As filed with the Securities and Exchange Commission on August 9, 1996
Registration No. 333-7487
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
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.
Dorsey & Whitney LLP
Pillsbury Center South, 220 South Sixth Street
Minneapolis, Minnesota 55402
(612) 340-2600
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 OFFERING PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
- --------------------------- ------------- ------------------------ -------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, no par value 900,000 shares $3.25 $2,925,000 $1,009(1)
</TABLE>
(1) The registration fee with respect to 2,599,000 shares of Common Stock, no
par value, was paid at the time of the initial filing.
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.
AMENDMENT NO. 1
TO
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
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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; Plan of Distribution
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; Plan of Distribution
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; 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>
900,000 SHARES
[LOGO]
COMMON STOCK
All of the 900,000 shares of common stock, no par value (the "Common Stock"),
offered hereby are being sold by PACE Health Management Systems, Inc. ("PACE" or
the "Company"). The Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "PCES." On August 5, 1996, the closing bid price of the Common Stock
as reported by the Nasdaq SmallCap Market was $4.00 per share.
See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share $3.25 $0 $3.25
Total $2,925,000 $0 $2,925,000
</TABLE>
(1) Before deducting expenses, payable by the Company, estimated at
$265,000.
The shares of Common Stock are offered by the Company without underwriters or
placement agents and will be sold only to a limited number of investors
acceptable to the Company. See "Plan of Distribution."
The date of this Prospectus is August 9, 1996
PACE CARE MANAGEMENT SYSTEM
PACE CMS provides the essential clinical record keeping, workflow automation and
clinical decision support functionality required by hospitals and integrated
delivery systems, at the point-of-care.
[GRAPHIC DESCRIBING THE PACE CARE MANAGEMENT SYSTEM]
* Under development
Trademarks and trade names referred to in this Prospectus are the property of
their respective owners.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY 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."
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 900,000 shares
Common Stock to be outstanding 5,052,199 shares (1)
after the offering
Use of Proceeds To fund research and development,
expansion of sales and marketing,
working capital and general corporate
purposes.
Nasdaq SmallCap symbol PCES
(1) All calculations of outstanding shares in the Prospectus, either on the
date of this Prospectus or as adjusted for the shares offered hereby, are
based on the number of shares outstanding on May 31, 1996. 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."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
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 $4,295
Total assets 5,680 4,566 7,226
Long-term obligations 48 44 44
Total liabilities 1,274 736 736
Total shareholders' equity 4,406 3,830 6,490
(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 900,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$3.25 per share less 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 are deployed 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 ten 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 have a material adverse effect on 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. As of October 19, 1996, JRS Clinical Technologies, Inc. ("JRS"), an
entity that developed for the Company a software base for a nursing station
documentation system, may distribute to others that software base. Although the
Company has modified this software base, a third party that obtained a software
base from JRS could gain some benefit toward developing a competitive product.
The Company's practice of providing certain of its customers an escrow
arrangement for accessing (in certain circumstances) 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 the
Company's 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
claims based on intellectual proprietary 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, 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 hardware and software 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 diagnoses 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 for approximately six
months. 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 42.1% of the Company's outstanding shares of Common Stock (44.4%
if stock options and warrants held by officers, directors and principal
shareholders were exercised), assuming no purchase of the shares of Common Stock
offered hereby by existing officers, directors and principal shareholders. 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. The 900,000 shares offered hereby will be
subject to a 270-day lock-up agreement. At the present time, approximately
4,076,616 of the Company's outstanding shares are either freely tradeable or may
be sold in reliance on Rule 144, subject to compliance with the provisions of
that Rule. In addition, warrants to purchase approximately 388,000 shares of
Common Stock are presently exercisable, and the holders of such warrants have
the right to cause the Company to register the Common Stock received on the
exercise of such warrants. 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 of 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 $1.97 per share based on an assumed public offering price of
$3.25. Additional dilution could result from the exercise of certain
outstanding options and warrants. See "Dilution."
LOCK-UP AGREEMENT AND POSSIBLE TRANSFER RESTRICTIONS. All shares sold in this
offering will be subject to a 270-day lock-up pursuant to the Subscription
Agreement that must be signed by all purchasers. Securities laws of certain
states may require purchasers to acquire the shares in this offering for
investment and/or place other restrictions on transfer of the shares. See
"Securities Eligible for Future Sale" and "Plan of Distribution."
NO MINIMUM OFFERING AMOUNT. The terms of the offering do not require that any
minimum number of shares be sold. All funds received for subscriptions will
therefore be at the immediate disposal of the Company even if fewer than
900,000 shares are sold. See "Plan of Distribution."
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 $3.25 after
deducting estimated expenses payable in connection with this offering, are
estimated to be approximately $2.7 million.
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 900,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of $3.25
per share after 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;
5,052,199 shares issued and outstanding, as adjusted(1) 13,300 15,960
Additional paid-in capital 54 54
Accumulated deficit (9,524) (9,524)
------- -------
Total shareholders' equity 3,830 $ 6,490
------- -------
Total capitalization $ 3,874 $ 6,534
======= =======
</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."
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
approximately $3.8 million, or $0.92 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 900,000 shares of
Common Stock offered hereby at an assumed offering price of $3.25 per share, and
after deducting estimated offering expenses payable by the Company, the
Company's net tangible book value at March 31, 1996 would have been
approximately $6.5 million, or $1.28 per share. This represents an immediate
increase in net tangible book value of $0.36 per share to existing shareholders
and an immediate dilution of $1.97 per share to new investors purchasing shares
in this offering. The following table illustrates this dilution:
Assumed offering price per share $3.25
Net tangible book value per share before the offering $0.92
Increase in net tangible book value per share attributable to
new investors 0.36
-----
Pro forma net tangible book value per share after the offering 1.28
-----
Dilution per share to new investor(s) $1.97
=====
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 82.2% $14,418,992 83.1% $3.47
New Investors 900,000 17.8 2,925,000 16.9 3.25
--------- ----- ----------- ----- -----
Total 5,052,199 100.0% $17,343,992 100.0% $3.43
========= ===== =========== ===== =====
</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 $3.29
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.
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 9-5/8 5-1/4
Third Quarter (through July 31, 1996) 7-1/2 4-1/4
On August 5, 1996, the last sale price of the Common Stock, as reported on
the Nasdaq SmallCap Market, was $4.00 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 to implement successfully
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 include
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.
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.
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 $1,691,305 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 DECEMBER 31, 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 1993 and 1994, respectively.
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 $1,691,305 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,
1994 1994 1994 1994 1995 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Systems revenues $ 11,152 $ 16,298 $ 20,464 $ 4,432 $ 320,022 $ 403,158
Customer support services 80,337 84,204 81,955 78,991 81,806 100,337
----------- ----------- ----------- ----------- ----------- -----------
91,489 100,502 102,419 83,423 401,828 503,495
----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of systems revenues 9,408 10,408 20,012 24,273 56,992 134,829
Client services 75,572 90,721 113,845 156,246 149,560 204,215
Product development 95,930 97,989 67,643 1,870,054 119,542 209,571
Sales and marketing 133,921 159,226 185,772 143,383 155,243 214,280
General and administrative 190,392 209,410 221,675 113,457 258,917 232,087
----------- ----------- ----------- ----------- ----------- -----------
505,223 567,754 608,947 2,307,413 740,254 994,982
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations (413,734) (467,252) 506,528 (2,223,990) (338,426) (491,487)
Other income (expense), net (2,635) (4,510) (2,117) (2,395) (9,295) 37,971
----------- ----------- ----------- ----------- ----------- -----------
Loss before income taxes (416,369) (471,762) (508,645) (2,226,385) (347,721) (453,516)
Provision for income taxes -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (416,369) $ (471,762) $ (508,645) $(2,226,385) $ (347,721) $ (453,516)
=========== =========== =========== =========== =========== ===========
Loss per common and common
equivalent share $ (0.40) $ (0.46) $ (0.49) $ (3.39) $ (0.34) $ (0.14)
=========== =========== =========== =========== =========== ===========
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
</TABLE>
(wide table continued from above)
QUARTER ENDED
-------------------------------------
SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1996
----------- ----------- -----------
$ 479,134 $ 528,391 $ 705,052
91,676 76,272 100,144
----------- ----------- -----------
570,810 604,663 805,196
----------- ----------- -----------
192,918 236,284 114,083
267,330 247,277 168,918
231,531 419,500 338,950
233,416 262,166 321,047
333,607 461,006 517,403
----------- ----------- -----------
1,258,802 1,626,233 1,460,401
----------- ----------- -----------
(687,992) (1,021,570) (655,205)
54,169 44,142 25,085
----------- ----------- -----------
(633,823) (977,428) (630,120)
-- -- --
----------- ----------- -----------
$ (633,823) $ (977,428) $ (630,120)
=========== =========== ===========
$ (0.15) $ (0.78) $ (0.15)
=========== =========== ===========
4,152,199 4,152,199 4,152,199
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 cash requirements for
approximately six months. 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
education. 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
+ Admission Assessments + Flow Sheets ** Clinical Library
+ Care Planning >> Vital Signs ** On-Line Policies &
+ Nursing Assessments >> Intake & Output Mgmt. Procedures
+ Daily Cares/Nursing >> Neuro Check ** Patient Education
Interventions >> Patient Control ** Physician View Screens
+ Kardex Analgesic ** Screen & Forms Builder
+ Patient Acuity Capture >> Hemodialysis
>> Dietary
</TABLE>
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 ** On-Line Medication Charting
** Respiratory Therapy
* 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.
[GRAPHIC DESCRIBING PACE THREE-TIER ARCHITECTURE]
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 ten 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 arranging to resell certain
applications from third party vendors. One such application the Company resells
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 obtaining reseller 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 technical and 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 reduce significantly 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. As of October 19, 1996,
JRS Clinical Technologies, Inc. ("JRS"), an entity that developed for the
Company a software base for a nursing documentation system, may distribute to
others that software base. Although the Company has modified this software base,
a third party that obtained a software base from JRS could gain some benefit
toward developing a competitive product. 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 or violates 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 the Company's 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, even when considered medical devices, are
nonetheless 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
adulteration and misbranding.
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 hardware and software 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 could 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 could 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 could 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 August 5, 1996, the Company employed 58 full-time personnel and 2
part-time persons of which 5 are executives, 25 are research and product
development employees, 15 are client services employees, 9 are sales and
marketing personnel, and 6 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 Officer 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. Mr.
Emkjer has entered into an employment agreement with the Company. The employment
agreement provides 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 granted 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.
It is possible that the investment funds with which Mr. Spreng is affiliated,
and/or Mr. Pappajohn and/or Edgewater Private Equity Fund, LP (which presently
owns 5.1% of the Company's outstanding stock), will purchase shares in this
offering. Any such purchases will be made on the same terms and conditions as
purchases by unaffiliated third parties.
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 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)
each Named Executive Officer of the Company, and (iv) 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
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(13)
- ------------------------------------ -------- -------- ------------
<S> <C> <C> <C>
DIRECTORS AND OFFICERS:
R. David Spreng(2) 715,501(3) 17.1% 14.0%
John G. Pappajohn(4) 353,325 8.5 7.0
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 22.6
OTHER FIVE PERCENT OR MORE SHAREHOLDERS:
IAI Investment Funds 715,501(3) 17.1 14.0
Mutual Ventures of South Dakota(7) 423,825 10.2 8.4
Michael J. Vasquez(8)(9) 261,444(10) 6.3 5.2
Simon Casady(11) 259,879 6.2 5.1
Edgewater Private Equity Fund, LP(12) 212,096 5.1 4.2
</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. Includes
14,237 shares issuable upon the exercise of warrants. 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.
(11) Address: 1238 Fulton, Indianola, Iowa 50125.
(12) Address: 666 Grand Avenue, Suite 200, Des Moines, Iowa 50309 Attention:
James A. Gordon.
(13) Without giving effect to any shares that may be purchased in this offering
by the existing officers, directors or principal shareholders.
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, the Company will have outstanding an aggregate
of 5,052,199 shares of Common Stock, assuming the issuance of 900,000 shares of
Common Stock offered hereby. Of the total outstanding shares, all of the 900,000
shares of Common Stock offered hereby and the 1,300,000 shares of Common Stock
sold in the initial public offering in April 1995 will be freely tradeable
without restriction or further registration under the Securities Act, and will
therefore be available for immediate resale in the public market upon expiration
or waiver of the lock-up agreement described below, except for shares purchased
by an "affiliate" of the Company within the meaning of Rule 144 under the
Securities Act (whose sales would be subject to certain volume limitations and
other restrictions described below). As defined in Rule 144, an affiliate of an
issuer is a person who controls, is controlled by or is under common control
with such issuer.
All of the shares purchased in this offering will be subject to the Subscription
Agreement to be signed by all purchasers. The Subscription Agreement provides in
part that a purchaser of shares in this offering will not offer, sell, contract
to sell, make any short sale (including, but not limited to, a "short against
the box"), pledge or otherwise dispose of, directly or indirectly, any shares
purchased in this offering during a 270-day period beginning on the closing of
the sale of the shares to such purchaser, without the prior written consent of
the Company. This 270-day lock-up agreement takes precedence over any
limitations on resale under the Securities Act.
The remaining 2,852,199 shares of Common Stock to be outstanding following this
offering (the "Restricted Shares") were issued and sold by the Company in
private transactions in reliance on certain exemptions from registration
afforded by the Securities Act. As such, the Restricted Shares, together with
any shares purchased in the initial public offering or this offering by an
affiliate of the Company, are "restricted securities" and may not be sold
without compliance with the registration requirements of the Securities Act or
pursuant to an applicable exemption therefrom, including Rule 144.
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 (5,052,199 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. Common Stock registered
under the Securities Act at the time of purchase (including shares sold in this
offering) which are owned by affiliates of the Company are eligible for sale
under Rule 144 without regard to the two-year holding period described above,
but are subject to the restrictions on manner of sale, notice and availability
of current public information described above.
On the date of this Prospectus, of the 2,852,199 Restricted Shares,
approximately 2,776,616 are eligible for immediate sale, subject to compliance
with the requirements of Rule 144. Upon the expiration of the 270-day lock-up
period for the shares offered hereby, substantially all of the Restricted Shares
will be eligible for sale under Rule 144. In addition warrants to purchase
approximately 388,000 shares of Common Stock are presently exercisable, and the
holders of such warrants have the right to cause the Company to register the
Common Stock received on the exercise of such warrants.
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.
The Company does not intend to register the shares of Common Stock sold in this
offering under any state securities laws, and shares purchased by residents of
certain states may be subject to certain restrictions on transferability imposed
by such state securities laws. The foregoing discussion assumes there are no
such state law restrictions.
PLAN OF DISTRIBUTION
THE OFFERING
The Company is offering up to 900,000 shares of its Common Stock, no par value
(the "Shares"), to accredited investors at a price of $3.25 per share. The
minimum purchase by any subscriber is 50,000 Shares ($162,500), although the
Company, in its sole discretion, may sell less than the minimum number of Shares
to a limited number of prospective investors. Investors may subscribe for any
number of shares above the 50,000 share minimum. The offering will terminate
when all 900,000 Shares have been sold, or 11:00 a.m. C.S.T., August 16, 1996,
whichever occurs first, unless extended by the Company. The offering price has
been determined by the Company based on discussions with prospective investors
and consideration of other relevant factors, including the 270-day lock-up
agreements with respect to the Shares. See "Price Range of Common Stock" and
"Securities Eligible for Future Sale."
The terms of the offering do not require that any minimum number of Shares be
sold. All funds received from subscriptions will thus be at the immediate
disposal of the Company even if less than the full amount of the offering is
purchased by investors, or the Company may determine to return any
subscriptions, either at its sole discretion.
The Shares will be offered and sold, on behalf of the Company, through the
Company's officers and directors. No selling commissions will be paid to any
officer or director of the Company in connection with the offer and sale of the
Shares.
SUBSCRIPTIONS
Prospective investors who desire to purchase Shares hereunder must (i) complete
and execute a Subscription Agreement (the "Subscription Agreement") in the form
distributed herewith, (ii) make a check payable to the order of "PACE Health
Management Systems, Inc." for the purchase price and (iii) forward the completed
and executed Subscription Agreement along with the check to the Company. The
Company reserves the right to reject any Subscription Agreement and to return
the purchase price without interest.
The Subscription Agreement contains a 270-day lock-up agreement with respect
to the shares purchased in this offering. See "Securities Eligible for Future
Sale."
The Company will issue a certificate representing the Shares purchased by each
investor as soon as practicable following any closing with respect to such
investor's Shares.
INVESTOR QUALIFICATIONS
The Shares are offered only to "accredited investors" as defined in Rule 501(a)
of Regulation D of the Securities and Exchange Commission. As so defined,
"accredited investors" generally include:
(a) Most banks and savings institutions, whether acting in their individual or
in fiduciary capacities, any broker/dealer registered under the Securities
Exchange Act of 1934, most insurance companies, investment companies
registered under, any business development company defined in, or any
private business development company defined in the Investment Company Act
of 1940, Small Business Investment Companies, any state or municipal
employee plan with assets exceeding $5,000,000, employee benefit plans
subject to the provisions of the Employee Retirement Income Security Act of
1974 which either have total assets in excess of $5,000,000 or as to which
investment decisions are made by a fiduciary which is either a bank,
insurance company or registered investment adviser;
(b) Any (i) corporation, (ii) nonprofit organization qualified under Section
501(c)(3) of the Internal Revenue Code, (iii) business trust, or (iv)
partnership, in each case if such entities have assets in excess of
$5,000,000 and were not established for purposes of making this investment;
(c) Any officer or director of the Company;
(d) Any natural person whose net worth, or joint net worth together with such
individual's spouse, exceeds $1,000,000;
(e) Any natural person whose income exceeded $200,000 or whose joint income with
his or her spouse exceeded $300,000 in both 1993 and 1994 and who reasonably
expects an income in excess of such amount in 1995; and
(f) Any entity each of whose equity owners separately meets any of the criteria
set forth above.
Each potential investor of the Shares will be required to represent to the
Company in the Subscription Agreement that such investor meets one or more of
the above criteria for qualification as an accredited investor. In addition,
each such investor will be required to represent that such investor is able to
bear the economic risk of an investment in the Shares, that together with such
investor's purchaser representative, if any, such investor has such knowledge
and experience in financial and business matters that such investor is able to
evaluate an investment in the Shares, and has been given the opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering and to obtain additional information which the Company possesses.
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 and Des Moines,
Iowa.
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.
/s/ McGladrey & Pullen, LLP
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, SALES REPRESENTATIVES OR OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
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 24
Management 35
Compensation of Executive Officers and
Directors 37
Certain Transactions 41
Principal Shareholders 42
Description of Capital Stock 43
Securities Eligible for Future Sale 44
Plan of Distribution 46
Legal Matters 47
Experts 47
Additional Information 47
Index to Financial Statements F-1
900,000 SHARES
[LOGO]
COMMON STOCK
PROSPECTUS
, 1996
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
Nasdaq Listing Fee 7,500
Blue Sky fees and expenses 5,000
Printing and engraving expenses 45,000
Legal fees and expenses 150,000
Auditors' accounting fees and expenses 45,000
Transfer Agent and Registrar fees 5,000
Miscellaneous expenses 1,899
--------
Total $265,000
========
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
- -------- ------
Registrant's Restated Articles of Incorporation, as amended 3.1
Registrant's Restated Bylaws 3.2
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
matured on the closing of the initial public offering. The
placement agent 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 Subscription 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)
10.21 Employment Agreement with Mark J. Emkjer dated February 15, 1996.
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 (previously included on page II-5 of the Registration Statement).
</TABLE>
(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.
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 has duly caused this Amendment No. 1 to the Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, in the City
of West Des Moines, State of Iowa, on the 8th day of August, 1996.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
By: /s/ MARK J. EMKJER
Mark J. Emkjer
CHIEF EXECUTIVE OFFICER AND DIRECTOR
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement was signed by the
following persons in the capacities indicated below as of August 8, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ MARK J. EMKJER Chief Executive Officer and Director August 8, 1996
Mark J. Emkjer (Principal Executive Officer)
/S/ ROGER D. HUSEMAN Vice President of Finance and Administration, August 8, 1996
Roger D. Huseman Chief Financial Officer and Secretary and
Treasurer
*
Carl S. Witonsky Chairman of the Board and Director August 8, 1996
*
John G. Pappajohn Director August 8, 1996
*
R. David Spreng Director August 8, 1996
*
William W. Childs Director August 8, 1996
*
Gordon M. Derzon Director August 8, 1996
</TABLE>
By: /s/ MARK J. EMKJER
Mark J. Emkjer
Attorney-in-Fact
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
<S> <C> <C>
1.1 Form of Subscription Agreement.
5.1 Opinion of Dorsey & Whitney LLP.
10.21 Employment Agreement with Mark J. Emkjer dated February 15, 1996.
11.1 Earnings Per Share Calculation.
23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors.
23.2 Consent of Dorsey & Whitney LLP (contained in Exhibit 5.1 above).
</TABLE>
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING.
SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN.
PARAGRAPH 3 AND PAGES 4 AND 5 REQUIRE COMPLETION
SUBSCRIPTION AGREEMENT
PACE Health Management Systems, Inc.
1025 Ashworth Road
West Des Moines, Iowa 50265
Ladies and Gentlemen:
The undersigned hereby tenders this subscription and applies for the purchase of
the number of shares of Common Stock, no par value (the "Shares"), of PACE
Health Management Systems, Inc., an Iowa corporation (the "Company"), set forth
on the signature page below, at a price of $3.25 per Share. By execution of this
Subscription Agreement, the undersigned acknowledges that the Company is relying
upon the accuracy and completeness of the representations contained herein in
complying with its obligations under applicable securities laws.
1. The undersigned acknowledges and represents as follows:
(a) That the undersigned has received, carefully reviewed and is
familiar with this Subscription Agreement for Common Stock
(the "Agreement") and the Prospectus dated August 8, 1996
(together with all appendices and supplements (if any)
thereto) (the "Prospectus");
(b) That the undersigned is in a financial position to hold the
Shares for an indefinite period of time and is able to bear
the economic risk and withstand a complete loss of the
undersigned's investment in the Shares;
(c) That the undersigned believes the undersigned, either alone or
with the assistance of the undersigned's own professional
investment advisor, has such knowledge, business acumen and
experience in financial and business matters that the
undersigned is capable of fully analyzing the financial and
other risks applicable to the Company and its business as well
as evaluating the merits and risks of the prospective
investment in the Shares and has the net worth to undertake
such risks;
(d) That the undersigned has obtained, to the extent the
undersigned deems necessary, the undersigned's own personal
professional advice with respect to the risks inherent in the
investment in the Shares, and the suitability of an investment
in the Shares in light of the undersigned's financial
condition and investment needs;
(e) That the undersigned believes that the investment in the
Shares is suitable for the undersigned based upon the
undersigned's investment objectives and financial needs, and
the undersigned has adequate means for providing for the
undersigned's current financial needs and personal
contingencies and has no need for liquidity of investment with
respect to the Shares;
(f) That the undersigned has been given access to full and
complete information regarding the Company and has utilized
such access to the undersigned's satisfaction for the purpose
of obtaining information in addition to, or verifying
information included in the Agreement and the Prospectus and,
particularly, the undersigned has either attended or been
given reasonable opportunity to attend a meeting with
representatives of the Company, including the Company's
President, for the purpose of asking questions of, and
receiving answers from, such representatives concerning the
Company and to obtain any additional information necessary to
make an investment decision with respect to the Shares;
(g) That the undersigned recognizes that an investment in the
Shares involves a high degree of risk, including, but not
limited to, the risks set forth in the Prospectus under the
caption "Risk Factors";
(h) That the undersigned realizes that (i) the purchase of the
Shares is a long-term investment; (ii) the purchaser of the
Shares must bear the economic risk of investment for an
indefinite period of time because the Shares have not been
registered under the securities laws of any state and,
therefore, none of such securities can be sold unless they are
subsequently registered under said laws or exemptions from
such registrations are available; and (iii) the undersigned
may not be able to liquidate the undersigned's investment in
the event of an emergency or pledge any of such securities as
collateral for loans; and
(i) That the undersigned certifies, under penalties of perjury,
that the undersigned is NOT subject to the backup withholding
provisions of Section 3406(a)(i)(C) of the Internal Revenue
Code of 1986, as amended (Note: you are subject to backup
withholding if (i) you fail to furnish your Social Security
number or taxpayer identification number herein; (ii) the
Internal Revenue Service notifies the Company that you
furnished an incorrect Social Security number or taxpayer
identification number; (iii) you are notified that you are
subject to backup withholding; or (iv) you fail to certify
that you are not subject to backup withholding or you fail to
certify your Social Security number or taxpayer identification
number.)
2. The undersigned represents and warrants that the undersigned is a bona
fide resident of, is domiciled in and received the offer and made the
decision to invest in the Shares in the State set forth on the
signature page below and that the Shares are being purchased by the
undersigned in the undersigned's name solely for the undersigned's own
beneficial interest and not as nominee for, or on behalf of, or for the
beneficial interest of, or with the intention to transfer to, any other
person, trust or organization.
3. The undersigned represents and warrants that the undersigned is an
"accredited investor" as defined in Rule 501(a) of Regulation D of the
Securities Act of 1933, as amended (the "Securities Act"), because the
undersigned meets at least one of the following criteria (please check
one):
- ----- The undersigned is either (i) a bank as defined in Section
3(a)(2) of the Securities Act, or any savings and loan
association or other institution as defined in Section 3(a)(5)(A)
of the Securities Act whether acting in its individual or
fiduciary capacity, any broker or dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934, (ii) an
insurance company as defined in Section 2(13) of the Securities
Act, (iii) an investment company registered under the Investment
Company Act of 1940 or a business development company as defined
in Section 2(a)(48) of such Act, (iv) a Small Business Investment
Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of
1958, or (v) an employee benefit plan within the meaning of Title
I of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which plan fiduciary is either a bank,
savings and loan association, insurance company or registered
investment adviser, or if the employee benefit plan has total
assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons who are accredited
investors; or
- ----- The undersigned is a private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of
1940; or
- ----- The undersigned is a corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific
purpose of acquiring the Shares, with total assets in excess of
$5,000,000, or an organization described in Section 501(c)(3) of
the Internal Revenue Code; or
- ----- The undersigned is a director or executive officer of the
Company; or
- ----- The undersigned is a natural person whose individual net worth,
or joint net worth with his or her spouse, exceeds $1,000,000 at
the time of the undersigned's purchase; or
- ----- The undersigned is a natural person who had an individual income
in excess of $200,000 in each of the two most recent years or
joint income with the undersigned's spouse in excess of $300,000
in each of those years and who reasonably expects to reach the
same income level in the current year; or
- ----- The undersigned is a trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
Shares, whose purchase is directed by a sophisticated person as
described in Rule 506(b)(2)(ii) of Regulation D of the Securities
Act.
- ----- The undersigned is any entity in which all of the equity owners
are accredited investors (if this item is checked, a Subscription
Agreement and Letter of Investment Intent must be completed for
each equity owner of such entity).
4. The undersigned hereby irrevocably agrees that he, she or it will not,
without the prior written approval of the Company, offer, sell,
contract to sell, make any short sale (including, but not limited to, a
"short against the box"), pledge, or otherwise dispose of directly or
indirectly, any Shares of Common Stock purchased by the undersigned
pursuant to this Agreement for a period of two hundred seventy (270)
days following the date on which the Shares are issued to the
undersigned pursuant to this Agreement. Notwithstanding the foregoing,
any transfer of Shares of Common Stock of the Company which either (i)
will not result in any change in beneficial ownership, including, but
not limited to, pro rata partnership distributions and transfers into
trusts for the benefit of the original holder, or (ii) constitute bona
fide gifts of such shares will not require the consent of the Company,
provided, that the transferee enters into a lock-up agreement with
substantially the same provisions as this Section 4 covering the
remainder of the lock-up period hereunder. The undersigned confirms
that he, she or it understands that the Company will rely upon the
representations set forth in this Agreement in proceeding with the sale
and issuance of the Shares hereunder. The undersigned understands that
this Agreement is irrevocable and shall be binding on the undersigned
and his, her or its respective successors, heirs, personal
representative and assigns. The undersigned agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of Common Stock or other securities of the Company
held by the undersigned except in compliance with this Agreement.
5. Securities laws of certain states may impose requirements in addition
to those set forth herein. Acceptance of this subscription by the
Company will be contingent on the satisfaction of all such
requirements.
SIGNATURE PAGE
I. The Number of Shares of Common Stock of PACE Health Management Systems, Inc.
that I wish to Subscribe for:
- ------------------- ---------------------------------------------
Number of Shares Payment enclosed ($3.25 multiplied by the
number of Shares) (Make checks payable to
"PACE Health Management Systems, Inc.")
II. Manner in which title is to be held (check the correct box):
[ ] Individual [ ] Tenants in Common
[ ] Joint Tenants with [ ] Corporation
Right of Survivorship [ ] Trust
[ ] Partnership [ ] Other (please describe ____________)
III. Name in which title is to be held (please print--the certificates will be
issued in this name):
--------------------------------------------------------------------------
First Name Middle Initial Last Name
IV. Addresses
(A.) Address of Subscriber's Domicile and Bona Fide Residence
--------------------------------------------------------------------------
Street Address or PO Box
--------------------------------------------------------------------------
City, State and Zip Code
-----------------------------------------
Telephone Number
(B.) Address to Which Correspondence Should be Directed
(if different from above)
--------------------------------------------------------------------------
Street Address or PO Box
--------------------------------------------------------------------------
City, State and Zip Code
-----------------------------------------
Telephone Number
V. Social Security or Tax ID Number
-----------------------------------
VI. Signatures:
(A) Individual Signatures
----------------------------------- ----------------------------------
Signature Second Signature (If purchasing
as joint tenants or tenants in
common, both parties must sign)
-----------------------------------
Date
(B) Corporate, Partnership
and other Entities
----------------------------------- ----------------------------------
Print Name of Entity Entity Type (partnership,
corporation, etc.)
----------------------------------- ----------------------------------
By (signature of person signing) Its (title of person signing)
-----------------------------------
Date
This Subscription Agreement and Letter of Investment Intent is accepted as of
_______________, 1996.
(DAY AND MONTH)
PACE HEALTH MANAGEMENT SYSTEMS, INC.
By ________________________________
CERTIFICATE OF SIGNATORY
(Not to be completed by individuals)
I,_______________________________________________________, am the __ __________
(PRINTED NAME OF PERSON SIGNING; FIRST NAME, MI, LAST NAME) (TITLE)
of ______________________________________________________________ (the "Entity")
(NAME OF ENTITY)
I certify that I am empowered and duly authorized by the Entity to execute and
carry out the terms of the Subscription Agreement and Letter of Investment
Intent and to purchase and hold the Shares, and certify further that the
Subscription Agreement and Letter of Investment Intent has been duly and validly
executed on behalf of the Entity and constitutes a legal and binding obligation
of the Entity.
IN WITNESS WHEREOF, I have hereto set my hand this______day of___________, 1996.
(DAY) (MONTH)
____________________________________________
(SIGNATURE)
EXHIBIT 5.1
[Dorsey & Whitney LLP Letterhead]
PACE Health Management Systems, Inc.
1025 Ashworth Road, Suite 420
West Des Moines, IA 50265
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
In connection with Amendment No. 1 to the Registration Statement (the
"Registration Statement") on Form S-1 filed By PACE Health Management Systems,
Inc. (the "Company") with the Securities and Exchange Commission on or about the
date hereof relating to an offering of up to 900,000 shares of Common Stock, no
par value, of the Company (the "Shares") we have examined such corporate
documents and records and reviewed such matters of law as we have deemed
necessary or advisable for the purposes of this opinion, and based thereon, we
advise you that it is our opinion that:
1. The Company is a validly existing corporation in good standing under the
laws of the State of Iowa.
2. The Shares, when issued and paid for as contemplated in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Prospectus comprising a part of the Registration Statement.
Dated: August 8, 1996
/s/ DORSEY & WHITNEY LLP
DJL
EXHIBIT 11.1
PACE HEALTH MANAGEMENT SYSTEMS, INC.
EARNINGS PER SHARE CALCULATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of
shares outstanding 1,034 1,043 1,069 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)
</TABLE>
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).
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of February 15, 1996 by PACE Health
Management Systems, Inc., 1025 Ashworth Road, West Des Moines, Iowa 50265, an
Iowa corporation (the "Company") and Mark J. Emkjer, 4310 Oakwood Lane, West Des
Moines, Iowa 50265 ("Emkjer").
1. Employment. The Company hereby employs Emkjer as its Chief Executive
Officer and as a Director on the Board of Directors for an indefinite term
commencing March 18, 1996 (the "Commencement Date"). This employment is
full-time, and Emkjer agrees to perform the duties as are customary to
these offices, and those duties assigned to him from time-to-time by the
Board of Directors.
2. Compensation and Benefits; Reimbursement of Expenses.
2.1 Salary. Emkjer's base salary is $165,000 annually, payable in
semi-monthly installments, less required withholdings for taxes, the
employee's portion of FICA, et cetera.
2.2 Benefits. Emkjer is entitled to receive the medical, disability, and
life insurance coverage, and the vacation, sick leave and holiday
benefits, as are made available to the Company's top executive
personnel, all in accordance with the Company's benefits program in
effect from time to time.
2.3 Signing Bonus. The Company will pay Emkjer on a one time basis
$10,000 to compensate him for the incidental expenses associated
with moving from California to Iowa, not covered by Section 2.7.
2.4 Annual Bonuses. In addition to Emkjer's base salary, either as set
initially by this Agreement, or by the Board after an annual review,
Emkjer may receive an annual bonus of up to 50% of his base
compensation. Bonuses will be determined by the Board and based on
goals determined by the Board in the areas of a) financial
performance, b) stock price appreciation, and c) operating
objectives.
2.5 Stock Options. The Company grants Emkjer the following stock
options:
(a) 100,000 shares of common stock of the Company pursuant
non-qualified stock options, with an exercise price of $2.50
per share, and with vesting of 20% of the shares on each of
the first five anniversaries of the Commencement Date, if
Emkjer is still employed on that anniversary.
(b) 110,000 shares of common stock of the Company, pursuant to
non-qualified stock options, with an exercise price of $1.00
per share, with vesting to take place as follows:
(i) 35,000 shares when Emkjer has purchased a home and
relocated his family to Des Moines, and
(ii) 15,000 shares vesting on each of the first five
anniversaries of the Commencement Date, if Emkjer is
still employed on that anniversary.
Although this option is not issued pursuant to the Company's
qualified incentive stock option plan, it must be exercised in
accordance with the terms of the Company's qualified incentive stock
option plan.
2.6 Reimbursement of Expenses. The Company will reimburse Emkjer for
expenses, including those for travel, meals, and entertainment,
incurred by Emkjer in connection with and reasonably related to the
furtherance of the Company's business.
2.7 One-time Moving Expense Reimbursement. The Company will promptly
reimburse Emkjer for the cost of selling his home and relocating his
family from San Ramon, California, to Des Moines, Iowa. These costs
include, among other things, monthly payments on the loan secured by
Emkjer's California residence for each month that Emkjer also is
maintaining a home in Iowa (provided Emkjer is taking reasonable
steps to sell his California residence), the sales commission on his
present home in California, home loan and moving expenses for Emkjer
and his family. The Company will reimburse Emkjer for these expenses
upon Emkjer providing reasonable documentation regarding the
expenses.
2.8 Annual Review of Emkjer's Performance. On each anniversary of the
Commencement Date, the Board of Directors of the Company will review
Emkjer's employment performance and all elements of his
compensation. The Board will consider whether to increase any
component of Emkjer's compensation, but in no event will the Board
reduce Emkjer's compensation without the written consent of Emkjer.
3. Change of Control. If there is a Change of Control of the Company (as
defined below), all unvested options then granted to Emkjer on the date of
the Change of Control will be vested immediately.
A "Change of Control" of the Company has occurred when:
(a) in one transaction or a series of related transactions, the sale or
other transfer of voting power (including voting power exercisable
on a contingent or deferred basis as well as immediately-exercisable
voting power) representing effective control of the Company is made
to a person or group of related persons who, on the date of this
Agreement, is not affiliated (within the meaning of the Securities
Act of 1933) with the Company, whether the sale or transfer results
from a tender offer or otherwise; or
(b) a merger or consolidation in which the Company is a constituent
corporation, and in which the Company's shareholders immediately
prior to the merger or consolidation, will beneficially own,
immediately after it, securities of the Company or any surviving or
new corporation resulting therefrom, having less than a majority of
the voting power of the Company or any surviving or new corporation;
or
(c) a sale, lease, exchange or other transfer or disposition by the
Company of all or substantially all its assets to any person or
group of related persons.
4. Severance. If the Company discharges Emkjer without cause, then the
Company shall pay to Emkjer, as consideration for the post employment
covenants herein, on the thirtieth day of each of the 6 months following
the termination, an amount equal to Emkjer's then current monthly base
salary, provided however, the Company shall no longer be obligated to make
such payments if Emkjer has violated the post employment covenants herein.
5. Termination.
5.1 Events of Termination. The employment of Emkjer will terminate on
the occurrence of any of the following events, with the last day of
Emkjer's employment (whether pursuant to notice or otherwise) being
referred to as the "Termination Date":
(a) Emkjer dies;
(b) The Company, by written notice to Emkjer or his personal
representative, discharges Emkjer due to his inability to
perform the duties assigned to him for a continuous period
exceeding 90 days by reason of injury, physical or mental
illness or other disability, which condition has been
certified by a physician. But, prior to discharging Emkjer
pursuant to this subparagraph, the Company must give a written
statement of findings to Emkjer or his personal representative
setting forth specifically the nature of the disability and
the resulting performance failures. Emkjer will have a period
of ten (10) days thereafter to respond in writing to the Board
of Directors' findings;
(c) Emkjer is discharged by the Board of Directors of the Company
for cause. In this Agreement, the term "cause" means:
(i) Emkjer's conviction of (or pleading guilty or nolo
contendere to) a felony or misdemeanor involving dishonesty or
moral turpitude; or
(ii) (a) The willful and continued failure of Emkjer to
substantially perform his duties with the Company (other than
a failure resulting from illness or disability) after a demand
for substantial performance is requested by the Company's
Board of Directors, which specifically identifies the manner
in which it is claimed Emkjer has not substantially performed
his duties, or (b) Emkjer is willfully engaged in misconduct
which has a direct and material adverse monetary effect on the
Company. For purposes of this subpart (ii), no act or failure
to act on Emkjer's part shall be considered "willful" unless
done, or omitted to be done, by Emkjer in bad faith and
without reasonable belief that Emkjer's action or omission was
in the best interest of the Company. No termination may occur
for cause pursuant to this subpart (ii) unless Emkjer has been
provided with specific information as to the acts or omissions
which form the basis of the allegation of cause, and Emkjer
has had an opportunity to be heard, with counsel if he so
desires, before the Board of Directors and the Board
determines that Emkjer was guilty of conduct constituting
"cause" as defined, specifying the particulars thereof in
detail;
(d) Emkjer is discharged by the Board of Directors of the Company
without cause, which the Company may do at any time after 90
days notice to Emkjer;
(e) Emkjer voluntarily terminates his employment due to a default
by the Company in the performance of any of its obligations in
this Agreement, and the default remains uncured by the Company
more than ten days following its receipt of written notice
from Emkjer; or
(f) Emkjer voluntarily terminates his employment for any reason
other than the Company's default, which Emkjer may do at any
time after 90 days notice to the Company.
6. Proprietary Information; Developments. Emkjer must not, during his
employment by the Company or any time thereafter, disclose any Proprietary
Information (as trade secret is defined in the Uniform Trade Secrets Act)
to any third party, without the written consent of the Board of Directors.
Emkjer hereby assigns all works of authorship, inventions or trade secrets
developed by him, either alone or with others, and within the scope of his
employment, to the Company. Emkjer also agrees to provide the Company, at
the Company's expense, the reasonable effort necessary to perfect or
enforce its rights in these assets.
7. Emkjer's Post-Employment Covenants. For a period of one year following the
Termination Date, for whatever reason, Emkjer agrees:
(a) He will not, directly or indirectly, whether for his own account or
as an individual, employee, director, consultant or advisor, or in
any other capacity whatsoever, provide services to any person, firm,
corporation or other business enterprise that is involved in the
conception, development or marketing of any products or services
that are or maybe competitive with either (i) the products and
services manufactured and/or marketed by Company prior to Emkjer's
termination, or (ii) products and/or services which the Company is
in the process of developing prior to Emkjer's termination, unless
he obtains the prior written consent of the Board of Directors.
(b) He will not, directly or indirectly, encourage or solicit, or
attempt to encourage or solicit, any individual to leave the
Company's employ for any reason, or interfere in any other manner
with the employment relationships at the time existing between the
Company and its current or prospective employees.
(c) He will not induce, or attempt to induce, any customer, supplier,
distributor, licensee or any other party having a business
relationship with the Company to cease doing business with the
Company, or in any way interfere with the existing business
relationship between any customer, supplier, distributor, licensee
or any other party and the Company.
(d) The parties do not intend to interfere with Emkjer's ability to
obtain gainful employment after the Termination Date for any period
of time unless Emkjer has received payment as required by Section 4
above for the time period in question. Regardless of whether the
post employment covenants are applicable Emkjer shall at all times
be forbidden from engaging in unfair competition against the
Company.
8. Remedy for Breach. Emkjer acknowledges that money damages may not be
sufficient to compensate the Company for any loss incurred by reason of a
breach of Emkjer of paragraphs 6 or 7 of this Agreement. Therefore, Emkjer
agrees that equitable relief, by injunction or otherwise, ought to be
available to the Company for any breach by him of paragraph 6 or 7, in
addition to any other remedies to which the Company may be entitled.
9. Arbitration. Any dispute between the parties relating in any way to this
agreement shall be resolved by binding arbitration of the American
Arbitration Association in Des Moines, Iowa in accordance with the
Association's commercial rules, and judgment may be entered upon the award
by any court having appropriate jurisdiction thereof. Any questions
concerning arbitrability shall be determined by the arbitrator.
The filling of a lawsuit to obtain injunctive relief shall not be deemed
to be a waiver of the right to arbitrate. A petition for a temporary
restraining order shall be determined by the court, but issues relating to
a preliminary injunction, a permanent injunction and/or damages shall be
resolved by the arbitrator.
If any restriction imposed on Emkjer by this Agreement is determined to be
unreasonably broad, then the arbitrator may limit the scope of the
restriction and may enforce the restriction as limited.
10. Attorney Fees. In any arbitration or court proceeding involving any
dispute relating to this Agreement, the prevailing parties shall be
entitled to reasonable attorneys fees and costs.
11. Miscellaneous. This Agreement is governed, both as to validity and
performance, by the laws of the State of Iowa, but, Iowa conflicts laws
must not be applied by a court or arbitrator so as to apply the
substantive law of another jurisdiction. This is the entire Agreement of
the parties, and it merges any prior agreements or understandings of the
parties related to the employment of Emkjer by the Company. If any
provision of this Agreement is determined by a court or arbitrator of
competent jurisdiction to be invalid or unenforceable, the remaining terms
of the contract will nevertheless continue, and the parties or a court or
arbitrator will endeavor to interpret those terms so as to give effect to
the intention of the parties. The failure of a party to enforce any term
of this Agreement will not be construed as a wavier of that term, nor will
it prevent that party from enforcing that term or any other term of this
Agreement. Any lawsuit between the parties relating in any way to this
Agreement must be filed only in the State or Federal Court situated in
Polk County, Iowa. This Agreement may be amended or supplemented only by a
writing signed by each party. This Agreement, or any amendments or
supplements to it, may be signed in counterparts. All notices required or
permitted by this Agreement must be mailed or sent by facsimile
transmission to the party at the address listed in the preamble, except as
a party otherwise designates in writing. Notices are deemed received three
days after mailing by US mail postpaid, registered or certified, or
immediately if sent by facsimile transmission. This Agreement binds the
heirs, successors, and assigns of each party, but, the obligations imposed
on each party by this Agreement must not be delegated without the written
consent of each party, but, the Company may assign all its rights and
obligations under this Agreement to a successor by merger or sale of
substantially all of its assets.
IN WITNESS WHEREOF, the Company and Emkjer have signed this Agreement
effective the date written in the preamble.
PACE HEALTH MANAGEMENT MARK J. EMKJER
SYSTEMS, INC.
By:________________________________ /s/ MARK J. EMKJER
Date Signed:________________________ Date Signed: February 15, 1996
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
August 8, 1996
