U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
_X_ Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 1996
___ Transition report under section 13 or 15(d) of the Securities
Act of 1934 for the transition period from _____ to _____.
Commission File Number: 0-27554
PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Name of small business issuer as specified in its charter)
Iowa 42-1297992
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
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)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par
(Title of class)
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 past 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____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's net revenues for its most recent fiscal year: $3,040,400
The aggregate market value of the voting stock held by non-affiliates, based
upon the closing sale price of the common stock on March 11,1997 as reported by
the Nasdaq SmallCap Market, was approximately $6,983,000. Shares of common stock
held by each officer and director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates.
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 February 28, 1997
- -------------------- -----------------------------
Common Stock, no par 5,090,184
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on May 23, 1997
are incorporated by reference into Part III.
Transitional Small Business Disclosure Format (Check one): YES___ NO_X_
PACE HEALTH MANAGEMENT SYSTEMS, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Page
ITEM 1. Description of Business........................................ 1
ITEM 2. Description of Property........................................ 9
ITEM 3. Legal Proceedings.............................................. 9
ITEM 4. Submission of Matters to a Vote of Security Holders............ 9
PART II.
ITEM 5. Market for Common Equity and Related Shareholder Matters....... 10
ITEM 6. Management's Discussion and Analysis or Plan of Operation...... 10
ITEM 7. Financial Statements........................................... 16
ITEM 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 32
PART III.
ITEM 9. Directors, Executive Officers, Promoters and Control Person,
Compliance With Section 16(a) of the Exchange Act.............. 32
ITEM 10. Executive Compensation......................................... 32
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management..................................................... 32
ITEM 12. Certain Relationships and Related Transactions................. 32
ITEM 13. Exhibits and Reports on Form 8-K............................... 34
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
PACE develops and markets advanced patient care management software systems that
enable healthcare 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 healthcare 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, physicians 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, and
enhancing communications and coordination of care among members of the patient
care team. Additionally, its systems 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 while reducing
costs.
THE COMPANY
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 an artificial intelligence-based "Clinical Library." This
library was the culmination of twenty years of research at Carnegie-Mellon
University and Creighton University. 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. During fourth
quarter of 1995, 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, which
represents a significant enhancement to PACE/CIS. PACE CMS uses an
object-oriented open three-tier client/server architecture and Microsoft(R)
technology such as Windows NT(R) Server and SQL Server which enable it to be
integrated with nearly every hospital information system (HIS) or practice
management system on the market, thereby protecting the investments in systems
which may currently be in place at the customer's site. The next generation of
PACE, Graphical PACE CMS, increases user functionality while adding a graphical
user interface. Successfully installed at two facilities in 1996, Graphical PACE
CMS has the user friendliness of Windows with significantly enhanced clinical
functionality as compared to the original character-based product.
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 issued during previous rounds of private financing were
converted to common stock on a one-to-one basis. In September 1996, the Company
sold 900,000 shares of common stock at $3.25 per share for net proceeds to the
Company of approximately $2.8 million.
INDUSTRY OVERVIEW
Over the past two decades, healthcare costs have risen dramatically relative to
the overall rate of inflation. Historically, reimbursement for healthcare
organizations has been based on a fee-for-service model of payment. With
increasing pressure to reduce costs, managed care organizations and other payers
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 healthcare 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. In essence, caregivers in many
circumstances may be making patient care decisions without current information.
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 healthcare 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 Healthcare 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 healthcare industry, a need exists
for a healthcare 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
healthcare administrators.
PRODUCTS
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 and object orientation allow PACE CMS to be integrated with a
healthcare provider's existing information systems, including financial
management, admissions, pharmacy, laboratory and other ancillary systems. PACE
CMS is a tightly integrated array of the following five modules that work in
harmony to provide a COMPLETE PATIENT MANAGEMENT SOLUTION for caregivers:
Clinical Documentation
The Clinical Documentation module is a disciplinary decision support and
documentation system that automates patient charting functions for
enhanced productivity and information-sharing. Documentation applications
capture, analyze and report on such elements as:
1. Vital signs
2. Fluid balances (intake and output)
3. Observations and findings (assessments)
4. Prescribed medications
5. Infused intravenous solutions
6. Clinical pathways
7. Individual patient care plans
Additionally, this module provides personalized on-line education to
enhance a patient's understanding of his/her illness and prescribed
treatment programs.
Case Management
The PACE Case Management module improves the delivery of patient care
through the use of clinical pathways. The foundation of the system is the
clinical path, a CareMap(R) product licensed to the Company by The Center
for Case Management. Case Management provides complete solutions for:
1. Analysis and creation of the pathway with the Critical Pathway
Analyzer (CPA)
2. Documentation of the pathway at the point of care
3. Integration with orders, results and documentation
4. Monitoring of variances and outcomes during the episode of care
5. Reporting of aggregate pathway information retrospective of the
care
Critical Care
The PACE Critical Care module integrates all patient information for
clinical decision-making in the critical care setting. It permits direct
automatic capture of patient information from medical instruments such as
cardiac monitors and ventilators. This information is verified and then
automatically sent to the Clinical Documentation module where it is
displayed and organized for rapid decision support and compared with
established clinical pathways.
Clinical Repository
The PACE Clinical Repository is the central warehouse for data collected
across the enterprise. As patient information is collected, it is
automatically sent to the Clinical Repository for permanent storage. Over
time, this accumulated information becomes the foundation for the
permanent electronic medical record for each patient.
Order Communications
The PACE Order Communications module serves as a vital communications link
that processes and broadcasts clinician orders and results throughout the
healthcare enterprise.
The Company believes that PACE systems are differentiated from other healthcare
decision support systems by their breadth of functionality and flexibility. 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 powerful advantage of PACE CMS. The Company expects
that the user-friendly nature of Graphical PACE CMS will further differentiate
the Company's systems from its competitors.
The Company is also a reseller of computer hardware and software obtained from
third party vendors. At the present time, purchases are made from a limited
number of suppliers. The Company believes there are numerous alternate sources
of such materials in the event current suppliers are unable to provide
sufficient supplies or increase prices.
MARKETING AND SALES
The potential market for patient care management and point-of-care systems in
the United States includes approximately 6,500 hospitals and other healthcare
facilities such as rehabilitation centers and long-term care facilities. The
majority of these entities have not yet invested in complete patient care
management systems with full point-of-care- capabilities. Company management
believes that the need for healthcare providers to control costs, document care,
adopt standards of care and still maintain or improve the quality of care will
require healthcare providers to invest in new systems.
To ensure its products meet market and client needs, the Company established a
formal product management department in 1996 to keep abreast of marketing and
clinical trends. This team translates information into functionality as they
lead client focus groups and PACE technical personnel in designing modules,
products and enhancements that will interface with existing PACE systems. Also
in 1996, the Company expanded its sales force and reorganized sales territories
into six regions within the United States and added a national accounts focus.
The direct sales effort is supported by a marketing communications program
designed to contact the Company's target audience, which is comprised of the
healthcare provider's chief executives, nursing management, information systems
managers and physicians. The 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.
PACE system sales are generally made to potential customers that are either 1)
adding a patient care management system to complement their other core financial
or clinical systems or 2) replacing their existing clinical systems to more
effectively support their integrated delivery system.
The sales cycle for point-of-care clinical information systems from initial
sales contact to contract signature can be as long as twelve to eighteen months,
depending on the size and governing structure of the prospective customer. To
make information systems decisions, prospective customers frequently form a
committee comprised of personnel from several of their departments, such as
administrative, clinical and information systems. The healthcare provider may
also use industry consultants to assist in the evaluation. This committee (or
consultant) identifies vendors who meet the healthcare provider's requirements
by issuing requests for information or requests for proposals (RFP). This
process requires the Company to write in-depth proposals and conduct
demonstrations at the prospective customer's site. In 1996, the Company signed
agreements with several of its customers to act as Premier Client sites to
provide prospective customers with the opportunity to see the software systems
being used in a live environment by clinicians and healthcare professionals. In
addition, a prospective customer may also visit Company headquarters for
corporate overviews and product presentations. This process leads to the
Company's selection as vendor of choice prior to beginning contract
negotiations. Contract signature completes the sales cycle.
In order to expand its market coverage, two remarketing agreements were signed
in the fourth quarter of 1995 with companies whose products and services both
utilize and complement PACE products. These agreements allow each signatory to
market to each other's current customer base and to sell jointly to prospective
new clients. The agreements are intended as a marketing arrangement only and
require that each company represent, install and support its own products. To
the extent that the Company determines that other remarketing agreements,
business acquisitions, partnerships or joint venture business relationships will
further its business strategy, it will consider entering into such acquisitions
or relationships.
Contracts to install the Company's products generally provide that the customer
may terminate its contract only upon a material breach by the Company. Under
customary sales arrangements, the Company receives partial payment when the
contract is signed. Although an individual payment schedule is determined
contractually for each customer, additional payments are generally due upon
delivery of hardware and software, upon commencement of system operation, and
upon final acceptance of the system by the customer. Generally, acceptance by
the customer has been required after the Company has satisfied specified
criteria, including the installation of all hardware and the implementation of
all software. The customer is not permitted to withhold such acceptance
unreasonably. Payment has generally been required and made within 30 days of
invoice.
The Company recognizes revenue from the sale of PACE software systems which
consist primarily of software license fees, software implementation and
installation services, and 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 license 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 or configuration obligations. Following implementation of
the software, the Company also receives monthly revenues for customer support
services. Revenue from customer support services, including system updates, is
recognized over the period the services are provided. The Company recognizes
revenue 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.
BACKLOG
The Company's backlog consists of signed contracts that the Company expects to
implement within the next 12 to 18 months. As of December 31, 1996, the Company
had a backlog of approximately $1,900,000 compared to $3,900,000 on December 31,
1995. As of December 31, 1996, the Company also had software support maintenance
agreements which ranged from 12 to 72 months in length and represented total
future revenues of approximately $1,657,000 compared to $1,049,982 on December
31, 1995. As of February 28, 1997, the Company had a backlog of approximately
$8,000,000 which included $3,100,000 of future revenue from software support
maintenance agreements.
COMPETITION
The market for point-of-care clinical information systems is highly competitive.
Competitors vary in size and in the scope of the products and services they
offer. Many of them are larger and better capitalized than the Company. Among
the Company's principal competitors are traditional HIS vendors and clinical
information systems vendors. These companies include Cerner Corp., Keane, HBO &
Co., which purchased CliniCom Inc. in 1995, Meditech, Inc., Phamis,
Incorporated, SMS Corp., Hewlett-Packard Co., SpaceLabs Medical, Inc. and Emtek
HealthCare Systems, Inc., a subsidiary of Motorola, Inc.
The Company believes its products are and will be well positioned to compete
with such vendors with several competitive advantages. In addition to being
comprehensive, PACE CMS includes a full set of clinical applications which are
continuously expanded to accommodate clinically-oriented functions that can
benefit from increased automation. Among the PACE concepts which management
believes provide competitive advantages are:
* Flexibility--PACE CMS includes an extensive set of components that allow the
facilities to customize the system to the needs of many different healthcare
environments.
* Open Systems--PACE CMS products are built upon a three-tiered client/server
architecture. PACE maintains extensive use of the Microsoft(R) component
architecture. PACE utilizes Windows 95 or NT workstation for the
presentation of the client operating systems and Windows NT or UNIX for the
application server operating system. The relational database is MS SQL
Server or Oracle. In addition, each customer can choose the specific
hardware that best fits its information systems investments.
* Open Network--PACE CMS provides clinicians with access to all relevant
computerized information, wherever it may be within the healthcare system.
* Service and Support--PACE CMC offers a broad spectrum of service and support
including 24-hour telephone support, on-site service for critical problems,
on-line support, software installation services, system integration
services, training services and data update services.
Management also believes that PACE competes well on the depth and sophistication
of its product suite including:
* The PACE Clinical Library--An on-line reference library of over 2,000
inpatient care protocols, care plans, and medical treatment guidelines.
* The PACE Graphical User Interface--A unique, intuitive user interface
designed by a team of graphic artists, clinicians, and technical
specialists.
* The PACE Clinical Pathway Analyzer--An innovative product, designed to help
create provider-specific clinical pathways based on the provider's
historical clinical practice patterns and patient populations.
RESEARCH AND DEVELOPMENT
The Company's product development activities are focused on providing
information systems that support the transition to managed care, enhance cost
containment and improve patient outcomes. Current product development activities
will be used to expand existing applications into additional healthcare settings
within the healthcare enterprise, such as home healthcare or ambulatory care.
Product development will also focus on adding enhancements to current products
which will include using more efficient architecture configuration and
incorporating new evolving technologies and standards.
Total research and development costs incurred by the Company were approximately
$1,535,500, $732,500, and $1,998,000 for 1996, 1995, and 1994, respectively.
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. A portion of the
expert system (the interpretive system for systematic learning and support for
decision-making within the PACE Clinical Library) is patented and the Company is
the assignee of that patent. Due to the nature of the software industry, the
Company believes that its ability to develop, enhance and modify its current
products and other clinical information systems is more significant to its
ability to compete in the market than patent, trade secret and copyright
protection.
In addition, the Company seeks to protect its proprietary information through
nondisclosure agreements with its employees. The Company's policy is to have
employees enter into a nondisclosure agreement containing provisions that
prohibit the disclosure of confidential information to anyone outside the
Company, require disclosure to the Company of any new ideas, developments,
discoveries or inventions conceived during employment, and require assignment to
the Company of proprietary rights to such matters that are related to the
Company's business and technology.
GOVERNMENT REGULATION
The Company's products are not currently subject to regulation by the FDA, and
the Company does not intend to change its products in a manner that would
subject them to existing FDA regulation. There can be, however, no assurance
that the Company's products will not become subject to future guidelines,
regulations or inspection procedures of the FDA or other state or federal
regulatory bodies
EMPLOYEES
As of December 31, 1996, the Company employed 63 full-time personnel of which 4
are executives, 12 are sales and marketing personnel, 5 are administrative and
clerical personnel, 25 are product development employees, and 17 are client
services 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. The Company is a party to a joint employer agreement with Merit
Resources, Inc., a third-party provider of employee administration, benefits and
personnel services. Under this agreement, all personnel serving the Company are
employees of the provider (Merit) for the purposes of payroll administration and
benefit packages. A stipulation of this joint employer relationship is that all
employees owe all fiduciary and confidentiality obligations concerning the
Company's proprietary information to the Company and not Merit. In addition, the
Company's officers serve as officers of the Company only, and not of Merit.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies approximately 11,500 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 1997 and is currently being renegotiated. 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.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders of the Company in the
fourth quarter of 1996.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PACE Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"PCES." The following table sets forth the range of high and low prices as
reported by the Nasdaq SmallCap Market beginning April 27, 1995.
Quarter ended High Low
--------------------------------------------------------------------
6/30/95 5 3/8 4 7/8
9/30/95 5 1/2 4 7/8
12/31/95 5 3/8 2 1/2
3/31/96 6 2 3/4
6/30/96 9 5/8 5 1/4
9/30/96 7 1/2 3 1/8
12/31/96 4 7/8 3
As of March 7, 1997, there were 76 shareholders of record and approximately
1,000 beneficial shareholders of the Company's common stock. The Company has
declared no cash dividends since inception and has no plan to declare a dividend
in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 an artificial intelligence-based "Clinical Library." This
library was the culmination of twenty years of research at Carnegie-Mellon
University and Creighton University. 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. During fourth
quarter of 1995, 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. During 1996, PACE CMS, the
system from which the Company derives substantially all of its revenues, was
enhanced through the first release of a graphical user interface (GUI) utilizing
a three-tier, client/server, open-systems architecture ("Graphical PACE CMS").
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 issued during previous rounds of private financing were
converted to common stock on a one-to-one basis. In September 1996, the Company
sold 900,000 shares of common stock at $3.25 per share for net proceeds to the
Company of approximately $2.8 million.
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.
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
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $3,040,400 and $2,080,796 in 1996 and
1995, respectively, representing an increase of 46%. Revenues from software
license fees increased 106% to $1,534,000 in 1996 compared to $743,090 in 1995.
Revenues from hardware sales also increased 29% to $810,864 in 1996 compared to
$627,342 in 1995. Revenues for 1996 were mainly attributable to software
licensing fees and hardware sales on a 20-site contract initiated in the first
quarter 1996. In the fourth quarter 1996, this client expanded the contract to
include an additional 8 sites. This contract accounted for 63% and 11% of net
revenues in 1996 and 1995, respectively. Customer support services revenues were
$420,987 and $350,091 in 1996 and 1995, respectively, representing an increase
of 20%. This increase was due to additional maintenance contracts resulting from
the continued growth in the Company's installed client base.
COST OF SYSTEMS REVENUES: Costs of systems revenues include hardware purchases,
commissions, and royalties payable to third parties. The Company's cost of
systems revenues was $853,777 and $621,023 in 1996 and 1995, respectively,
representing an increase of 37%, primarily as a result of costs associated with
increased hardware sales. Cost of systems revenues as a percentage of net
revenues was 28% and 30% in 1996 and 1995, respectively. Total cost of systems
revenues as a percentage of total net revenues in future periods could reflect
considerable variations depending on the product mixes of revenues.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and support. Client services expenses were
$890,287 and $868,382 in 1996 and 1995, respectively, representing an increase
of 3%. While client services expenses have remained relatively constant from
1995 to 1996, the Company expects these expenses will increase significantly in
the future relative to new sales and the 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 $1,748,645 and
$980,144 in 1996 and 1995, respectively, representing an increase of 78%. This
increase was primarily due to increases in personnel and payroll related
expenses as the Company accelerated work on its Graphical User Interface (GUI)
project and expanded staffing on its Critical Pathway Analyzer (CPA) project.
The Company capitalized $495,399 and $147,861 of product development costs and
amortized $213,175 and $247,610 in 1996 and 1995, respectively.
WRITE-OFF OF CAPITALIZED SOFTWARE: Write-off of capitalized software development
costs reflects a one-time adjustment of $1,270,835 during 1996. This write-off
reflects the unamortized costs of developing the Company's original text-based
version of CMS. This version of the product will no longer be offered for sale
and, as a result, any net realizable value to the Company for that product is
minimal. This adjustment was made following the Company's delivery and
implementation of its new three-tier Graphical User Interface Solution (GUI)
during the third quarter of 1996.
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 $1,364,727 and $865,105 in
1996 and 1995, respectively, representing an increase of 58%. This increase was
primarily due to increases in personnel and payroll related expenses as the
Company reorganized the sales and marketing department into three regions and
increased the sales force with 3 new hires and added an additional sales support
position.
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
$1,790,130 and $1,285,617 in 1996 and 1995, respectively, representing an
increase of 39%. This increase was primarily due to an increase in professional
services, depreciation expense, and an increase in insurance expense related to
the Company's director's and officer's liability coverage. In addition, the
Company incurred costs of approximately $400,000 associated with the recruiting
and hiring of several senior management members during the year.
OTHER INCOME (EXPENSE), NET: Other income (expense) net is comprised of interest
income and expenses. Other income (expense) net was $97,810 and $126,987 in 1996
and 1995, respectively, representing a decrease of 23%. 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 1996, cash balances and interest income decreased as
a result of net cash used for working capital needs, capital expenditures, and
operating losses.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET REVENUES: The Company's net revenues were $2,080,796 and $377,833 in 1995
and 1994, respectively, representing an increase of 451%. This increase was a
direct 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
on marketing the PACE/CIS and developing the PACE/CMS. Due to the long sales
cycle inherent in the industry, the first new PACE/CIS contracts were not
executed until late 1994 and the revenue earned on those contracts was therefore
not recognized until after 1994. This accounted for the large increase during
1995 in systems revenues. Customer support services revenues were $350,091 and
$325,487 in 1995 and 1994, respectively, representing an increase of 8%.
COST OF SYSTEMS REVENUES: The Company's cost of systems revenues was $621,023
and $64,101 in 1995 and 1994, respectively, representing an increase of 869%.
This increase was due to the large number of new installations in 1995 and the
lack of new contracts in 1994. Cost of systems revenues as a percentage of net
revenues was 30% and 17% in 1995 and 1994, respectively. This increase was due
to a shift in product mix from systems revenue that included a higher percentage
of hardware sales, which resulted in lower gross margins.
CLIENT SERVICES: Client services expenses were $868,382 and $436,384 in 1995 and
1994, respectively, representing an increase of 99%. This 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.
SALES AND MARKETING: Sales and marketing expenses were $865,105 and $622,302 in
1995 and 1994, respectively, representing an increase of 39%. 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.
PRODUCT DEVELOPMENT: Product development expenses were $980,144 and $2,131,616
in 1995 and 1994, respectively, representing a decrease of 54%. This 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 $147,861 and
$191,305 of internal software development costs and amortized $247,610 and
$198,253 in 1995 and 1994, respectively. In 1994, the Company capitalized an
additional $1,500,000 of software developed by a third party vendor.
GENERAL AND ADMINISTRATIVE: General and administrative expenses were $1,285,617
and $734,934 in 1995 and 1994 respectively, representing an increase of 75%.
This 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 $126,987 and
($11,657) in 1995 and 1994, respectively, representing a change of $138,644
primarily due to higher invested cash balances resulting from the Company's
initial public offering.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1996, the Company had net operating loss (NOL) carryforwards of
approximately $12,764,000 to offset future federal taxable income. In accordance
with Internal Revenue Code of 1986, as amended, a change in ownership of greater
than 50% of the Company 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 $4,945,000 which are subject to an annual
limitation of approximately $1,400,000, of which a cumulative amount of
approximately $2,100,000 is available as of December 31, 1996.
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 by 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.
For the three years ended December 31, 1996, 1995, and 1994, the Company
reflected net losses of $4,780,191, $2,412,488, and $3,623,161, respectively,
resulting in net cash used in operations for each of the years of $2,969,718,
$2,461,645 and $2,548,549, respectively. During the third quarter of 1996, the
Company recorded a non-cash write-off of capitalized software in the amount of
$1,270,835. Accounts payable and accrued expenses increased $485,493 to $887,534
at December 31, 1996 from $402,041 at December 31, 1995, primarily due to an
increase in hardware purchased for resale.
Accounts receivable increased $672,433 to $1,301,132 at December 31, 1996 from
$628,699 at December 31, 1995 due to an increase in the number of software
system installations initiated or completed in 1996. The Company has established
an allowance for doubtful accounts at the end of 1996 which management believes
is adequate. Included in accounts receivable are unbilled accounts receivable
which were recognized in revenue prior to when payments were due to the Company
under the customer contracts.
Net cash used in investing activities for the three years ended December 31,
1996, 1995, and 1994 was $853,898, $483,237, and 292,670, respectively. Cash
used in investing activities was primarily for the purchase of computer and
office equipment and capitalized software costs.
Net cash provided by financing activities for the three years ended December 31,
1996, 1995, and 1994 was $2,679,002, $5,664,337, and $2,940,057, respectively.
Net cash provided by financing activities was primarily related to proceeds from
the sale of stock during each of the periods. For the twelve months ended
December 31, 1996, the Company used cash of $761,961 for the repayment of
long-term obligations and received net cash of $500,000 from the Company's line
of credit.
The Company occupies approximately 11,500 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 1997 and is currently being renegotiated. 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 December 31, 1996, the Company had working capital of $1,109,395,
including a cash balance of $1,687,044. The Company also has a $1,000,000
revolving line of credit with a financial institution which expires in February
1998. The line of credit is collateralized by substantially all assets of the
Company. Interest is payable monthly at prime (8.25% at December 31, 1996).
Outstanding borrowings totaled $500,000 at December 31, 1996. The Company
believes that existing cash balances, funds available under its line of credit,
existing backlog and future software systems contracts, together with additional
capital anticipated to be obtained from investors will adequately fund
operations for at least the next twelve months.
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 17
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 18
Statements of operations 19
Statements of shareholders' equity 20
Statements of cash flows 21-22
Notes to financial statements 23-31
- --------------------------------------------------------------------------------
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, 1996 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, 1996. 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Des Moines, Iowa
January 28, 1997
PACE HEALTH MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS (NOTE 2) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 6) $ 1,687,044 $ 2,831,658
Accounts receivable (Note 7) 1,013,132 628,699
Inventories, primarily computer equipment 46,480 22,993
Prepaid expenses 49,756 37,056
------------ ------------
TOTAL CURRENT ASSETS 2,796,412 3,520,406
------------ ------------
NON-CURRENT ACCOUNTS RECEIVABLE (Note 7) 288,000 --
------------ ------------
FURNITURE AND EQUIPMENT, net of accumulated
depreciation 1996 $492,777; 1995 $282,939 (Note 2) 527,540 378,879
------------ ------------
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization 1996 $321,084; 1995 $542,455 791,852 1,780,463
------------ ------------
$ 4,403,804 $ 5,679,748
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank (Note 2) $ 500,000 $ --
Current maturities of long-term obligations (Note 2) 13,858 761,932
Accounts payable 578,573 191,899
Accrued expenses 308,961 210,142
Customer deposits 285,625 61,873
------------ ------------
TOTAL CURRENT LIABILITIES 1,687,017 1,225,846
------------ ------------
LONG-TERM OBLIGATIONS, less current maturities (Note 2) 33,776 47,663
------------ ------------
SHAREHOLDERS' EQUITY (Note 10)
Serial preferred stock, no par value; authorized
5,000,000 shares; issued none -- --
Common stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1996 5,090,184 shares;
1995 4,152,199 shares (Note 3) 16,241,444 13,300,481
Additional paid-in capital 116,000 --
Accumulated deficit (13,674,433) (8,894,242)
------------ ------------
2,683,011 4,406,239
------------ ------------
$ 4,403,804 $ 5,679,748
============ ============
See Notes to Financial Statements.
</TABLE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
- -------------------------------------------------------------------------------
Net revenues: (Note 1)
Systems revenues $ 2,619,413 $ 1,730,705 $ 52,346
Customer support services 420,987 350,091 325,487
----------- ----------- -----------
3,040,400 2,080,796 377,833
----------- ----------- -----------
Costs and expenses: (Note 8)
Cost of systems revenues 853,777 621,023 64,101
Client services 890,287 868,382 436,384
Product development (Note 9) 1,748,645 980,144 2,131,616
Write-off of capitalized software 1,270,835 -- --
Sales and marketing 1,364,727 865,105 622,302
General and administrative 1,790,130 1,285,617 734,934
----------- ----------- -----------
7,918,401 4,620,271 3,989,337
----------- ----------- -----------
LOSS FROM OPERATIONS (4,878,001) (2,539,475) (3,611,504)
----------- ----------- -----------
Other income (expense):
Interest income 67,290 149,783 4,939
Interest expense (5,222) (22,796) (16,596)
Other 35,742 -- --
----------- ----------- -----------
97,810 126,987 (11,657)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (4,780,191) (2,412,488) (3,623,161)
Provision for income taxes (Note 5) -- -- --
----------- ----------- -----------
NET LOSS $(4,780,191) $(2,412,488) $(3,623,161)
=========== =========== ===========
Loss per common and common
equivalent share (Note 1) $ (1.06) $ (0.78) $ (3.39)
=========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding (Note 1) 4,506,166 3,091,560 1,069,337
=========== =========== ===========
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
SERIES A
THROUGH H ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 10) (7,549,539) 7,549,539 -- -- --
Issuance of 1,200,000 shares of
common stock (Note 10) -- 5,065,120 -- -- 5,065,120
Issuance of 100,000 shares of common
stock (Note 10) -- 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
Exercise of 37,985 stock options -- 140,117 -- -- 140,117
(Note 3)
Issuance of 900,000 shares of common
stock -- 2,800,846 -- -- 2,800,846
Compensation expense recognized upon
grant of stock options (Note 3) -- -- 116,000 -- 116,000
Net loss -- -- -- (4,780,191) (4,780,191)
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ -- $16,241,444 $116,000 $(13,674,433) $ 2,683,011
====================================================================================
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,780,191) $(2,412,488) $(3,623,161)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation 209,838 124,259 62,258
Amortization 213,175 247,610 198,253
Write-off of capitalized software 1,270,835 -- --
Compensation expense recognized upon grant
of stock options 116,000 -- --
Provision for doubtful accounts 26,807 80,000 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable (699,240) (535,886) 143,089
(Increase) decrease in inventories (23,487) 26,805 (27,185)
(Increase) in prepaid expenses (12,700) (16,266) (10,758)
Decrease in deposit with software developer -- -- 500,000
Increase in accounts payable
and accrued expenses 485,493 155,443 15,960
Increase (decrease) in customer deposits 223,752 (131,122) 192,995
---------- ---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (2,969,718) (2,461,645) (2,548,549)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized computer software development costs (495,399) (147,861) (191,305)
Proceeds from payments on notes receivable -- -- 13,403
Purchase of furniture and equipment (358,499) (335,376) (114,768)
---------- ---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (853,898) (483,237) (292,670)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for expenses of issuing capital stock (124,154) (447,864) (9,939)
Proceeds from exercise of stock options 140,117 -- --
Proceeds from notes payable 950,000 500,000 --
Proceeds from sale of preferred stock -- 71,971 3,510,124
Proceeds from sale of common stock 2,925,000 5,915,050 --
Proceeds from collection of subscriptions receivable -- 881,285 --
Principal payments on long-term obligations (761,961) (756,105) (5,128)
Payments on notes payable (450,000) (500,000) (555,000)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,679,002 5,664,337 2,940,057
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,144,614) 2,719,455 98,838
CASH AND CASH EQUIVALENTS
Beginning 2,831,658 112,203 13,365
---------- ---------- ----------
Ending $ 1,687,044 $ 2,831,658 $ 112,203
========== ========== ==========
</TABLE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash payments for interest $ 5,221 $ 22,796 $ 6,185
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Series H preferred stock for release
of note payable to shareholder $ -- $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 -- 13,886 --
Repayment of notes payable with proceeds assigned as
collateral -- 500,000 --
</TABLE>
See Notes to Financial Statements.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 in the healthcare industry,
located throughout the United States, on an unsecured basis on terms that it
establishes for individual customers. One customer accounted for 63.8% and 11.3%
of net revenues in 1996 and 1995, respectively (none in 1994), including
approximately 81% of current and non-current accounts receivable at December 31,
1996.
A summary of the Company's significant accounting policies is as follows:
Cash equivalents: The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
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. Amortization expense was $213,175, $247,610 and $198,253, in 1996,
1995 and 1994, respectively.
At each balance sheet date, the unamortized capitalized costs of a computer
software product is compared to the net realizable value of that product and
the amount by which the unamortized capitalized costs exceed the net
realizable value is written off.
Revenue recognition:
Systems revenues: Systems revenues consist of software license fees,
software implementation and installation services and 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: 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 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.
Stock-based compensation: In October 1995, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (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 Accounting Principles Board
Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. The Company has elected to continue to apply the intrinsic
value based method of accounting for stock options issued to employees.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
NOTE 2. PLEDGED ASSETS, NOTE PAYABLE TO BANK AND LONG-TERM OBLIGATIONS AT
DECEMBER 31, 1996
The Company has a $1,000,000 revolving line of credit with a financial
institution which expires in February 1998 and is collateralized by
substantially all assets of the Company. Interest is payable monthly at prime
(8.25% at December 31, 1996). Outstanding borrowings totaled $500,000 at
December 31, 1996.
<TABLE>
<CAPTION>
The Company's long-term obligations are summarized as follows:
Payments Due
Within
Description Total One Year
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured non-interest bearing note payable, shareholder,
due in monthly installments of $824 through May 2001 $43,663 $ 9,887
Note payable, financial institution, collateralized by computer
equipment with a depreciated cost of approximately
$3,700, due in monthly installments of $572
including interest at 9%, through August 1997 3,971 3,971
-------------------
$47,634 $13,858
</TABLE>
Approximate aggregate maturities of long-term obligations are as follows as of
December 31, 1996:
Year ending December 31,
1997 $ 13,900
1998 9,900
1999 9,900
2000 9,900
2001 4,000
-----------
$ 47,600
===========
Based on the borrowing rates available to the Company for notes payable and
long-term obligations with similar maturities, the fair values of notes payable
and long-term obligations approximate their carrying values at December 31, 1996
and 1995, respectively.
NOTE 3. COMMON STOCK WARRANTS AND OPTIONS
Common stock 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 of 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. Warrants to
purchase 18,728 shares with exercise prices ranging from $3.21 to $4.12 were
exercised during 1996. At December 31, 1996, warrants to purchase 263,282 shares
were outstanding and warrants to purchase 255,373 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. Class A warrants to purchase 14,184
shares with an exercise price of $3.75 were exercised during 1996. At December
31, 1996, Class A warrants to purchase 114,052 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 was exercisable beginning April
1996 and expires in April 2000.
Common stock options
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; 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. Stock option activity under the stock
compensation plan is summarized as follows:
Option price Available for
per share Outstanding grant
------------ --------- ---------
1995 Plan 545,494
Granted $ 2.75 74,864 (74,864)
-------- --------
Balance, December 31, 1994 $ 2.75 74,864 470,630
Granted $ 3.00 157,467 (157,467)
Canceled $ 2.75 (13,910) 13,910
-------- --------
Balance, December 31, 1995 $2.75 - 3.00 218,421 327,073
Granted $3.25 - 3.88 261,000 (261,000)
Exercised $2.75 - 3.00 (5,073) --
Canceled $3.00 - 3.25 (13,347) 13,347
-------- --------
BALANCE, DECEMBER 31, 1996 $2.75 - 3.88 461,001 79,420
======== ========
At December 31, 1996, options to purchase 51,836 shares were exercisable.
In March 1996, the Board of Directors adopted the Nonqualified Executive Stock
Option Plan (the "stock option plan"). The stock option plan provides for the
grant of nonqualified stock options to executive officers of the Company. The
Company has reserved 200,000 shares for issuance pursuant to the stock option
plan. Options may be granted at prices determined by the Board of Directors,
which may not be less the 85% of the fair market value of the shares subject to
the options as of the date of grant. 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 the grant, and are exercisable at the price of $2.75 per share. Options
expire on the earlier of the tenth anniversary of the date the options were
granted or the end of the thirty day period following termination of employment.
As of December 31, 1996, the Company had granted options to purchase 21,816
shares, at which date, none were exercisable.
In March 1996, the Company granted a nonqualified stock option to a former
officer of the Company to purchase 40,912 shares of common stock at an exercise
price of $3.75 per share. At the date of grant, 20% of the option was
exercisable with an additional 20% of the option becoming exercisable one year
from the date of grant. The option expires in June 1997. If a change in control
of the Company occurs before March 15, 1997, the former officer would be
entitled to purchase all 40,912 shares subject to the option.
In March 1996, the Company granted a nonqualified stock option to an officer of
the Company to purchase 100,000 shares of common stock which vests 20% on the
first anniversary date of the grant and 20% on each on the next four anniversary
dates of the grant, all of which are exercisable at the price of $2.50 per
share. In addition, the officer received another nonqualified stock option to
purchase 110,000 shares at an exercise price of $1.00 per share. At the date of
grant, 35,000 shares under the option were eligible for purchase with the
balance vesting at the rate of 15,000 shares per year for five years beginning
one year from the date of grant. The options expire on the earlier of the tenth
anniversary of the date the options were granted or the end of the thirty day
period following termination of employment.
Compensation cost charged to income for the grant of stock options was $116,000
for the year ended December 31, 1996 (none for the years ended December 31, 1995
and 1994). Had compensation cost for all of the stock-based compensation plans
been determined based on the grant date fair values of awards (the method
described in SFAS No. 123), approximate reported net loss and loss per common
and common equivalent share would have been increased to the pro forma amounts
shown below:
1996 1995
------------ ------------
Net loss:
As reported $(4,780,000) $(2,412,000)
Pro forma (5,488,000) (3,316,000)
Loss per common and
common equivalent share
As reported $ (1.06) $ (0.78)
Pro forma (1.22) (1.07)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants after December 31, 1994: dividend rate of 0%, price
volatility of 79%, risk-free interest rates ranging from 5.74% to 7.40%, and
expected lives ranging from 5 to 10 years.
The effects of applying SFAS No. 123 are not indicative of future amounts since,
among other reasons, options vest over several years and additional awards
generally are made each year.
NOTE 4. 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, 1996 is approximately $52,500. Rent
expense for 1996, 1995 and 1994 was approximately $140,000, $123,000 and
$82,000, respectively.
NOTE 5. INCOME TAX MATTERS
Approximate deferred taxes consist of the following components as of December
31, 1996 and 1995:
Deferred tax assets: 1996 1995
----------- ----------
Net operating loss carryforwards $ 4,978,000 $2,825,900
Computer software development costs -- 164,700
Deferred revenue 186,000 163,300
Research and development credit carryforwards 176,700 92,300
Allowance for doubtful accounts 19,500 31,200
Accrued vacation 22,000 17,600
Deferred interest income 6,000 17,000
----------- ----------
5,388,200 3,312,000
Less valuation allowance 5,200,200 3,312,000
----------- ----------
188,000 --
Deferred tax liabilities, computer software
development costs (188,000) (--)
=========== ==========
$ -- $ --
=========== ==========
The Company recorded valuation allowance of approximately $5,200,200, and
$3,312,000 against deferred tax assets at December 31, 1996 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 $1,888,200, $935,600, and $1,447,400 during 1996, 1995
and 1994, respectively.
The provision for income taxes differs from the approximate amount of income tax
benefit determined by applying the U.S. Federal income tax rate to pretax loss
for the years ended December 31, 1996, 1995 and 1994 due to the following:
1996 1995 1994
----------- --------- -----------
Computed federal income tax (benefit) $(1,673,000) $(844,400) $(1,268,100)
Other, primarily computed state
income tax benefit (215,200) (90,600) (179,300)
Accounting losses for which deferred
federal and state income tax
benefits could not be recognized 1,888,200 935,000 1,447,400
=========== ========= ===========
$ -- $ -- $ --
=========== ========= ===========
At December 31, 1996, the Company has approximately $12,764,000 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 2012.
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, of which a cumulative amount of approximately $2,100,000 is
available as of December 31, 1996.
NOTE 6. 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 7. ACCOUNTS RECEIVABLE
1996 1995
----------- ---------
Current
Billed $ 526,490 $ 608,011
Accrued revenue 536,642 100,688
----------- ---------
$ 1,063,132 $ 708,699
Less: Allowance for doubtful accounts (50,000) (80,000)
----------- ---------
$ 1,013,132 $ 628,699)
=========== =========
Non-Current
Accrued revenue $ 288,000 $ --
=========== =========
Accrued revenue receivable represents revenue recognized 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
payments are due at specified dates or, if earlier, upon the installation and
system set-up at each site.
NOTE 8. RECLASSIFICATION
Certain costs and expenses on the Statements of Operations for the years ended
December 31, 1995 and 1994 have been reclassified with no effect on income.
NOTE 9. RESEARCH AND DEVELOPMENT COSTS
Total research and development costs charged to product development were
approximately $1,535,500, $732,500 and $1,998,000 for 1996, 1995 and 1994,
respectively.
NOTE 10. INITIAL PUBLIC OFFERING REVERSE STOCK SPLIT, CONVERSION OF PREFERRED
STOCK, SUPPLEMENTARY EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In April 1995, the Company sold, through an underwritten public offering,
1,200,000 shares of common stock at $5.00 per share which provided the Company
with cash 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 an underwriter's over-allotment provision in the underwriting
agreement. 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.
NOTE 11. LIQUIDITY AND CAPITAL RESOURCES
From its inception, the Company has been involved in on-going research and
development activities that have required significant capital resources and has
accumulated net losses of approximately $13,700,000. During this period, the
Company has financed its operations primarily with capital contributed by
investors. Management expects to continue its research and development
activities in the future and anticipates that additional funding from investors
will be required to meet anticipated working capital needs. The Company believes
that existing cash balances, funds available under its line of credit (see Note
2), existing backlog and future software systems contracts, together with
additional capital anticipated to be obtained from investors, will adequately
fund operations for at least the next twelve months.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information under the captions "Directors of the Company," Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in the Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held May 23, 1996 (the "1997 Proxy
Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation," "Stock
Options/SARS/LTIP" and "Compensation of Directors" appearing in the 1997 Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" appearing in the 1997 Proxy Statement is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" appearing in the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
3. Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation, as amended (1)
3.2 Restated Bylaws (1)
4. Instruments defining the rights of shareholders
4.1 Form of Common Stock Certificate (2)
4.9 Form of Class A Warrant Certificate (2)
4.12 Form of Class B Warrant Certificate (2)
4.13 Form of Agent's Warrant (2)
4.14 Restated Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3.1)
4.15 Restated Bylaws (Incorporated by reference to
Exhibit 3.2)
10. Material Contracts
10.1 Employment Agreement for Michael Vasquez, as amended
December 16, 1994 (2)
10.2 Employment Agreement for Simon Casady, as amended
December 16, 1994 (2)
10.3 1995 Stock Compensation Plan, effective February 10,
1995 (2)
10.4 Form of Incentive Stock Option Agreement (2)
10.5 Form of Non-Qualified Stock Option Agreement (2)
10.6 Form of Non-Employee Director Non-Qualified Stock
Option Agreement (2)
10.7 Incentive Stock Option Agreement for Michael J.
Vasquez dated December 16, 1994 (2)
10.8 Form of Five-year Employee Warrants (2)
10.9 Form of Three-year Employee Warrants (2)
10.10 Compensatory Warrants issued to Director Carl S.
Witonsky dated April 22, 1994 and December 16,
1994 (2)
10.11 Compensatory Warrants issued to Director Bill W.
Childs dated February 26, 1990 and December 16,
1994 (2)
10.12 Form of Lockup Agreements with Executive Officers,
Directors and Shareholders (2)
10.13 Consulting Services Agreement with Steven Evans dated
December 31, 1993 (2)
10.14 Consulting Services Agreement with Carl S. Witonsky
dated January 1, 1995 (2)
10.15 Software Purchase Agreement with JRS Clinical
Technologies, Inc. dated October 18, 1989 (2)
10.16 COMMES Purchase Agreement between the Company and
Creighton University dated December 18, 1989 (2)
10.17 Office Lease and Amendments thereto between the
Company and Ashworth Plaza Ltd. (2)
10.18 Merit Client Agreement with Customer dated January 1,
1995 (2)
10.19 Master Agreement with Customer dated September 30,
1994 (2)
10.20 Nonqualified Executive Stock Option Plan adopted March
25, 1996 (3)
10.21 Employment Agreement with Mark J. Emkjer dated
February 15, 1996 (4)
11 Earnings Per Share Calculation (included herein)
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Form 8-K dated May 3, 1996.
(2) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 33-90408-C, effective April 27, 1995.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-7487, effective August 9, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1996.
SIGNATURES
In accordance with Section 13 or 15(d) 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)
By /s/ Mark J. Emkjer
---------------------------------------
Mark J. Emkjer, Chief Executive Officer
and Director
MARCH 15,1997
---------------------------------------
Dated
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
MARCH 15, 1997 By /s/ Mark J. Emkjer
- ------------------ -----------------------------------------
Dated Mark J. Emkjer, Chief Executive Officer
and Director
MARCH 17, 1997 By /s/ Roger D. Huseman
- ------------------ -----------------------------------------
Dated Roger D. Huseman, Vice President, Secretary
and Treasurer, Chief Financial Officer and
Principal Accounting Officer
MARCH 21, 1997 By /s/ Carl S. Witonsky
- ------------------ -----------------------------------------
Dated Carl S. Witonsky, Chairman and Director
MARCH 21, 1997 By /s/ John G. Pappajohn
- ------------------ -----------------------------------------
Dated John G. Pappajohn, Director
MARCH 21, 1997 By /s/ R. David Spreng
- ------------------ -----------------------------------------
Dated R. David Spreng, Director
MARCH 17, 1997 By /s/ Bill W. Childs
- ------------------ -----------------------------------------
Dated Bill W. Childs, Director
MARCH 21, 1997 By /s/ Gordon M. Derzon
- ------------------ -----------------------------------------
Dated Gordon M. Derzon, Director
PACE HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit
Number Item Page
- ------- ------------------------------------ ----
11 Earnings Per Share Calculation 37
27 Financial Data Schedule 38
Exhibit 11
PACE HEALTH MANAGEMENT SYSTEMS, INC.
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Weighted average number of shares
outstanding 4,506,166 3,091,560 1,069,337
Net loss available for common and common
equivalent shares $(4,780,191) $(2,412,488) $(3,623,161)
Loss per common and common equivalent share
$ (1.06) $ (0.78) $ (3.39)
</TABLE>
The above computation has been adjusted to reflect a 1-for-1.8 reverse stock
split
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,687,044
<SECURITIES> 0
<RECEIVABLES> 1,063,132
<ALLOWANCES> 50,000
<INVENTORY> 46,480
<CURRENT-ASSETS> 2,796,412
<PP&E> 1,020,317
<DEPRECIATION> 492,777
<TOTAL-ASSETS> 4,403,804
<CURRENT-LIABILITIES> 1,687,017
<BONDS> 0
0
0
<COMMON> 16,241,444
<OTHER-SE> (13,558,433)
<TOTAL-LIABILITY-AND-EQUITY> 4,403,804
<SALES> 3,040,400
<TOTAL-REVENUES> 3,040,400
<CGS> 1,744,064
<TOTAL-COSTS> 7,918,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,222
<INCOME-PRETAX> (4,780,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,780,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,780,191)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
