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, 1997
___ 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 Number)
incorporation or organization)
1025 Ashworth Road
West Des Moines, IA 50265
- --------------------------------------------------------------------------------
(Address and zip code of principal executive offices)
(515) 222-1717
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(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]
<PAGE>
Issuer's net revenues for its most recent fiscal year: $2,958,160
The aggregate market value of the voting and non-voting common stock held by
non-affiliates, based upon the closing sale price of the common stock on
February 11, 1998 as reported by the Nasdaq SmallCap Market, was approximately
$1,600,000. 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 March 20, 1998
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Common Stock, no par 5,321,784
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (Check one): YES ___ NO __X__
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Page
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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 9
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 33
ITEM 12. Certain Relationships and Related Transactions 33
ITEM 13. Exhibits and Reports on Form 8-K 33
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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, physicians'
offices, 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 communication 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 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. To that foundation, PACE added point-of-care software
applications in the early 1990's and introduced PACE Clinical Information System
("PACE/CIS"). During fourth quarter of 1995, the Company discontinued the
marketing and sale of PACE/CIS; however, it was from these core modules that
PACE CMS complete care management system evolved. 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 an object-oriented open three-tier, client/server architecture
("Graphical PACE CMS"). 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. Currently installed or being
installed at nine facilities, Graphical PACE CMS has the user friendliness of
Windows with significantly enhanced clinical functionality.
In May 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 Corporation). The MR2000 product integrates every element of
traditional paper charting activities into a system that improves practice
efficiency and quality of care.
From 1994 through 1997, the Company has met development schedules and put
multiple enhancements and new product releases into production, including the
current Graphical PACE CMS. As of December 31, 1997, PACE had 74 customers under
contract and had completed installation of the Graphical PACE CMS in six
facilities. During 1997, the Company signed new contracts valued at over
$4,000,000, however, the lack of substantial capital on the balance sheet
seriously impacted end of year operations. To reduce
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overhead, minimize negative cash flow, and attract capital or secure strategic
partners for operational growth, the Company determined it necessary to
terminate approximately 40 employees on February 18, 1998. These reductions were
primarily targeted at legacy non-graphical product cost centers, allowing the
Company to continue directing resources into the Graphical PACE CMS development
and sales efforts and remain focused on current implementation agreements. See
"Management's Discussion and Analysis--Liquidity and Capital Resources."
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.
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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 that 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 six 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
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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.
Ambulatory
The PACE MR2000 (purchased from HSS in 1997) provides point and click
access to a limitless range of healthcare information while facilitating
the development of treatment protocols. It enables physicians to track
problems, symptoms, treatments and outcomes. It organizes patient
demographic and historical information, clinical notes, pharmaceutical
records, laboratory results, referral letters, consultation information,
and more. PACE MR2000 is designed to work in a wide range of healthcare
environments, from a single-physician office to multi-specialty or
multi-site clinics.
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 further differentiates 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.
<PAGE>
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 process in 1996 to keep abreast of marketing and
clinical trends. This process translates information into functionality by
leading client focus groups and PACE technical personnel in designing modules,
products, and enhancements that will interface with existing PACE systems. 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, four remarketing agreements have been
signed since 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, partnerships or joint venture business relationships will further
its business strategy, it will consider entering into such relationships.
<PAGE>
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, and 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 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 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 13, 1997, the Company
had a backlog of approximately $4,000,000 that included $900,000 of 1998
estimated revenue from software support maintenance agreements. As of December
31, 1997, the Company had software support maintenance agreements that ranged
from 12 to 72 months in length and represented total future revenues of
approximately $2,000,000 compared to $1,657,000 on December 31, 1996.
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. Most are larger and better capitalized than the Company. Among the
Company's principal competitors are traditional healthcare information systems
vendors and clinical information systems vendors. These companies include Cerner
Corp; Keane; HBO & Co. which purchased CliniCom Inc. in 1995; Meditech, Inc.;
Phamis, Incorporated (a division of IDX); SMS Corp.; Hewlett-Packard Co.;
SpaceLabs Medical, Inc. and Emtek HealthCare Systems, Inc., a subsidiary of
Eclipsys.
<PAGE>
In addition to being comprehensive, PACE CMS includes a full set of clinical
applications that 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. 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 Case Management Module--A sophisticated suite of applications
which electronically manage a Clinical Pathway or protocol from a workflow
perspective.
* 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.
* The PACE Clinical Documentation Module--Extraordinary depth in documenting
all inpatient and bedside activities to replace the paper records.
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 complete the graphical conversion of current products and
enhance existing graphical functionality. Product development will also focus on
adding enhancements to current applications that will include using more
efficient architecture configuration and incorporating new evolving applications
technologies and standards.
Total research and development costs incurred by the Company were approximately
$2,296,000, $1,535,500 and $732,500 for 1997, 1996, and 1995 respectively.
<PAGE>
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, 1997, the Company employed 64 full-time personnel of whom 8
were sales and marketing personnel, 7 were administrative and clerical
personnel, 25 were product development personnel, and 24 were client services
personnel. Subsequent to the corporate downsizing in February 1998, the Company
currently employs a staff of 21 full-time personnel of whom 2 are sales and
marketing, 3 are administrative, 9 are product development, and 7 are client
services. The Company anticipates no further employee terminations at this time.
Concurrently with the corporate downsizing in February 1998, the Company entered
into retention agreements with its remaining employees. These agreements provide
for the payment to the employee of a specified amount upon the earliest to occur
of the following: (a) June 30, 1998 if the employee is employed by the Company
on such date, (b) the date of a Change in Control (as defined in the agreement)
if the employee is employed by the Company on such date, (c) termination of
employment by the Company for any reason other than Cause (as defined in the
agreement), or (d) termination of employment by the employee for Good Reason (as
defined in the agreement), and upon the satisfaction of certain additional
conditions. In addition, the retention agreement amends all existing stock
options held by the affected employees to provide that, in the event an employee
becomes entitled to receive a payment under the retention agreement, any stock
options vested as of the date of such entitlement shall terminate on the later
of (a) two years from the date of such entitlement or (b) the date specified in
the stock option agreement.
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
<PAGE>
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 currently occupies office space under three separate lease
agreements. The Company occupies approximately 11,500 square feet of office
space at its headquarters in West Des Moines, Iowa. This lease expires in May
1998. The Company occupies approximately 5,500 square feet in Huntersville,
North Carolina under a lease that expires in October 1998. In addition, the
Company leases 1,200 square feet of office space located in Charlotte, North
Carolina under a separate lease that expires in August 1999, which it is
currently negotiating to sublease. The Company anticipates renewing the two
leases that expire in 1998, but reducing the square footage in West Des Moines
by approximately 50%.
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 1997.
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 bid prices as
reported by the Nasdaq SmallCap Market beginning April 27, 1995. These
quotations reflect inter-dealer prices, without retail markup, markdown, or
commission and may not reflect actual transactions.
Quarter ended High Low
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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
3/31/97 3 5/8 2
6/30/97 4 1 7/8
9/30/97 3 1 1/4
12/31/97 1 7/8 5/16
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. During the fourth quarter of 1997, the Company sold 750,000
shares of Series A Convertible Participating Preferred Stock, convertible into
common stock on a 2 for 1 basis, for $750,000 in an unregistered private
placement. Subsequent to the end of 1997, the Company sold an additional 625,000
shares of convertible participating preferred stock at $1.00 per share
representing proceeds of $625,000.
<PAGE>
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. 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").
On May 30, 1997, the Company expanded its product line into the ambulatory
market when it purchased substantially all of the assets of Healthcare Software
Solutions, L.C. (HSS), an affiliate of Wellmark, Inc. (formerly IASD Health
Services Corp.). HSS, headquartered in Des Moines, Iowa, was developing clinical
information systems 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. Total
consideration for the acquisition included cash in the amount of $50,000,
230,000 shares of PACE common stock with a market value of $2.89 per share as of
May 30, 1997, and a royalty payment on all MR2000 software licensed between May
30, 1997 and May 30, 2000. This transaction is accounted for under the purchase
method of accounting. The purchase price of HSS has been allocated to the
identifiable tangible and intangible assets acquired based on their estimated
fair values. The acquired, in-process research and development was immediately
charged to operations as required under generally accepted accounting
principles. The intangible assets have estimated remaining lives of two to five
years.
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 preferred stock at $1.00 per
share representing total proceeds of $2,250,000. Each share of preferred stock
is convertible into 2 shares of common stock. Subsequent to the end of 1997, the
Company sold an additional 625,000 shares of convertible participating preferred
stock at $1.00 per share representing proceeds of $625,000.
<PAGE>
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, 1997 AND 1996
NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $2,958,160 and $3,040,400 in 1997 and
1996, respectively, representing a decrease of 3%. Revenues from software
license fees decreased 206% to $501,171 in 1997 compared to $1,534,000 in 1996.
Revenues from hardware sales increased 68% to $1,363,112 in 1997 compared to
$810,864 in 1996. Revenues from implementation services increased 62% to
$444,359 in 1997 compared to $274,549 in 1996 as a result of increased
installations initiated during 1997. Revenues for 1997 were mainly attributable
to software licensing fees, hardware sales and implementation services on 2 new
customers initiated in the first quarter of 1997. These two contracts accounted
for 41% of net revenues in 1997. Revenues for 1996 were mainly attributable to
software licensing fees and hardware sales on a 20-site contract initiated in
the first quarter of 1996. In the fourth quarter of 1996, this client expanded
the contract to include an additional 8 sites which accounted for the majority
of the decrease in software license fees in 1997 compared to 1996. This contract
accounted for 10% and 64% of net revenues in 1997 and 1996, respectively.
Customer support services revenues were $649,518 and $420,987 in 1997 and 1996,
respectively, representing an increase of 54%. This increase was due to
additional maintenance contracts resulting from the continued growth in the
Company's installed client base.
<PAGE>
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 $1,415,262 and $853,777 in 1997 and 1996, respectively,
representing an increase of 66%, primarily as a result of costs associated with
increased hardware sales. Cost of systems revenues as a percentage of net
revenues was 48% and 28% in 1997 and 1996, 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
$1,469,993 and $890,287 in 1997 and 1996, respectively, representing an increase
of 65%. This increase was primarily due to increases in personnel and payroll
related expenses needed to support the new sales and growth in the 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 $1,922,776 and
$1,748,645 in 1997 and 1996 respectively, representing an increase of 10%. The
Company capitalized $589,941 and $495,399 of product development costs and
amortized $215,365 and $213,175 in 1997 and 1996, 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.
PURCHASED RESEARCH AND DEVELOPMENT: As a result of the HSS acquisition on May
30, 1997, the Company expensed in-process research and development in the amount
of $588,502.
SALES AND MARKETING: Sales and marketing expenses include salaries, advertising,
trade show costs and travel expenses related to the sale and marketing of the
Company's systems. Sales and marketing expenses were $1,375,999 and $1,364,727
in 1997 and 1996, respectively, representing an increase of less than 1%.
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
$1,694,337 and $1,790,130 in 1997 and 1996, respectively, representing an
decrease of 5%.
OTHER INCOME (EXPENSE), NET: Other income (expense) net is comprised primarily
of interest income and expenses. Other income (expense) net was ($169,506) and
$97,810 in 1997 and 1996, representing a decrease of $267,316. This decrease was
a result of decreased interest income caused by reduced cash balances and
increased interest expense caused by additional borrowing on the line of credit.
Included in 1997 is other expense relative to the amortization of unearned debt
guarantee fees in the amount of $150,000.
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUES: 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
licenses fees increased 106% to $1,534,000 in 1996 compared to $743,090 in 1995.
Revenues from hardware sales increased 29% to $810,864 in 1996 compared to
$627,342 in 1995. Revenues from implementation services decreased 24% to
$274,549 in 1996 compared to $360,273 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: 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.
CLIENT SERVICES: Client services expenses were $890,287 and $868,382 in 1996 and
1995, respectively, representing an increase of 3%.
PRODUCT DEVELOPMENT: 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 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 departments into three regions and
increased the sales force with 3 new hires.
GENERAL AND ADMINISTRATIVE: 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 1996.
<PAGE>
OTHER INCOME (EXPENSE), NET: 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 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.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had net operating loss (NOL) carryforwards of
approximately $16,696,000 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 $3,500,000 is available as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception in 1987 through 1994, 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. In the third and fourth quarters of
1997, the Company sold 2,250,000 shares of convertible preferred stock at $1.00
per share representing total proceeds of $2,250,000. Each share of preferred
stock is convertible into 2 shares of common stock. Subsequent to the end of
1997, the Company sold an additional 625,000 shares of convertible preferred
stock at $1.00 per share representing proceeds of $625,000.
For the three years ended December 31, 1997, 1996, and 1995, the Company
reflected net losses of $5,678,215, $4,780,191 and $2,412,488, respectively,
resulting in net cash used in operations for each of the years of $3,821,955,
$2,969,718, and $2,461,645, respectively. For each of the years presented, the
Company incurred depreciation and amortization expenses totaling $658,342,
$423,103 and $371,869, respectively. During the second quarter of 1997, the
Company expensed in-process research and development costs in the amount of
$588,502 resulting from the asset purchase of HSS paid for primarily with stock.
Customer deposits increased $679,115 to $964,740 at December 31, 1997 from
$285,625 at December 31, 1996, primarily due to an increase in customer deposits
received by the Company in advance of revenue recognition.
Net cash used in investing activities for the three years ended December 31,
1997, 1996, and 1995 was $949,733, $853,898, and $483,237, respectively. Cash
used in investing activities was primarily for the purchase of computer and
office equipment and capitalized software costs. Additionally, on May 30, 1997,
the Company used cash in the amount of $50,000 as consideration in the asset
purchase of HSS.
<PAGE>
Net cash provided by financing activities for the three years ended December 31,
1997, 1996, and 1995 was $3,610,000, $2,679,002, and $5,664,337, respectively.
Net cash provided by financing activities was primarily related to proceeds from
the sale of common and convertible preferred stock during each of the periods.
For the twelve months ended December 31, 1997, the Company also received net
cash of $1,500,000 from the Company's line of credit.
As of December 31, 1997, the Company had a cash balance of $525,356. The Company
also has a $2,000,000 revolving line of credit with a financial institution that
expires May 31, 1998. The line of credit is collateralized by substantially all
assets of the Company and personal guarantees for $1,000,000 by two of the
Company's shareholders. Interest is payable monthly at prime (8.5% at December
31, 1997). Outstanding borrowings totaled $2,000,000 at December 31, 1997.
While short-term working capital was obtained from existing investors during
1997, the Company was 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 PACE 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. As a part of this downsizing, approximately 40 employees were
terminated and various other cost-saving measures are under examination. The
reductions were targeted at legacy non-graphical product areas, allowing the
Company to continue directing resources into the development, sales and
implementation of the Graphical PACE CMS products.
The Company is continuing to evaluate and, where appropriate, pursue long-term
capital or strategic partnering, including potential merger or sale
alternatives. However, there is no assurance these efforts will be successful.
The inability to obtain long-term capital would adversely affect the Company's
ability to continue as a going concern in the longer term.
As indicated above, the Company's existing investors purchased $625,000 of
Convertible Participating Preferred Stock during the first quarter of 1998. The
Company believes that this capital, combined with operating cash flows, existing
cash balances, and possibly additional capital from investors will adequately
fund operations while a long-term solution is being secured, or until at least
the end of 1998.
YEAR 2000 CONVERSION
The Company does not believe that the year 2000 conversion will have a material
adverse effect on its business. However, the Company has established procedures
to identify, evaluate and implement any necessary changes to its internally
developed computer systems and applications. In addition, the Company intends to
inquire of its material supplies, distributors, financial institutions and
others with whom it does business, relative to any year 2000 conversion issues
or concerns.
<PAGE>
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 23-32
- --------------------------------------------------------------------------------
<PAGE>
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, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and its current liabilities exceed its current assets. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 13. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Des Moines, Iowa
January 28, 1998
except for Note 13, as to which the date is March 16, 1998
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (NOTE 2) 1997 1996
- ------------------------------------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 6) $ 525,356 $ 1,687,044
Accounts receivable (Notes 7 and 11) 1,087,485 1,013,132
Inventories, primarily computer equipment 70,157 46,480
Prepaid expenses 28,417 49,756
-----------------------------
TOTAL CURRENT ASSETS 1,711,415 2,796,412
-----------------------------
NON-CURRENT ACCOUNTS RECEIVABLE (Notes 7 and 11) 288,000 288,000
-----------------------------
FURNITURE AND EQUIPMENT, net of accumulated
depreciation 1997 $785,754; 1996 $492,777 636,992 527,540
-----------------------------
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization 1997 $523,795; 1996 $321,084 1,179,082 791,852
-----------------------------
OTHER ASSETS, net 57,730 --
-----------------------------
$ 3,873,219 $ 4,403,804
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, bank (Note 2) $ 2,000,000 $ 500,000
Current maturities of long-term obligations (Note 2) 79,252 13,858
Accounts payable 386,565 578,573
Accrued expenses 300,534 308,961
Customer deposits 964,740 285,625
-----------------------------
TOTAL CURRENT LIABILITIES 3,731,091 1,687,017
-----------------------------
LONG-TERM OBLIGATIONS, less current maturities (Note 2) 53,888 33,776
-----------------------------
SHAREHOLDERS' EQUITY (Notes 10 and 13))
Serial preferred stock, no par value, authorized 1,000,000
shares; issued none -- --
Convertible participating preferred stock, Series A, no par
value; authorized 4,000,000 shares; paid for but not
issued 1997 2,250,000; 1996 none 2,250,000 --
Common stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1997 5,321,784 shares;
1996 5,090,184 shares (Note 3) 16,910,544 16,241,444
Additional paid-in capital 413,486 116,000
Accumulated deficit (19,352,648) (13,674,433)
Unearned debt guarantee fees (133,142) --
-----------------------------
88,240 2,683,011
-----------------------------
$ 3,873,219 $ 4,403,804
=============================
</TABLE>
See Notes to Financial Statements
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues: (Note 11)
Systems revenues $ 2,308,642 $ 2,619,413 $ 1,730,705
Customer support services 649,518 420,987 350,091
-------------------------------------------
2,958,160 3,040,400 2,080,796
-------------------------------------------
Costs and expenses: (Note 8)
Cost of systems revenues 1,415,262 853,777 621,023
Client services 1,469,993 890,287 868,382
Product development (Note 9) 1,922,776 1,748,645 980,144
Write-off of capitalized software -- 1,270,835 --
Purchased research and development (Note 9) 588,502 -- --
Sales and marketing 1,375,999 1,364,727 865,105
General and administrative 1,694,337 1,790,130 1,285,617
-------------------------------------------
8,466,869 7,918,401 4,620,271
-------------------------------------------
LOSS FROM OPERATIONS (5,508,709) (4,878,001) (2,539,475)
-------------------------------------------
Other income (expense):
Interest income 13,796 67,290 149,783
Interest expense (227,567) (5,222) (22,796)
Other 44,265 35,742 --
-------------------------------------------
(169,506) 97,810 126,987
-------------------------------------------
LOSS BEFORE INCOME TAXES (5,678,215) (4,878,191) (2,412,488)
Provision for income taxes (Note 5) -- -- --
-------------------------------------------
NET LOSS $(5,678,215) $(4,780,191) $(2,412,488)
===========================================
Basic and diluted loss per share (Note 1) $ (1.06) $ (1.06) $ (0.78)
===========================================
Weighted average number of
shares outstanding (Note 1) 5,402,895 4,506,166 3,091,560
===========================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Unearned
Additional Debt
Preferred Common Paid-In Accumulated Guarantee
Stock Stock Capital Deficit fees Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 7,401,455 $ 250,219 $ -- $ (6,481,754) $ -- $ 1,169,920
Issuance of 44,033 shares
of redeemable Series H 148,084 -- -- -- -- 148,084
preferred stock
Conversion of 1,978,063
shares of Series B
through H preferred
stock to common stock (7,549,539) 7,549,539 -- -- -- --
Issuance of 1,200,000
shares of common stock -- 5,065,120 -- -- -- 5,065,120
Issuance of 100,000 shares
of common stock -- 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 (Note 3) -- 140,117 -- -- -- 140,117
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
Exercise of 1,600 stock
options (Note 3) -- 4,400 -- -- -- 4,400
Issuance of 230,000 shares
of common stock (Note 10) -- 664,700 -- -- -- 664,700
Compensation expense
recognized upon grant of
stock options (Note 3) -- -- 96,750 -- -- 96,750
Unearned debt guarantee
fees recognized upon
grant of stock warrants -- -- 283,142 -- (283,142) --
Issuance of 2,250,000
shares of Series A
convertible participating
preferred stock 2,250,000 -- -- -- -- 2,250,000
Offering costs associated
with the issuance of
Series A convertible
participating preferred -- -- (82,406) -- -- (82,406)
stock
Net loss -- -- -- (5,678,215) -- (5,678,215)
Amortization of unearned
debt guarantee fees -- -- -- -- 150,000 150,000
(Note 3)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 2,250,000 $ 16,910,544 $ 413,486 $(19,352,648) $ (133,142) $ 88,240
======================================================================================
</TABLE>
See Notes to Financial Statements
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,678,215) $(4,780,191) $(2,412,488)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation 292,977 209,838 124,259
Amortization 365,365 213,175 247,610
Purchased research and development 588,502 -- --
Write-off of capitalized software -- 1,270,835 --
Compensation expense recognized upon grant
of stock options 96,750 116,000 --
Provision for doubtful accounts (11,694) 26,807 80,000
Other 61,516 -- --
Change in assets and liabilities:
(Increase) in accounts receivable (39,482) (699,240) (535,886)
(Increase) decrease in inventories 42,307 (23,487) 26,805
(Increase) decrease in prepaid expenses 21,339 (12,700) (16,266)
Increase (decrease) in accounts payable
and accrued expenses (240,435) 485,493 155,443
Increase (decrease) in customer deposits 679,115 223,752 (131,122)
-------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (3,821,955) (2,969,718) (2,461,645)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for net assets of Healthcare
Software Solutions (50,000) -- --
Capitalized computer software development costs (589,941) (495,399) (147,861)
Purchase of furniture and equipment (309,792) (358,499) (335,376)
-------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (949,733) (853,898) (483,237)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for expenses of issuing capital stock (82,406) (124,154) (447,864)
Proceeds from exercise of stock options 4,400 140,117 --
Proceeds from notes payable 2,980,000 950,000 500,000
Proceeds from sale of preferred stock 2,250,000 -- 71,971
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 (61,994) (761,961) (756,105)
Payments on notes payable (1,480,000) (450,000) (500,000)
-------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,610,000 2,679,002 5,664,337
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,161,688) (1,144,614) 2,719,455
CASH AND CASH EQUIVALENTS
Beginning 1,687,044 2,831,658 112,203
-------------------------------------------
Ending $ 525,356 $ 1,687,044 $ 2,831,658
===========================================
</TABLE>
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash payments for interest $ 77,567 $ 5,221 $ 22,796
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of Series H preferred stock for release
of note payable to shareholder $ -- $ -- $ 109,650
Accrued interest converted to long-term obligation -- -- 13,886
Repayment of notes payable with proceeds assigned as
collateral -- -- 500,000
Purchase of inventory on account 40,000 -- --
Purchase of net assets of Healthcare Software Solutions
Assets acquired (Note 10):
In-process research and development 588,502 -- --
Accounts receivable 23,177 -- --
Furniture and 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 Financial Statements.
<PAGE>
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 that 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.
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 $202,711, $213,175 and $247,610, in
1997, 1996 and 1995, 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 obligations is accounted for over the length of the
implementation period using the percentage-of-completion method of
accounting.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 and assumptions: 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.
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.
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 employee 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-based employee
compensation. Accordingly, compensation cost for stock options issued to
employees 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.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unearned debt guarantee fees: The estimated fair value of the stock warrants
granted to non-employees is determined by using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend rates of 0%,
price volatility of 64%, risk-free interest rates of 6.0% and expected lives of
5 years. The unearned debt guarantee fees are being amortized to interest
expense by the interest method over the period of the related debt.
NOTE 2. PLEDGED ASSETS, NOTE PAYABLE TO BANK AND LONG-TERM OBLIGATIONS AT
DECEMBER 31, 1997
The Company has a $2,000,000 revolving line of credit with a financial
institution that expires May 31, 1998 and is collateralized by substantially all
assets of the Company and the personal guarantees of two of the Company's
shareholders. The note has not been renewed by the financial institution and the
Company is presently in default. Interest is payable monthly at prime (8.50% at
December 31, 1997). Outstanding borrowings totaled $2,000,000 at December 31,
1997.
The Company's long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
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 $ 33,775 $ 9,887
Unsecured non-interest bearing note payable, due in annual installments of
$15,000 through May 2000 45,000 15,000
Unsecured non-interest bearing note payable, due in monthly installments of
$6,045 through September 1998 54,365 54,365
------------------------
$ 133,140 $ 79,252
========================
</TABLE>
Approximate aggregate maturities of long-term obligations are as follows as of
December 31, 1997:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 79,300
1999 24,900
2000 24,900
2001 4,000
------------------------
$ 133,100
========================
</TABLE>
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, 1997
and 1996, respectively.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. COMMON STOCK WARRANTS, OPTIONS AND SUBSEQUENT EVENT
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. At December 31,
1997, warrants to purchase 261,265 shares were outstanding and warrants to
purchase 257,992 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. At December 31, 1997, Class A warrants
to purchase 114,052 shares and Class B warrants to purchase 59,105 shares were
outstanding and exercisable.
The Company has issued Series A warrants to convertible, participating Series A
preferred stock shareholders. In addition, the Company has issued Series A
warrants to certain shareholders for their unconditional promise to guarantee
repayment of the Company's revolving line of credit. The warrants were
exercisable beginning in July 1997 and expire beginning in July 2002 through
December 2002. The exercise price of the warrants is $0.50. The Series A warrant
holders were granted certain limited piggyback and Form S-3 registration rights
with respect to the shares issuable upon exercise of the warrants. At December
31, 1997, Series A warrants to purchase 2,017,860 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 Company's 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
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the earliest 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:
<TABLE>
<CAPTION>
Option price Available for
per share Outstanding grant
-------------- ------------- --------------
<S> <C> <C> <C>
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
Granted $1.75 5,000 (5,000)
Canceled $1.75 - 3.25 (210,881) 210,881
------------- --------------
BALANCE, DECEMBER 31, 1997 $.50 - 3.88 225,120 285,301
============= ==============
</TABLE>
On January 5, 1998 by Board action, the exercise price for all current employee
options was changed to $0.50. At December 31, 1997, options to purchase 78,719
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 800,000 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 than 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. On January 5, 1998, by Board action, the exercise price for
all current, non-qualified stock options to executive officers was $0.50.
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. Options to purchase 1,600 shares with an exercise price of $2.75
were exercised during 1997. As of December 31, 1997, the Company had granted
options to purchase 401,686 shares of which 763 were exercisable.
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 $0.50 per
share. In addition, the officer received another nonqualified stock option to
purchase 110,000 shares at an exercise price of $0.50 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 earliest of the tenth
anniversary of the date the options were granted or the end of the thirty-day
period following termination of employment.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Compensation cost charged to income for the grant of stock options for 1997 and
1996 was $96,750 and $116,000, respectively (none for the year ended December
31, 1995). 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:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss:
As reported $ (5,678,000) $ (4,780,000) $ (2,412,000)
Pro forma (5,958,000) (5,488,000) (3,316,000)
Loss per common and
common equivalent share
As reported $ (1.06) $ (1.06) $ (0.78)
Pro forma (1.14) (1.22) (1.07)
</TABLE>
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 ranging from 77% to 79%, risk-free interest rates ranging from 5.74%
to 7.40%, and expected lives ranging from 5 to 10 years.
Amortization expense of unearned debt guarantee fees charged to income for the
grant of Series A warrants for 1997 was $150,000. (None for the years ended
December 31, 1996 and 1995.)
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 office facilities in North Carolina and Iowa. The leases
require monthly payments ranging from approximately $800 to $11,500 and expire
from May 1998 to August 1999. The total remaining commitment at December 31,
1997 is approximately $141,000. Rent expense for 1997, 1996 and 1995 was
approximately $170,000, $140,000 and $123,000, respectively.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INCOME TAX MATTERS
Approximate deferred taxes consist of the following components as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
--------------- --------------
<S> <C> <C>
Net operating loss carryforwards $ 6,511,000 $ 4,978,000
Computer software development costs 225,000 -
Deferred revenue 400,000 186,000
Research and development credit carryforwards 338,000 176,500
Allowance for doubtful accounts 15,000 19,500
Compensation expense on stock options 82,000 -
Amortization expense on unearned debt guarantee fees 59,000 -
Accrued expenses 87,000 22,000
Other 2,000 6,000
--------------- --------------
7,719,000 5,388,000
Less valuation allowance 7,504,000 5,200,000
--------------- --------------
215,000 188,000
Deferred tax liabilities, computer software
development costs (215,000) (188,000)
--------------- --------------
$ - $ -
=============== ==============
</TABLE>
The Company recorded a valuation allowance of $7,504,000, and $5,200,000 against
deferred tax assets at December 31, 1997 and 1996, 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 $2,304,000,
$1,888,000, and $935,000 during 1997, 1996 and 1995, 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, 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ----------------- --------------
<S> <C> <C> <C>
Computed federal income tax (benefit) $ (2,214,500) $ (1,673,000) $ (844,000)
Other, primarily computed state income tax
benefit (89,500) (215,000) (91,000)
Accounting losses for which deferred
federal and state income tax benefits
could not be recognized 2,304,000 1,888,000 935,000
--------------- ----------------- --------------
$ - $ - $ -
=============== ================= ==============
</TABLE>
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, the Company has approximately $16,696,000 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 $3,500,000 is
available as of December 31, 1997.
NOTE 6. CONCENTRATION OF CREDIT RISK The Company maintains cash in bank deposit
accounts that, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
NOTE 7. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Current
Billed $ 752,491 $ 526,490
Accrued revenue 373,301 536,642
------------- ------------
1,125,792 1,063,132
Less: Allowance for doubtful accounts (38,307) (50,000)
------------- ------------
$ 1,087,485 $ 1,013,132
============= ============
Non-Current
Accrued revenue $ 288,000 $ 288,000
============= ============
</TABLE>
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 year ended
December 31, 1995 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 $2,296,000, $1,535,500 and $732,500 for 1997, 1996 and 1995,
respectively.
NOTE 10. PURCHASE OF HEALTHCARE SOFTWARE SOLUTIONS, L.C.
On May 30, 1997, the Company acquired substantially all of the assets, net of
certain liabilities, of Healthcare Software Solutions, L.C. (HSS), a developer
of ambulatory clinical information systems, for a purchase price of $715,000,
which included cash in the amount of $50,000 and 230,000 shares of the Company's
common stock. A royalty payment is required on the purchased software licensed
between May 30, 1997 and May 30, 2000.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The acquisition has been accounted for as a purchase and results of operations
of HSS since the date of acquisition are included in the financial statements.
Unaudited pro forma results of operations for the years ended December 31, 1997
and 1996 as though HSS had been acquired as of January 1, 1996 are as follows:
1997 1996
------------- --------------
Net revenues $ 2,980,110 $ 3,104,504
Net loss (5,444,454) (6,791,126)
Basic and diluted loss per share (1.01) (1.51)
NOTE 11. MAJOR CUSTOMERS
Current and non-current accounts receivable at December 31, 1997 and 1996
include amounts concentrated with the following customer:
1997 1996
----------- -----------
Customer A 40.0% 81.0%
=========== ===========
Net revenues for the years ended December 31, 1997, 1996, and 1995 include the
following approximate amounts concentrated with the following customers:
1997 1996 1995
---------- ---------- ---------
Customer A 10% 63% 11%
Customer B 21% - -
Customer C 20% - -
---------- ---------- ---------
51% 63% 11%
========== ========== =========
NOTE 12. CONVERTIBLE PARTICIPATING PREFERRED STOCK AND VOTING RIGHTS
The Convertible Participating Preferred Stock must be converted into fully paid
and non-assessable shares of Common Stock by the Company upon the earlier of (i)
the closing of a Qualified Public Offering, or (ii) the affirmative vote of the
holders of a majority of the outstanding Convertible Participating Preferred
Stock for a mandatory conversion. A "Qualified Public Offering" is a public
offering of the shares of the Company in which (a) a minimum of $10 million is
raised in such offering by the Company, or (b) the per share purchase price is
at least $4.00 and (c) the offering is underwritten on a firm basis by a
recognized underwriter.
Each share of Convertible Participating Preferred Stock shall be convertible
into fully paid and nonassessable shares of Common Stock at a rate of two shares
of Common Stock for each share of Convertible Participating Preferred Stock,
subject to adjustment when Common Stock has been proportionately adjusted. The
initial "Conversion Price" shall be equal to $1.00 per share divided by the
Conversion Rate. Upon conversion, all accumulated and unpaid dividends to the
conversion date on the Convertible Participating Preferred Stock so converted
shall also be converted into fully paid and nonassessable shares of Common Stock
at the rate of $0.50 of accumulated and unpaid dividends for each share of
Common Stock.
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The holders of the Convertible Participating Preferred Stock are entitled to an
annual $0.10 cumulative dividend per share payable in cash and shall become due
and payable when, as and if declared by the Board of Directors or the conversion
of the Convertible Preferred Stock. Accumulated undeclared dividends in arrears
were approximately $26,500 for the year ended December 31, 1997.
Convertible Participating Preferred Stock and Common Stock are entitled to one
vote per share.
NOTE 13. LIQUIDITY, CAPITAL RESOURCES, SUBSEQUENT EVENTS, AND MANAGEMENT'S
PLANS
From its inception, the Company has been involved in on-going research and
development activities that have required significant capital resources and have
accumulated net losses of approximately $19,400,000. During this period, the
Company has financed its operations primarily with capital contributed by
investors. Subsequent to the end of 1997, the Company sold an additional 625,000
shares of convertible participating preferred stock at $1.00 per share
representing proceeds of $625,000.
To reduce the negative cash flow, promote new and significant capital, and
secure strategic partners for operational growth, the Company terminated
approximately 40 employees on February 18, 1998, with reductions primarily
targeted at legacy character-based product cost centers. The Company continues
to direct resources into the Graphical PACE CMS development and sales effort and
focus on current implementation agreements. Management believes that
implementing these operational changes will help in attracting capital or
finding strategic partners, including possible merger or sale alternatives. In
conjunction with this process, the Company is pursuing and evaluating all
opportunities and alternatives.
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 (the "1998 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 1998 Proxy
Statement is incorporated herein by reference.
<PAGE>
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 1998 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 1998 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)
<PAGE>
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)
10.22 Amendment to Employment Agreement with Mark J. Emkjer
dated October 17, 1998 (included herein)
10.23 Form of Employee Retention Agreement (included herein)
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 1997.
<PAGE>
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 20, 1998
--------------
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 20, 1998 By /s/ Mark J. Emkjer
- ------------------ ------------------------------------------------
Dated Mark J. Emkjer, Chief Executive Officer
and Director
March 20, 1998 By /s/ Roger D. Huseman
- ------------------ ------------------------------------------------
Dated Roger D. Huseman, Vice President, Secretary
and Treasurer, Chief Financial Officer and
Principal Accounting Officer
March 18, 1998 By /s/ Carl S. Witonsky
- ------------------ ------------------------------------------------
Dated Carl S. Witonsky, Chairman and Director
March 19, 1998 By /s/ John G. Pappajohn
- ------------------ ------------------------------------------------
Dated John G. Pappajohn, Director
March 24,1998 By /s/ R. David Spreng
- ------------------ ------------------------------------------------
Dated R. David Spreng, Director
March 31, 1998 By /s/ Bill W. Childs
- ------------------ ------------------------------------------------
Dated Bill W. Childs, Director
March 19, 1998 By /s/ Gordon M. Derzon
- ------------------ ------------------------------------------------
Dated Gordon M. Derzon, Director
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
- ------ -------------------------------------------------- ----
10.22 Amendment to Mark J Emkjer,
Employment Agreement 37
10.23 Form of Employee Retention Agreement 39
11 Earnings Per Share Calculation 44
27 Financial Data Schedule 45
EXHIBIT 10.22
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made as of the 17th day of
October, 1997, between PACE Health Management Systems, Inc., an Iowa
corporation, with its principal offices at 1025 Ashworth Drive, West Des Moines,
Iowa 50265 (the "Company") and Mark J. Emkjer ("Employee"), an individual
resident of the state of North Carolina.
The Company and Employee are currently parties to an Employment
Agreement dated as of February 15, 1996 (the "Agreement"). The parties desire to
amend the Agreement as specified herein and to continue the Agreement, as so
amended, in effect.
Therefore, the parties agree as follows:
1. Section 4 of the Agreement is amended by striking such Section and
substituting the following:
4. Trigger Event Benefits.
(a) Upon the occurrence of a Trigger Event (as
defined herein) while Employee is still employed by the
Company, the Company shall pay or provide to Employee (i) a
cash payment equal to his base salary for the preceding twelve
(12) months, plus (ii) the continuation, at the Company's
cost, all benefits provided by the Company for the Employee
under Section 2.2 for a period of twelve (12) months following
the Trigger Event, plus (iii) in the case of an event
described in clause (c) of the definition of Trigger Event
below, a cash payment equal to two percent (2%) of the
consideration paid to the Company or its shareholders, as the
case may be, in connection with such tender offer, merger,
acquisition of substantially all of the Company's assets or
other similar transaction. The items specified in clauses (i),
(ii) and (iii) are referred to herein as the "Trigger Event
Benefit." The items specified in clauses (i) and (iii) shall
be paid to Employee at the time of the Trigger Event entitling
Employee to such Trigger Event Benefit.
(b) The Company also agrees that all of the
Employee's currently outstanding stock options (whether under
this Agreement or other plans) are amended to provide that,
upon the occurrence of a Trigger Event, each vested option for
shares of the Company's common stock granted to, and
exercisable by, Employee as of the date of the Trigger Event
shall remain outstanding and exercisable by the Employee until
the first anniversary of the Trigger Event.
(c) For purposes of this Section, the following
definitions shall apply:
<PAGE>
(i) "Trigger Event" shall mean (A) Employee is
terminated without Cause (as defined herein), (B) the Company
is liquidated, or (C) any person becomes the owner of more
than 50% of the Company's outstanding common stock as a result
of a tender offer, merger, acquisition of substantially all of
the Company's assets or other similar transaction (but not
including an investment by a third party in stock newly issued
by the Company or the conversion into common stock of
convertible securities by a person holding such securities on
October 17, 1997, or the conversion into common stock of
convertible securities newly issued by the Company as part of
an investment in the Company by a third party.
(ii) "Cause" shall mean termination by the Company of
Employee's employment based upon (a) the willful and continued
failure by Employee substantially to perform his duties and
obligations (other than any such failure resulting from his
Disability) or (b) the willful engaging by Employee in
misconduct which is materially injurious to the Company,
monetarily or otherwise. For purposes of this clause (ii), no
action or failure to act on Employee's part shall be
considered "willful" unless done, or omitted to be done, by
Employee in bad faith and without reasonable belief that his
action or omission was in the best interests of the Company.
(iii) "Disability" shall mean any physical or mental
condition which would qualify Employee for a disability
benefit under the Company's long-term disability plan, or if
such a plan does not then exist any physical or mental
condition which renders the Employee incapable of engaging in
any substantial gainful employment and which can be expected
to result in death or has lasted or can be expected to last
for a continuous period of not less than twelve (12 months.)
2. Except as specifically stated herein, the Agreement shall remain in full
force and effect.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
Signed
---------------------------------
Carl S. Witonsky, Chairman of the Board
EMPLOYEE
Signed
---------------------------------
Mark J. Emkjer
EXHIBIT 10.23
FORM OF EMPLOYEE RETENTION AGREEMENT
This Retention Agreement (this "Agreement") is made and entered into by
and between PACE Health Management Systems, Inc., an Iowa corporation (the
"Company"), with its principal offices at 1025 Ashworth Drive, West Des Moines,
Iowa 50265 and INSERT NAME (the "Employee"), residing in Des Moines, Iowa.
WHEREAS, this Agreement is intended to specify the financial
arrangements that the Company will provide to the Employee upon the Employee's
separation from employment with the Company under any of the circumstances
described herein and upon the occurrence of certain other events; and
WHEREAS, this Agreement is entered into by the Company in the belief
that it is in the best interest of the Company to provide stable conditions of
employment for the Employee notwithstanding the possibility, threat, or
occurrence of certain types of changes in control or other events, thereby
enhancing the Company's ability to attract and retain highly qualified people;
NOW, THEREFORE, in consideration of the mutual covenants, promises,
payments, and undertakings of the parties hereto, the parties agree as follows:
1. Effect of Agreement; Term. The Employee shall be employed on an
at-will basis. This Agreement is not, and shall not be construed as, an
employment contract affecting in any way the duration of the Employee's
employment or any terms and conditions thereof except those set forth herein.
Except as set forth herein, the Employee or the Company may terminate their
employment relationship at any time, for any reason, or for no reason.
This Agreement will commence on the date hereof and shall
continue in effect until the earlier of June 30, 1998, termination of
Employee's employment for any reason, or a Change in Control (as defined
in Section 2.1 hereof).
2. Definitions. When the following terms are used in this Agreement
with initial capital letters, they shall have the following meanings.
2.1. A "Change in Control" shall mean any of the following: (a) a sale
of all or substantially all of the assets of the Company; (b) any
person or group of persons acting in concert, except a Permitted
Shareholder as hereinafter defined, becomes the beneficial owner (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of more than 50% of the combined voting power
of the Company's then outstanding securities; (c) a consolidation or
merger of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of the Company's
outstanding capital stock are converted into cash, securities or other
property, other than a consolidation or merger of the Company in which
Company shareholders immediately prior to the consolidation or merger
have the same proportionate ownership of voting capital stock of the
surviving corporation immediately after the consolidation or merger;
(d) approval by the shareholders of the Company of any plan or proposal
for the liquidation or dissolution of the Company; or (e) the Board of
Directors of the Company, in its sole and absolute discretion,
determines that there has been a sufficient change in the share
ownership of the Company to constitute a change of effective ownership
or control of the Company. A "Permitted Shareholder" means John G.
Pappajohn, Simon Cassidy, IAI Investment Funds,
<PAGE>
FBL Investment Advisory Services, Inc. (or any shareholder for which
FBL makes investment decisions), Edgewater Private Equity Fund, L.P.,
and any person who is an officer or director of the Company on the date
hereof, and any affiliate of any of the foregoing.
2.2. "Good Reason" shall mean the occurrence of any of the following
events, except for the occurrence of such an event in connection with
the termination or reassignment of the Employee's employment by the
Company for Cause (as defined in Section 2.3 hereof), due to the
Employee's Disability (as defined in Section 2.6 hereof), or due to the
Employee's death: (a) the assignment to the Employee of employment
responsibilities which are not of comparable responsibility and status
as the employment responsibilities held by the Employee on the date of
this Agreement or the failure to pay such base salary within three
business days of the date due; (b) a reduction by the Company in
Employee's base salary as in effect on the date of this Agreement; (c)
the Company's requiring Employee to be based at a location that is in
excess of 30 miles from the location of Employee's principal office on
the date of this Agreement; (d) the failure by the Company to provide
employee benefit plans, programs, policies and practices (including,
without limitation, retirement plans and medical, dental, life and
disability insurance coverage) to Employee and Employee's family and
dependents (if applicable) that provide substantially similar benefits,
in terms of aggregate monetary value, to Employee and Employee's family
and dependents (if applicable) at substantially similar costs to
Employee as the benefits provided by those plans, programs, policies
and practices in effect on the date of this Agreement.
2.3. "Cause" shall mean: (a) repeated neglect by the Employee of any of
Employee's duties or Employee's repeated failures or omissions to carry
out lawful and reasonable orders which, in the reasonable judgment of
the Company, are willful and deliberate and which are not cured within
a reasonable period after the Employee's receipt of written notice
thereof from the Company, (b) any act or acts of personal dishonesty by
the Employee intended to result in the personal enrichment of the
Employee at the expense of the Company, (c) any willful and deliberate
misconduct that is materially and demonstrably injurious to the
Company, or (d) any criminal indictment, presentment, charge or
conviction (including a plea of guilty or no contest) of Employee for a
felony, whether or not the Company is the victim of such offense.
2.4. "Notice of Termination" shall mean a written notice which sets
forth the date of termination of employment and, in reasonable detail,
the facts and circumstances claimed to provide a basis, if any, for
termination of Employee's employment.
2.5. "Disability" shall mean any physical or mental condition, which
causes the Employee to fail to render services to the Company for a
period of ninety (90) days during any one hundred eighty (180) day
period. The existence or nonexistence of the Employee's Disability will
be determined in good faith by the Board of Directors after notice in
writing given to the Employee at least thirty (30) days prior to such
determination. During such thirty (30) day period, the Employee shall
be permitted to make a presentation to the Board of Directors for its
consideration.
3. Termination Procedures. Any purported termination of Employee's
employment by the Company or Employee (other than by reason of Employee's death)
during the term of this Agreement shall be communicated by a Notice of
Termination in accordance with Section 8 hereof. No purported termination by the
Company of Employee's employment during the term of this Agreement shall be
<PAGE>
effective if it is not pursuant to a Notice of Termination. Failure by Employee
to provide Notice of Termination shall not limit any of Employee's rights under
this Agreement except to the extent the Company can demonstrate that it suffered
actual damages by reason of such failure.
4. Qualification for Benefits. Employee shall be eligible for payments
pursuant to the terms of this Agreement at the occurrence of the earliest of (a)
June 30, 1998 if Employee is employed by the Company on such date, (b) the date
of a Change in Control if Employee is employed by the Company on such date, (c)
termination of employment by the Company for any reason other than Cause, or (d)
termination of employment by Employee for Good Reason; provided, however, that
Employee shall not receive any payments or benefits under this Agreement unless
and until Employee executes an effective general release of all claims against
the Company and its affiliates in the form and manner prescribed by the Company;
and provided further, that failure to execute such a general release within one
month of Employee's date of termination of employment shall result in the loss
of any rights to receive payments or benefits under this Agreement.
Notwithstanding the foregoing, no severance benefits become payable pursuant to
this Agreement in the event of termination of employment upon Employee's death
or Disability.
5. Benefits. Within 30 days following qualification for benefits
pursuant to Section 4 hereof, the Company shall pay to the Employee, out of
funds deposited in a trust fund at Firstar Bank Iowa, N.A., a lump sum cash
amount equal to _________________ ________________________________. Such payment
shall be subject to any applicable payroll or other taxes required by law to be
withheld and shall be distributed by the Company or a payroll service designated
by the Company. In the event that qualification for benefits pursuant to Section
4 hereof is in connection with a termination of employment, such payment shall
be in lieu of any other severance program then in place with respect to the
Company; PROVIDED, HOWEVER, that if the time of such termination of employment
Employee would be entitled to a greater payment pursuant to any severance
program then applicable and for which Employee qualifies for payment, Employee
may elect to receive payments under such severance program in lieu of payments
pursuant to this Agreement.
6. 280G Limitation. In the event that any payment or benefit received
or to be received by Employee in connection with a change in control of the
Company or termination of Employee's employment (whether payable pursuant to the
terms of this Agreement or any other plan, contract, agreement or arrangement
with the Company, with any person whose actions result in a change in control of
the Company or with any person constituting a member of an "affiliated group" as
defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"), with the Company or with any person whose actions result in a
change in control of the Company) (collectively, the "Total Payments") would not
be deductible (in whole or in part) by the Company or such other person making
such payment or providing such benefit solely as a result of Section 280G of the
Code, the amount payable to Employee pursuant to Section 5 hereof shall be
reduced until no portion of the Total Payments is not deductible solely as a
result of Section 280G of the Code or such amount payable to Employee pursuant
to Section 5 is reduced to zero. For purposes of this limitation, (a) no portion
of the Total Payments shall be taken into account which in the opinion of tax
counsel selected by the Company does not constitute a "parachute payment" within
the meaning of Section 280G(b)(2) of the Code (such as payments payable pursuant
to the Company's standard or general severance policies); (b) the payment
pursuant to Section 5 shall be reduced only to the extent necessary so that the
Total Payments (other than those referred to in the immediately preceding clause
(a)) in their entirety constitute reasonable compensation within the meaning of
Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to
in the immediately preceding clause (a); and (c) the value of any other non-cash
benefit or of any deferred cash payment included in the Total Payments shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. In case of uncertainty as
to whether all or some portion of a payment is or is not payable to Employee
under this Agreement, the Company shall
<PAGE>
initially make the payment to the Employee, and Employee agrees to refund to the
Company any amounts ultimately determined not to have been payable under the
terms hereof.
7. Amendment of Stock Options. Notwithstanding any provision of any
existing stock option agreement between the Company and the Employee, in the
event the Employee becomes entitled to receive a payment under Section 4 of this
Agreement, any stock options vested as of the date of such entitlement shall
terminate on the later of (a) two (2) years from the date of such entitlement or
(b) the date specified in the stock option agreement. This Section shall not
affect the vesting, manner of exercise or any provision of such options other
than the termination date.
8. Successors.
(A) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(B) This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and
legatees. If Employee should die while any amount would still be
payable to Employee hereunder if Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement, to Employee's devisee,
legatee or other designee or, if there is no such designee, to
Employee's estate or, if no estate, in accordance with applicable law.
9. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when actually delivered or when mailed by United
States registered mail, postage prepaid, addressed to the other party as
follows:
If to the Company, to:
PACE Health Management Systems, Inc.
1025 Ashworth Drive, Suite 200
West Des Moines, Iowa 50265
ATTENTION: Roger D. Huseman or Mark J. Emkjer
If to Employee, to:
INSERT NAME
STREET
CITY, STATE ZIP
PHONE
Either party to this Agreement may change its address for
purposes of this Section 8 by giving 15 days' prior notice to the other party
hereto.
10. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by Employee and the Company. The validity, interpretation,
construction, and performance of this Agreement shall be governed by the laws of
the State of Iowa.
<PAGE>
11. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement by their signatures below.
PACE HEALTH MANAGEMENT SYSTEMS, INC.
By
---------------------------------------
Carl S. Witonsky, Chairman of the Board
EMPLOYEE NAME
------------------------------------------
Signed
EXHIBIT 11
PACE HEALTH MANAGEMENT SYSTEMS, INC.
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average number of shares
outstanding. 5,402,895 4,506,166 3,091,560
Net loss available for common and common
equivalent shares $ (5,678,215) $ (4,780,191) $ (2,412,488)
Basic and diluted loss per share $ (1.06) $ (1.06) $ (0.78)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 525,356
<SECURITIES> 0
<RECEIVABLES> 1,125,791
<ALLOWANCES> 38,306
<INVENTORY> 70,157
<CURRENT-ASSETS> 1,711,415
<PP&E> 1,422,746
<DEPRECIATION> 785,754
<TOTAL-ASSETS> 3,873,219
<CURRENT-LIABILITIES> 3,731,091
<BONDS> 0
0
2,250,000
<COMMON> 16,910,544
<OTHER-SE> (19,072,304)
<TOTAL-LIABILITY-AND-EQUITY> 3,873,219
<SALES> 2,958,160
<TOTAL-REVENUES> 2,958,160
<CGS> 2,885,255
<TOTAL-COSTS> 8,466,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,567
<INCOME-PRETAX> (5,678,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,678,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,678,215)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
