an
aggregate principal amount of $500,000, and nontransferable Class B
Warrants to purchase 54,549 shares of Common Stock to certain
accredited investors. The subordinated notes bear interest at the rate
of 14% per annum, are secured by a first subordinated lien on certain
technology of the Company and mature on the earlier of (i) February 8,
1996, or (ii) the closing of the initial public offering. The
Representative acted as agent in the placement of the subordinated
notes and as such received a cash commission of 5% of the principal
amount of the subordinated notes, and received Class B Warrants to
purchase 4,555 shares of Common Stock. The Class B Warrants are
exercisable at the lesser of 75% of the per share public offering
price, a subsequent private placement price in a single private
placement in which the Company receives at least $3,000,000 in gross
proceeds, or $4.12 per share. Warrant holders were granted certain
limited piggyback and Form S-3 registration rights with respect to the
shares issuable upon exercise of the warrants.
The sales set forth above were made in reliance on Section 3(b) or Section 4(2)
of the Securities Act for transactions not involving a public offering. With
regard to the reliance by the Company upon the exemptions from registration
provided under the Securities Act for the sales of securities disclosed above,
certain inquiries were made by the Company to establish that such sales
qualified for such exemption from the registration requirements. In particular,
the Company confirmed that with respect to the exemption claimed under Section
3(b) or Section 4(2) of the Securities Act (i) all offers of sales and sales
were made by personal contact from officers or directors of the Company or other
persons closely associated with the Company, (ii) each investor made
representations that he or she was sophisticated in relation to this investment
or was an "accredited investor" as defined in Rule 501 promulgated under the
Securities Act (and the Company has no reason to believe such representations
were incorrect), (iii) each purchaser gave assurance of investment intent and
the certificates for the shares bear a legend accordingly, and (iv) offers and
sales within any offering were made to a limited number of persons.
ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
1.1 * Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation, as amended.(1)
3.2 Restated Bylaws.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Series G Preferred Stock Purchase Agreement dated December 31, 1993.(1)
4.3 Series G Preferred Stockholders' Rights Agreement dated January 11, 1994.(1)
4.4 Series G Preferred Stock Purchase Agreement dated June 15, 1994, as amended.(1)
4.5 Series G Preferred Stockholders' Rights Agreement dated June 15, 1994, as amended.(1)
4.6 Series H Preferred Stock Purchase Agreement dated January 31, 1995.(1)
4.7 Series H Preferred Stockholders' Rights Agreement dated January 31, 1995.(1)
4.8 Preferred Stock Amendment Agreement dated as of February 10, 1995.(1)
4.9 Form of Class A Warrant Certificate.(1)
4.10 Form of Subordinated Notes dated February 8, 1995.(1)
4.11 Security Agreement Relating to Subordinated Notes dated February 8, 1995.(1)
4.12 Form of Class B Warrant Certificate.(1)
4.13 Form of Agent's Warrant.(1)
4.14 Restated Articles of Incorporation, as amended (See Exhibit 3.1).(1)
4.15 Restated By-Laws (See Exhibit 3.2).(1)
5.1 * Opinion of Dorsey & Whitney LLP.
10.1 Employment Agreement for Michael Vasquez, as amended December 16, 1994.(1)
10.2 Employment Agreement for Simon Casady, as amended December 16, 1994.(1)
10.3 1995 Stock Compensation Plan, effective February 10, 1995.(1)
10.4 Form of Incentive Stock Option Agreement.(1)
10.5 Form of Non-Qualified Stock Option Agreement.(1)
10.6 Form of Non-Employee Director Non-qualified Stock Option Agreement.(1)
10.7 Incentive Stock Option Agreement for Michael J. Vasquez dated December 16, 1994.(1)
10.8 Form of Five-year Employee Warrants.(1)
10.9 Form of Three-year Employee Warrants.(1)
10.10 Compensatory Warrants issued to Director Carl S. Witonsky dated April 22, 1994 and December 16,
1994.(1)
10.11 Compensatory Warrants issued to Director William W. Childs dated February 26, 1990, and December
16, 1994.(1)
10.12 Form of Lockup Agreements with Executive Officers, Directors and Shareholders.(1)
10.13 Consulting Services Agreement with Steven Evans dated December 31, 1993.(1)
10.14 Consulting Services Agreement with Carl S. Witonsky dated January 1, 1995.(1)
10.15 Software Purchase Agreement with JRS Clinical Technologies, Inc., dated October 18, 1993, and
amendments thereto.(1)
10.16 COMMES Purchase Agreement between the Company and Creighton University dated December 18, 1989.(1)
10.17 Office Lease and Amendments thereto between the Company and Ashworth Plaza Ltd.(1)
10.18 Merit Client Agreement dated January 1, 1995.(1)
10.19 Master Agreement with Customer dated September 30, 1994.(1)
10.20 Nonqualified Executive Stock Option Plan.(1)
11.1 Earnings Per Share Calculation.
16.1 Letter on change in certifying accountant.(1)
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors.
23.2 Consent of Dorsey & Whitney LLP (contained in Exhibit 5.1 above).
24.1 Power of Attorney (included on page II-5 of the Registration Statement).
</TABLE>
__________
* To be filed by amendment
(1) Incorporated by reference to the corresponding exhibit numbers in the
Company's Registration Statement on Form SB-2 filed on March 17, 1995,
Registration No. 33-90409-C.
(2) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996, Commission
File No. 0-27554.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters, at the Closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 14, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer of controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
Registrant will treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1), or(4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declares it effective.
(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
SIGNATURES
In accordance with the requirement of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of West Des
Moines, State of Iowa, on the day of , 1996.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
By: /s/ MARK J. EMKJER
------------------------
Mark J. Emkjer
CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Mark J. Emkjer and Roger D. Huseman and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as amended,
this Registration Statement was signed by the following persons in the
capacities indicated below and on the dates stated.
SIGNATURE TITLE
/S/ MARK J. EMKJER Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Mark J. Emkjer
/S/ ROGER D. HUSEMAN Vice President of Finance and Administration,
- ------------------------ Chief Financial Officer and Secretary and
Roger D. Huseman Treasurer
/S/ CARL S. WITONSKY
- ------------------------ Chairman of the Board and Director
Carl S. Witonsky
/S/ JOHN G. PAPPAJOHN Director
- ------------------------
John G. Pappajohn
/S/ R. DAVID SPRENG R. Director
- ------------------------
David Spreng
/S/ WILLIAM W. CHILDS Director
- ------------------------
William W. Childs
/S/ GORDON M. DERZON Director
- ------------------------
Gordon M. Derzon
INDEX TO EXHIBITS
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EXHIBIT DESCRIPTION
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1.1 * Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation, as amended.(1)
3.2 Restated Bylaws.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Series G Preferred Stock Purchase Agreement dated December 31, 1993.(1)
4.3 Series G Preferred Stockholders' Rights Agreement dated January 11, 1994.(1)
4.4 Series G Preferred Stock Purchase Agreement dated June 15, 1994, as amended.(1)
4.5 Series G Preferred Stockholders' Rights Agreement dated June 15, 1994, as amended.(1)
4.6 Series H Preferred Stock Purchase Agreement dated January 31, 1995.(1)
4.7 Series H Preferred Stockholders' Rights Agreement dated January 31, 1995.(1)
4.8 Preferred Stock Amendment Agreement dated as of February 10, 1995.(1)
4.9 Form of Class A Warrant Certificate.(1)
4.10 Form of Subordinated Notes dated February 8, 1995.(1)
4.11 Security Agreement Relating to Subordinated Notes dated February 8, 1995.(1)
4.12 Form of Class B Warrant Certificate.(1)
4.13 Form of Agent's Warrant.(1)
4.14 Restated Articles of Incorporation, as amended (See Exhibit 3.1).(1)
4.15 Restated By-Laws (See Exhibit 3.2).(1)
5.1 * Opinion of Dorsey & Whitney LLP.
10.1 Employment Agreement for Michael Vasquez, as amended December 16, 1994.(1)
10.2 Employment Agreement for Simon Casady, as amended December 16, 1994.(1)
10.3 1995 Stock Compensation Plan, effective February 10, 1995.(1)
10.4 Form of Incentive Stock Option Agreement.(1)
10.5 Form of Non-Qualified Stock Option Agreement.(1)
10.6 Form of Non-Employee Director Non-qualified Stock Option Agreement.(1)
10.7 Incentive Stock Option Agreement for Michael J. Vasquez dated December 16, 1994.(1)
10.8 Form of Five-year Employee Warrants.(1)
10.9 Form of Three-year Employee Warrants.(1)
10.10 Compensatory Warrants issued to Director Carl S. Witonsky dated April 22, 1994 and December 16,
1994.(1)
10.11 Compensatory Warrants issued to Director William W. Childs dated February 26, 1990, and December
16, 1994.(1)
10.12 Form of Lockup Agreements with Executive Officers, Directors and Shareholders.(1)
10.13 Consulting Services Agreement with Steven Evans dated December 31, 1993.(1)
10.14 Consulting Services Agreement with Carl S. Witonsky dated January 1, 1995.(1)
10.15 Software Purchase Agreement with JRS Clinical Technologies, Inc., dated October 18, 1993, and
amendments thereto.(1)
10.16 COMMES Purchase Agreement between the Company and Creighton University dated December 18, 1989.(1)
10.17 Office Lease and Amendments thereto between the Company and Ashworth Plaza Ltd.(1)
10.18 Merit Client Agreement dated January 1, 1995.(1)
10.19 Master Agreement with Customer dated September 30, 1994.(1)
10.20 Nonqualified Executive Stock Option Plan.(1)
11.1 Earnings Per Share Calculation.
16.1 Letter on change in certifying accountant.(1)
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors.
23.2 Consent of Dorsey & Whitney LLP (contained in Exhibit 5.1 above).
24.1 Power of Attorney (included on page II-5 of the Registration Statement).
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* To be filed by amendment
(1) Incorporated by reference to the corresponding exhibit numbers in the
Company's Registration Statement on Form SB-2 filed on March 17, 1995,
Registration No. 33-90409-C.
(2) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996, Commission
File No. 0-27554.
EXHIBIT 11.1
PACE HEALTH MANAGEMENT SYSTEMS, INC.
EARNINGS PER SHARE CALCULATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1992 1993 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
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Weighted average number of
shares outstanding 1,034 1,043 1,070 3,092 1,028 4,152
Net loss available for common
and common equivalent shares $ (421) $(1,024) $(3,623) $(2,412) $ (348) $ (630)
Loss per common and common
equivalent share $(0.41) $ (0.98) $ (3.39) $ (0.78) $(0.34) $(0.15)
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The above computation has been adjusted to reflect a 1-for-1.8 stock split
effected prior to the date of the Company's initial public offering (April 27,
1995).
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
PACE Health Management Systems, Inc.
1025 Ashworth Road
West Des Moines, IA 50265
We hereby consent to the use in this Registration Statement on Form S-1 of our
report, dated January 19, 1996, relating to the financial statements of PACE
Health Management Systems, Inc., and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Des Moines, Iowa
July 2, 1996
