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:
March 31, 1997 0-27554
- -------------------------------- -------------------------------
PACE Health Management Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Iowa 42-1297992
- -------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification 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 April 28, 1997
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Common Stock, no par 5,091,784
Transitional Small Business Disclosure Format (Check one): YES ___ NO __X__
PACE HEALTH MANAGEMENT SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Condensed Balance Sheets 1
March 31, 1997 and December 31, 1996
Condensed Statements of Operations 2
Three Months Ended March 31, 1997 and 1996
Condensed Statements of Cash Flows 3
Three Months ended March 31, 1997 and 1996
Notes to Condensed Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 5-8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 8
ITEM 2. CHANGES IN SECURITIES 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
ITEM 5. OTHER INFORMATION 8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 8
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
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MARCH 31, 1997 DEC. 31, 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,728 $ 1,687,044
Accounts receivable, net 1,324,356 1,013,132
Inventories, primarily computer equipment 253,677 46,480
Prepaid expenses 39,465 49,756
------------ ------------
TOTAL CURRENT ASSETS 1,670,226 2,796,412
------------ ------------
NON-CURRENT ACCOUNTS RECEIVABLE 288,000 288,000
------------ ------------
FURNITURE AND EQUIPMENT, at cost, net of
accumulated depreciation 1997 $547,094; 1996 $492,777 553,136 527,540
------------ ------------
COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization 913,682 791,852
------------ ------------
$ 3,425,044 $ 4,403,804
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable-bank $ 500,000 $ 500,000
Current maturities of long-term obligations 12,221 13,858
Accounts payable, customer deposits and
accrued expenses 1,398,501 1,173,159
------------ ------------
TOTAL CURRENT LIABILITIES 1,910,722 1,687,017
------------ ------------
LONG-TERM OBLIGATIONS, less current maturities 31,304 33,776
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 16,241,444 16,241,444
Additional paid-in capital 116,000 116,000
Accumulated deficit (14,874,426) (13,674,433)
------------ ------------
1,483,018 2,683,011
------------ ------------
$ 3,425,044 $ 4,403,804
============ ============
See Notes to Condensed Financial Statements.
</TABLE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
MARCH 31
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1997 1996
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NET REVENUES $ $
Systems revenues 522,389 705,052
Customer support services 119,195 100,144
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641,584 805,196
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COSTS AND EXPENSES
Cost of systems revenues 398,759 114,083
Client services 278,918 176,741
Product development 428,011 346,750
Sales and marketing 387,873 327,187
General and administrative 350,304 495,640
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1,843,865 1,460,401
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LOSS FROM OPERATIONS (1,202,281) (655,205)
OTHER INCOME, NET 2,288 25,085
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LOSS BEFORE INCOME TAXES (1,199,993) (630,120)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $(1,199,993) $ (630,120)
=========== ===========
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.23) $ (0.15)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 5,171,294 4,152,199
=========== ===========
See Notes to Condensed Financial Statements
<TABLE>
<CAPTION>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
MARCH 31,
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
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<S> <C> <C>
Net loss $(1,199,993) $ (630,120)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation 54,317 39,955
Amortization 25,698 60,048
Compensation expense recognized upon grant of
stock option -- 54,011
Change in assets and liabilities:
(Increase) in accounts receivable (311,224) (49,308)
(Increase) in other current assets (196,906) (33,149)
Increase in other current liabilities 225,342 213,393
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (1,402,766) (345,170)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized computer software development costs (147,528) (94,217)
Purchase of furniture and equipment (79,913) (84,751)
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NET CASH (USED IN) INVESTING ACTIVITIES (227,441) (178,968)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 500,000 --
Payments on notes payable and long term obligations (504,109) (751,497)
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NET CASH (USED IN) FINANCING ACTIVITIES (4,109) (751,497)
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,634,316) (1,275,635)
CASH AND CASH EQUIVALENTS
Beginning 1,687,044 2,831,658
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Ending $ 52,728 $ 1,556,023
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash payments for interest $ 5,557 $ 220
See Notes to Condensed Financial Statements
</TABLE>
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 three 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 month
period ended March 31, 1996 have been reclassified with no effect on income.
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"). 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. 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"). Graphical PACE CMS was installed and became operational
at two facilities during 1996.
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
NET REVENUES: Net revenues include systems revenue and customer support
services. The Company's net revenues were $641,584 and $805,196 for the three
months ended March 31, 1997 and 1996, respectively, representing a decrease of
20%. Revenues from software license fees were $34,196 and $525,850, for the
three months ended March 31, 1997 and 1996, respectively, representing a
decrease of 93%. This decrease was primarily due to recognition of software
license fees on a 20-site license agreement, following acceptance of a pilot
project from a healthcare provider with a nationwide network of 37
rehabilitation hospitals in the three months ended March 31, 1996. This
healthcare provider accounted for 91% of the software license fees for that same
period. Revenues from hardware sales were $407,536 and $78,504 for the three
months ended March 31, 1997 and 1996, respectively, representing an increase of
419% . This increase was primarily a result of follow-on orders for equipment
for the 20-site license agreement initiated in the first quarter of 1996. This
healthcare provider accounted for 68% of the hardware revenues for the period
ended March 31, 1997. Customer support services revenues were $119,195 and
$100,144 for the three months ended March 31, 1997 and 1996, respectively,
representing an increase of 19%. 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
$398,759 and $114,083 for the three months ended March 31, 1997 and 1996,
respectively, representing an increase of 250%. This increase is a result of
costs associated with increased hardware sales. Cost of systems revenues totaled
62% and 14% of total net revenues for the three months ended March 31, 1997 and
1996, respectively. Total cost of systems revenues as a percentage of total net
revenues could continue to fluctuate in the future depending on the product
mixes of revenues.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and customer support. Client services expenses
were $278,918 and $176,741 for the three months ended March 31, 1997 and 1996,
respectively, representing an increase of 58%. This increase was 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 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 $428,011 and
$346,750 for the three months ended March 31, 1997 and 1996, respectively,
representing an increase of 23%. 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 $147,528
and $94,217 of product development costs and amortized $25,698 and $60,048 in
the three months ended March 31, 1997 and 1996, respectively. The increased
efforts associated with the GUI and CPA projects accounted for the increases in
capitalized expenses in the period presented.
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 $387,873 and $327,187 for
the three months ended March 31, 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 reorganized the sales and marketing
department into three regions and expanded its sales force efforts.
GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries
and expenses for the corporate administration and finance, legal, insurance and
depreciation expenses. General and administrative expenses were $350,304 and
$495,640 for the three months ended March 31, 1997 and 1996, respectively,
representing a decrease of 29%. This decrease was primarily a result of costs
associated with senior management changes in the period ended March 31, 1996.
OTHER INCOME, NET: Other income, net is comprised of interest income and
expenses. Other income, net was $2,288 and $25,085 for the three months ended
March 31, 1997 and 1996, respectively, representing a decrease of 91%. This
decrease was a result of decreased interest income caused by declining cash
balances and investment amounts in the period ended March 31, 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.
For the three month periods ended March 31, 1997 and 1996, the Company reflected
net losses of $1,199,993 and $630,120 respectively, resulting in net cash used
in operations for each of the periods of $1,402,766 and $345,170, respectively.
Accounts payable, customer deposits, and accrued expenses increased $225,342 to
$1,398,501 at March 31, 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 increased $311,224 to $1,612,356 at March 31, 1997 from
$1,301,132 at December 31, 1996. This increase was due to billings generated by
several contracts initiated during the first three months of 1997. The Company
has established an allowance for doubtful accounts which management believes is
adequate. Included in accounts receivable is accrued revenue receivable which
decreased $169,936 to $654,706 at March 31, 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 three months ended March 31, 1997
and 1996 was $227,441 and $178,968, respectively. Cash used in investing
activities was primarily for the purchase of computer and office equipment and
capitalized software costs.
Net cash used in financing activities consisted of repayment of long-term
obligations in the amount of $4,109 and net proceeds from the line of credit. At
December 31, 1996, outstanding borrowings on the line of credit was $500,000. In
the three months ended March 31, 1997, the Company repaid the line of credit in
the amount of $500,000 and prior to the end of that period, received proceeds
from the line of credit in the amount of $500,000.
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 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 March 31, 1997, the Company had a cash balance of $52,728. 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 which 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 March 31, 1997). Outstanding borrowings totaled
$500,000 at March 31, 1997. The Company's management expects to continue its
research and development activities in the future and anticipates that
additional funding from investors may be required to meet anticipated working
capital needs. The Company also 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NA
ITEM 5. OTHER INFORMATION.
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)
May 9, 1997 /s/ ROGER D. HUSEMAN
- ---------------------- --------------------------------------------
Dated Vice President of Finance and Administration
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 52,728
<SECURITIES> 0
<RECEIVABLES> 1,612,356
<ALLOWANCES> 50,000
<INVENTORY> 253,677
<CURRENT-ASSETS> 1,670,226
<PP&E> 1,100,230
<DEPRECIATION> 547,094
<TOTAL-ASSETS> 3,425,044
<CURRENT-LIABILITIES> 1,910,722
<BONDS> 0
0
0
<COMMON> 16,241,444
<OTHER-SE> 14,758,426
<TOTAL-LIABILITY-AND-EQUITY> 3,425,044
<SALES> 641,584
<TOTAL-REVENUES> 641,584
<CGS> 677,677
<TOTAL-COSTS> 1,843,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,557
<INCOME-PRETAX> (1,199,993)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,199,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,199,993)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
