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:
September 30, 1998 0-27554
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PACE HEALTH MANAGEMENT SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
Iowa 42-1297992
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
1025 Ashworth Road
West Des Moines, IA 50265
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(Address and zip code of principal executive offices)
(515) 222-1717
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject of the filing requirements for at least the
past 90 days. YES _X_ NO ___
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Number of Shares Outstanding
Class October 31, 1998
----- ----------------
Common Stock, no par 5,321,784
Transitional Small Business Disclosure Format (Check one): YES ___ NO _X_.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
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Condensed Balance Sheets 1
September 30, 1998 and December 31, 1997
Condensed Statements of Operations 2
Three Months and Nine Months Ended September 30, 1998 and 1997
Condensed Statements of Cash Flows 3-4
Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 6-11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
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<TABLE>
<CAPTION>
SEPT. 30, 1998 DEC. 31, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 152,271 $ 525,356
Accounts receivable, net 126,679 1,087,485
Inventories, primarily computer equipment 74,113 70,157
Prepaid expenses 162,078 28,417
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TOTAL CURRENT ASSETS 515,141 1,711,415
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NON-CURRENT ACCOUNTS RECEIVABLE -- 288,000
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FURNITURE AND EQUIPMENT, at cost, net of
accumulated depreciation 394,688 636,992
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COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization 1,087,116 1,179,082
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OTHER ASSETS, net 41,461 57,730
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$ 2,038,406 $ 3,873,219
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,100,000 $ 2,000,000
Current maturities of long-term obligations 24,887 79,252
Accounts payable, customer deposits and
accrued expenses 1,122,787 1,651,839
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TOTAL CURRENT LIABILITIES 3,247,674 3,731,091
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LONG-TERM OBLIGATIONS, less current maturities 31,472 53,888
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SHAREHOLDERS' EQUITY:
Preferred stock 2,875,000 2,250,000
Common stock 16,190,544 16,910,544
Additional paid-in capital 413,486 413,486
Unearned debt guarantee fees -- (133,142)
Accumulated deficit (21,439,770) (19,352,648)
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(1,240,740) 88,240
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$ 2,038,406 $ 3,873,219
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</TABLE>
See Notes to Condensed Financial Statements.
1
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PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
NET REVENUES
Systems revenues $ 205,100 $ 825,880 $ 470,333 $ 2,091,768
Customer support services 198,585 187,800 639,972 468,859
------------ ------------ ------------ ------------
403,685 1,013,680 1,110,305 2,560,627
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of systems revenues 452 344,617 49,919 1,221,835
Client services 157,286 420,492 778,684 1,047,745
Product development 208,555 471,251 999,929 1,381,852
Purchased research and development -- -- -- 588,502
Sales and marketing 63,765 339,940 392,047 1,081,002
General and administrative 151,106 402,369 807,835 1,088,235
------------ ------------ ------------ ------------
581,164 1,978,669 3,028,414 6,409,171
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (177,479) (964,989) (1,918,109) (3,848,544)
OTHER INCOME (EXPENSE) NET 13,488 (14,763) (169,013) 16,088
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (163,991) (979,752) (2,087,122) (3,832,456)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (163,991) $ (979,752) $ (2,087,122) $ (3,832,456)
============ ============ ============ ============
LOSS PER COMMON AND COMMON EQUIVALENT SHARES $ (0.04) $ (0.18) $ (0.43) $ (0.73)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,321,784 5,402,895 5,321,784 5,275,994
============ ============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements
2
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PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,087,122) $ (3,832,456)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation 208,659 205,519
Amortization 300,593 130,111
Purchased research and development -- 588,502
Other -- 61,516
Change in assets and liabilities:
(Increase) decrease in accounts receivable 1,248,806 (26,167)
(Increase) in other current assets (137,617) (175,405)
Increase (decrease) in other current liabilities (508,326) 326,737
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NET CASH (USED IN) OPERATING ACTIVITIES (975,007) (2,721,643)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for net assets of Healthcare Software Solutions -- (50,000)
Capitalized computer software development costs (59,216) (435,284)
Purchase of furniture and equipment (11,872) (215,531)
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NET CASH (USED IN) INVESTING ACTIVITIES (71,088) (700,815)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 100,000 1,930,000
Proceeds from sale of Series A preferred stock 625,000 1,492,059
Proceeds from the sale of equipment 24,791 --
Proceeds from sale of common stock -- 6,400
Payments on notes payable and long term obligations (76,781) (1,521,387)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 673,010 1,907,072
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (373,085) (1,515,386)
CASH AND CASH EQUIVALENTS
Beginning 525,356 1,687,044
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Ending $ 152,271 $ 171,658
============ ============
</TABLE>
(Continued)
3
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
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1998 1997
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash payments for interest $ 71,461 $ 49,837
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Purchase of net assets of Healthcare Software Solutions
Assets acquired:
In-process research and development $ -- $ 588,502
Accounts receivable -- 23,177
Property & equipment, primarily computer equipment -- 92,637
Intangible assets -- 70,384
Liabilities assumed -- (60,000)
------------ ------------
-- 714,700
Issuance of common stock -- (664,700)
------------ ------------
Cash paid -- 50,000
============ ============
</TABLE>
See Notes to Condensed Financial Statements
4
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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NOTE 1. BASIS OF PRESENTATION
The accompanying financial information should be read in conjunction with the
annual financial statements and notes thereto for the year ended December 31,
1997. 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 nine months are not necessarily indicative of
the results to be expected for the entire fiscal year.
NOTE 2. BASIC AND DILUTED LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share,
which requires the Company to present basic and diluted loss per share amounts.
Basic loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted loss per share is based on the weighted
average number of common shares and dilutive potential common shares outstanding
during the period. Dilutive potential common shares consist of stock options and
warrants (using the treasury stock method) and convertible preferred stock
(using the if-converted method). Dilutive potential common shares are excluded
from the computation if their effect is anti-dilutive.
NOTE 3. SUBSEQUENT EVENT - SALE OF ASSETS.
On October 7, 1998, Registrant completed the sale of substantially all of its
assets to, and the assumption of certain of its liabilities by, Minnesota Mining
and Manufacturing Company ("3M") pursuant to an Asset Purchase Agreement dated
June 30, 1998, as amended, as described in Registrant's definitive proxy
statement dated September 14, 1998. The transaction was approved by the holders
of both the common stock and the preferred stock at a special meeting of
shareholders held on October 7, 1998.
The purchase price of the transaction was approximately $5.9 million, including
$4.75 million in cash (of which $750,000 will be held in escrow for nine months
to secure the Company's indemnification obligations under the Asset Purchase
Agreement), plus the assumption of substantially all of the Company's
liabilities other than $2.1 million in line of credit balances, which were paid
off from proceeds at closing. 3M offered positions to most the Company's
employees and has assumed full support of the Company's customers (see
"Management Discussion and Analysis or Plan of Operations").
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL. PACE Health Management Systems, Inc 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." 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. In 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").
During the second quarter of 1997, the Company expanded its product line into
the ambulatory market when it purchased substantially all of the assets of
Healthcare Software Solutions, L.C. (HSS), an affiliate of Wellmark, Inc.
(formerly IASD Health Services Corp.). HSS, headquartered in Des Moines, Iowa,
was developing clinical information systems for use by physicians working in
single-practitioner offices, multi-specialty groups, and multi-site clinics.
This "MR2000 for Windows" product integrates every element of the traditional
paper chart into an electronic clinical information system that improves
practice efficiency and the quality of care. The system provides point and click
access to healthcare information that facilitates the development of treatment
protocols and enables physicians to track patients' problems, symptoms,
treatments and outcomes
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. In the third and fourth quarters of 1997,
the Company sold 2,250,000 shares of convertible participating preferred stock
at $1.00 per share representing total proceeds of $2,250,000. In the first
quarter of 1998, the Company sold an additional 625,000 shares of convertible
participating preferred stock at $1.00 per share representing proceeds of
$625,000. Each share of preferred stock is convertible into 2 shares of common
stock.
During the second quarter of 1998 the Company entered into an agreement with
Minnesota Mining and Manufacturing Company ("3M") to sell substantially all of
its assets in exchange for cash and an assumption of certain liabilities. On
October 7, 1998, Registrant completed the sale of substantially all of its
assets to, and the assumption of certain of its liabilities by, 3M pursuant to
an Asset Purchase Agreement dated June 30, 1998, as amended, as described in
Registrant's definitive proxy statement dated September 14, 1998. The
transaction was approved by the holders of both the common stock and preferred
stock at a special meeting of shareholders held on October 7, 1998.
6
<PAGE>
The purchase price of the transaction was approximately $5.9 million, including
$4.75 million in cash (of which $750,000 will be held in escrow for nine months
to secure the Company's indemnification obligations under the Asset Purchase
Agreement), plus the assumption of substantially all of the Company's
liabilities other than $2.1 million in line of credit balances, which were paid
off from proceeds at closing. 3M offered positions to most the Company's
employees and has assumed full support of the Company's customers.
Prior to the sale of assets, the Company derived 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 was recognized upon delivery of the software,
provided that collectibility was probable and the Company has no significant
obligations remaining under the software licensing agreement. The estimated
costs of any insignificant remaining obligations was accrued and charged to
costs and expenses at the time of revenue recognition. Revenue from software
license fee agreements that require significant customization was accounted for
over the length of the implementation period using the percentage-of-completion
method of accounting. Revenue from implementation and installation services was
accounted for separately from the software license fees and recognized when the
services were performed. Revenue from hardware sales was recognized upon
shipment or upon completion of significant staging and configuration
obligations. Customer support services, which include system updates, were
recognized over the period the services are performed.
Prior to the asset sale, the Company capitalized software development costs that
relate primarily to either the development of new software or significant
enhancements to existing software. Software costs were 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
required capitalization of expenses following determination of technical
feasibility and until the software was ready for general release. The
capitalized costs were 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 were compared to the net realizable value of the product and
the amount by which the unamortized capitalized costs exceed the net realizable
value was written off. The net realizable value was the estimated future gross
revenues from a product, reduced by the estimated future costs of completing and
disposing of that product.
RESULTS OF OPERATIONS
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NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $403,685 and $1,013,680 for the three
months ended September 30, 1998 and 1997, respectively, representing a decrease
of 60%. For the nine months ended September 30, 1998 and 1997, the Company's net
revenues were $1,110,305 and $2,560,627 respectively, representing a 57%
decrease. Systems revenues for the quarter ended September 30, declined
$620,780, or 75%, from $825,880 in 1997 to $205,100 in 1998. For the nine months
ended September 30, systems revenues declined $1,621,435, or 78%, from
$2,091,768 in 1997 to $470,333 in 1998. These decreases were the result of
delays in implementation of several 1997 contracts, combined with the impact
from no new contracts during the current fiscal year (see "Liquidity and Capital
Resources"). Included in systems revenues is
7
<PAGE>
revenue from software license fees, implementation fees and hardware sales.
Customer support services revenues were $198,585 and $187,800 for the three
months ended September 30, 1998 and 1997, respectively, representing an increase
of 6%, and $639,972 and $171,113 for the nine months ended September 30, 1998
and 1997, respectively, representing an increase of 37%. These changes were due
to increased support service fees as a result of the new sites installed during
1997.
COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
third party software, commissions and royalties. Cost of systems revenues were
$452 and $344,617 for the three months ended September 30, 1998 and 1997,
respectively, representing a decrease of 99%. Cost of systems revenues were
$49,919 and $1,221,835 for the nine months ended September 30, 1998 and 1997,
respectively, representing a decrease of 96%. These decreases were a direct
result of the decline in systems revenue and associated costs.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and customer support. Client services expenses
were $157,286 and $420,492 for the three months ended September 30, 1998 and
1997, respectively, representing a decrease of 63%. Client services expenses
were $778,684 and $1,047,745 for the nine months ended September 30, 1998 and
1997, representing a decrease of 26%. The decrease in the third quarter was a
result of the corporate downsizing that occurred in February 1998 (see
"Liquidity and Capital Resources").
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 $208,555 and
$471,251 for the three months ended September 30, 1998 and 1997, respectively,
representing a decrease of 56%. Product development expenses were $999,929 and
$1,381,852 for the nine months ended September 30, 1998 and 1997, respectively,
representing a decrease of 28%. The Company capitalized no expenses in the third
quarter of 1998 as compared to $150,127 in the third quarter of 1997 and
amortized approximately $55,000 in both periods. The Company capitalized $59,216
during the first nine months of 1998 compared to $435,284 during the first nine
months of 1997. The Company amortized $300,593 and $130,111 during the nine
months ended September 30, 1998 and 1997, respectively. Except as noted above,
other decreases in product development expenses and capitalized costs were a
result of the corporate downsizing that occurred in February 1998 (see
"Liquidity and Capital Resources").
PURCHASED RESEARCH AND DEVELOPMENT. During the second quarter of 1997 the
Company expensed in-process research and development costs in the amount of
$588,502 related to an acquisition completed on May 30, 1997.
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 $63,765 and $339,940 for
the three months ended September 30, 1998 and 1997, respectively, representing a
decrease of 81%. Sales and marketing expenses were $392,047 and $1,081,002 for
the nine months ended September 30, 1998 and 1997, respectively, representing a
decrease of 64%. The decreases in sales and marketing expenses were a result of
the corporate downsizing that occurred in February 1998 (see "Liquidity and
Capital Resources").
8
<PAGE>
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 $151,106 and
$402,369 for the three months ended September 30, 1998 and 1997, respectively,
representing a decrease of 62%. General and administrative expenses were
$807,835 and $1,088,235 for the nine months ended September 30, 1998 and 1997,
respectively, representing a decrease of 26%. The decreases in expenses were a
result of the corporate downsizing that occurred in February 1998 (see
"Liquidity and Capital Resources"). Included in 1998 year-to-date are expenses
related to retention bonuses of $156,000 paid to employees on June 30, 1998.
The Company expects all expenses should decrease in the future relative to the
Company's sale of assets in October, resulting in only two remaining employees
and minimal operational expenses.
OTHER (EXPENSE) INCOME, NET: Other (expense) income, net is comprised primarily
of interest income and expenses. Other income, net was $13,488 and ($14,763) for
the three months ended September 30, 1998 and 1997, respectively and ($169,013)
and $16,088 for the nine months ended September 30, 1998 and 1997, respectively.
For the periods presented interest income decreased as a result of reduced cash
balances and interest expense increased due to additional borrowing on the lines
of credit. Included in the 1998 third quarter and year-to-date is other income
of $51,000 for a state R&D tax credit received during the quarter. Included in
1998 year-to-date is other expense related to the amortization of unearned debt
guarantee fees in the amount of $133,142.
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
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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 participating 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. In September 1996,
the Company sold 900,000 shares of common stock at $3.25 per share for net
proceeds of approximately $2.8 million. In the third and fourth quarters of
1997, the Company sold $2,250,000 shares of convertible participating preferred
stock at $1.00 per share representing total proceeds of $2,250,000. During the
first quarter of 1998, the Company sold an additional 625,000 shares of
convertible participating preferred stock at $1.00 per share representing total
proceeds of $625,000. Each share of preferred stock is convertible into 2 shares
of common stock.
For the nine month periods ended September 30, 1998 and 1997, the Company
reflected net losses of $2,087,122 and $3,832,456 respectively, resulting in net
cash used in operations for each of the periods of $975,007 and $2,721,643,
respectively. Accounts payable, customer deposits, and accrued expenses
decreased $529,052 to $1,122,787 at September 30, 1998 from $1,651,839 at
December 31, 1997. As of September 30, 1998 customer deposits, which include
deposits and amounts billed and paid under contract terms, in excess of revenue
recognition, totaled $861,160.
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Accounts receivable decreased $1,248,806 to $126,679 at September 30, 1998 from
$1,375,485 at December 31, 1997 due to increased collections on customer
balances and significantly reduced billings in the period. The Company has
established an allowance for doubtful accounts which management believes is
adequate. Included in accounts receivable is accrued revenue which decreased
$607,601 to $53,700 at September 30, 1998 from $661,301 at December 31, 1997.
The accrued revenue receivable consists primarily of (a) revenue from 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 and (b) revenue from equipment delivered, but
not yet billed. 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 nine months ended September 30,
1998 and 1997 was $71,088 and $700,815, respectively. Cash used in investing
activities was primarily for the purchase of computer and office equipment and
capitalized computer software costs.
Net cash provided by financing activities for the nine months ended September
30, 1998 and 1997 was $673,010 and $1,907,072, respectively. Net cash provided
by financing activities during the nine months ended September 30, 1998 was
primarily related to proceeds from the sale of convertible participating
preferred stock.
As of September 30, 1998, the Company had a cash balance of $152,271. The
Company also had a $2,000,000 revolving line of credit with a financial
institution and a $200,000 line of credit with one of the Company's
shareholders. The lines of credit were collateralized by substantially all
assets of the Company and personal guarantees totaling $1,000,000 by two of the
Company's shareholders. Interest was payable monthly. Outstanding borrowings
totaled $2,100,000 at September 30, 1998. The outstanding balances were paid in
full on October 8, 1998.
While short-term working capital was obtained from existing investors during the
last 12 months, the Company has been unable to secure long-term funding. The
lack of sufficient long-term capital on the Company's balance sheet,
representing financial stability to prospective customers, resulted in the
delayed implementation of several signed contracts and the delayed completion of
numerous pending contracts in which the Company had been named Vendor-of-Choice.
As a result, certain operational and financial changes were implemented
subsequent to year-end. To reduce overhead and minimize the Company's cash
needs, the Company downsized its operations in February 1998. As a part of this
downsizing, approximately 40 employees were terminated.
During the second quarter the Company signed an agreement with 3M Health
Information Systems ("3M") to sell substantially all of the its assets to 3M. On
October 7, 1998, Registrant completed the sale of substantially all of its
assets to, and the assumption of certain of its liabilities by, 3M pursuant to
an Asset Purchase Agreement dated June 30, 1998, as amended, as described in
Registrant's definitive proxy statement dated September 14, 1998. The
transaction was approved by the holders of both the common stock and the
preferred stock at a special meeting of shareholders held on October 7, 1998.
The purchase price of the transaction was approximately $5.9 million, including
$4.75 million in cash (of which $750,000 will be held in escrow for nine months
to secure the Company's indemnification obligations under the Asset Purchase
Agreement), plus the assumption of substantially all of the
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<PAGE>
Company's liabilities other than $2.1 million in line of credit balances, which
were paid off from proceeds at closing. The sale resulted in a gain on sale in
excess of $3.0 million in the fourth quarter. 3M offered positions to most PACE
employees and has assumed full support of the Company's customers. Post closing
the Company will have minimal operating expenses and only two employees. The
Company's post closing Balance Sheet reflects cash, including the escrow
balance, in excess of $2.0 million with minimal debt.
The net proceeds from the sale will be retained by the Company pending a
determination of whether to engage in a follow-on transaction. It is the
intention of the Company to seek a business combination with another entity,
before considering possible liquidation and distribution of its assets. The
Company believes that with the cash on hand and net operating loss
carryforwards, subject to the limitation of such carryforwards under the
Internal Revenue Code, such a combination may be attractive to potential
partners and would better serve the interest of the Company's shareholders. If
no suitable business combination is identified within a reasonable period of
time, the Company may elect to liquidate and distribute the remaining net
proceeds to shareholders. If the Company liquidated at the present time, all of
the net assets of the Company would be paid to holders of the Company's
preferred stock.
11
<PAGE>
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
A special meeting of the shareholders of PACE Health Management Systems,
Inc. was held at he office of the Company, 1025 Ashworth Road, City of West Des
Moines, Iowa on October 7, 1998.
At the meeting shareholders approved to an Asset Purchase Agreement, dated
June 30, 1998 (the "Asset Purchase Agreement") by and between the Company and
Minnesota Mining and Manufacturing Company ("3M"), described under "Management
Discussion and Analysis or Plan of Operations - General." The vote was as
follows:
FOR AGAINST ABSTENTIONS
Common Stock 8,428,277 - 76.1% 10,500 - 0.1% 4,000 - 0.0%
Preferred Stock 2,875,000 - 100% -0- -0-
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
Reports on Form 8-K were filed on October 16, 1998 and
September 9, 1998.
12
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)
November 13, 1998 /s/ ROGER D. HUSEMAN
- --------------------- --------------------------------------------
Dated Vice President of Finance and Administration
and Chief Financial Officer
13
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 152,271
<SECURITIES> 0
<RECEIVABLES> 126,679
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2,875,000
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