U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
June 30, 1996 33-90408-C
PACE Health Management Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Iowa 42-1297992
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1025 Ashworth Road
West Des Moines, IA 50265
(Address and zip code of principal executive offices)
(515) 222-1717
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject of the filing requirements for at least the
past 90 days. YES __X__ NO _____
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Number of Shares Outstanding
Class July 18, 1996
Common Stock, no par 4,188,002
Transitional Small Business Disclosure Format (Check one):
YES ____ NO __x__
PACE HEALTH MANAGEMENT SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Page
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets........................................1
June 30, 1996 and December 31, 1995
Condensed Statements of Operations..............................2
Three Months and Six Months Ended June 30, 1996 and 1995
Condensed Statements of Cash Flows..............................3
Six Months Ended June 30, 1996 and 1995
Notes to Condensed Financial Statements.........................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................5
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................9
ITEM 2. CHANGES IN SECURITIES..............................................9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................................9
ITEM 5. OTHER INFORMATION..................................................9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................9
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1996 DEC. 31, 1995
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash $ 336,625 $ 2,831,658
Accounts receivable, net 1,201,827 628,699
Inventories, primarily computer equipment 61,220 22,993
Prepaid expenses 69,146 37,056
------------ -----------
Total current assets 1,668,818 3,520,406
------------ -----------
Furniture and Equipment, at cost, net of
accumulated depreciation 488,018 378,879
------------ -----------
Computer Software Development Costs, net of accumulated amortization:
Purchased 1,319,354 1,356,146
Internally developed 544,920 424,317
------------ -----------
1,864,274 1,780,463
------------ -----------
$ 4,021,110 $ 5,679,748
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations $ 17,159 $ 761,932
Accounts payable, customer deposits and
accrued expenses 610,777 463,914
------------ -----------
Total current liabilities 627,936 1,225,846
------------ -----------
Long-Term Obligations, less current maturities 39,408 47,663
------------ -----------
Shareholders' Equity:
Common stock 13,433,594 13,300,481
Additional paid-in capital 75,011 --
Accumulated deficit (10,154,839) (8,894,242)
------------ -----------
3,353,766 4,406,239
------------ -----------
$ 4,021,110 $ 5,679,748
============ ===========
See Notes to Condensed Financial Statements.
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PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Systems revenues $ 724,794 $ 403,158 $ 1,429,846 $ 723,180
Customer support services 112,593 100,337 212,737 182,143
----------- ----------- ----------- -----------
837,387 503,495 1,642,583 905,323
----------- ----------- ----------- -----------
Costs and expenses:
Cost of systems revenues 169,523 134,829 283,606 191,821
Client services 200,562 204,215 369,480 353,775
Product development 408,942 209,571 747,892 329,113
Sales and marketing 294,733 214,280 615,780 369,523
General and administrative 407,117 232,087 924,520 491,004
----------- ----------- ----------- -----------
1,480,877 994,982 2,941,278 1,735,236
----------- ----------- ----------- -----------
Loss from operations (643,490) (491,487) (1,298,695) (829,913)
Other income, net 13,013 37,971 38,098 28,676
----------- ----------- ----------- -----------
Loss before income taxes (630,477) (453,516) (1,260,597) (801,237)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (630,477) $ (453,516) $(1,260,597) $ (801,237)
=========== =========== =========== ===========
Loss per common
and common equivalent share $ (0.15) $ (0.14) $ (0.30) $ (0.40)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 4,262,921 3,140,026 4,253,659 2,013,341
=========== =========== =========== ===========
See Notes to Condensed Financial Statements.
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<CAPTION>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
------------ ------------
<S> <C> <C>
Net Loss $(1,260,597) $ (801,238)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation 91,639 83,925
Amortization 120,289 44,543
Compensation expense recognized upon
grant of stock option 75,011 --
Change in assets and liabilities:
(Increase) in accounts receivable (573,128) (321,045)
(Increase) in other current assets (70,317) (71,948)
Increase in accounts payable, customer
deposits, and accrued expenses 146,863 (56,274)
----------- -----------
Net cash (used in) operating activities (1,470,240) (1,122,037)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized computer software development costs (204,100) (129,192)
Purchase of furniture and equipment (200,778) (211,022)
----------- -----------
Net cash (used in) investing activities (404,878) (340,214)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 500,000
Proceeds from sale of preferred stock -- 38,433
Proceeds from sale of common stock 133,113 5,520,120
Proceeds from collection of stock subscriptions
receivable -- 881,285
Payments on notes payable and long term obligations (753,028) (1,253,216)
----------- -----------
Net cash provided by (used in) financing activities (619,915) 5,686,622
----------- -----------
Net increase (decrease) in cash (2,495,033) 4,224,371
CASH
Beginning 2,831,658 112,203
----------- -----------
Ending $ 336,625 $ 4,336,574
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash payments for interest $ 675 $ 21,558
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Series H preferred stock for release
of note payable to shareholder $ -- $ 109,650
Accrued interest converted to long-term debt -- 13,886
Repayment of notes payable with proceeds assigned
as collateral -- 500,000
See Notes to Condensed Financial Statements
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PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial information should be read in conjunction with the
annual financial statements and notes thereto for the year ended December 31,
1995. The financial information included herein is unaudited; such information
reflects all adjustments which, in the opinion of management, are necessary in
order to make the financial statements not misleading.
The results of operations for the six months are not necessarily indicative of
the results to be expected for the entire fiscal year.
NOTE 2. LOSS PER COMMON SHARE 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.
NOTE 3. RECLASSIFICATION
Certain costs and expenses on the Statements of Operations for the three and six
month periods ended June 30, 1995 have been reclassified with no effect on
income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. PACE Health Management Systems, Inc. ("PACE" or the "Company") 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. In 1995, the Company introduced
PACE CMS, a comprehensive care management system which includes order management
and results reporting, clinical pathway management and clinical repository
modules, in addition to the Clinical Library database and point-of-care
applications.
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.
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. 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.
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.
RESULTS OF OPERATIONS
NET REVENUES: Net revenues include systems revenues and customer support
services. Net revenues were $503,495 and $837,387 for the three months ended
June 30, 1995 and 1996, respectively, representing an increase of 66.3%. Systems
revenue comprised 80.0% and 86.6% of total net revenues for the three months
ended June 30, 1995 and 1996, respectively. Net revenues were $905,323 and
$1,642,583 for the six months ended June 30, 1995 and 1996, respectively,
representing an increase of 81.4%. The increase in systems revenues 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 first quarter of 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 59.2% of the revenue for the three month period and 61.2% of the
revenue for the six month period ending June 30, 1996.
COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
commissions and royalties payable to third parties. Cost of systems revenues was
$134,829 and $169,523 in the three months ended June 30, 1995 and 1996,
respectively, representing an increase of 25.7%. Cost of systems revenues was
$191,821 and $283,606 in the six months ended June 30, 1995 and 1996,
respectively, representing an increase of 47.8%. The increase for both the three
month and six month period was primarily as a result of costs associated with
increased net revenues. Cost of systems revenues totaled 26.7% and 20.2%,
respectively, of total net revenues for the three months ended June 30, 1995 and
1996 and cost of systems revenues totaled 21.2% and 17.3%, respectively, of
total net revenues for the six months ended June 30, 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 hardware and software.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation and support. Client services expenses were $204,215 and
$200,562 for the three months ended June 30, 1995 and 1996, respectively,
representing a decrease of 1.8%. Client services expenses were $353,775 and
$369,480 for the six months ended June 30, 1995 and 1996, respectively,
representing an increase of 4.4%. 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 $209,571 and
$408,942 for the three months ended June 30, 1995 and 1996, respectively,
representing an increase of 95.1%. Product development expenses were $329,113
and $747,892 for the six months ended June 30, 1995 and 1996, respectively,
representing an increase of 127.2%. The increase for the three months and six
months ended June 30, 1996 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
$48,048 and $109,883 of product development costs and amortized $70,365 and
$60,241 in the three months ended June 30, 1995 and 1996, respectively. The
Company capitalized $129,192 and $204,100 of product development costs and
amortized $83,925 and $120,289 in the six months ended June 30, 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 $214,280 and $294,733 for
the three months ended June 30, 1995 and 1996, respectively, representing an
increase of 37.5%. Sales and marketing expenses were $369,523 and $615,780 for
the six months ended June 30, 1995 and 1996, respectively, representing an
increase of 66.6%. These increases were 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
$232,087 and $407,117 for the three months ended June 30, 1995 and 1996,
respectively, representing an increase of 75.4%. This increase was primarily due
to increases in personnel and payroll related expenses, professional services,
and depreciation expense. General and administrative expenses were $491,004 and
$924,520 for the six months ended June 30, 1995 and 1996, respectively,
representing an increase of 88.3%. This increase was primarily due to an
increase in professional services, an increase in rent expense following the
Company's expansion of office space in West Des Moines, Iowa, and an increase in
insurance expense related to the Company's director's and officer's liability
coverage. In addition, the Company incurred one time costs of approximately
$260,000 associated with the recruiting and hiring of the Company's new Chief
Executive Officer in March 1996.
OTHER INCOME, NET: Other income, net is comprised of interest income and
expenses. Other income, net was $37,971 and $13,013 for the three months ended
June 30, 1995 and 1996, respectively, representing a decrease of 65.7%. Other
income, net was $28,676 and $38,098 for the six months ended June 30, 1995 and
1996, respectively, representing an increase of 32.8%. Following completion of
the initial public offering in April, 1995, cash balances and investments
increased substantially, resulting in increased interest income beginning in the
second quarter of 1995. 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.
PROVISION FOR INCOME TAXES: No provision for income tax benefit has been
recorded due to the Company recording a valuation allowance on the deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $336,625 as of June 30, 1996 decreased $2,495,033 from $2,831,658 as of
December 31, 1995. Since its inception, the Company has experienced annual
operating losses and negative cash flows from operations. The Company's primary
source of cash and working capital has been from investor funds. During the six
months ended June 30, 1996, the Company used net cash of $1,470,240 in operating
activities, $404,878 in capital expenditures, and $753,028 in the repayment of
long-term obligations. During the same period, the Company received $133,113 in
proceeds from the exercise of common stock options.
Accounts receivable of $1,201,827 as of June 30, 1996 increased $573,128 from
$628,699 as of December 31, 1995 as revenues continued to increase. The Company
has established an allowance for doubtful accounts which management believes is
adequate. Included in accounts receivable are unbilled accounts receivable of
$590,438 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 of $610,777 as of June
30, 1996, increased $146,863 from $463,914 as of December 31, 1995. This
increase was primarily due to an increase in customer deposits of $160,302
received by the Company in advance of revenue recognition. For the six months
ended June 30, 1996, the Company incurred $404,878 in capital expenditures which
consisted of computer software development costs, computer equipment utilized in
research and development, and sales demonstration equipment.
The Company occupies approximately 11,500 square feet of office 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 under a lease expiring in May 1998. The Company believes its facilities
are adequate to satisfy its currently anticipated business requirements through
May 1997 ap[proximately.
As of June 30, 1996, the Company had working capital of approximately $1.0
million, including a cash balance of approximately $336,000. 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 June 30, 1996)
under which no amount was outstanding as of June 30, 1996. The line of credit
expires on April 30, 1997.
The Company filed a registration statement on July 12, 1996 with the Securities
and Exchange Commission to raise additional capital.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
N/A
ITEM 2. CHANGES IN SECURITIES.
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
for which this report is filed.
SIGNATURES
In accordance with requirements of the Exchange Act , the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)
August 12, 1996 /s/ ROGER D. HUSEMAN
- -------------------------------- ------------------------------------
Dated Roger D. Huseman, Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 336,625
<SECURITIES> 0
<RECEIVABLES> 1,281,827
<ALLOWANCES> 80,000
<INVENTORY> 61,220
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<PP&E> 862,594
<DEPRECIATION> 374,576
<TOTAL-ASSETS> 4,021,110
<CURRENT-LIABILITIES> 627,936
<BONDS> 39,408
0
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<COMMON> 13,433,594
<OTHER-SE> (10,079,828)
<TOTAL-LIABILITY-AND-EQUITY> 4,021,110
<SALES> 1,642,583
<TOTAL-REVENUES> 1,642,583
<CGS> 653,086
<TOTAL-COSTS> 2,941,278
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<INTEREST-EXPENSE> 586
<INCOME-PRETAX> (1,260,597)
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