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, 1997 0-27554
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PACE Health Management Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Iowa 42-1297992
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
1025 Ashworth Road
West Des Moines, IA 50265
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(Address and zip code of principal executive offices)
(515) 222-1717
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(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 31, 1997
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Common Stock, no par 5,321,784
Transitional Small Business Disclosure Format (Check one): YES ___ NO __X__
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Condensed Balance Sheets 1
June 30, 1997 and December 31, 1996
Condensed Statements of Operations 2
Three Months and Six Months Ended June 30, 1997 and 1996
Condensed Statements of Cash Flows 3-4
Six Months Ended June 30, 1997 and 1996
Notes to Condensed Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 6-10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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JUNE 30, 1997 DEC. 31, 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,965 $ 1,687,044
Preferred stock subscriptions receivable 1,250,000 --
Accounts receivable, net 811,618 1,013,132
Inventories, primarily computer equipment 161,251 46,480
Prepaid expenses 91,682 49,756
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TOTAL CURRENT ASSETS 2,409,516 2,796,412
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NON-CURRENT ACCOUNTS RECEIVABLE 288,000 288,000
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FURNITURE AND EQUIPMENT, at cost, net of
accumulated depreciation 1997 $620,550; 1996 $492,777 625,675 527,540
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COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization 1,002,721 791,852
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OTHER ASSETS 68,576 --
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$ 4,394,488 $ 4,403,804
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable-bank $ 975,000 $ 500,000
Current maturities of long-term obligations 40,550 13,858
Accounts payable, customer deposits and
accrued expenses 1,320,700 1,173,159
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TOTAL CURRENT LIABILITIES 2,336,250 1,687,017
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LONG-TERM OBLIGATIONS, less current maturities 58,832 33,776
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SHAREHOLDERS' EQUITY:
Preferred stock 1,497,999 --
Common stock 16,912,544 16,241,444
Additional paid-in capital 116,000 116,000
Accumulated deficit (16,527,137) (13,674,433)
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1,999,406 2,683,011
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$ 4,394,488 $ 4,403,804
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</TABLE>
See Notes to Condensed Financial Statements
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET REVENUES
Systems revenues $ 743,499 $ 724,794 $ 1,265,888 $ 1,429,846
Customer support services 161,864 112,593 281,059 212,737
----------- ----------- ----------- -----------
905,363 837,387 1,546,947 1,642,583
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COSTS AND EXPENSES
Cost of systems revenues 478,459 169,523 877,218 283,606
Client services 348,335 208,385 627,253 385,126
Product development 482,590 416,742 910,601 763,492
Purchased research and development 588,502 -- 588,502 --
Sales and marketing 353,189 300,873 741,062 628,060
General and administrative 335,562 385,354 685,866 880,994
----------- ----------- ----------- -----------
2,586,637 1,480,877 4,430,502 2,941,278
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LOSS FROM OPERATIONS (1,681,274) (643,490) (2,883,555) (1,298,695)
OTHER INCOME, NET 28,563 13,013 30,851 38,098
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,652,711) (630,477) (2,852,704) (1,260,597)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $(1,652,711) $ (630,477) $(2,852,704) $(1,260,597)
=========== =========== =========== ===========
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.31) $ (0.15) $ (0.55) $ (0.30)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,251,246 4,262,921 5,211,491 4,253,659
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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SIX MONTHS ENDED
JUNE 30,
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1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,852,704) $(1,260,597)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation 127,773 91,639
Amortization 76,096 120,289
Purchased research and development 588,502 --
Compensation expense recognized upon grant of
stock option -- 75,011
Change in assets and liabilities:
(Increase) decrease in accounts receivable 224,691 (573,128)
(Increase) in other current assets (156,697) (70,317)
Increase in other current liabilities 147,541 146,863
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NET CASH (USED IN) OPERATING ACTIVITIES (1,844,798) (1,470,240)
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for net assets of Healthcare Software Solutions (50,000) --
Capitalized computer software development costs (285,157) (204,100)
Purchase of furniture and equipment (133,271) (200,778)
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NET CASH (USED IN) INVESTING ACTIVITIES (468,428) (404,878)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 975,000 --
Proceeds from sale of Series A preferred stock 247,999 --
Proceeds from sale of common stock 6,400 133,113
Payments on notes payable and long term obligations (508,252) (753,028)
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NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 721,147 (619,915)
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,592,079) (2,495,033)
CASH AND CASH EQUIVALENTS
Beginning 1,687,044 2,831,658
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Ending $ 94,965 $ 336,625
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</TABLE>
(Continued)
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash payments for interest $ 18,298 $ 675
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SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Subscriptions receivable for Series A preferred stock $ 1,250,000 $ --
=========== ===========
Purchase of net assets of Healthcare Software Solutions
Assets acquired:
In-process research and development 588,502 --
Accounts receivable 23,177 --
Property & equipment, primarily computer equipment 92,637 --
Intangible assets 70,384 --
Liabilities assumed (60,000) --
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714,700 --
Issuance of common stock (664,700) --
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Cash payment 50,000 --
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</TABLE>
See Notes to Condensed Financial Statements
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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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,
1996. 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 periods presented.
NOTE 3. RECLASSIFICATION
Certain costs and expenses on the Statements of Operations for the three and six
month period ended June 30, 1996 have been reclassified with no effect on
income.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 an artificial intelligence-based "Clinical Library." This library was the
culmination of twenty years of research 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") for the
hospital acute care setting. 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 representing a significant enhancement to
PACE/CIS including modules for rehabilitation, critical care, orders, and
pathway management. During 1996, PACE CMS, the system from which the Company
derives substantially all of its revenues, was further enhanced through the
first release of a graphical user interface (GUI) utilizing a three-tier,
client/server, open systems architecture ("Graphical PACE CMS").
On May 30, 1997, the Company expanded its product line into the ambulatory
market when it purchased substantially all of the assets of Healthcare Software
Solutions, L.C. (HSS), an affiliate of Wellmark, Inc. (formerly IASD Health
Services Corp.). HSS, headquartered in Des Moines, Iowa, was developing clinical
information systems to physicians working in single practitioner offices,
multi-specialty groups, and multi-site clinics. The HSS "MR2000 for Windows"
product integrates every element of the traditional paper chart into an
electronic clinical information system that improves practice efficiency and the
quality of care. The system provides point and click access to healthcare
information that facilitates the development of treatment protocols and enables
physicians to track patients' problems, symptoms, treatments and outcomes. Total
consideration for the acquisition included cash in the amount of $50,000,
230,000 shares of PACE common stock with a market value of $2.89 per share as of
May 30, 1997, and a royalty payment on all MR2000 software licensed between May
30, 1997 and May 30, 2000. This transaction is accounted for under the purchase
method of accounting. The purchase price of HSS has been allocated to the
identifiable tangible and intangible assets acquired based on their estimated
fair values. The acquired, in-process research and development was immediately
charged to operations as required under generally accepted accounting
principles. The intangible assets have estimated remaining lives of two to five
years.
The Company derives substantially all of its revenues from the sale of PACE
systems including (a) software license fees, (b) software implementation and
installation services and (c) hardware sales. Revenue from software license fees
is recognized upon delivery of the software provided that collectibility is
probable and the Company has no significant obligations remaining under the
software licensing agreement. The estimated costs of any insignificant remaining
obligations are accrued and charged to costs and expenses at the time of revenue
recognition. Revenue from software license fee agreements that require
significant customization is accounted for over the length of the implementation
period using the percentage-of-completion method of accounting. Revenue from
implementation and installation services is accounted for separately from the
software license fees and recognized when the services are performed. Revenue
from hardware sales is recognized upon shipment or upon completion of
significant staging and configuration obligations. Customer support services,
which include system updates, are recognized over the period the services are
performed.
<PAGE>
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. At each
balance sheet date, the unamortized capitalized costs of a computer software
product are compared to the net realizable value of the product and the amount
by which the unamortized capitalized costs exceed the net realizable value is
written off. The net realizable value is the estimated future gross revenues
from a product, reduced by the estimated future costs of completing and
disposing of that product.
RESULTS OF OPERATIONS
NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $905,363 and $837,387 for the three
months ended June 30, 1997 and 1996, respectively, representing an increase of
8%. Included in systems revenues is revenue from software license fees totaling
$267,579 and $506,640 for the three months ended June 30, 1997 and 1996,
respectively, and revenue from hardware sales, totaling $337,636 and $140,687
for the same periods. For the six months ended June 30, 1997 and 1996, the
Company's net revenues were $1,546,947 and $1,642,583 respectively, representing
a decrease of 6%. Included in systems revenues for this same period is revenue
from software license fees, totaling $301,775 and $1,032,490, respectively, and
revenue from hardware sales, totaling $745,172 and $219,191. Customer support
services revenues were $161,864 and $112,593 for the three months ended June 30,
1997 and 1996, respectively, representing an increase of 44%, and $281,059 and
$212,737 for the six months ended June 30, 1997 and 1996, respectively,
representing an increase of 32%. This increase was due to additional maintenance
contracts resulting from the continued growth in the Company's installed client
base.
COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
third party software, commissions and royalties. Cost of systems revenues were
$478,459 and $169,523 for the three months ended June 30, 1997 and 1996,
respectively, representing an increase of 182%. Cost of systems revenues were
$877,218 and $283,606 for the six months ended June 30, 1997 and 1996,
respectively, representing an increase of 209%. This increase is a result of
costs associated with increased hardware sales. Cost of systems revenues totaled
53% and 20% of total net revenues for the three months ended June 30, 1997 and
1996, respectively and 57% and 17% of total net revenues for the six months
ended June 30, 1997 and 1996, respectively. Total cost of systems revenues as a
percentage of total net revenues will continue to fluctuate in the future
depending on the product mixes of revenues.
<PAGE>
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and customer support. Client services expenses
were $348,335 and $208,385 for the three months ended June 30, 1997 and 1996,
respectively, representing an increase of 67%. Client services expenses were
$627,253 and $385,126 for the six months ended June 30, 1997 and 1996,
respectively, representing an increase of 63%. These increases were primarily
due to increases in personnel and payroll related expenses as client services
were expanded to provide implementation services and customer support for the
additional sites. The Company expects these expenses will increase significantly
in the future relative to new sales and growth in the Company's installed client
base.
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 $482,590 and
$416,742 for the three months ended June 30, 1997 and 1996, respectively,
representing an increase of 16%. Product development expenses were $910,601 and
$763,492 for the six months ended June 30, 1997 and 1996, respectively,
representing an increase of 19%. This increase was primarily due to increases in
personnel and payroll related expenses as the Company continued to accelerate
efforts on its Graphical User Interface (GUI) project and expanded staffing on
its Critical Pathway Analyzer (CPA) project. The Company capitalized $137,629
and $109,883 of product development costs and amortized $50,398 and $60,241 in
the three months ended June 30, 1997 and 1996, respectively. The Company
capitalized $285,157 and $204,100 of product development costs and amortized
$76,096 and $120,289 in the six months ended June 30, 1997 and 1996,
respectively. The increased efforts associated with the GUI and CPA projects
accounted for the increases in capitalized expenses in the periods presented.
PURCHASED RESEARCH AND DEVELOPMENT: As a result of the HSS acquisition on May
30, 1997, the Company expensed in-process research and development in the amount
of $588,502.
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 $353,189 and $300,873 for
the three months ended June 30, 1997 and 1996, respectively, representing an
increase of 17%. Sales and marketing expenses were $741,062 and $628,060 for the
six months ended June 30, 1997 and 1996, respectively, representing an increase
of 18%. This increase was primarily due to increases in personnel and payroll
related expenses as the Company expanded its sales force efforts and its product
development team.
GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries
and expenses for corporate administration and finance, legal, insurance and
depreciation expenses. General and administrative expenses were $335,562 and
$385,354 for the three months ended June 30, 1997 and 1996, respectively,
representing a decrease of 13%. General and administrative expenses were
$685,866 and $880,994 for the six months ended June 30, 1997 and 1996,
respectively, representing a decrease of 22%. This decrease was primarily a
result of costs incurred from senior management changes during the six months
ended June 30, 1996.
<PAGE>
OTHER INCOME, NET: Other income, net is comprised of interest income and
expenses. Other income, net was $28,563 and $13,013 for the three months ended
June 30, 1997 and 1996, respectively, representing an increase of 119%. This
increase was primarily due to receipt of the State of Iowa research activity
credit. Other income, net was $30,851 and $38,098 for the six months ended June
30, 1997 and 1996, respectively, representing a decrease of 19%. This decrease
was a result of decreased interest income from reduced cash balances and
investment amounts in the period ended June 30, 1997.
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
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 numerous private placements, receiving approximately $7.8 million in
aggregate net proceeds. In 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. Additionally, in
September 1996, PACE sold 900,000 shares of common stock at $3.25 per share for
net proceeds of approximately $2.8 million. In June 1997, the Company received
orders for 1,142,856 shares of convertible preferred stock at $1.75 per share
representing total proceeds of approximately $2 million. The Company received
$250,000 prior to the end of the second quarter and recorded subscriptions
receivable in the amount of $1,250,000. Subsequent to the second quarter, the
balance in subscriptions receivable in the amount of $1,250,000 was collected.
For the six month periods ended June 30, 1997 and 1996, the Company experienced
net losses of $2,852,704 and $1,260,597 respectively, resulting in net cash used
in operations for each of the periods of $1,844,798 and $1,470,240 respectively.
During the second quarter, the Company expensed in-process research and
development technology in the amount of $588,502 relative to the purchase of the
assets of HSS.
Accounts payable, customer deposits and accrued expenses increased $147,541 to
$1,320,700 at June 30, 1997 from $1,173,159 at December 31, 1996. This increase
was primarily due to an increase in customer deposits received by the Company in
advance of revenue recognition.
Accounts receivable decreased $201,514 to $1,099,618 at June 30, 1997 from
$1,301,132 at December 31, 1996. This decrease was due to an increase in cash
receipts on billings generated by several contracts initiated during the first
three months of 1997. Included in accounts receivable is accrued revenue
receivable which decreased $92,908 to $731,734 at June 30, 1997 from $824,642 at
December 31, 1996. The accrued revenue receivable represents revenue on site
license agreements for which the Company has delivered and installed the first
of multiple copies of a software product to be installed at various customer
sites in exchange for a fixed fee. Under these site license agreements, license
fees are due at specified dates or, if earlier, upon the installation and system
set-up at each site.
Net cash used in investing activities for the six months ended June 30, 1997 and
1996 was $468,428 and $404,878, respectively. Cash used in investing activities
was primarily for the purchase of computer and office equipment and capitalized
software costs. Additionally, on May 30, 1997, the Company used cash in the
amount of $50,000 as consideration in the asset purchase of HSS.
<PAGE>
Net cash used in financing activities consisted primarily of repayment of
long-term obligations in the amount of $8,252, net proceeds from the sale of
preferred stock in the amount of $247,999, and net proceeds from the line of
credit in the amount of $475,000. At December 31, 1996, outstanding borrowings
on the line of credit was $500,000. During the six months ended June 30, 1997,
the Company reduced the outstanding line of credit balance to zero and
subsequently borrowed $975,000 under the line of credit.
The Company occupies approximately 12,260 square feet of office space at its
headquarters in West Des Moines, Iowa and approximately 1,200 square feet in
Charlotte, North Carolina. The lease for its headquarters in West Des Moines,
Iowa expires in May 1998. The lease in North Carolina expires in May 1998. The
Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements increase, however, it anticipates
this increase to be minimal for the next twelve months.
As of June 30, 1997, the Company had a cash balance of $94,965. At that date,
the Company did not have material long-term obligations or commitments for
capital expenditures. The Company has a $1.0 million revolving line of credit
with a financial institution that expires in February 1998. The line of credit
is collateralized by substantially all assets of the Company. Interest is
payable at prime (8.25% as of June 30, 1997). Outstanding borrowings totaled
$975,000 at June 30, 1997. Subsequent to the end of the second quarter, the
outstanding preferred stock subscriptions receivable of $1.250,000 had been
received
The Company intends to continue its research and development activities and the
expansion of its sales efforts. To the extent possible, the Company will fund
such activities from borrowings under working capital generated by operations
and from its bank line of credit. However, the Company expects that additional
equity investments will be required, and it may from time to time engage in
private placement transactions with selected investors. As disclosed in the
Company's Form 8-K filed August 11, 1997, the Company is currently conducting a
private placement of up to an additional $5 million of convertible preferred
stock, ($7,000,000 in total proceeds) although there can be no assurance that
the offering will be successful.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
On May 30, 1997, the Company issued 230,000 shares of common stock as a
part of the purchase price of the assets of Healthcare Software Solutions, L.C.,
as discussed under "Management's Discussion and Analysis or Plan of Operations."
In June 1997, the Company received orders for 1,142,856 shares of
Series A convertible preferred stock at a price of $1.75 per share, plus
warrants to purchase 285,714 shares of common stock, for a total of $2,000,000.
The Company received $250,000 prior to the end of the second quarter and
recorded subscriptions receivable in the amount of $1,250,000. The convertible
preferred stock is convertible into common stock on a share for share basis. The
warrants are exercisable at a price of $1.75 per share and expire five years
from the date of issuance.
<PAGE>
Neither transaction involved the payment of any underwriting discount
or placement fee. Both transactions were exempt under Section 4(2) of the
Securities Act of 1933 and Securities and Exchange Commission Rule 506.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of PACE Health Management Systems,
Inc was held at the office of the Company, 1025 Ashworth Road, City of West Des
Moines, Iowa on May 23, 1997. The following matters were voted upon:
1. Election of Directors:
NAME VOTES RECEIVED TERM
Bill W. Childs 4,071,097 shares 3 years
R. David Spreng 4,071,097 shares 3 years
2. Proposal to ratify the appointment of McGladrey & Pullen, LLP, as
independent auditors:
FOR AGAINST ABSTENTIONS
4,068,916 shares 5,775 shares 2,100 shares
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.3 Articles of Amendment to the Articles of
Incorporation filed June 27, 1997
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed August 11, 1997
<PAGE>
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, 1997 /s/ ROGER D. HUSEMAN
- ---------------------- --------------------------------------------
Dated Vice President of Finance and Administration
and Chief Financial Officer
ARTICLES OF AMENDMENT
EXHIBIT 3.3
OF
PACE HEALTH MANAGEMENT SYSTEMS, INC.
TO THE SECRETARY OF STATE OF THE STATE OF IOWA:
Pursuant to Section 1002 of the Iowa Business Corporation Act (the "Act"),
the undersigned corporation adopts the following amendment to the corporation's
Articles of Incorporation.
I. The name of the corporation is Pace Health Management Systems, Inc. (the
"Company").
II. The Company's Restated Articles of Incorporation, filed with the Iowa
Secretary of State and effective as of May 3, 1996, are hereby amended by
designating a series of the Company's Preferred Stock, such series to be known
as Convertible Preferred Stock, Series A (the "Convertible Preferred Stock").
The preferences, limitations and relative rights of the Convertible Preferred
Stock shall be as follows:
SECTION 1. DESIGNATION; NUMBER OF SHARES; PURCHASE PRICE. The shares of
such series shall be designated as "Convertible Preferred Stock, Series A", and
the number of shares constituting the Convertible Preferred Stock shall be
4,000,000. The Convertible Preferred Stock may be issued and sold by the Company
at the discretion of the Board of Directors at a price of $1.75 per share.
SECTION 2. PAR VALUE. The Convertible Preferred Stock shall have no par
value.
SECTION 3. RANK. The Convertible Preferred Stock shall rank prior to
all of the Company's Common Stock, no par value (the "Common Stock"), now
outstanding or hereafter issued, both as to payment of dividends and as to
distribution of assets upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of
Convertible Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, annual dividends at the rate of $0.175 per share. Such dividends shall
be fully cumulative, shall accumulate quarterly without interest, shall be
payable in cash and shall become due and payable when, as and if declared by the
Board of Directors or the conversion of the Convertible Preferred Stock.
Dividends shall be payable to holders of record as they appear on the stock
books of the Company on such record dates as shall be fixed by the Board of
Directors. Such record dates shall be not more than 60 nor less than 10 days
preceding the respective dividend payment date. The amount of dividends payable
per share of Convertible Preferred Stock for each full quarterly dividend period
shall be computed by dividing the annual dividend amount by four. The amount of
dividends payable for the initial dividend period and for any other period
shorter than a full quarterly dividend period shall be computed on the basis of
a 360-day year of twelve 30-day months. No dividends or other distributions
shall be paid or set apart for payment on, and no purchase, redemption or other
acquisition shall be made by the Company of, any shares of Common Stock or any
other capital stock ranking junior as to the payment of dividends to the
Convertible Preferred Stock (the "Junior Preferred Stock") unless and until
<PAGE>
dividends on the Convertible Preferred Stock, including the full dividend for
the then-current quarterly dividend period, shall have been paid or declared and
set apart for payment.
Upon the full payment of all accumulated and unpaid preferred dividends
to the holders of the Convertible Preferred Stock, the holders of Convertible
Preferred Stock shall participate in and receive dividends on a parity with the
holders of Common Stock on an as-converted basis, when, as and if such dividends
or other distributions are declared by the Board of Directors.
Any reference to "distribution" contained in this Section 4 shall not
be deemed to include any distribution made in connection with a liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
SECTION 5. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of Convertible Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets constitute stated capital or surplus
of any nature, an amount equal to the dividends accumulated and unpaid thereon
to the date of final distribution to such holders, whether or not declared,
without interest, plus a sum equal to $1.75 per share, before any payment shall
be made or any assets distributed to the holders of Common Stock or any other
capital stock of the Company ranking junior as to liquidation rights to the
Convertible Preferred Stock ("Junior Liquidation Stock"). The entire assets of
the Company available for distribution shall be distributed ratably among the
holders of the Convertible Preferred Stock and any other capital stock of the
Company which ranks on a parity as to liquidation rights with the Convertible
Preferred Stock in proportion to the respective preferential amounts to which
each is entitled (but only to the extent of such preferential amounts).
After payment in full of the liquidation preference of the shares of
the Convertible Preferred Stock, the holders of such shares shall participate in
the distribution of the remaining assets by the Company on a parity with the
holders of Common Stock on an as-converted basis.
The merger or consolidation of the Company with or into another
corporation, or the sale, transfer or other disposition of all or substantially
all of the assets of the Company which results in the shareholders of the
Company immediately prior to the consummation of such transaction holding less
than 50% of the voting securities of the surviving entity immediately following
the consummation of the transaction shall be deemed to be a liquidation or
dissolution of the Company for purposes of this Section 5.
SECTION 6. CONVERSION. Holders of Convertible Preferred Stock may, at
their option upon surrender of the certificates therefor, convert any or all of
their shares of Convertible Preferred Stock into fully paid and nonassessable
shares of Common Stock (and such other securities and property as they may be
entitled to, as hereinafter provided) at any time after issuance thereof.
There shall be a mandatory conversion of all outstanding Convertible
Preferred Stock by the Company upon the earlier of (i) the closing of a
Qualified Public Offering, or (ii) the affirmative vote of the holders of a
majority of the outstanding Convertible Preferred Stock for a mandatory
conversion. A "Qualified Public Offering" is a public offering of the shares of
the Company in which (a) a minimum of $10 million is raised in such offering by
the Company, (b) the per share purchase price is at least $4.00 and (c) the
offering is underwritten on a firm basis by a recognized underwriter.
<PAGE>
Each share of Convertible Preferred Stock shall be convertible into
fully paid and nonassessable shares of Common Stock at the rate of one share of
Common Stock for each share of Convertible Preferred Stock, subject to
adjustment from time to time as provided in Section 7 (such conversion rate, as
so adjusted shall be referred to as the "Conversion Rate"). The initial
"Conversion Price" shall be equal to $1.75 per share divided by the Conversion
Rate, and is subject to adjustment as provided in Section 7. Upon conversion,
all accumulated and unpaid dividends to the conversion date on the Convertible
Preferred Stock so converted shall also be converted into fully paid and
nonassessable shares of common Stock at the rate of $1.75 of accumulated and
unpaid dividends for each share of Common Stock, subject to adjustment in the
same manner as any adjustment in the Conversion Price or Conversion Rate under
Section 7.
To effect the conversion the holders of Convertible Preferred Stock
shall surrender for such purpose to the Company or its agent, certificates
representing shares to be converted, duly endorsed in blank or accompanied by
proper instruments of transfer. The Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of Common Stock or other securities or property upon conversion of
Convertible Preferred Stock in a name other than that of the holder of the
shares of Convertible Preferred Stock being converted, nor shall the Company be
required to issue or deliver any such shares or other securities or property
unless and until the person or persons requesting the issuance thereof shall
have paid to the Company the amount of any such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Convertible Preferred Stock
outstanding upon the basis hereinbefore provided shall at all times be reserved
by the Company, free from preemptive rights, for such conversion. If the Company
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Convertible Preferred Stock shall be convertible as herein provided, the Company
shall at the same time also make proper provision so that thereafter there shall
be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Convertible Preferred
Stock on the new basis.
Upon the surrender of certificates representing shares of Convertible
Preferred Stock to be converted, duly endorsed or accompanied by proper
instruments of transfer as provided above, the person converting such shares
shall be deemed to be the holder of record of the Common Stock issuable upon
such conversion, and all rights with respect to the shares surrendered shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets as herein provided.
No fractional shares are to be issued upon the conversion of the
Convertible Preferred Stock, but the Company shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in an
amount equal to the fraction of the share remaining times the Conversion Price.
SECTION 7. ADJUSTMENTS TO CONVERSION PRICE AND CONVERSION RATE. The
Conversion Rate shall be adjusted from time to time in the event the Company
shall (i)pay a dividend or make a distribution on its Common Stock in shares of
its capital stock, (ii)subdivide its outstanding Common Stock into a greater
number of shares, (iii)combine the shares of its outstanding Common Stock into a
smaller number of shares, or (iv)issue by reclassification of its Common Stock
any shares of its capital stock. In each such case the Conversion Rate in effect
immediately prior thereto shall be proportionately adjusted so that the
<PAGE>
holder of any Convertible Preferred Stock thereafter surrendered for conversion
shall be entitled to receive, to the extent permitted by applicable law, the
number and kind of shares of capital stock of the Company which such holder
would have owned or have been entitled to receive after the happening of such
event had such Convertible Preferred Stock been converted immediately prior to
the record date for such event (or if no record date is established in
connection with such event, the effective date for such action). An adjustment
pursuant to this paragraphshall become effective immediately after the record
date in the case of a stock dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification.
Except for issuances of Common Stock specifically listed below, the
Conversion Price shall be adjusted from time to time if the Company shall issue
any additional shares of Common Stock (including securities convertible into
Common Stock) without consideration or for consideration per share less than the
Conversion Price then in effect. In such event, the Conversion Price shall be
adjusted to a price equal to the price paid per share for the additional Common
Stock issued. The Conversion Price shall not be adjusted in the event of the
issuance of Common Stock (i) upon the conversion of Convertible Preferred Stock,
or (ii) to officers, directors, employees, agents or consultants of the Company
pursuant to any stock option or equity incentive plans approved by the Board of
Directors.
Whenever the Conversion Rate or Conversion Price is adjusted, the
Company shall give notice by mail to the holders of record of Convertible
Preferred Stock, setting forth the adjustment and the new Conversion Rate and
Conversion Price. Notwithstanding the foregoing notice provisions, failure by
the Company to give such notice or a defect in such notice shall not affect the
binding nature of such corporate action of the Company.
SECTION 8. VOTING RIGHTS. Except as specified in Section 8 or as
expressly required by the Act, the holders of Convertible Preferred Stock shall
be entitled to one vote per share and shall vote, together with the holders of
Common Stock as a single class, on all matters required or permitted to be
submitted to the shareholders of the Company.
SECTION 9. CERTAIN ACTIONS NOT TO BE TAKEN WITHOUT VOTE OF HOLDERS OF
CONVERTIBLE PREFERRED STOCK. Without the consent or affirmative vote of the
holders of a majority of the outstanding shares of Convertible Preferred Stock,
voting separately as a class, the Company shall not (i) secure additional
capitalization through the issuance of debt or equity securities, (ii) merge
with or into or acquire more than 50% of the stock of, or all or substantially
all of the assets of, another entity, (iii) reorganize or recapitalize the
Company, (iv) sell, lease, license or otherwise dispose of all or substantially
all of the assets of the Company, (v) alter any rights, preferences, or
limitations of Convertible Preferred Stock, (vi) pay any dividend on Junior
Preferred Stock or Common Stock, (vii) repurchase Convertible Preferred Stock or
any other preferred stock issued by the Company or Common Stock, (viii) amend
the Company's Articles of Incorporation or Bylaws, (ix) increase the size of the
Board of Directors to more than six (6) directors; (x) voluntarily liquidate the
Company or (xi) create a new series or class of securities of the Company.
SECTION 10. AMENDMENT. Any provision of these Articles of Amendment,
including any of the terms of the Convertible Preferred Stock, may be amended or
waived at any time by the agreement of the Company and the holders of a majority
of the outstanding shares of Convertible Preferred Stock. The
<PAGE>
Company shall promptly furnish a copy of any such amendment or waiver to each
holder of record of the Convertible Preferred Stock.
III. The Board of Directors of the Company duly adopted the foregoing as the
preferences, limitations and relative rights of the Convertible Preferred Stock
by unanimous resolution on June 27, 1997.
IV. Pursuant to Section 602 of the Act, shareholder approval is not required for
this Amendment.
Dated this 27th day of June, 1997.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
By /s/ MARK J. EMKJER
-----------------------------
Mark J. Emkjer, President and
Chief Executive Officer
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