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, 1999
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)
2116 Financial Center
Des Moines, IA 50309
- ------------------------------------------------------------------------------
(Address and zip code of principal executive offices)
(515) 244-5746
-------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par
--------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject of the filing requirements for at least the past 90
days. YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's net revenues for its most recent fiscal year: $0
<PAGE>
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 March
15, 2000 as reported by Reuters, Ltd., was approximately $2,596,133. 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 15, 2000
----- --------------
Common Stock, no par 5,677,436
Transitional Small Business Disclosure Format (Check one): YES NO X
----- -----
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Page
----
ITEM 1. Description of Business 1
ITEM 2. Description of Property 2
ITEM 3. Legal Proceedings. 2
ITEM 4. Submission of Matters to a Vote of Security Holders 2
PART II.
ITEM 5. Market for Common Equity and Related Shareholder Matters 3
ITEM 6. Management's Discussion and Analysis or Plan of Operation 3
ITEM 7. Financial Statements 7
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 22
PART III.
ITEM 9. Directors, Executive Officers, Promoters and
Control Person, Compliance With Section 16(a)
of the Exchange Act 22
ITEM 10. Executive Compensation 23
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management 24
ITEM 12. Certain Relationships and Related Transactions 25
ITEM 13. Exhibits and Reports on Form 8-K 27
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Prior to October 1998, PACE developed and marketed advanced patient care
management software systems that enabled healthcare providers to standardize the
delivery of care, maximize resource utilization and improve clinical outcomes.
The Company's enterprise-wide, client/server applications automated charting,
clinical workflow processes and clinical pathways. The Company's core system,
PACE CMS, was a modular suite of advanced software applications that provided
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.
On October 7, 1998, the Company completed the sale of substantially all of its
assets to, and the assumption of certain of its liabilities by, Minnesota Mining
and Manufacturing Company ("3M") ("the Transaction"). The sale was made pursuant
to an Asset Purchase Agreement dated June 30, 1998, as amended, as described in
Company's definitive proxy statement dated September 14, 1998. The Transaction
was approved by the holders of both the common stock and the preferred stock at
a special meeting of shareholders held on October 7, 1998.
The purchase price of the Transaction was approximately $5.9 million, including
$4.75 million in cash, of which $750,000 was originally placed in escrow to
secure the Company's indemnification obligations under the Asset Purchase
Agreement, plus the assumption of substantially all of the Company's liabilities
other than $2.1 million in line of credit balances, which were paid off from
proceeds at closing. Subsequent to the closing of the Transaction, the Company
agreed that $25,000 of the amount in escrow could be paid to 3M as part of a
purchase price adjustment contemplated by the Asset Purchase Agreement, leaving
an escrow balance of $725,000.
In July 1999, the Company received proceeds from the restricted escrow account
totaling $555,958, including interest of $31,000. Approximately $200,000 remains
in the escrow account pending resolution of disputed indemnification claims.
Following the Transaction, the Company has no ongoing operations and no revenues
and has minimal operating expenses. The Company presently has no employees. The
Company's December 31, 1999 balance sheet reflects cash (including the escrow
balance pursuant to the Transaction) in excess of $2.0 million and minimal
liabilities.
The net proceeds from the sale will be retained by the Company pending a
determination of whether to engage in a follow-on transaction. The Company has
been seeking a business combination with another entity, before considering
possible liquidation and distribution of its assets. The Company believes that
with the cash on hand and net operating loss carryforwards, subject to the
limitation of such carryforwards under the Internal Revenue Code, such a
combination may be attractive to potential partners and would better serve the
interests of the Company's shareholders. As of the date of this Form 10-KSB, no
definitive agreement has been signed for a follow-on transaction. If no suitable
business combination is identified within a reasonable period of time, the
Company may elect to liquidate and distribute the remaining net proceeds to
shareholders. If the Company liquidated at the present time, all of the net
assets of the Company would be paid to holders of the Company's preferred stock.
-1-
<PAGE>
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." 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 derived 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 allowed PACE CMS to be integrated with a healthcare
provider's existing information systems, including financial management,
admissions, pharmacy, laboratory, and other ancillary systems. Graphical PACE
CMS had the user friendliness of Windows with significantly enhanced clinical
functionality.
In the second quarter of 1997, the Company expanded its product line into the
ambulatory market when it purchased substantially all of the assets of
Healthcare Software Solutions, L.C. (HSS), an affiliate of Wellmark, Inc.
(formerly IASD Health Services Corporation). The MR2000 product integrated
traditional paper charting activities into a system that improved practice
efficiency and quality of care.
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 overhead, minimize negative cash flow, and try to 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.
In June 1998 the Company entered into the Asset Purchase Agreement with 3M
whereby the Company sold substantially all of its assets for cash and an
assumption of substantially all liabilities, except the Company's lines of
credit. The Transaction closed on October 7, 1998. See "The Company -- General."
ITEM 2. DESCRIPTION OF PROPERTY
Prior to the Transaction, the Company leased office space in West Des Moines,
Iowa, Huntersville, North Carolina and Charlotte, North Carolina. The Charlotte,
North Carolina lease was terminated prior to closing the Transaction. As part of
the Transaction, 3M assumed the West Des Moines and Huntersville leases. The
Company does not currently have any office facilities.
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 1999.
-2-
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Beginning May 19, 1998, PACE Common Stock has been quoted on the OTC Bulletin
Board under the symbol "PCES." From the Company's initial public offering on
April 27, 1995 through May 18, 1998, the Company's Common Stock was traded on
The Nasdaq SmallCap Market. The following table sets forth the range of high and
low bid prices as reported by The Nasdaq SmallCap Market from April 27, 1995
through May 18, 1998, and thereafter sets forth the high and low bid prices as
reported by Reuters, Ltd. These quotations reflect inter-dealer prices, without
retail markup, markdown, or commission and may not reflect actual transactions.
Quarter ended High Low
-------------------------------------------------
3/31/98 0.72 0.25
4/1 to 5/18/98 0.31 0.13
5/19 to 6/30/98 0.31 0.13
9/30/98 0.10 0.55
12/31/98 0.65 0.01
3/31/99 0.28 0.02
6/30/99 0.29 0.04
9/30/99 0.50 0.06
12/31/99 0.90 0.36
The Company has declared no cash dividends since its inception with respect to
the Common Stock, and has no plan to declare a dividend in the near future. If
declared by the Board of Directors, the holders of Preferred Stock are entitled
to receive annual dividends at the rate of $0.175 per share. The Board has
declared no cash dividends with respect to the Preferred Stock and has no plan
to declare a dividend in the near future other than in connection with the
completion of a follow-on transaction or the liquidation of the Company. As of
March 15, 2000, there were 66 shareholders of record of the Company's common
stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET REVENUES, COST OF SYSTEMS REVENUE, CLIENT SERVICES, PRODUCT DEVELOPMENT, AND
SALES AND MARKETING: Net revenues included systems revenues and customer support
services. Cost of systems revenues included hardware purchases, third party
software, commissions and royalties. Client services expenses included salaries
and expenses related to implementation, installation and customer support.
Product development expenses included salaries and expenses related to
development and documentation of software systems, net of capitalized software
development costs. Sales and marketing expenses included salaries, advertising,
trade show costs and travel expenses related to the sale and marketing of the
Company's systems. Following the Transaction, the Company has no ongoing
operations, no revenues and has minimal operating expenses. As a result, all of
the above categories reflect no amounts for the year ended December 31, 1999.
For the year ended December 31, 1998, the final year of operations, the Company
had net revenues of $1,151,415, cost of systems revenue of $50,169, client
services expense of $812,843, product development expense of $1,030,853 and
sales and marketing expense of $411,960.
-3-
<PAGE>
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
$144,351 and $1,113,321 in 1999 and 1998, respectively, representing a decrease
of 87%. This decrease was attributable to the asset sale in October of 1998 and
the lack of ongoing operations during 1999. Included in the 1998 expense is
$260,000 of compensation expense recognized from a 1996 stock option grant, as
compared to $0 in 1999. Also included in 1998 expense are $495,675 of retention
bonuses paid to employees on June 30 and in October to incentivize employees to
remain with the Company through closing of the Transaction and a payment of
$187,198 to the Company's former Chief Executive Officer under his employment
agreement upon completion of the Transaction. General and administrative
expenses for 1999 are comprised primarily of insurance, professional fees and
administrative salaries.
OTHER INCOME (EXPENSE) NET: Other income (expense), net is comprised primarily
of interest income, interest expense and income from the gain on sale of assets.
Interest income increased in 1999 due to the increase in the amount of cash held
by the Company during the year. All remaining debt was paid off with the sale to
3M in October 1998, resulting in no interest expense during 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES: Net revenues include systems revenues (composed of software
license fees, hardware sales and implementation fees) and customer support
services. The Company's net revenues were $1,151,415 and $2,958,160 in 1998 and
1997, respectively, representing a decrease of 61%. Revenues from software
license fees decreased 59% to $206,998 in 1998 compared to $501,171 in 1997.
Revenues from hardware sales decreased 98% to $24,505 in 1998 compared to
$1,363,112 in 1997. Revenues from implementation services decreased 46% to
$238,830 in 1998 compared to $444,359 in 1997. Systems revenues decreased
throughout the year as implementation of older contracts were completed and no
new implementations were initiated. 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. Customer support services revenues were
$681,082 and $649,518 in 1998 and 1997, respectively, representing a decrease of
5% as the Company's installed client base stayed fairly constant.
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 $50,169 and $1,415,262 in 1998 and 1997, respectively,
representing a decrease of 97%, primarily as a result of reduced costs
associated with the decreased hardware sales.
CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and support. Client services expenses were
$812,243 and $1,469,993 in 1998 and 1997, respectively, representing a decrease
of 45%. This decrease was attributable to the corporate downsizing in February
1998, followed by the asset sale in October when all remaining client service
employees were terminated.
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 $1,030,853 and
$1,922,776 in 1998 and 1997 respectively, representing a decrease of 59%. This
decrease was attributable to the corporate downsizing in February 1998, followed
by the asset sale in October when all remaining technical services employees
were terminated. The Company capitalized $59,216 and $589,941 of product
development costs and amortized $167,451 and $215,365 in 1998 and 1997,
respectively.
-4-
<PAGE>
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 $411,960 and $1,375,999 in
1998 and 1997, respectively, representing a decrease of 81%. This decrease was
attributable to the corporate downsizing in February 1998, followed by the asset
sale in October when all remaining sales and marketing personnel were
terminated.
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
$1,113,321 and $1,694,337 in 1998 and 1997, respectively, representing a
decrease of 40%. This decrease was attributable to the corporate downsizing in
February 1998, followed by the asset sale in October when all but two remaining
administrative personnel were terminated. Included in the 1998 expense is
$260,000 of compensation expense recognized from a 1996 stock option grant, as
compared to $96,750 in 1997. Also included in 1998 expense are $495,675 of
retention bonuses paid to employees on June 30 and in October to incentivize
employees to remain with the Company through closing of the Transaction and a
payment of $187,198 to the Company's former Chief Executive Officer under his
employment agreement upon completion of the Transaction.
OTHER INCOME (EXPENSE) NET: Other income (expense), net is comprised primarily
of interest income, interest expense and income from the gain on sale of assets.
Interest income and interest expense reflect minimal change from 1997 to 1998,
as debt and cash balances remained constant until after the asset sale to 3M in
October 1998.
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 was
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
providing 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. In the first
quarter of 1998, the Company sold an additional 625,000 shares of convertible
participating preferred stock at $1.00 per share representing proceeds of
$625,000. Each share of preferred stock is convertible into 2 shares of common
stock.
In 1999, the Company reflected a net loss of $44,188 and cash used in operations
of $12,696. For 1998 the Company reported net income of $951,670, as a result of
the $3,374,354 gain on sale of assets to 3M, and cash used in operations of
$948,197. Net of this gain on sale the Company's net loss would have been
$2,422,684. For the year ended December 31, 1997 the Company reflected a net
loss of $5,678,215 resulting in net cash used in operations of $3,821,955. For
each of the years presented, the Company incurred depreciation and amortization
expenses totaling $0, $509,252 and $658,342, respectively.
Net cash provided by investing activities for the two years ended December 31,
1999 and 1998 was $524,958 and $3,219,174, respectively. Cash provided by
investing activities was primarily related to the receipt of funds from the
asset sale to 3M. Net cash used in investing activities for the year ended
December 31, 1997 was $949,733 and was primarily for the purchase of computer
and office equipment and capitalized software costs.
-5-
<PAGE>
Net cash provided by (used in) financing activities for the three years ended
December 31, 1999, 1998, and 1997 was $91,728, ($1,483,349), and $3,610,000,
respectively. Net cash provided by financing activities during 1999 was
primarily related to proceeds from the exercise of stock options. Net cash used
in financing activities during 1998 was primarily related to repayments on
long-term obligations and notes payable. During 1997 net cash provided by
financing activities was primarily related to proceeds from the sale of
convertible preferred stock. 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, 1999, the Company had total liabilities of only $11,944 and a
cash balance of $2,117,016, of which $200,042 is held in escrow to secure the
Company's indemnification obligations under the asset sale to 3M. As of March 1,
2000 the Company has no ongoing operations and no revenues and has minimal
operating expenses. The Company presently has no employees.
The net proceeds from the sale will be retained by the Company pending a
determination of whether to engage in a follow-on transaction. The Company has
been seeking a business combination with another entity, before considering
possible liquidation and distribution of its assets. The Company believes that
with the cash on hand and net operating loss carryforwards, subject to the
limitation of such carryforwards under the Internal Revenue Code, such a
combination may be attractive to potential partners and would better serve the
interests of the Company's shareholders. As of the date of this Form 10-KSB, no
definitive agreement has been signed for a follow-on transaction. If no suitable
business combination is identified within a reasonable period of time, the
Company may elect to liquidate and distribute the remaining net proceeds to
shareholders. If the Company liquidated at the present time, all of the net
assets of the Company would be paid to holders of the Company's preferred stock.
-6-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
- ------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 8
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 9
Statements of operations 10
Statements of shareholders' equity 11
Statements of cash flows 12
Notes to financial statements 14
- ------------------------------------------------------------------------------
-7-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PACE Health Management Systems, Inc.
Des Moines, Iowa
We have audited the accompanying balance sheets of PACE Health Management
Systems, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Des Moines, Iowa
March 8, 2000
-8-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 5) $ 1,916,974 $ 1,312,984
Restricted escrow account (Note 10) 200,042 725,000
Accounts receivable 520 2,798
Prepaid expenses -- 29,366
-----------------------------
$ 2,117,536 $ 2,070,148
-----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,944 $ 2,096
Accrued expenses 9,000 10,000
-----------------------------
TOTAL CURRENT LIABILITIES 11,944 12,096
-----------------------------
SHAREHOLDERS' EQUITY
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; issued and outstanding
2,875,000 shares (note 9) 2,875,000 2,875,000
Common stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1999 5,567,436 ; 1998 5,321,784
shares (note 2) 17,002,272 16,910,544
Additional paid-in capital 673,486 673,486
Accumulated deficit (18,445,166) (18,400,978)
-----------------------------
2,105,592 2,058,052
-----------------------------
$ 2,117,536 $ 2,070,148
=============================
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues: (Note 8)
Systems revenues $ -- $ 470,333 $ 2,308,642
Customer support services -- 681,082 649,518
-----------------------------------------
-- 1,151,415 2,958,160
-----------------------------------------
Costs and expenses:
Cost of systems revenues -- 50,169 1,415,262
Client services -- 812,243 1,469,993
Product development (Note 6) -- 1,030,853 1,922,776
Purchased research and development -- -- 588,502
Sales and marketing -- 411,960 1,375,999
General and administrative 144,351 1,113,321 1,694,337
-----------------------------------------
144,351 3,418,546 8,466,869
-----------------------------------------
LOSS FROM OPERATIONS (144,351) (2,267,131) (5,508,709)
-----------------------------------------
Other income (expense):
Interest income 84,323 24,711 13,796
Interest expense -- (269,050) (227,567)
Gain on asset sale (Note 10) -- 3,374,354 --
Other 15,840 88,786 44,265
-----------------------------------------
100,163 3,218,801 (169,506)
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (44,188) 951,670 (5,678,215)
Provision for income taxes (Note 4) -- -- --
-----------------------------------------
NET INCOME (LOSS) $ (44,188) $ 951,670 $(5,678,215)
=========================================
Earnings (loss) per share (Note 3)
Basic $ (0.06) $ 0.13 $ (1.06)
=========================================
Fully diluted $ (0.06) $ 0.09 $ (1.06)
=========================================
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Unearned
Additional Debt
Preferred Paid-In Accumulated Guarantee
Stock Common Stock Capital Deficit Fees Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ -- $16,241,444 $116,000 $(13,674,433) $ -- $ 2,683,011
Exercise of 1,600 stock options
(Note 2) -- 4,400 -- -- -- 4,400
Issuance of 230,000 shares of
common stock (Note 7) -- 664,700 -- -- -- 664,700
Compensation expense recognized
upon grant of stock options (Note 2) -- -- 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 preferred
stock -- -- (82,406) -- -- (82,406)
Net loss -- -- -- (5,678,215) -- (5,678,215)
Amortization of unearned debt
guarantee fees (Note 2) -- -- -- -- 150,000 150,000
------------------------------------------------------------------------------------
Balance, December 31, 1997 2,250,000 16,910,544 413,486 (19,352,648) (133,142) 88,240
Issuance of 625,000 shares of
Series A preferred stock 625,000 -- -- -- -- 625,000
Amortization of unearned debt
guarantee fees (Note 2) -- -- -- -- 133,142 133,142
Compensation expense recognized
upon grant of stock options (Note 2) -- -- 260,000 -- -- 260,000
Net income -- -- -- 951,670 -- 951,670
------------------------------------------------------------------------------------
Balance, December 31, 1998 2,875,000 16,910,544 673,486 (18,400,978) -- 2,058,052
Exercise of 245,652 stock
options (Note 2) -- 91,728 -- -- -- 91,728
Net loss -- -- -- (44,188) -- (44,188)
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $2,875,000 $17,002,272 $673,486 $(18,445,166) $ -- $ 2,105,592
====================================================================================
</TABLE>
See Notes to Financial Statements.
-11-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (44,188) $ 951,670 $(5,678,215)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation - 208,659 292,977
Amortization - 300,593 365,365
Purchased research and development - - 588,502
Compensation expense recognized upon grant
of stock options - 260,000 96,750
Gain on sale of assets to 3M (Note 10) - (3,374,354) -
Other - - 49,822
Change in assets and liabilities:
(Increase) decrease in accounts receivable 2,278 1,209,259 (39,482)
(Decrease) in accounts payable
and accrued expenses (152) (390,849) (240,435)
Increase (decrease) in customer deposits - (101,815) 679,115
Increase (decrease) in other current assets 29,366 (11,360) 63,646
------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (12,696) (948,197) (3,821,955)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for net assets of Healthcare
Software Solutions - - (50,000)
Capitalized computer software development costs - (59,216) (589,941)
Net Proceeds from sale to 3M (Note 10) 524,958 3,290,262 -
Purchase of furniture and equipment - (11,872) (309,792)
------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 524,958 3,219,174 (949,733)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for expenses of issuing capital stock - - (82,406)
Proceeds from exercise of stock options 91,728 - 4,400
Proceeds from notes payable - 100,000 2,980,000
Proceeds from sale of preferred stock - 625,000 2,250,000
Proceeds from the sale of assets - 24,791 -
Payments on long-term obligations and
notes payable - (2,233,140) (1,541,994)
------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 91,728 (1,483,349) 3,610,000
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 603,990 787,628 (1,161,688)
CASH AND CASH EQUIVALENTS
Beginning 1,312,984 525,356 1,687,044
------------------------------------------
Ending $1,916,974 $ 1,312,984 $ 525,356
==========================================
</TABLE>
(Continued)
-12-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION
Cash payments for interest $ - $ 283,571 $ 77,567
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Purchase of net assets of Healthcare Software Solutions
Assets acquired (Note 7):
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
==========================================
Sale of net assets to 3M:
Gross cash received $ - $ 4,025,000 $ -
Expenses of sale - (734,738) -
------------------------------------------
PROCEEDS FROM SALE TO 3M (NOTE 10) - 3,290,262 -
Liabilities assumed
Deferred revenue - 862,925 -
Accrued liabilities - 104,117 -
Accounts payable - 159,311 -
Restricted escrow on sale - 725,000 -
Assets sold
Furniture, equipment and computer software
development costs - (1,523,265) -
Inventory - (74,113) -
Accounts receivable - (163,428) -
Other assets - (6,455) -
------------------------------------------
GAIN ON SALE OF ASSETS TO 3M $ - $ 3,374,354 $ -
==========================================
</TABLE>
See Notes to Financial Statements.
-13-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Prior to the sale of the majority of its assets (Note 10),
the Company was in the business of developing, marketing and supporting advanced
clinical software that automates the recording, storage and management of
patient care information. The software provided complete care management
solutions to physicians, nurses and other clinicians in multiple settings at the
point of care.
A summary of the Company's significant accounting policies is as follows:
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.
Cash equivalents: The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
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.
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.
-14-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
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 income (loss) per share amounts. Basic loss per share is based on the
weighted average number of common shares outstanding during the period. Diluted
income (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).
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 $0, $167,451, and $202,711 in 1999, 1998 and 1997,
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.
NOTE 2. COMMON STOCK WARRANTS AND OPTIONS
Common stock warrants
The Company has issued common stock purchase warrants to various shareholders,
directors, employees, and certain accredited investors. One group of warrants
expires ten years after the date of issuance. The second group of warrants
expires five years after the date of issuance. At December 31, 1999, warrants to
purchase 176,278 shares were outstanding and exercisable. The warrants provide
for reductions in the exercise price under certain terms and conditions and are
exercisable at prices ranging from $.50 to $4.58 per share with an average price
per share of approximately $2.90.
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, 1999, Series A warrants to purchase 2,830,360 shares were outstanding and
exercisable.
-15-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 expire on the second anniversary of the date the employee
ceased employment with the company.
Stock option activity under the stock compensation plan is summarized as
follows:
Option price Available
per share Outstanding for grant
------------ ----------- ---------
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 $0.50 - 3.88 255,120 285,301
Granted $0.50 15,431 (15,431)
Canceled $1.75 - 3.88 (49,880) 49,880
-------- --------
Balance, December 31, 1998 $0.10 - 0.50 220,671 319,750
Exercised $0.10 - 0.50 (69,564) --
-------- --------
BALANCE, DECEMBER 31, 1999 $0.50 151,107 319,750
======== ========
On January 5, 1998 by Board action, the exercise price for all current employee
options was changed to $0.50. The exercise price was subsequently reduced to
$0.10 for options held by Roger Huseman in recognition of his continued
employment by the Company subsequent to the sale of assets. At December 31,
1999, options to purchase all 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 second anniversary of the date the employee ceased
employment with the Company. Options to purchase 152,086 shares with exercise
prices of $0.10 and $0.50 were exercised during 1999. As of December 31, 1999,
the Company had granted options to purchase 355,900 shares, all of which were
exercisable.
-16-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Compensation cost charged to income for the grant of stock options for 1999,
1998 and 1997, was $0, $260,000 and $96,750, respectively. 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:
1999 1998 1997
-------- -------- -----------
Net Income (loss):
As reported $(44,000) $952,000 $(5,678,000)
Pro forma (44,000) 776,000 (5,958,000)
Basic and diluted income (loss) per
common share
As reported $ (0.06) $ 0.13 $ (1.06)
Pro forma (0.06) 0.10 (1.14)
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 1998 and 1997 was $133,142 and $150,000,
respectively.
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.
-17-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per-share:
<TABLE>
<CAPTION>
Per-Share
Amount
------------
Net income
Numerator Denominator (loss)
----------- ----------- ------------
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------
<S> <C> <C> <C>
Net (loss) $ (44,188)
Dividends in arrears included in the calculation (287,500)
-----------
Basic earnings per share, available to
common stockholders (331,688) $ 5,567,436 $ (0.06)
============
Effect of dilutitive securities - -
----------- -----------
Diluted earnings per share, available to
common stockholders plus assumed
conversion of preferred shares $ (331,688) $ 5,567,436 $ (0.06)
=========== =========== ============
Year Ended December 31, 1998
--------------------------------------------------
Net income $ 951,670
Dividends in arrears included in the calculation (273,500)
-----------
Basic earnings per share, available to
common stockholders 678,170 $ 5,321,784 $ 0.13
============
Effect of dilutitive securities:
convertible preferred stock 273,500 5,750,000
----------- -----------
Diluted earnings per share, available to
common stockholders plus assumed
conversion of preferred shares $ 951,670 $11,071,784 $ 0.09
=========== =========== ============
Year Ended December 31, 1997
--------------------------------------------------
Net (loss) $(5,678,215)
Dividends in arrears included in the calculation (26,000)
-----------
Basic (loss) per share, available to
common stockholders (5,704,715) $ 5,402,895 $ (1.06)
============
Effect of dilutitive securities:
convertible preferred stock - -
----------- -----------
Diluted (loss) per share, available to
common stockholders plus assumed
conversion of preferred shares $(5,704,715) $ 5,402,895 $ (1.06)
=========== =========== ============
</TABLE>
-18-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAX MATTERS
Approximate deferred taxes consist of the following components as of December
31, 1999 and 1998:
Deferred tax assets: 1999 1998
---------- ----------
Net operating loss carryforwards $6,483,000 $6,502,000
Research and development
credit carryforwards 391,000 338,000
Compensation expense on stock options 169,000 189,000
Amortization expense on unearned
debt guarantee fees 110,000 113,000
Other 5,000 -
---------- ----------
7,158,000 7,142,000
Less valuation allowance 7,158,000 7,142,000
---------- ----------
$ - $ -
========== ==========
The Company recorded a valuation allowance of $7,158,000 and $7,142,000, against
deferred tax assets at December 31, 1999 and 1998, 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 (decrease) of
$16,000, ($362,000) and $2,304,000, during 1999, 1998 and 1997, 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, 1999, 1998 and 1997, due to the following:
1999 1998 1997
--------
Computed federal income
tax (benefit) $(15,000) $ 385,000 $(2,214,000)
Other, primarily computed state
income tax benefit (1,000) (23,000) (90,000)
Accounting losses (income) for
which deferred deferred federal
and state income tax benefits
benefits could not be recognized
(reduced the valuation allowance) 16,000 (362,000) 2,304,000
--------
$ - $ - $ -
========
At December 31, 1999, the Company has approximately $16,624,000 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 2019.
-19-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. 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 6. RESEARCH AND DEVELOPMENT COSTS
Total research and development costs were approximately $790,944 and $2,296,000
for 1998 and 1997, respectively.
NOTE 7. 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.
NOTE 8. MAJOR CUSTOMERS
Net revenues for the years ended December 31, 1999, 1998, and 1997, include the
following approximate amounts concentrated with the following customers:
1999 1998 1997
---------- ---------- ----------
Customer A - 13% 10%
Customer B - 19% 21%
Customer C - - 20%
---------- ---------- ----------
- 32% 51%
========== ========== ==========
NOTE 9. 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.
-20-
<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 $587,500 and $300,00 at December 31, 1999 and 1998,
respectively.
Convertible Participating Preferred Stock and Common Stock are entitled to one
vote per share.
NOTE 10. SALE OF ASSETS
On October 7, 1998, the Company completed the sale of substantially all of its
assets to, and the assumption of certain of its liabilities by, Minnesota Mining
and Manufacturing Company ("3M").
The purchase price of the Transaction was approximately $5.9 million, including
$4.75 million in cash (of which $750,000 was originally placed in escrow to
secure the Company's indemnification obligations under the Asset Purchase
Agreement), plus the assumption of substantially all of the Company's
liabilities other than $2.1 million in line of credit balances, which were paid
off from proceeds at closing. In July 1999, the Company received proceeds from
the restricted escrow totaling approximately $525,000. At December 31, 1999,
approximately $200,000 remains in the escrow account pending resolution of
indemnification claims. The Company disputes all claims for indemnification and
has made no provision for indemnification claims in the financial statements.
The net proceeds from the sale will be retained by the Company pending a
determination of whether to engage in a follow-on transaction. The Company has
been seeking a business combination with another entity, before considering
possible liquidation and distribution of its assets. If no suitable business
combination is identified within a reasonable period of time, the Company may
elect to liquidate and distribute the remaining net proceeds to shareholders. If
the Company liquidated at the present time, all of the net assets of the Company
would be paid to holders of the Company's preferred stock.
-21-
<PAGE>
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 Company's Articles of Incorporation provide that the Board of Directors will
consist of no less than three and no more than seven members and that the Board
is divided into three classes, each class to be as nearly equal in number as
possible. Presently the Company has two Directors -- John Pappajohn and Bill W.
Childs -- and five vacancies. Following the closing of the Transaction, board
members Mark J. Emkjer, Carl S. Witonsky, R. David Spreng and Gordon M. Derzon
resigned. None of the resigning directors has furnished the Company with any
letter describing any disagreement with the Company on any matter relating to
the Company's operations, policies or practices. The term of Director John
Pappajohn expired in 1998, and the term of Director Bill W. Childs will expire
at the 2000 annual meeting of shareholders. Mr. Pappajohn is continuing his
position until such time as the next annual meeting of shareholders. The Company
does not intend to incur the expense of convening such a meeting because it will
either complete a follow-on transaction or dissolve and does not intend to
engage in any further business activities.
DIRECTORS OF THE COMPANY
The following paragraphs set forth information concerning each of the current
Directors of the Company:
Bill W. Childs, age 59, has been a director of the Company since February 1990.
He is the Chief Executive Officer of MC Informatics, an outsourcing and
facilities management company based in Fountain Valley, California. From April
1995 to September 1996 was a Senior Vice President of CyCare, an information
systems company providing physicians' office software. Prior to that, he was the
President and CEO of Health Data Analysis, Inc. from 1984 until May 1995. Mr.
Childs was the founder and Editor-in-Chief of Healthcare Informatics, a leading
hospital information systems magazine published by Health Data Analysis, Inc. He
also is the founder or co-founder of several other magazines, including
Computers in Healthcare, Healthcare Computing & Communications Canada, and r.f.
design. He was also one of the founders of Continental Healthcare Systems and
TDS Healthcare Systems Corp.
John Pappajohn, age 70, has been a Director of the Company since January 1994.
Since 1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital
Resources, a venture capital fund, and President of Equity Dynamics, Inc., a
financial consulting firm, both located in Des Moines, Iowa. Mr. Pappajohn also
serves as a director of the following public companies: Radiologix, Inc.; MC
Informatics, Inc.; Allion Healthcare, Inc.; and Patient Infosystems, Inc.
EXECUTIVE OFFICERS
All of the Company's executive officers other than Mark J. Emkjer, President and
Chief Executive Officer, and Roger D. Huseman, Chief Financial Officer, resigned
as employees of the Company following the closing of the Transaction in October
1998. Mr. Emkjer terminated his employment with the Company effective January 1,
1999. Mr. Huseman became a part-time employee of the Company, effective March 1,
1999 and terminated his employment with the company in August of 1999.
-22-
<PAGE>
ORGANIZATION OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee to advise the Board of
Directors on questions, policies and general matters of accounting, financing
and operating controls, to review the audit of the Company's financial
statements, and to select auditors subject to the approval of the full Board and
ratification by the shareholders. From January 1, 1998 through the dates of
resignation of Messrs. Spreng and Witonsky, the Audit Committee consisted of Mr.
Pappajohn, Mr. Spreng and Mr. Witonsky. No Audit Committee meetings were held in
1999.
The Board of Directors as a whole acts as a nominating committee for candidates
for the Board of Directors. Directors are selected without regard to race,
creed, color, sex or national origin, and must have demonstrated outstanding
business and civic accomplishments. The Board of Directors will consider all
candidates recommended by shareholders in accordance with the procedure to be
established in the Company's Bylaws which require recommendations to be
submitted in writing ninety days in advance of the annual meeting of
shareholders. Such recommendations should include the name and address of the
shareholder and the candidate pursuant to which the recommendation is being
made, such other information about the candidate pursuant to which the
recommendation is being made, such other information about the candidate as
required to be included in the Company's proxy statement and the consent of the
candidate to serve as a director if elected. Recommendations should be sent to
the Secretary, PACE Health Management Systems, Inc., 2116 Financial Center, Des
Moines, Iowa 50309.
The Board of Directors of the Company held 4 meetings during 1999. All Directors
attended at least 75% of the number of meetings of the Board of Directors.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors receive no compensation for serving on the Board of Directors other
than reimbursement of reasonable expenses incurred in attending meetings.
Nonemployee directors who are not affiliated with principal shareholders and who
began service as directors prior to February 1995 (only Mr. Childs and Mr.
Witonsky) have received nonqualified warrants to purchase Common Stock. Mr.
Childs and Mr. Witonsky were each granted warrants to purchase 27,274 shares of
Common Stock of the Company as consideration for serving on the Board of
Directors. The warrants have an exercise price of at least 85% of the fair
market value of the Common Stock, as determined by the Board of Directors, on
the date of grant.
Subsequent to February 10, 1995, under the 1995 Stock Compensation Plan, new
non-employee directors receive a nondiscretionary grant of nonqualified stock
options for 21,820 shares upon their election or appointment to the Board. The
Plan provides for automatic grants of nonqualified stock options to new
non-employee directors at an exercise price equal to 100% of the fair market
value of the shares on the date of grant. One-fifth of such options vest over
each of five years from the date of election or appointment of the new
non-employee director. The non-employee director options are exercisable for ten
years from the date of grant. The Compensation Committee has no discretion
regarding the grant or terms of non-employee director options. Mr. Derzon
received a nonqualified option to purchase 21,820 shares under the Plan upon his
appointment as a director in 1995. During 1999 no options were granted to any
board members.
EXECUTIVE COMPENSATION
The Company did not employ a Chief Executive Officer during the year ended
December 31, 1999. In addition, there were no other persons who served as
executive officers of the Company during the year ended December 31, 1999 whose
total annual salary and bonus for the year exceeded $100,000.
-23-
<PAGE>
STOCK OPTIONS/SARS/LTIPS
There were no stock options granted during the year ended December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SHARE OWNERSHIP
The following tables set forth, as of March 15, 2000, based on the information
available to the Company, the number and percentages of shares of the Common
Stock and Preferred Stock beneficially owned by each current director, by the
chief executive officer of the Company and all other executive officers whose
total cash compensation in the year ended December 31, 1999 exceeded $100,000,
by all directors and such executive officers as a group, and by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock and Preferred Stock. The table
setting forth information with respect to holders of Common Stock includes (i)
shares of Common Stock issuable upon the exercise of options and warrants
exercisable within 60 days and (ii) ownership of Preferred Stock, which is
convertible into Common Stock on a 2 for 1 basis. The Company is aware of no
stockholder, other than those listed below, claiming to hold more than five
percent of any class of the Company's outstanding voting securities.
NO. OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT OF CLASS
OF BENEFICIAL OWNER(3) OWNED(1)(8) OUTSTANDING(9)
- --------------------------------------------------------------------------------
COMMON STOCK:
DIRECTORS AND OFFICERS:
John G. Pappajohn 5,749,824(2) 55.6
Bill W. Childs 37,474(5) *
All present directors and
named executive officers
as a group (2 persons) 5,787,298(9) 55.8
OTHER FIVE PERCENT OR MORE
SHAREHOLDERS:
Simon Casady(4) 314,428(10) 5.6
Edgewater Private Equity Fund, L.P.(6) 2,227,757(11) 30.6
William Walters(7) 2,718,138(12) 34.7
PREFERRED STOCK:
DIRECTORS AND OFFICERS:
John G. Pappajohn 1,500,000 52.2
OTHER FIVE PERCENT OR MORE
SHAREHOLDERS:
William Walters 875,000 30.4
Edgewater Private Equity Fund, L.P. 500,000 17.4
- ------------
* Less than 1%.
-24-
<PAGE>
1) Unless otherwise noted, each person has sole investment and voting power
with respect to the shares indicated. Preferred stock is entitled to two
votes per share and is convertible into common stock on a two for one
basis.
2) Includes 100,000 common stock shares held by Halkis, Ltd. and 109,917
common shares held by the John & Mary Pappajohn Scholarship Foundation,
both affiliates of Mr. Pappajohn, 765,301 common stock shares, 1,500,000
preferred stock shares and presently exercisable warrants to purchase
1,774,606 shares held by Mr. Pappajohn.
3) Except as noted, the address of each director of the Company is 2116
Financial Center, Des Moines, Iowa 50309.
4) Address: 1238 Fulton, Indianola, Iowa 50125.
5) Includes 37,474 shares issuable upon the exercise of presently
exercisable options.
6) Address: 900 N. Michigan Ave., 14th Floor, Chicago, IL 60611.
7) Address: 650 Fifth Avenue, New York, NY 10019.
8) Assumes exercise of options or warrants exercisable on or before
December 31, 1999 by the named person or group, but by no other person.
9) Includes shares, options and warrants held by Messrs. Pappajohn and
Childs as described in the notes above.
10) Includes 302,465 shares and presently exercisable warrants to purchase
11,963 shares.
11) Includes 517,090 common stock shares, 500,000 preferred stock shares and
presently exercisable warrants to purchase 710,667 shares.
12) Includes 466,699 common stock shares, 875,000 preferred stock shares and
presently exercisable warrants to purchase 501,439 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, the Company paid $5,871 to Equity Dynamics, Inc., an entity wholly
owned by John Pappajohn, a Director of the Company, in reimbursement of expenses
directly related to administration of the Company.
During 1997 and the first quarter of 1998, John Pappajohn, who is a Director of
the Company and who beneficially owns 34.5% of the Company's Common Stock; IAI
Investment Funds, which beneficially owns 48.7% of the Company's Common Stock
and which was at that time an affiliate of R. David Spreng, who was then a
Director of the Company; Edgewater Private Equity Fund, L.P., which beneficially
owns 31.7% of the Company's Common Stock; and an affiliate of EquiTrust
Investment Management Services, Inc. (formerly FBL Investment Advisory Services,
Inc.), which beneficially owned 26.4% of the Company's Common Stock, purchased
an aggregate of 2,875,000 shares of the Company's Preferred Stock at a price of
$1.00 per share. Each share of Preferred Stock is convertible into two shares of
Common Stock. For additional information, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
In August 1997, the Company's Board of Directors reduced the exercise price of
all outstanding stock options of the Company to $1.75 per share. In January
1998, the Board of Directors reduced the exercise price of all outstanding stock
options to $.50 per share. In adopting each resolution, the Board determined
that, prior to the amendment, the options no longer provided an incentive for
the holders of such options because the market price of the Company's stock had
declined to substantially below the then-effective exercise price of the
options. In each case, the Board also determined that the amended exercise
-25-
<PAGE>
price was equal to the fair market value of the Company's common stock, within
the meaning of the stock option plans, as of the date of the amendment. These
amendments applied to options held by officers and directors of the Company, as
well as to options held by employees who were not officers or directors. Also,
in consideration for Roger Huseman's staying with the Company after the sale of
assets to 3M, the Company reduced the exercise price of all of his outstanding
options to $0.10 per share.
-26-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report.
3. Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation, as amended (1)
3.2 Restated Bylaws (1)
4. Instruments defining the rights of shareholders
4.1 Form of Common Stock Certificate (2)
4.9 Form of Class A Warrant Certificate (2)
4.12 Form of Class B Warrant Certificate (2)
4.13 Form of Agent's Warrant (2)
4.14 Restated Articles of Incorporation, as amended (Incorporated
by reference to Exhibit 3.1)
4.15 Restated Bylaws (Incorporated by reference to Exhibit 3.2)
10. Material Contracts
10.1 Employment Agreement for Michael Vasquez, as amended
December 16, 1994 (2)
10.2 Employment Agreement for Simon Casady, as amended December 16,
1994 (2)
10.3 1995 Stock Compensation Plan, effective February 10, 1995 (2)
10.4 Form of Incentive Stock Option Agreement (2)
10.5 Form of Non-Qualified Stock Option Agreement (2)
10.6 Form of Non-Employee Director Non-Qualified Stock Option
Agreement (2)
10.7 Incentive Stock Option Agreement for Michael J. Vasquez dated
December 16, 1994 (2)
10.8 Form of Five-year Employee Warrants (2)
10.9 Form of Three-year Employee Warrants (2)
10.10 Compensatory Warrants issued to Director Carl S. Witonsky
dated April 22, 1994 and December 16, 1994 (2)
10.11 Compensatory Warrants issued to Director Bill W. Childs dated
February 26, 1990 and December 16, 1994 (2)
10.12 Form of Lockup Agreements with Executive Officers, Directors
and Shareholders (2)
10.13 Consulting Services Agreement with Steven Evans dated
December 31, 1993 (2)
10.14 Consulting Services Agreement with Carl S. Witonsky dated
January 1, 1995 (2)
10.15 Software Purchase Agreement with JRS Clinical Technologies,
Inc. dated October 18, 1989 (2)
10.16 COMMES Purchase Agreement between the Company and Creighton
University dated December 18, 1989 (2)
10.17 Office Lease and Amendments thereto between the Company and
Ashworth Plaza Ltd. (2)
10.18 Merit Client Agreement with Customer dated January 1, 1995 (2)
10.19 Master Agreement with Customer dated September 30, 1994 (2)
10.20 Nonqualified Executive Stock Option Plan adopted March 25,
1996 (3)
10.21 Employment Agreement with Mark J. Emkjer dated February 15,
1996 (4)
10.22 Amendment to Employment Agreement with Mark J. Emkjer dated
October 17, 1997 (5)
10.23 Form of Employee Retention Agreement (5)
10.24 Asset Purchase Agreement dated June 30, 1998, as amended, with
Minnesota Mining and Manufacturing Company (6)
11 Earnings Per Share Calculation (included herein)
-27-
<PAGE>
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.
5) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1997.
6) Incorporated by reference from the Company's definitive Proxy Statement
dated September 14, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the year ended December 31,
1999.
-28-
<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/ John Pappajohn
------------------------------------
John Papppajohn, Director
March 28, 2000
--------------
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 28, 2000 By /s/ John G. Pappajohn
- ------------------ -------------------------------
Dated John G. Pappajohn, Director
March 28, 2000 By /s/ Bill W. Childs
- ------------------ -------------------------------
Dated Bill W. Childs, Director
-29-
<PAGE>
PACE HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
- ------ ---------------------------------------------- ----
27 Financial Data Schedule 34
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,117,016
<SECURITIES> 0
<RECEIVABLES> 520
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,117,536
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,117,536
<CURRENT-LIABILITIES> 11,944
<BONDS> 0
0
2,875,000
<COMMON> 17,002,272
<OTHER-SE> (17,771,680)
<TOTAL-LIABILITY-AND-EQUITY> 2,117,536
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 144,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (44,188)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,188)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
