Current Report — Form 8-K Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 8-K Current Report HTML 420K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 9K
3: EX-4.1 Instrument Defining the Rights of Security Holders HTML 10K
4: EX-4.2 Instrument Defining the Rights of Security Holders HTML 7K
5: EX-4.3 Instrument Defining the Rights of Security Holders HTML 93K
6: EX-4.4 Instrument Defining the Rights of Security Holders HTML 93K
7: EX-10.3 Material Contract HTML 260K
8: EX-10.4 Material Contract HTML 113K
9: EX-10.5 Material Contract HTML 248K
10: EX-10.6 Material Contract HTML 134K
11: EX-23.1 Consent of Experts or Counsel HTML 9K
12: EX-23.2 Consent of Experts or Counsel HTML 9K
13: EX-99.1 Miscellaneous Exhibit HTML 122K
14: EX-99.2 Miscellaneous Exhibit HTML 93K
15: EX-99.3 Miscellaneous Exhibit HTML 216K
(Former
Name or Former Address, if Changed Since Last Report)
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1
Item
2.01
Completion
of Acquisition of Assets
Item
3.02
Unregistered
Sale of Equity Securities
Item
5.01
Changes
in Control of Registrant
Item
5.02
Departure
of Directors or Principal Officers; Election of Directors;
Appointment
of Principal Officers
On
August2, 2006, Pace Health Management Systems, Inc., an Iowa corporation
(“Pace”,
the
“Company”,
“we”
or
“us”)
entered into a Stock Purchase Agreement (“Agreement”)
with
CONMED, Inc., a Maryland corporation (“CONMED”)
and
all of the stockholders of CONMED (the “CONMED
Stockholders”),
pursuant to which Pace agreed to purchase all the issued and outstanding capital
stock of CONMED from the CONMED Stockholders (the “Acquisition”). We
previously reported the execution of the Agreement in a Form 8-K filed on August8, 2006, and its extension in a Form 8-K filed on January 17, 2007. This Form
8-K has been filed to report the consummation of the Acquisition on January26,2007.
Prior
to
October 1998, we 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. On October7, 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. Since the date of the sale of these assets, the Company
has had no ongoing operations and no revenues and has minimal operating
expenses. The Company’s September 30, 2006 unaudited balance sheet reflects
current assets of $1,642,434
(including cash and cash equivalents of $1,090,641)
and
current liabilities of $57,916.
CONMED
has provided correctional healthcare services since 1984 and was formed as
a
corporation on June 10, 1987 in the State of Maryland for the purpose of
providing healthcare services exclusively to county detention centers located
in
Maryland. As CONMED developed, it accepted more contracts for additional
services including pharmacy and out-of-facility healthcare expenses. In 2000,
CONMED served more than 50% of the county detention healthcare services market
in Maryland. In 2003, CONMED elected to seek contracts outside of Maryland
and
by 2006, it had secured contracts in Kansas, Virginia and Washington. Currently,
CONMED is in contract with and services 17 detention centers and facilities
at
the county level in the United States. For the fiscal year ended December 31,2005, CONMED had net revenues from medical services provided to correctional
institutions of $11,669,332. For the nine months ended September 30, 2006,
CONMED had net revenues from medical services provided to correctional
institutions of $11,117,051. As a result of the Acquisition, CONMED is a
wholly-owned subsidiary of Pace, and the business of CONMED is now our primary
business.
Under
the
terms of the Agreement and Acquisition, we paid to the CONMED Stockholders
consideration consisting of: (i) $8,000,000 in cash, minus the Additional Cash
Deposit (as defined below) and (ii) 8,000 shares of Pace’s Series C Convertible
Preferred Stock. In a simultaneous transaction we completed a private placement
(“Private
Placement”)
of
approximately $15,000,000 worth of units of our Series B Convertible Preferred
Stock and warrants (described under “Recent Sales of Unregistered Securities”
below), of which approximately $8,000,000 were paid directly to the CONMED
stockholders as consideration for the sale of CONMED’s capital stock.
2
We
paid
to CONMED
a
non-refundable cash deposit of $250,000 upon execution of the Agreement, which
was released to the CONMED stockholders upon expiration of the original
agreement on October 31, 2006. Thereafter, an amendment to the Stock Purchase
Agreement was executed on January 12, 2007 to extend the closing date to January31, 2007. As a result of such extension, and upon execution of such amendment,
we paid to CONMED
an
additional non-refundable cash deposit of $250,000 (the “Additional
Cash Deposit”),
which
was deducted from the $8,000,000 cash payment paid to the CONMED
stockholders at the closing of the Acquisition.
On
January 15, 2007, our Board of Directors approved a plan of recapitalization
(“Plan
of Recapitalization”),
which
it expects to submit for shareholder approval. Under the proposed Plan of
Recapitalization as further set forth in Item 8.01, Other Events, below, we
expect, as soon as practicable, to effect some or all of the following:
·
A
reverse split or exchange of 1 share for each 20 shares of common
stock.
·
Conversion
of the existing Series A Preferred Stock of Pace into 4,584,196 shares
of
common stock (immediately after the 1 for 20 exchange or reverse
stock
split) in exchange for conversion of and waiver of remaining accrued
and
unpaid dividends.
·
Reincorporation
in the state of Delaware.
·
Implementing
a stock option plan.
3
DESCRIPTION
OF THE BUSINESS OF CONMED
General
As
a
result of the Supreme Court decision in Estelle v. Gamble 1976, all individuals
held against their will are required to be provided with community standard
healthcare. Under this requirement, all counties are required to provide
healthcare services for their inmates. CONMED is a specialist in the provision
of these services.
County
Correctional Healthcare Services
CONMED
provides the following array of healthcare services for inmates in county
facilities under contract with the counties served. The contracts are primarily
multiple year, fixed cost contracts with annual escalations, caps on
out-of-facility healthcare and catastrophic expenses, and adjustments on a
per
diem basis for changes in population served.
Correctional
healthcare services include a broad array of services that support the care
of
inmates detained in county detention centers. Correctional healthcare services
include but are not limited to the following categories:
· General
healthcare services
· Hospital
Services
· Acute
care services
· Mental
health services
· Surgical
Services
· Pharmacy
· Laboratory
Services
· Physical
and Occupational Therapy
· IV
therapy
· Dental
services
· EKG’s
· Diagnostic
Imaging/Radiology
· Dialysis
Services
· Durable
Medical Equipment
CONMED
either directly provides these services within the detention facilities or
contracts for the provision of these services within or outside the facility.
CONMED makes every effort to provide the medical services within the facilities
due to security and cost considerations.
Contracting
CONMED
has a well developed and highly successful model for predicting healthcare
costs
based on 23 years of accumulated experience, external data on healthcare costs,
trending, and knowledge of current and future drivers of cost. This predicative
model is the basis for the cost proposals provided by CONMED in competitive
bids. The model addresses and aggregates costs related to staffing, on site
costs, out-of-facility costs, pharmacy, supplies, administrative costs, taxes,
and contract fees. Having predictive reliability of costs assures a higher
probability of sustained profits.
Staffing
CONMED
provides staffing of healthcare professionals at each of the contracted
facilities. The staffing patterns are obtained from the Request for Proposals
(RFP) distributed by the counties. The level of staffing varies depending on
the
size of the facility, i.e., larger facilities typically require a larger
staffing pattern. The ratio of staff members to inmates is approximately 24
full-time equivalent staff positions per 1,000 inmates. This ratio varies
depending on the physical structure of the facilities and the specific desire
of
the administration of the individual facilities. Generally, CONMED contracts
with existing staff at the facility to the greatest extent possible when
entering into a new contract. The onsite staffing for any facility may include
RN’s LPN’s, Medics, Medication Aides, Nursing Assistants, Physicians,
Psychiatrists, Psychologists, Social Workers, Physician Assistants, Nurse
Practitioners, Medical Records Clerks, Administrative and support
staff.
4
CONMED
actual staffing expenses generally come in under budget due to the Company’s
aggressive management, and its focus on employee development and reward system,
as well as careful management of overtime and low employee turnover rate
(approximately 3%).
Pharmacy
CONMED
provides medications for inmates within its contracted detention facilities.
Medications are currently provided from two national pharmacy contractors,
Diamond Pharmacy and Correct RX, which specialize in the provision of these
services to detention centers. CONMED has an enormous amount of accumulated
management information regarding pharmacy expenses in its contracted facilities.
This information is useful in the cost proposal portions of its bids and also
in
its ability to focus on high cost areas within the provision of pharmacy
services. A few examples follow:
1.
Atypical
Antipsychotic Medications - Approximately 20% of inmates receive
medication for psychiatric illness. The costs for these medications
were
relatively low and stable until 2002. At that time, several new
medications were introduced to the general market that became popular
with
psychiatrists. These medications include Seroquel, Zyprexa and Risperidal.
The introduction of these new medications to correctional facilities
produced a sharp spike in pharmacy costs. Little or no evidence showed
efficacy of these medications in the short term setting of county
detention centers. Through a process of medical education for psychiatric
providers, careful feedback regarding costs, and other programs,
CONMED
has been able to reduce costs to levels that existed prior to the
introduction of these new medications. Such medications continue
to be
utilized, however, only in select and appropriate
cases.
2.
Methicillin
Resistant Staphylococcus Aureus (“MRSA”)
- In 2003, an epidemic of MRSA emerged in hospitals, locker rooms and
jails. Hospital treatments of MRSA generally included very expensive
intravenous medications. Initially, jails followed and used this
same
treatment. In an effort to prevent and limit the spread of MRSA,
as well
as treat this disease in the correctional facilities, CONMED engaged
the
services of specially trained microbiologists to develop treatment
protocols. This investment proved to be quite cost effective as the
microbiologists determined that the most effective treatment of MRSA
within this community (jails) was an inexpensive oral antibiotic,
namely
Bactrim.
In-Facility
Services
CONMED
provides comprehensive healthcare services from the time an inmate enters the
facility until the time of such inmate’s release from the facility. In some
cases, the Company is responsible for providing healthcare services to an
individual at the time of his or her arrest. The vast majority of such services
are provided on site by our clinical staff. CONMED’s
healthcare services begin at intake with a screening examination and triage.
Such services are continued through the provision of daily sick calls. Most
states have implemented a statutory or audit requirement for a physical
examination and dental examination of each inmate, to be conducted within 14
days of admission to the facility. The initial and subsequent examinations
include psychiatric screening evaluations to detect suicide potential and major
psychiatric illness requiring special treatment.
The
costs
for services provided within the facility are generally regionally-based and
easily predicted. The highest costs relate to onsite x-rays, the majority of
which are chest x-rays completed to discount active tuberculosis and x-rays
for
minor trauma.
5
Out-of-Facility
Services
Inmates
requiring services outside the facility fall into two broad categories: (i)
emergencies and (ii) circumstances that require services beyond the capability
of the facility. Out-of-Facility services are broken down into several
categories, including third party administrators (“TPA”)
and
hospital services. All
out-of-facility services are provided through the use of a local or regional
contracted network using a third party administrator. In some cases we have
been
able to negotiate rates of payment with local hospitals or high volume providers
that are less expensive than the discounted rates offered through the
TPA.
1.
Hospital Services - CONMED enters into service agreements with local hospitals
to provide in-patient services for inmates. In many cases, we are able to
utilize the hospital-based “hospitalist program” to assure the most cost
effective and shortest stays. In many cases, the courts will release inmates
from custody at the time of hospitalization, thus releasing (i) CONMED from
financial responsibility, (ii) the county from the responsibility of providing
two Officers for round-the-clock security, and (iii) the hospital from the
responsibility to provide a private room. When an inmate is hospitalized, a
daily report is obtained from the Medical Director for the site, and from the
Health Services Manager. The site administration remains in close contact with
the hospital care provider to assure early repatriation to the facility. CONMED
experiences hospital bed days of less than 100 per thousand
inmates.
2.
Third
Party Administrator - CONMED contracts with TPA’s serving each facility in which
it provides healthcare services. The TPA’s provide a network of physicians,
hospitals and ancillary services that are paid based on contracted fee
schedules. These fee schedules typically include 40% or more discounts over
the
charges. The TPA is compensated based on a percent of the savings to CONMED
for
the repricing of claims.
Dental
Services
Dental
services are provided onsite for most of our contracted facilities. Such
facilities maintain dental suites with equipment for conducting dental x-rays.
CONMED typically provides a contract dentist at a rate of approximately 12
hours
per week, per 1000 inmates, depending on the RFP requirements.
Additional
Services
Value-added
services that CONMED provides to its clients include the following:
·
Healthcare
Services Consultations - On request from the facility administration,
CONMED will provide consultations on healthcare issues such as
Tuberculosis, Avian Flu, AIDS, Hepatitis, Methadone, Reentry programs
and
many other topics pertinent to correctional healthcare. These
consultations typically relate to policy issues affecting multiple
facilities. In many cases CONMED has provided expert testimony to
State
legislative bodies and agencies.
·
Audit
Compliance programs - CONMED provides an audit compliance program
as part
of our core responsibility to all sites. CONMED has experts in all
State
and National audit processes on staff. These individuals provide
guidance
to the sites to assure 100% audit compliance.
·
OSHA
compliance programs - Regulation 1910.1030 of the U.S. Department
of
Labor, Occupational Safety & Health Administration (“OSHA”),
provides guidelines and universal precautions that shall be observed
to
prevent contact with blood or other potentially infectious materials.
Such
regulations are applicable to all occupational exposure to blood
or other
potentially infectious materials. CONMED
complies with OSHA and provides to its staff members, among other
things,
appropriate personal protective equipment such as gloves, gowns,
laboratory coats, face shields or masks and eye protection, as well
as
mouthpieces, resuscitation bags, pocket masks, or other ventilation
devices. The purpose of such protective equipment is to prevent blood
or
other potentially infectious materials to pass through to or reach
the
employee’s clothes, undergarments, skin, eyes, mouth etc. Other procedures
the Company implements in accordance with OSHA include, but are not
limited to, ensuring a clean and sanitary worksite, procedures for
discarding contaminated waste, and cleaning and laundering its staff’s
clothing and equipment.
6
·
Risk
Management - CONMED promotes risk management through a process of
daily
monitoring of significant healthcare events, weekly and monthly review
of
trends and subsequent measured actions. Through attention to detail
in the
provision and documentation of healthcare, adherence to standards
of care
and monitoring of events, CONMED is able to substantially reduce
the risk
of poor outcomes and/ or litigation.
·
Sick
call services for staff - CONMED provides limited sick call services
to
detention center staff for acute problems. This often allows the
staff to
continue at work rather than taking a sick day for a doctor’s visit. This
value added service is appreciated by the facility staff and
administration.
·
Emergency
services for staff and visitors -
CONMED
believes it is imperative that its medical staff be well trained
and
equipped to handle emergencies. Thus, the Company ensures that its
medical
staff is familiar with the correctional facility and is equipped
to
deliver prompt emergency care anywhere in the facility. Specific
equipment
is maintained and restocked when necessary, within each facility
in the
event of an emergency, including an emergency kit capable of maintaining
basic life support.
Sales
and Marketing
Sales
and
marketing efforts for CONMED correctional healthcare services is based on the
following:
1.
Market
analysis - In 2004, CONMED engaged in a national market analysis
and
survey searching for markets with attractive opportunities. We have
designated Colorado, Florida, Kansas, New Jersey, Oregon, Pennsylvania,
Texas, Virginia, and Washington as early targets. The following are
the
Company’s prime targets:
a.
Facilities
of 500 inmates or more that are currently not served by a correctional
healthcare contractor;
b.
Facilities
of 500 inmates or more that are served by a local hospital or healthcare
provider;
c.
Facilities
of 500 inmates or more that are served by a failing
competitor;
d.
Facilities
of 500 inmates or more that are served by a competitor that is leaving
the
county detention center market to focus on prisons;
and
e.
Facilities
of 500 inmates or more that are served by a competitor where the
results
of audits are known to have been
sub-standard.
7
2.
Word
of Mouth - CONMED has a well-developed contact network through our
existing contracts and through our strategic relationships with national
pharmacy contractors. This network has established early indications
of
counties considering outsourcing healthcare services, changing their
current contractors or offering bids for other
reasons.
3.
Online
procurement services - CONMED contracts with ONVIA, an online government
contracting research service, to establish early determinations of
county
intentions to bid.
4.
Trade
meetings - CONMED’s staff attends annual regional and national trade
meetings. These meetings serve as an opportunity to meet and greet
new
potential clients. Our trade show booth attracts attention with a
variety
of marketing tools and ‘give-aways’. CONMED often sponsors special events
and awards at these meetings.
5.
Cold
calls - CONMED uses, to a limited extent, cold calls typically only
in
cases where some collateral indication of a probability of success
exists.
6.
Advertising
in Trade Journals.
7.
Public
Speaking engagements for special topics on
request.
8.
Website
promotion of CONMED’s capabilities and
experience.
CONMED
currently utilizes its CEO, Medical Director and Vice President of Strategic
Planning as well as the founders and executive vice presidents as the primary
sales force. We anticipate adding a full-time Director of Marketing and Research
during 2006.
Competition
CONMED
is
aware of four major sources of competition:
1.
National
contracting companies that serve both the county and state prison
systems.
While CONMED is aware of several national companies that provide
healthcare services to county detention centers, it appears this
is not
their main focus. These companies, including Prison Health Services,
Inc.,
Correctional Medical Services, Inc., Correct Care Solutions Inc.,
Wexford
Health Sources, Inc.,
Naphcare, Inc and Armor Correctional Health Services are primarily
in the
business of providing services to state prisons. There are a few
companies
that provide healthcare services to county detention centers within
confined regions, such as California Forensic Medical Group Inc.
in
California, and Primecare Medical, Inc. in Pennsylvania. These companies
are privately held and can be characterized as small to medium size
businesses when compared to the major national prison healthcare
companies.
2.
Local
or regional companies focused on county detention centers.
The Company’s main competitors include Primecare in Pennsylvania and CFMG
in California. There are several small local groups in markets which
we
are developing at this time.
3.
Local
Hospitals.
We have seen several incidences of local hospital systems providing
healthcare services to the county detention centers. Such incidences
arose
out of the absence of other interested providers. In two cases of
which we
are aware, Volusia County Florida and Sedgwick County Kansas, the
hospital
costs for these counties were extremely high, as might be expected.
Counties seeking significant cost savings will seek a contractor
other
than the local hospital.
8
4.
Local
Physicians.
In some cases, our competitor is a local solo physician or group
of
physicians. Such contractors typically provide only the onsite sick
call
services. They have limited expertise in the correctional healthcare
services provision. Increasingly, they are unable to obtain cost
effective
liability insurance that will cover both their primary work, as well
as
their correctional healthcare
services.
Intellectual
Property
The
Company does not currently own and has not registered any trademarks, patents,
or any other intellectual property.
Government
Regulation
The
industries in which CONMED operates are subject to extensive federal, state
and
local regulations and/or orders of judicial authorities, including healthcare,
pharmaceutical and safety regulations and judicial orders, decrees and
judgments. Some of the regulations and orders are unique to CONMED’s industries,
and the combination of regulations and orders it faces is unique. Generally,
prospective providers of healthcare and pharmaceutical services to correctional
facilities must be able to detail their readiness to, and must comply with,
a
variety of applicable state and local regulations and State and National
standards. CONMED’s contracts typically include reporting requirements,
supervision and on-site monitoring by representatives of the contracting
governmental agencies.In
addition, CONMED’s doctors, nurses, pharmacists and other healthcare
professionals who provide services on its behalf are in most cases required
to
obtain and maintain professional licenses and are subject to state regulation
regarding professional standards of conduct. CONMED’s services are also subject
to operational and financial audits by the governmental agencies with which
CONMED has contracts and by the courts of competent jurisdiction. Additionally,
services provided to health benefit plans in certain cases are subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”).
CONMED may not always successfully comply with these regulations and failure
to
comply can result in material penalties, non-renewal or termination of contracts
with correctional facilities or prohibition from proposing for new business
in
certain jurisdictions.
Health
Insurance Portability and Accountability Act of 1996. The
Administrative Simplification Provisions of the Health Insurance Portability
and
Accountability Act of 1996 (“HIPAA”)
require
the use of uniform electronic data transmission standards for health care claims
and payment transactions submitted or received electronically. These provisions
are intended to encourage electronic commerce in the health care industry.
CONMED does not electronically file at present, but may do so in the future,
subjecting it to all of the regulations of HIPAA. HIPAA also includes
regulations on standards to protect the security and privacy of health-related
information. The privacy regulations extensively regulate the use and disclosure
of individually identifiable health-related information, whether communicated
electronically, on paper or orally.
Corporate
Practice of Medicine/Fee Splitting.
Many of
the states in which CONMED operates have laws that prohibit unlicensed persons
or business entities, including corporations, from employing physicians or
laws
that prohibit certain direct or indirect payments or fee-splitting arrangements
between physicians and unlicensed persons or business entities. Possible
sanctions for violations of these restrictions include loss of a physician's
license, civil and criminal penalties and rescission of business arrangements
that may violate these restrictions. These statutes vary from state to state,
are often vague and seldom have been interpreted by the courts or regulatory
agencies. CONMED reviews, on an ongoing basis, the applicable laws in each
state
in which CONMED operates and reviews its arrangements with its healthcare
providers to ensure that these arrangements comply with all applicable laws.
CONMED has no assurance that governmental officials responsible for enforcing
these laws will not assert that CONMED, or transactions in which it is involved,
are in violation of such laws, or that such laws ultimately will be interpreted
by the courts in a manner consistent with CONMED’s interpretations.
9
Regulation
of Bid Process and Contracting. Contracts
with governmental agencies are obtained primarily through a competitive bidding
process, which is governed by applicable state and local statutes and
ordinances. Although practices vary, typically a formal request for proposal
(“RFP”)
is
issued by the governmental agency, stating the scope of work to be performed,
length of contract, performance bonding requirements, minimum qualifications
of
bidders, selection criteria and the format to be followed in the bid or
proposal. Usually, a committee appointed by the governmental agency reviews
bids
and makes an award determination. The committee may award the contract to a
particular bidder or decide not to award the contract. The committees consider
a
number of factors, including the technical quality of the proposal, the bid
price and the reputation of the bidder for providing quality care. The award
of
a contract may be subject to formal or informal protest by unsuccessful bidders
through a governmental appeals process. If the committee does not award a
contract, the correctional agency may, among various options, continue to
provide healthcare services to its inmates with its own personnel or the
existing provider.
Certain
RFPs and contracts require the bidder to post a bid bond or performance bond.
Performance bonding requirements may cover one year or up to the length of
the
contract. Due to circumstances related to September 11, 2001 and the
collapse of certain major corporations, the surety market has sharply contracted
and the cost of surety bonds has substantially increased. In order to avoid
the
additional costs that performance bonds add to the contracts, increasingly
clients are reducing or eliminating the need for performance bonds.
CONMED’s
contracts with governmental agencies often require it to comply with numerous
additional requirements regarding record-keeping and accounting,
non-discrimination in the hiring of personnel, safety, safeguarding confidential
information, management qualifications, professional licensing requirements,
emergency healthcare needs of corrections employees and other matters. If a
violation of the terms of an applicable contractual or statutory provision
occurs, a contractor may be debarred or suspended from obtaining future
contracts for specified periods of time in the applicable location. CONMED
has
never been debarred or suspended from seeking procurements in any
jurisdiction.
Substantially
all of CONMED’soperating
revenue is derived from contracts with county governmental entities. CONMED’s
top three clients, Sedgwick County Detention Center, Harford County Detention
Center and Charles County Detention Center, generated approximately forty-six
percent (46%) of its total revenues for the nine months ended September 30,2006. Summaries of CONMED’s largest contracts follow below.
Sedgwick
County Detention Center Contract. CONMED
entered into a Services Agreement with the Board of County Commissioners of
Sedgwick County, Kansas (“Sedgwick
County”),
on
January 31, 2005, for a period of approximately two (2) years, and Sedgwick
County, at its option, may extend the agreement annually for two (2) additional
1-year terms upon written notice to CONMED. Sedgwick County pays CONMED a base
monthly fee, which may be adjusted for changes in inmate population levels.
CONMED also provides, at its own expense, a performance bond for thirty-three
percent (33%) of the total value of the awarded contract. CONMED may terminate
the agreement upon thirty (30) days written notice. Either party may immediately
terminate the agreement for a material breach of the agreement subject to
certain cure provisions.
10
Harford
County Detention Center Contract. CONMED
entered into a Health Services Agreement with the Sheriff of Harford County
on
March 14, 2002 to provide medical services to the inmates at the Harford County
Detention Center (“HCDC”),
for
an initial term of one (1) year, with the HCDC having the exclusive option
to
renew such agreement for four (4) additional one (1) year terms. The HCDC pays
CONMED a base monthly fee, which may be adjusted for changes in inmate
population levels. Under the agreement, CONMED is subject to mandatory staffing
requirements. CONMED may automatically terminate the agreement in the event
HCDC
fails to make timely payment due to CONMED. The HCDC may terminate the agreement
should the HCDC determine that such termination is in the best interests of
the
HCDC, or if CONMED fails to fulfill its obligations under the
agreement.
Charles
County Detention Center Contract. Effective
July 1, 2004, CONMED entered into a medical services agreement with the
Sheriff’s Office of Charles County, Maryland to provide both on-site and
off-site health care services to the inmates of the Charles County Detention
Facility (“CCDF”).
The
two (2) year agreement commenced on July 1, 2004, and the agreement provides
the
CCDF with three (3) successive one (1) year options to extend the term of the
agreement. The CCDF pays CONMED a total compensation in the amount of
approximately $2.9 million, which is paid in 24 equal monthly installments.
Such
monthly installments are adjusted for changes in inmate population levels.
Under
the agreement, CONMED is subject to mandatory staffing requirements. The
agreement also contains provisions that allow the CCDF to assess penalties
if
certain staffing criteria are not maintained. CONMED may terminate the agreement
upon thirty (30) days written notice in the event the CCDF fails to make timely
payment due to CONMED.
Baltimore
County Detention Center.
CONMED
is currently providing medical services to Baltimore County Detention Center
on
an interim transition basis. CONMED has entered into final negotiations for
a
new nine year contract with an annual revenue value equal to approximately
$5.6
million and an aggregate revenue value equal to approximately $54 million.
If
CONMED does not finalize the terms of this Baltimore County contract, and does
not gain Baltimore County as one of their contracted site facilities, CONMED’s
future business and financial performance may be seriously harmed.
Employees
As
of
December 31, 2006, Pace had one employee and one consultant, none of which
belong to a union, and relations with which Pace considers to be good.
As
of
December 31, 2006, CONMED had approximately 181 full-time and 13 part-time
employees and 118 per diem employees, and 18 physician contractors. The Company
provides all full-time employees with a comprehensive benefits package including
medical insurance, education stipend, dental insurance, 401-K and paid vacation.
CONMED believes that its relations with its employees are good. None of its
employees belong to a union.
Property
Pace
does
not currently have any office facilities.
LaPlata,
Maryland. In November, 2004, CONMED entered into an office lease agreement
for
approximately 2,400 square feet of office space housing CONMED’s executive and
administrative offices at an annual rental of $29,088 for 2004, increasing
to
$32,738 in the final year of the lease, which expires on November 30, 2009,
subject to a 5 year renewal option. CONMED currently intends to expand its
facilities in the near future by approximately 2,500 additional square feet.
Following the Acquisition, the LaPlata, Maryland offices have also become Pace’s
executive offices.
11
Legal
Proceedings
Pace
is
not currently a party to any material legal proceedings.
CONMED
is
currently involved in the following potential or threatened legal
proceedings:
(i)Linda
Courtillet, et al. v. Stephen Goldberg, MD, et al.
- Linda
Courtillet is bringing a wrongful death action against CONMED,
among
others, on behalf of her son, Logan Courtillet, an inmate at Charles County
Detention Facility who committed suicide on the premises on March 1, 2005.
A
complaint seeking money damages is to be filed in the Circuit Court for Charles
County, MD in the near future. Currently, CONMED’s
insurer, National Fire and Marine, is providing a defense in this
action.
(ii)Dawn
R. Travenichek v. CONMED
- On
July 3, 2006, CONMED
received
its first notice of an administrative complaint alleging wrongful termination
of
employment which was filed by a former employee of CONMED
who
provided services at the Sedgwick County Detention Facility in Kansas.
CONMED’s
management investigated the allegations and on January 8,
2007,
the
parties agreed to settle this
dispute,
for
which CONMED denies any liability,
for
an
amount equal to $5,000. A mutual release is currently being
prepared.
(iii)Board
of Nursing
- In
early 2005, the MD Board of Nursing (“BON”)
commenced an investigation (which is currently ongoing as of today) regarding
whether certain CONMED
employees licensed by the BON, or at least subject to the jurisdiction of BON,
performed work at certain detention facilities in contract with CONMED
whereby
such employees were not properly licensed. BON has acknowledged that it does
not
have jurisdiction over the actions of CONMED
itself,
however, the BON has threatened to take disciplinary action against 10 - 20
current or former employees of CONMED.
CONMED’s
management has fully cooperated with the BON and has implemented a number of
changes intended to address BON’s stated concerns. To the best of CONMED’s
knowledge, the BON has conducted all necessary employee interviews, and
CONMED
is
currently awaiting BON’s next steps or actions relating to these
employees.
(iv)Theresa
Lynn Rhoderick, PR for the Estate of Michael Rutherford, Sr., et al. v. CONMED,
Inc.,
Case
No. 06-2379 - This matter was brought in the Circuit Court for Frederick
County.
Michael
Rutherford, a known asthmatic inmate with a significant medical history, died
of
congestive heart failure with an underlying condition of mitral stenosis at
John
Hopkins Hospital on September 25, 2005. A wrongful death and survival action
has
been filed against CONMED on behalf of Mr. Rutherford. CONMED’s
insurer is providing a defense of this action. Mr. Francis X.
Leary
has
been
engaged by CONMED’s
insurer to
serve
as CONMED’s
defense counsel in this matter
as
well.
(v)Derek
L. Simms v. Steven R. Williams, et al.,
Civil
Action No. WMN-06-2867 - this claim
was
brought in the United States District Court for the District of
Maryland.
Derek
Simms filed a complaint alleging that he suffered injuries which were caused
by
the negligent medical care provided by CONMED while he was incarcerated in
Dorchester County Detention Center. Mr. Simms
alleged
that he did not receive adequate analgesic medication from CONMED, as he was
treated for an infectious disease. CONMED’s
insurer has retained Mr. Leary to serve as CONMED’s
defense counsel in this matter.
On
December 21, 2006, Mr. Leary filed a Motion to Dismiss, or in the alternative,
Motion for Summary Judgment. The Motion was based on the failure of Mr. Simms
to
state a caused of action upon which relief may be granted, and the failure
to
state a claim for violation of his 8th and 14th Amendment rights.
12
MANAGEMENT
As
a result of the Acquisition, our management and Board of Directors have been
reconstituted. The
names, ages and positions of our directors, executive officers and certain
significant employees following the Acquisition are as follows:
Name
Age
Position
Richard
Turner, PH.D.
60
President,
Chief Executive Officer and Director
(Pace
and CONMED)
Howard
M. Haft, MD
57
Executive
Vice President and Chief Medical Officer
(Pace
and CONMED)
John
Pappajohn
78
Chairman
of the Board of Directors and Director
(PACE
and CONMED)
Ronald
H. Grubman
57
Executive
Vice President of Mid-Atlantic Region (CONMED)
Richard
P. Olson
54
Executive
Vice President of Correctional Programs (CONMED)
Richard
M. Aiello
61
Chief
Operations Officer
(CONMED)
Thomas
W. Fry
62
Chief
Financial Officer and Secretary
(Pace
and CONMED)
There
are
no familial relationships among our directors and/or officers. Directors hold
office until the next annual meeting of stockholders or until their respective
successors have been elected and qualified.
Richard
Turner, Ph.D., President, Chief Executive Officer and Director of Pace and
CONMED
Dr.
Turner is currently our President, Chief Executive Officer and a Director.
Prior
to consulting for PACE in May of 2006, Dr. Turner served as President and Chief
Executive officer of EyeTel Imaging since January 2004. Prior to January 2004,
Dr. Turner previously served as President and Chief Executive Officer of BEI
Medical Systems (“BEI
Medical”),
a
company engaged in the development and marketing of a minimally invasive
endometrial ablation system. BEI Medical was sold to Boston Scientific for
approximately $95 million in 2002. Previously, President of the Healthcare
Group
for the Cooper Companies, Dr. Turner has held executive leadership positions
in
the medical industry for approximately 25 years, including President and
Director of CooperLaserSonics, Inc., President of CooperVision,Inc., President
and Chief Executive Officer/Director of Pancretec, Inc. (sold to Abbott Labs,
Inc.) and President of Kay Laboratories (sold to Baxter, Inc.). Dr. Turner
graduated from Old Dominion University with a Bachelor of Science degree, earned
his M.B.A. from Pepperdine University and earned his PhD from Berne
University.
13
Howard
Haft, MD - Executive Vice President and Chief Medical Officer of Pace and
CONMED
Dr.
Haft
is a founder of CONMED and acted as Director and Chief Medical Officer of CONMED
from 1984 to January 2007. He also serves as the President of the Maryland
Healthcare Associates and Georgetown Affiliate Multispecialty Group Practice.
He
serves on the Board of Directors of Apollo Medical Corporation that provides
practice management services to Maryland Healthcare Associates. He also serves
as President of the Maryland Foundation for Quality Healthcare, a not for profit
corporation providing healthcare education to the underprivileged of Maryland.
Dr. Haft holds a Medical Degree from Penn State University, Residency in
Internal Medicine from Brown University, a Masters in Medical Management from
Tulane University, and is recognized as a Certified Physician Executive by
the
American College of Physician Executives. He is Board Certified in Internal
Medicine and Emergency Medicine.
John
Pappajohn - Chairman of the Board of Directors of PACE and
CONMED
Mr.
Pappajohn has been a Director of PACE Health Management Systems, Inc. since
1995. Since 1969, Mr. Pappajohn has been the President and principal stockholder
of Equity Dynamics, Inc., a financial consulting firm, and the sole owner of
Pappajohn Capital Resources, a venture capital firm, both located in Des Moines,
Iowa. He also serves as a director for the following public companies: Allion
Healthcare, Inc., American CareSource Holdings, Inc., Healthcare Acquisition
Corp., MC Informatics, Inc., and Careguide, Inc. Mr. Pappajohn has been an
active private equity investor in healthcare companies for more than 30 years
and has served as a director of more than 40 public companies. Mr. Pappajohn
received his B.S.C. from the University of Iowa.
Ronald
H. Grubman, PA-C -
Executive
Vice President of Mid-Atlantic Region of CONMED
Mr.
Grubman, along with Dr. Haft, founded CONMED in 1984 with the introduction
of
St. Mary’s County Detention center. Mr. Grubman was President, Chief Executive
Officer and Director of CONMED from 1984 to
January 2007.
He
graduated from Long Island University and earned his B.S. from the Brooklyn
Cumberland Physician Assistant Program in 1975, and continues to provide medical
services.
Richard
R. Olson, PA-C - Executive Vice President of
Correctional Programs of CONMED
Mr.
Olson
joined CONMED as a partner in 1989 and has since served as the Chief of
Correctional Programs. Mr. Olson is responsible for CONMED’s correctional
healthcare operations. Mr. Olson graduated from the George Washington University
Physician Assistant Program in 1978. He was Board Certified in 1980 and was
subsequently hired by the Federal Bureau of Prisons, as a Physician Assistant.
While serving with the Bureau of Prisons, he was trained as a healthcare
administrator and was named the Bureau’s Coordinator of Infectious Diseases.
Richard
M. Aiello, MS, FBINA - Chief Operations Officer of CONMED
Mr.
Aiello has been Chief Operations Officer of CONMED since 2005. As such, he
provides leadership and management for all aspects of corporate operations
for
CONMED. Mr. Aiello is a 37-year veteran of public safety, with 27 years of
experience in law enforcement, rising to the rank of Major, as well as 10 years
of experience in corrections
where he
served
both as an Assistant Warden and Warden of an American Correctional Association
(ACA) accredited facility. He is a former Associate Professor at Harford
Community College and a graduate of the F.B I. National Academy, 147th
session.
Mr. Aiello graduated from the University of Maryland University College with
a
Bachelor of Science degree and earned his Master of Science Degree from Johns
Hopkins University.
14
Thomas
W. Fry, Chief Financial Officer and Secretary of Pace and
CONMED
Prior
to
joining PACE in September of 2006, Mr. Fry served as Chief Financial Officer
of
Vasomedical, Inc. from September 2003 to September 2006 and as Vice President,
Finance and Administration of BEI Medical Systems Company, Inc. from September
1997 until December 2002. From October 1992 until November 1997, Mr. Fry was
Vice President, Finance and Administration of its predecessor company of the
same name, which merged into BEI Medical Systems Company, Inc. in November
1997.
Mr. Fry has held various executive financial positions for approximately 27
years, including Corporate Controller of Disctronics Ltd. from 1989 to 1992,
Controller and Chief Financial Officer of Cavitron, Inc./CUSA, a medical device,
engineering and manufacturing company, from 1986 to 1989, and Manager of Profit
Planning and Manufacturing Controller of Chesebrough-Ponds International, from
1979 to 1986. Prior to that time, Mr. Fry was employed by Chesebrough-Ponds
and
GTE in various accounting and financial management positions. Mr. Fry graduated
from Southeast Missouri State University with a Bachelor of Science degree,
and
earned his M.B.A. from Pace University.
Employment
Agreements and Compensation Packages
Dr.
Richard Turner, President and Chief Executive Officer, has executed a
consulting/employment agreement effective as of January 26, 2007. The agreement
provides for an annual salary of $235,800; an annual target bonus of fifty
percent of annual salary (based on Mr. Turner’s performance and certain to be
determined milestones); option grant to purchase 1,000,000 shares of Common
Stock; health, disability and life insurance and retirement plan; and auto
gas
and maintenance expenses. In the event Mr. Turner’s employment is terminated
other than for good cause (as defined in the employment agreement), he will
receive a payment equal to his then applicable annual salary, excluding bonus,
for a period of six (6) months after termination.
Dr.
Howard Haft, Executive Vice President and Chief Medical Officer, has executed
an
employment agreement effective as of January 26, 2007. The agreement provides
for an annual salary of $250,000; an annual bonus equal to a value of up to
20%
of annual salary (such amount to be approved by the Board); life insurance
and
retirement plan; and travel expenses. In the event Dr. Haft’s employment is
terminated other than for good cause (as defined in the employment agreement),
he will receive a payment equal to his then applicable annual salary, excluding
bonus, for a period of six (6) months after termination.
Mr.
Ronald Grubman, Executive Vice President of Mid-Atlantic Region, has executed
an
employment agreement effective as of January 26, 2007. The agreement provides
for an annual salary of $190,000; an annual bonus equal to a maximum amount
of
$40,000 (from a bonus pool, based on Mr. Grubman’s ability to maintain the
Company’s current business and revenues generated by all Maryland sites for the
year 2007), as well as an additional bonus in the amount equal to one half
(1/2)
of one percent (1%) of the first twelve (12) months of gross revenue actually
collected and received by the Company from any new business services generated
by Mr. Grubman, excluding price escalators and cost-of-living adjustments;
health and life insurance and retirement plan; and travel expenses, in addition
to a monthly car allowance in the amount of $800 per month. In the event Mr.
Grubman’s employment is terminated other than for good cause, he will receive a
payment equal to his then applicable annual salary, excluding bonus, for a
period of six (6) months after termination.
Mr.
Richard Olson, Executive Vice President of Correctional Programs, has executed
an employment agreement effective as of January 26, 2007, and for a period
of
sixty (60) days thereafter. The agreement provides for an annual salary of
$120,000; life insurance and retirement plan; and travel expenses. In the event
Mr. Olson’s employment is terminated other than for good cause, he will receive
a payment in the amounts equal to his then applicable annual salary, excluding
bonus, for a period of sixty (60) days after termination.
15
Mr.
Richard Aiello, Chief Operating Officer of CONMED, has executed an employment
agreement effective as of July 1, 2004. The agreement provides for a five (5)
year term of employment; an annual salary of $136,600; a bonus which shall
be
determined
from time to time by the Board of Directors of CONMED in its sole
discretion;
retirement
plan and auto gas and maintenance expenses.
In the
event that Mr. Aiello’s employment is terminated other than for good cause, he
will receive a payment in the amounts equal to his then applicable salary,
plus
benefits, for a period of six (6) months after termination.
Mr.
Thomas W. Fry, Chief Financial Officer of CONMED,
has
executed an employment letter effective as of September 15, 2006. The agreement
provides for an annual salary of $175,000; bonus compensation plan will be
considered by the Board of Directors of CONMED
with a
target of twenty percent (20%) of annual salary; stock option plan will be
considered by the Board of Directors of CONMED
with
options to purchase up to 118,000 shares; retirement plan; travel expenses
and
other approved business expenses. In the event that Mr. Fry’s employment is
terminated, he will receive a payment in the amounts equal to his then
applicable salary for a period of six (6) months after termination.
Compensation
of the Board of Directors
The
Board of Directors has adopted the Company’s 2007 Stock Option Plan, subject to
shareholder approval as part of the Plan of Recapitalization. The
2007
Stock Option Plan provides for the grant of incentive stock options,
nonqualified stock options, restricted stock, stock bonuses and stock
appreciation rights to, among others, Company directors. The 2007 Stock Option
Plan will be administered by the Board of Directors which has the authority
and
discretion to determine: (1) 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.
Audit
Committee and Compensation Committee
During
fiscal 2007, the Company’s Board of Directors intends to create and establish an
Audit Committee and a Compensation Committee on behalf of the Company.
16
PRINCIPAL
SHAREHOLDERS
Beneficial
Ownership - Current
As
of the
date hereof, there were 8,316,074 shares of Common Stock, 2,875,000 shares
of
Series A Preferred Stock, 15,000 shares of Series B Preferred Stock and 8,000
shares of Series C Preferred Stock issued and outstanding. The following table
sets forth the names and beneficial ownership of our Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock owned
as
of January 26, 2007 (after giving effect to the Acquisition, the Private
Placement, and the conversion of 50% of the accrued but unpaid dividends on
our
Series A Preferred Stock but without giving effect to the Plan of
Recapitalization) by: (i) each of our directors, (ii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iii) all
holders of 5% or more of the outstanding shares of our Common Stock. Unless
otherwise noted, the address of all the individuals and entities named below
is
care of CONMED, Inc., 9375 Chesapeake Street, Suite 203, La Plata, Maryland20646:
Name
of Beneficial Owner (1)
(5)
Number
of Shares (Common)
%
of Class
Number
of Shares (Series A)
%
of Class
Number
of Shares (Series B)
%
of Class
Number
of Shares (Series C)
%
of Class
DIRECTORS
AND OFFICERS:
John
Pappajohn (2)
2,331,740
28.0
%
1,500,000
52.2
%
-
0.0
%
-
0.0
%
Richard
Turner (3)
-
0.0
%
-
0.0
%
-
0.0
%
-
0.0
%
Howard
M. Haft (4)
-
0.0
%
-
0.0
%
-
0.0
%
5,333
66.7
%
Ronald
H. Grubman (4)
-
0.0
%
-
0.0
%
-
0.0
%
1,333
16.7
%
Richard
P. Olson (4)
-
0.0
%
-
0.0
%
-
0.0
%
1,333
16.7
%
Thomas
W. Fry (5)
-
0.0
%
-
0.0
%
-
0.0
%
-
0.0
%
All
directors and named executive officers as a group (1)
(1)
Except as indicated by footnotes, beneficial ownership is determined in
accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934 and
generally includes voting or investment power with respect to securities. Except
as indicated by footnotes and subject to community property laws, where
applicable, the person named above has sole voting and investment power with
respect to all shares of the common stock shown as beneficially owned by him
or
her.
(2)
Includes 100,000 shares of common stock held by Halkis, Ltd, and 109,917 shares
of common stock held by the John and Mary Pappajohn Scholarship Foundation,
both
affiliates of Mr. Pappajohn. Includes 2,121,823 shares of common stock, but
does
not include (i) 3,000,000 shares of common stock issuable on conversion of
1,500,000 shares of Series A Preferred Stock and (ii) cumulative dividends
convertible into an aggregate of 1,356,521 shares of common stock, in each
case
issuable as part of the Plan of Recapitalization, subject to shareholder
approval. Mr. Pappajohn’s address is 2116 Financial Center, Des Moines, Iowa50309
(3)
Dr. Turner’s beneficial ownership excludes options to purchase 1,000,000 shares
of common stock issued under the 2007 Stock Option Plan, subject to approval
by
shareholders as part of the Plan of Recapitalization that may be acquired more
than 60 days after such approval.
(4)
The beneficial ownership of Dr. Haft , Mr. Grubman and Mr. Olson excludes
533,334, 133,333 and 133,333, respectively, shares of common stock issuable
on
conversion of Series C Preferred Stock in the Plan of Recapitalization. It
also
excludes options to purchase 83,333 shares of common stock issued (250,000
shares in aggregate) under the 2007 Stock Option Plan, subject to approval
by
shareholders as part of the Plan of Recapitalization that may be acquired more
than 60 days after such approval.
(5)
Mr. Fry’s beneficial ownership excludes 118,000 shares of common stock issued
under the 2007 Stock Option Plan, subject to approval by shareholders as part
of
the Plan of Recapitalization that may be acquired more than 60 days after such
approval.
(6)
Lehman Brother's and Pinnacle's beneficial ownership each excludes (i) 2,000,000
shares of common stock issuable on conversion of shares of Series B Preferred
Stock, and (ii) 500,000 warrants to purchase common stock at $0.30 per share
and
166,667 warrants to purchase common stock at $2.50 per share, each only
exercisable upon approval of the Plan of Recapitalization by the
shareholders.
18
Beneficial
Ownership - Post-Plan of Recapitalization
The
following table sets forth the names and beneficial ownership of our Common
Stock owned as of January 26, 2007, and after giving effect to the Plan of
Recapitalization, by: (i) each of our directors, (ii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iii) all
holders of 5% or more of the outstanding shares of our Common Stock. Unless
otherwise noted, the address of all the individuals and entities named below
is
care of CONMED, Inc., 9375 Chesapeake Street, Suite 203, La Plata, Maryland20646:
Number
of Shares (Common)
%
of Class
DIRECTORS
AND OFFICERS:
John
Pappajohn (2)
2,508,342
21.3
%
Richard
Turner (3)
100,000
*
Ronald
H. Grubman (4)
133,333
*
Richard
P. Olson (4)
133,333
*
Howard
M. Haft (4)
533,334
4.5
%
Thomas
W. Fry (5)
-
*
All
directors and named executive officers as a group (1)
(1)
Beneficial ownership is determined in accordance with Rule 13d-3(a) of the
Securities Exchange Act of 1934 and generally includes voting or investment
power with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of the common stock
shown
as beneficially owned by him or her.
19
(2)
Includes 100,000 shares of common stock held by Halkis, Ltd, and 109,917 shares
of common stock held by the John and Mary Pappajohn Scholarship Foundation,
both
affiliates of Mr. Pappajohn. Mr. Pappajohn’s address is 2116 Financial Center,
Des Moines, Iowa50309.
(3)
Dr. Turner’s beneficial ownership includes options to purchase 100,000 shares of
common stock issued under the 2007 Stock Option Plan, subject to approval by
shareholders as part of the Plan of Recapitalization that may be acquired within
60 days of such approval. Dr. Turner’s beneficial ownership excludes 900,000
shares of common stock issued under the 2007 Stock Option Plan, subject to
approval by shareholders as part of the Plan of Recapitalization that may be
acquired more than 60 days after such approval.
(4)
The beneficial ownership of Mr. Grubman, Mr. Olson and Dr. Haft excludes options
to purchase 83,333 shares of common stock issued to each (250,000 shares in
aggregate) under the 2007 Stock Option Plan, subject to approval by shareholders
as part of the Plan of Recapitalization that may be acquired more than 60 days
after such approval.
(5)
Mr. Fry’s beneficial ownership excludes 118,000 shares of common stock issued
under the 2007 Stock Option Plan, subject to approval by shareholders as part
of
the Plan of Recapitalization that may be acquired more than 60 days after such
approval.
(6)
Lehman Brother's and Pinnacle's beneficial ownership each includes 500,000
warrants to purchase common stock at $0.30 per share as well as warrants to
purchase 166,667 shares common stock at $2.50 per share.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During
2006 and 2005, the Company paid $4,167 on a monthly basis, plus direct expenses,
to Equity Dynamics, Inc., an entity wholly owned by John Pappajohn, a director
of the Company, for administrative services that include among other things;
accounting, investor relations, and Commission reporting. Total payments
received during 2006 and 2005 were $78,390 and $50,500, respectively.
On
October 24, 2005, Pace issued 750,000 warrants to purchase Common Stock. Of
these warrants, 600,000 were issued to John Pappajohn and the remaining 150,000
warrants were issued to his designees. The warrants were issued as compensation
for past services rendered and all warrants immediately vested. The warrants
have an exercise price of $0.50, which exceeded the market price of Common
Stock
at the time of issuance. The value of the warrants was separately estimated
at
$0.01 per share or $10,000 based on the Black-Scholes valuation of the call
option associated with a five year warrant. As part of the Plan of
Recapitalization, Mr. Pappajohn relinquished the 600,000 warrants that were
issued to him, and the remaining 150,000 warrants issued to his designees were
adjusted to 250,000 warrants to purchase Common Stock, exercisable at $0.30
per
share (post-split).
Mr.
John
Pappajohn, Pace’s chairman and, at the time, sole director, retained Maxim
Group LLC as the placement agent in the Private Placement and is engaged in
other matters with Maxim Group LLC unrelated to Pace and CONMED.
20
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Information
included in this section contains forward-looking statements regarding the
business, operations and financial condition of both the Company and CONMED
within the meaning of Section 27A of the Securities Act of 1933, as amended
and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). This information may involve known and unknown risks, uncertainties
and
other factors which may cause our actual results, performance or achievements
to
be materially different from our future results, performance or achievements
expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe our future plans, strategies
and expectations, are generally identifiable by use of the words "may,""will,""should,""expect,""anticipate,""estimate,""believe,""intend" or "project"
or the negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based on assumptions that
may
be incorrect, and there can be no assurance that these projections included
in
these forward-looking statements will come to pass. Our and CONMED’s actual
results could differ materially from those expressed or implied by the
forward-looking statements as a result of various factors. We caution you not
to
place undue reliance on these forward-looking statements. Such forward-looking
statements relate only to events as of the date on which the statements are
made. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise, even if
experience or future changes make it clear that any projected results or events
expressed or implied therein will not be realized. You are advised, however,
to
consult any further disclosures we make in future public statements and press
releases.
CONMED,
INC.
The
following discussion of CONMED’s results below is derived from CONMED’s
unaudited financial statements for the nine months ended September 2006 and
2005, as well as the audited financial statements included in this filing as
Exhibits 99.1 and 99.2.
Overview
CONMED
began providing correctional healthcare services in 1984. It was incorporated
on
June 10, 1987 in the State of Maryland for the purpose of providing healthcare
services exclusively to county detention centers located in Maryland. Our
initial business plan targeted small to medium size facilities for staffing
only. As we developed experience, we accepted more contracts for additional
services, including mental health, dentistry, laboratory, diagnostic imaging
and
radiologic services, pharmacy and out-of-facility healthcare expenses. In 2000,
we served more than 50% of the market in Maryland. In 2003, we elected to seek
contracts outside of our home State of Maryland and by 2006, we had secured
contracts in the States of Kansas, Virginia and Washington. Currently, we are
in
contract with and providing service to 18 detention centers/facilities in the
United States.
Net
revenue from CONMED’s medical services provided to correctional institutions for
the nine months ended September 30, 2006 and 2005, was $11,117,051 and
$8,255,161, respectively, which represents an increase of $2,861,890 or 34.7%.
Net income was $350,462 or 3.2% of revenue compared to $597,775 or 7.2% of
revenue for the nine months ended December 31, 2006 and 2005, respectively.
The
decrease in net income is primarily attributable to increased spending for
out-of-facility services, medical supplies and pharmacy costs incurred in the
first half of 2006.
21
Revenues
The
improvement in CONMED’s revenue for the nine months ended September 30, 2006
compared to the same period for the prior year resulted from the addition of
a
new contract with Yakima County, Washington and a new transition contract with
Baltimore County, Maryland, in September of 2006, which together accounted
for
$381,100 or 13.3% of the increase in revenue. Service contracts, which were
initiated during 2005, but operating for a full year in 2006 in Howard County,
Maryland, in Loudoun, County, Virginia and in Sedgwick County, Kansas
represented $1,609,787 or 56.2% of the total revenue improvement. Additional
revenue improvement totaling $776,809 or 27.1% of the increase resulted from
expansion of the services provided to a number of existing contracts initiated
in prior years, primarily in Fredrick County, Maryland. Price increases related
to existing service requirements totaling $94,194 or 3.3% of the increase.
Salaries
and employee benefits
Salaries
and employee benefits were $6,421,376 or 57.8% of revenue for the nine-month
period ended September 30, 2006, compared to $4,752,434 or 57.6% of revenue
for
the nine months ended September 30, 2005. The increase in spending for salaries
and employee benefits of $1,668,942 or 35.1% is primarily due to the addition
of
new employees to support the increase in service contracts.
Lab
fees and medical expenses
Laboratory
fees and medical expenses for the nine months ended September 30, 2006 and
2005
were $3,140,173 or 28.2% of revenue and $2,120,739 or 25.7% or revenue,
respectively, which represented an increase of $1,019,434 or 48.1%. The increase
in spending for laboratory fees and medical expenses in absolute dollars is
primarily due to the increase in revenue and number of persons covered by
CONMED’s services under the additional contracts. The increase in spending as a
percentage of revenue reflects the addition of new full service contracts plus
expansion of services to existing contracts. The addition of new medical
services to existing service contracts, which previously provided staffing
only
services results in a higher proportion of medical expenses to historical total
revenue. Additionally, expensive procedures were incurred in the first half
of
2006 at Sedgwich County, Kansas where there is no limit to the maximum cost
of
care provided, a feature contained in most of CONMED’s contracts. However,
recent legislation in Kansas that limits the cost for these procedures to
Medicaid rates will significantly reduce these costs in the future. Key factors
causing the increase in spending as a percentage of revenue were:
out-of-facility charges for hospital, emergency room and other out-patient
visits, which increased $355,901 or 51.3%; as well as pharmacy, which was up
$297,824 or 41.5%, medical supplies, which were up $63,636 or 94.2%; and
laboratory fees, which increased $89,213 or 117.6%.
Other
operating expenses
Other
operating expenses were $1,198,318 or 10.8% of revenue for the nine months
ended
September 30, 2006, compared to $782,155 or 9.5% of revenue for the nine-month
period September 30, 2005. The increase in spending is primarily due to
increased insurance fees for health, surety bonds and workers compensation
higher professional fees, educational seminars and conferences, travel and
advertising expenses.
22
Interest
expense
Interest
expenses for the nine months ended September 30, 2006 and 2005 were $6,722
and
$2,058, respectively.
Provision
for income taxes
CONMED
elected under the Internal Revenue Code to be taxed as an S Corporation
effective July 1987. The stockholders of an S Corporation are taxed on their
proportional share of the Company’s taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Net
revenue from CONMED’s medical services provided to correctional institutions for
the years ended December 31, 2005 and 2004 was $11,669,322 and $6,677,886,
respectively, which represented an increase of $4,991,436 or 74.7%. Net income
was $581,672 or 5.0 % compared to $285,160 or 4.3% for the years ended December31, 2005 and 2004, respectively. The increase in net income is attributable
to
the increased revenue.
Revenues
The
improvement in revenue in 2005 compared to 2004 reflects the addition of new
service contracts in Howard County, Maryland, in Loudoun, County, Virginia
and
in Sedgwick County, Kansas, which were initiated during 2005 and represented
$3,934,798 or 78.8% of the total revenue improvement. Additional revenue
improvement resulted from an expansion of the services provided to contracts
which were initiated in prior years, primarily in Charles County, Maryland,
totaling $934,998 or 18.7% of the increase in revenue. Price increases related
to existing service requirements totaling $121,640 or 2.5% of the increase.
Salaries
and employee benefits
Salaries
and employee benefits were $6,991,780 or 59.9% of revenue for the year ended
December 31, 2005, compared to $4,205,068 or 63.0% of revenue for the year
ended
December 31, 2004. The increase in spending for salaries and employee benefits
of $2,786,712 or 66.3% is primarily due to the increase in new service contracts
plus higher officers’ compensation. The improvement in spending for salaries and
employee benefits as a percentage of sales results from the expansion of
CONMED’s business model from providing staffing only to becoming a full service
provider, which results in lower spending on salaries as a percentage of
revenue.
Lab
fees and medical expenses
Laboratory
fees and medical expenses for the years ended December 31, 2005 and 2004 were
$2,989,838 or 25.6% of revenue and $1,259,967 or 18.9% or revenue, respectively,
which represented an increase of $1,729,871 or 137.3%. The increase in spending
for laboratory fees and medical expenses in absolute dollars is primarily due
to
the increase in revenue. The increase in spending as a percentage of revenue
reflects the addition of new full service contracts plus expansion of services
to existing contracts. The expansion of services from staffing only to full
service results in a higher proportion of medical expenses compared to
historical total revenue. Key factors causing the increase in spending as a
percentage of revenue were: out of facility charges for hospital services,
emergency room services and other out-patient visits, which increased $767,209
or 334.0%; as well as pharmacy, which was up $513,151 or 112.4%, and laboratory
fees, which increased $62,100 or 104.0%.
23
Other
operating expenses
Other
operating expenses were $1,101,599 or 9.4% of revenue for the year ended
December 31, 2005, compared to $914,919 or 13.7% of revenue for the year ended
December 31, 2004. The increase in spending for other operating expenses is
primarily due to increased insurance fees for professional insurance and surety
bonds, of $85,138 travel and automobile expenditures of $127,394, legal fees
of
$64,504 plus advertising and bid expenses of $101,812. The improvement in
spending in other operating expenses as a percentage of sales results from
the
absence of a $115,410 loss from an asset sale in 2004 and $267,830 related
to a
variance in healthcare insurance.
Interest
expense
Interest
expenses for the years ended December 31, 2005 and 2004 were $4,433 and $12,772,
respectively, reflecting a reduction in outstanding automobile
loans.
Liquidity
and Capital Resources
Financing
is provided by funds generated from our operating activities; historically
CONMED distributed excess funds to its shareholders.
Cash
and Cash Flow for the Years Ended December 31, 2005, Compared to
2004
Cash
as
of December 31, 2005 and 2004 was $487,029 and $44,461, respectively. Total
increases in cash were $442,568 and $40,854 for the years ending December 31,2005 and 2004, respectively.
Operating
activities provided $898,073 reflecting net income of $581,672 plus non-cash
expenses for depreciation of $42,830. Changes in working capital provided
$273,571 reflecting increases in accounts payable of $262,865, accrued expenses
of $195,487 and deferred revenue of $85,491, offset by increased accounts
receivable of $184,491 and prepaid expenses of $85,321.
Investing
activities used $67,529 for the purchase of office and medical
equipment.
Financing
activities used $387,976 primarily due to distribution to CONMED’s stockholders
of $372,000. Payments on existing loans were $15,976.
Cash
and Cash Flow for the Nine-Months Ended September 30, 2006, Compared to
2005
Cash
as
of September 30, 2006 and 2005 was $564,032 and $487,029, respectively. Total
increases in cash were $77,003 and $620,562 for the nine months ended September30, 2006 and 2005, respectively.
Operating
activities provided $467,658, reflecting net income of $350,462 plus non-cash
expenses for depreciation of $33,322 and loss on the disposal of equipment
of
$9,734. Changes in working capital provided $74,140, reflecting increases in
accounts payable of $526,489 and accrued expenses of $302,809 partially offset
by increased accounts receivable $545,635 deposits of $137,742, prepaid expenses
of $50,164 and deferred revenue of $21,617.
Investing
activities provided $8,213, reflecting $28,000 from the sale of equipment,
which
was partially offset by $19,787 used for the purchase of office and medical
equipment.
Financing
activities used $398,868, primarily due to distribution to the company’s
stockholders of $375,000. Payments on existing loans were $23,868.
24
Liquidity
CONMED
maintained a $1,000,000 line of credit which expired in December 2006. Interest
was paid monthly at the prime rate as listed in the Wall Street Journal plus
5%
per annum. In addition CONMED has $500,000 available for letters of credit,
which reduces the amount available from the line of credit. The outstanding
balance is due on demand and is guaranteed by CONMED’s stockholders and spouses.
The line of credit is collateralized by CONMED’s accounts receivable. In
addition the line of credit has certain other covenants, which CONMED must
meet
to maintain the credit facility. There were no borrowings respectively on the
line of credit at September 30, 2006 and 2005.
CONMED
is
required to provide performance and payment guarantee bonds with county
governments under certain contracts. As of September 30, 2006, it has two
performance bonds totaling $4,363,566. The surety issuing the bonds has recourse
against certain of CONMED’s assets in the event the surety is required to honor
the bonds. In addition ourCONMED’s stockholders and their spouses guarantee the
bonds.
Contractual
Obligations
The
following table presents our expected cash requirements for contractual
obligations outstanding as of September 30, 2006:
Total
Due
as of 9/30/07
Due
as of
9/30/08
and 9/30/09
Due
as of
9/30/10
and
9/30/11
Due
Thereafter
Automobile
Loan
$
22,328
$
15,100
$
7,434
$
-
$
-
Automobile
Leases
11,681
4,303
-
-
-
Office
Space Leased
102,873
72,238
48,869
Total
Contractual Cash Obligations
$
136,882
$
91,641
$
56,303
$
-
$
-
Effects
of Inflation
CONMED
believes that inflation and changing prices over the past three years have
not
had a significant impact on its revenue or results of operations.
Potential
Areas of Future Growth
1.
Pharmacy
as a revenue source.
CONMED currently contracts with specialty pharmacy companies for
the
provision of pharmacy services. It is likely that as CONMED grows
past $30
million in annual revenue, the pharmacy utilization will exceed $2.5
million per year. At that point in time, it may be possible to build
or
purchase independent pharmacy capability to serve the needs of CONMED
at
less cost. In addition, these services can be marketed to other facilities
that may seek these services independent of CONMED’s other correctional
healthcare services. Also, opportunities exist for the provision
of
pharmacy services to Nursing Homes and Assisted Living facilities
requiring similar packaging and distribution systems. CONMED has
grown
this source of revenue from nonexistent in 2000 to over $1 million
per
year in 2006.
25
2.
TPA
services.
The business of repricing claims for county detention centers will
likely
be appealing to virtually all counties across the country independent
of
their desire to utilize CONMED’s other correctional healthcare services. A
particularly attractive market for these services is found in the
large
number of small detention centers across the country. These facilities
have little or no market clout for negotiation of favorable rates
and
would benefit greatly from the services. CONMED has grown this line
of
business from nonexistent in 2003 to over $1 million in
2006.
3.
Dental
Services.
CONMED anticipates the development of a division to provide mobile
dental
services to the facilities we serve, as well as those seeking only
dental
services. Many small facilities do not have dental suites. The costs
of
sending inmates out to local dentists are high in comparison to the
costs
of contracting with a mobile unit. We believe this may be an attractive
program.
4.
Occupational
Medicine Services.
CONMED has found that the juxtaposition of our inmate healthcare
services
to other county law enforcement services has found us frequently
selected
to provide pre-employment physical examinations, drug screening programs,
OSHA programs and others as needed. We believe that we can provide
incentives to local site managers and Physicians to develop these
programs
with corporate support and training. CONMED recognizes nearly $100,000
of
annual revenue from these services
currently.
Summary
of Significant Accounting Policies
Revenue
CONMED’s
principal source of revenue is contracts to provide medical assistance to state
and local correctional facilities. Deferred revenues represents amounts that
may
be billed in advance of delivery under these contracts.
CONMED’s
contracts call for either a fixed monthly fee or a fixed fee per average daily
population of the correctional facility. The timing of each payment varies
per
contract. Revenues from contracts is recognized ratably, for fixed fees, or
monthly for contracts with fixed fees per average daily population.
Receivables
Receivables
are carried at original invoice amount less payments received and an estimate
made for doubtful receivables based on a review of all outstanding amounts
on a
monthly basis. Receivables are generally considered past due 30 days after
invoice date. Management determines the allowance for doubtful amounts by
regularly evaluating individual receivables and considering a creditor’s
financial condition, credit history and current economic conditions. Receivables
are written off when deemed uncollectible. Recoveries of receivables previously
written off are recorded when received.
Property
and equipment
Property
and equipment are recorded at cost. Depreciation is provided using the
straight-line and accelerated methods of depreciation over the estimated useful
lives of three to seven years. It is the policy of CONMED to capitalize
purchases of equipment and fixtures that benefit future periods. Repairs and
maintenance costs are expensed when incurred.
26
Income
taxes
CONMED
has elected under the Internal Revenue Code to be taxed as an S Corporation
effective July 1987. The stockholders of an S Corporation are taxed on their
proportionate share of CONMED’s taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Basic
and diluted loss per share
CONMED
has adopted Statement of Financial Accounting Standards (“SFAS”)
No.
128, Earnings per Share, which requires CONMED 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).
Recently
issued accounting standards
In
July
2006 the Financial Accounting Standards Board (“FASB”)
issued
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
- an
interpretation of FASB Statement No. 109 (“FIN
48”),
which
clarifies the accounting for uncertainty in tax positions. This interpretation
provides that the financial statement effects of a tax position shall initially
be recognized when it is more likely than not, based on the technical merits,
that the position will be sustained upon examination. This interpretation also
may require additional disclosures related to tax positions taken.
The
provisions of FIN 48 are effective as of the beginning of fiscal year 2007,
with
the cumulative effect of the change in accounting principle recorded as an
adjustment to the opening balance of retained earnings. Management is currently
evaluating the impact of adopting FIN 48 on CONMED’s financial statements, but
does not expect the adoption of this statement to be significant to the
financial statements.
PACE
HEALTH MANAGEMENT SYSTEMS, INC.
Overview
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. On October7, 1998, Pace completed the sale of substantially all of its assets to, and
the
assumption of certain of its liabilities by, Minnesota Mining and Manufacturing
Company (the “Transaction”).
Following
the Transaction and prior to the Acquisition, Pace had no ongoing operations
and
no revenues and has minimal operating expenses. Pace’s September 30, 2006
balance sheet reflects current assets of $1,364,459 and current liabilities
of
$57,916.
The
net
proceeds from the Transaction were retained by Pace pending a determination
of
whether to engage in a follow-on transaction. Prior to the Acquisition, Pace
had
been seeking to consummate a business combination before considering the
possible liquidation and distribution of its assets.
27
Results
of Operations
General
and administrative
General
and administrative expenses include bookkeeping costs, legal fees, expenses
associated with shareholder relations and SEC reporting requirements, and
insurance. General and administrative expenses were $123,000 and $27,480 for
the
three months ended September 30, 2006 and 2005, respectively, representing
an
increase of 347.60%. General and administrative expenses were $225,312 and
$82,351 for the nine months ended September 30, 2006 and 2005, respectively,
representing an increase of 173.60%, due mainly to an increase in auditing,
consulting, and administrative fees, as well as costs and fees incurred in
connection with the negotiation of the Acquisition.
Interest
Income
Interest
income was $17,143 and $14,320 for the three months ended September 30, 2006
and
2005, respectively, representing an increase of 19.71%. Interest income was
$55,752 and $30,246 for the nine months ended September 30, 2006 and 2005,
respectively, representing an increase of 84.33%. This increase is due mainly
to
an increase in money market and certificate of deposit interest
rates.
Provision
for income taxes
No
provision for income tax benefit has been recorded due to Pace recording a
valuation allowance on the deferred tax assets.
Liquidity
and Capital Resources
Net
cash
used in operating activities for the nine months ended September 30, 2006 and
2005 was $398,317 and $56,955, respectively. Pace has no ongoing operations
and
no revenues and has minimal operating expenses. Pace’s September 30, 2006
balance sheet reflects current assets of $1,364,459 and current liabilities
of
$57,916.
The
net
proceeds from the Transaction were retained by Pace pending a determination
of
whether to engage in a follow-on transaction. Prior to the Acquisition, Pace
had
been seeking to consummate a business combination, before considering possible
liquidation and distribution of its assets.
Summary
of Significant Accounting Policies
Since,
prior to the Acquisition, Pace had no ongoing operations or revenues, it has
not
identified any critical accounting policies.
Recently
Issued Accounting Standards
Effective
January 1, 2006, Pace adopted the provisions of Financial Accounting Standards
Board (“FASB”)
Statement of Financial Accounting Standard (“SFAS”)
No.
123 (revised), “Share-Based Payment” (“SFAS
123R”)
using
a modified version of prospective application. Prior to the adoption of SFAS
123R, Pace accounted for share-based payments to employees using the intrinsic
value method under Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees”(“APB
25”).
Under
the provisions of APB 25, restricted stock awards were accounted for using
variable plan accounting whereby compensation expense or benefit was recorded
each period from the date of grant to the measurement date based on the fair
value of Pace’s common stock at the end of each period. Stock option awards were
accounted for using fixed plan accounting whereby Pace recognized no
compensation expense for stock option awards because the exercise price of
options granted was equal to the fair value of the common stock at the date
of
grant.
28
Under
the
modified prospective application, the provisions of SFAS 123R apply to new
awards and to awards outstanding on January 1, 2006 and subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
expense recognized in the second quarter of 2006 includes compensation costs
for
all share-based payments granted prior to, but not yet vested as of January1,2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R. Prior periods
were not restated to reflect the impact of adopting the new standard.
As
a
result of all stock-based compensation being fully vested as of December 31,2005, there is no effect on income before taxes, net income and basic and
diluted earnings per share for the three months ended September 30,2006.
29
MARKET
PRICE AND DIVIDENDS ON PACE COMMON EQUITY AND OTHER 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 Small
Cap Market. The following table sets forth the range of high and low sales
prices of the Company’s Common Stock by quarter over the last two years. These
quotations reflect inter-dealer prices, without retail markup, markdown, or
commission and may not reflect actual transactions.
Quarter
ended
High
Low
3/31/05
0.27
0.08
6/30/05
0.20
0.11
9/30/05
0.15
0.10
12/31/05
0.15
0.10
3/31/06
0.50
0.10
6/30/06
0.36
0.15
9/30/06
0.40
0.16
12/31/06
0.22
0.18
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. 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.
In
January 2007, holders of the Company’s Series A Preferred Stock converted 50% of
the accrued but unpaid dividends on their Series A Preferred Stock into an
aggregate of 2,600,000 shares of Common Stock. All the holders of Series A
Preferred Stock have agreed to waive the remaining accrued and unpaid dividends
on their shares of Series A Preferred Stock at the consummation of the Plan
of
Recapitalization.
On
January 26, 2007, the high and low closing prices of our Common Stock was $0.30
and $0.25 respectively.
30
RISK
FACTORS
You
should carefully consider the risks described below before buying our common
stock. If any of the risks described below actually occurs, that event could
cause the trading price of our common stock to decline, and you could lose
all
or part of your investment.
Risks
related to Our Business
RISKS
ASSOCIATED WITH INTERNAL EXPANSION. The
Company’s growth is generally dependent upon CONMED’s ability to obtain
contracts to provide medical services to inmates in county correctional and
detention facilities. The growth rate of the Company’s business depends on a
number of factors, including crime rates and sentencing patterns in various
jurisdictions and the Company’s ability to integrate new facilities into its
management structure. The Company may have to obtain sufficient capital
resources in order to compete effectively in the industry. There can be no
assurance any contract will, in fact, be awarded. Further, there can be no
assurance the Company will be able to obtain contracts to manage the medical
services in new facilities or retain existing contracts upon their expiration.
CONMED
IS A PROFITABLE COMPANY PROVIDING CONTRACTED BUSINESS SERVICES. IN ANY CONTRACT
BUSINESS, IT IS POSSIBLE A CONTRACT WILL BE LOST OR NOT RENEWED.
CONMED’s
top three clients, Sedgwick County Detention Center, Harford County Detention
Center and Charles County Detention Center, generated approximately forty-six
percent (46%) of its total revenues for the nine months ended September 30,2006. These same clients generated approximately forty-two percent (42%) of
the
Company’s direct profit per contract. If a contracted detention facility,
particularly one of the Company’s primary detention facilities, terminates its
contract, which generally may be effective upon ninety (90) days written notice,
the Company’s business and financial performance may be seriously
harmed.
SHORT-TERM
CONTRACTS.
CONMED’s
detention center medical services contracts are typically short-term, ranging
from one to three years, with renewal or extension options in favor of the
contracting governmental agency. Including extension options, the Company has
one major contract and several smaller contracts subject to renewal in 2007,
which accounted for approximately 13% and 10% of revenue for the nine-month
period ended September 30, 2006, respectively. There can be no assurance these
or any other contract will be renewed or that extension options will be
exercised. Additionally, the contracting governmental agency typically may
terminate a facility contract without cause by giving the Company adequate
written notice. The Company customarily incurs significant development and
start-up costs in establishing its services within the new facilities, and
the
termination or non-renewal of a contract would require an immediate write-off
of
any unamortized costs associated with the contract, and could have a material
adverse effect upon the Company’s financial condition, results of operations and
liquidity.
CONMED
IS CURRENTLY NEGOTIATING A $5.6 MILLION CONTRACT TO PROVIDE MEDICAL SERVICES.
IF
CONMED DOES NOT FINALIZE THE TERMS OF THIS AGREEMENT, CONMED’S FINANCIAL
PERFORMANCE COULD BE NEGATIVELY AFFECTED.
CONMED
is currently providing medical services to Baltimore County Detention Center
on
an interim transition basis. CONMED has entered into final negotiations for
a
new nine year contract with an annual revenue value equal to approximately
$5.6
million and an aggregate revenue value equal to approximately $54 million.
If
CONMED does not finalize the terms of this Baltimore County contract, and does
not gain Baltimore County as one of their contracted site facilities, CONMED’s
future business and financial performance may be seriously harmed.
CONTRACTS
SUBJECT TO GOVERNMENTAL FUNDING.
CONMED’s
detention center medical services contracts are subject to either annual or
bi-annual governmental appropriations. Failure by a governmental agency to
receive such appropriations could result in termination of the contract by
such
agency or a reduction of the fee payable to the Company. In addition, even
if
funds are appropriated, delays in payments may occur which could have a material
adverse effect on the Company’s financial condition, results of operations and
liquidity.
31
CONMED’S
INABILITY TO OBTAIN REQUIRED PERFORMANCE AND/OR PAYMENT BONDS MAY LIMIT ITS
ABILITY TO MAINTAIN EXISTING CONTRACTS AND ACQUIRE ADDITIONAL CONTRACTS.
In
order
to expand CONMED’s business and obtain new facilities contracts, as well as
maintain certain existing contracts, CONMED will need to obtain bonds in certain
counties for which CONMED provides its services. In order to obtain such bonds,
or renew existing bonds, CONMED will be required to fulfill certain financial
requirements and standards. To the extent CONMED is unable to fulfill the
necessary financial requirements and standards, CONMED may not be able acquire
new facilities contracts and could lose its existing contracts, all of which
could negatively impact the Company’s business operations and financial
condition.
UNCERTAIN
OCCUPANCY LEVELS.
A small
portion of the Company’s revenues is generated under detention center medical
services contracts that specify an offset for populations under a specified
number. Under such a per diem rate structure, a decrease in occupancy levels
could cause a decrease in the facilities’ needs for medical services, and
therefore, could cause a decrease in revenue and profitability, and may have
some adverse effect on the Company’s overall financial condition, results of
operations and liquidity.
IMPACT
OF DISTURBANCE.
An
escape, riot, epidemic, catastrophic or other disturbance that seriously impacts
the health of a large number of inmates at one of CONMED’s facilities could have
a material adverse effect on the Company’s financial condition, results of
operations and liquidity. As a result of a disturbance inmates may suffer
multiple injuries for which the cost of care may have a temporary but
significant effect on profitability. Approximately 75% of CONMED’s healthcare
services revenues for the nine month period ended September 30, 2006 are
operated under caps which provide limits on the cost of exposure, however,
multiple events with significant costs may exceed budget targets.
The
remaining 25% of CONMED’s correctional healthcare services revenues from
continuing operations, contain no limits on CONMED’s exposure for treatment
costs related to catastrophic illnesses or injuries to inmates. Although CONMED
attempts to compensate for the increased financial risk when pricing contracts
that do not contain catastrophic limits and has not had any catastrophic
illnesses or injuries to inmates that exceeded its insurance coverage in the
past, there can be no assurance CONMED will not experience a catastrophic
illness or injury of a patient that exceeds its coverage in the future. The
occurrence of severe individual cases outside of those catastrophic limits
could
render contracts unprofitable and could have a material adverse effect on
CONMED’s financial condition and results of operations.
WE
MAY BE SUBJECT TO CERTAIN LITIGATION CLAIMS RESULTING FROM OR RELATING TO INMATE
DEATHS.
Prisoners may die while in a correctional facility due to various reasons,
including, without limitation, natural causes and suicide. Consequently, CONMED
may be exposed to potential liability arising from or relating to such deaths.
Such occurrences may have negatively impact CONMED’s business
operations.
WE
MAY INCUR SIGNIFICANT START-UP AND OPERATING COSTS ON NEW CONTRACTS BEFORE
RECEIVING RELATED REVENUES, WHICH MAY IMPACT OUR CASH FLOWS AND NOT BE
RECOUPED.When
we are awarded a contract to provide medical services to a facility, we may
incur significant start-up and operating expenses, including the cost of
purchasing equipment and staffing the facility, before we receive any payments
under the contract. These expenditures could result in a significant reduction
in our cash reserves and may make it more difficult for us to meet other cash
obligations. In addition, a contract may be terminated prior to its scheduled
expiration and as a result we may not recover these expenditures or realize
any
return on our investment.
32
CONMED
UTILIZES THIRD PARTY ADMINISTRATORS (TPA) AND PROVIDER NETWORKS TO OBTAIN
OUT-OF-FACILITY CARE IN VARIOUS MARKETS. SHOULD THOSE NETWORKS BECOME
INACCESSIBLE THE COSTS TO CONMED FOR PROVIDING THOSE SERVICES WOULD RISE
35-40%.Our
current profit margin is in part due to our ability to reduce out-of-facility
costs that are defined by contracted networks. Our costs are typically 40%
less
than the stated charges for these services. It is important to note that
healthcare providers for the general public utilize these same programs. It
is
unlikely the environment will change, causing the return of payments based
on
healthcare provider’s charges without discounts. The trend over the past ten
years has been one of deeper discounting against these charges. If the trend
reversed or slowed, it would negatively impact our operating margins and could
have a material adverse effect on the Company.
CHANGES
IN STATE AND FEDERAL REGULATIONS COULD RESTRICT CONMED’S ABILITY TO CONDUCT ITS
BUSINESS.CONMED
is
subject to extensive regulation by both the federal government and the states
in
which it conducts its business. There are numerous healthcare and other laws
and
regulations that CONMED is required to comply with in the conduct of its
business. These laws may be materially changed in the future or new or
additional laws or regulations may be adopted with which CONMED will be required
to comply. The cost of compliance with current and future applicable laws,
rules
and regulations may be significant.
These
state and federal laws and regulations that affect CONMED’s business and
operations include, but are not necessarily limited to:
·
healthcare
fraud and abuse laws and regulations, which prohibit illegal referral
and
other payments;
·
Employee
Retirement Income Security Act of 1974 and related regulations, which
regulate many healthcare plans;
·
pharmacy
laws and regulations;
·
privacy
and confidentiality laws and
regulations;
·
civil
liberties protection laws and
regulations;
·
state
and national correctional healthcare auditing
bodies;
·
various
licensure laws, such as nursing and physician licensing
bodies;
·
drug
pricing legislation; and
·
Medicare
and Medicaid reimbursement
regulations.
CONMED
believes it is operating its business in substantial compliance with all
existing legal requirements material to the operation of its business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to its business, and there cannot be any assurance
that
a regulatory agency charged with enforcement of any of these laws or regulations
will not interpret them differently or, if there is an enforcement action,
that
CONMED’s interpretation would prevail. In addition, there are numerous proposed
healthcare laws and regulations at the federal and state levels, many of which
could materially affect CONMED’s ability to conduct its business or adversely
affect its results of operations.
For
example, the State of Maryland Board of Nursing has requested that CONMED
provide 24 hour 365 day per year nursing coverage in order to be compliant
with
newly approved state regulations regarding nursing standards. To be compliant
with this change would require several of the smaller facilities to
significantly increase the level of staffing from part-time medics to full-time
nursing positions. The costs for this increase would be outside the scope of
the
current contracts. In order to be compliant, CONMED will need to secure contract
extensions for the higher level
of
staffing.
33
CONMED
is
currently in discussion with the Maryland Sheriff’s, Maryland Association of
Counties, Maryland Correctional Administrators Association and the Department
of
Health and Mental Hygiene to develop a workable matrix of staffing that will
fit
the needs and budgets of small county detention centers. Considerable progress
has been made toward reaching a negotiated resolution, however, there can be
no
assurance the Company will succeed in developing such a workable matrix of
staffing.
CONMED
IS SUBJECT TO HIPAA, THE FAILURE WITH WHICH TO COMPLY COULD ADVERSELY AFFECT
CONMED’S BUSINESS.On
August21, 1996, Congress passed the Health Insurance Portability and Accountability
Act of 1996 (“HIPAA”).
This
legislation required the Secretary of the Department of Health and Human
Services to adopt national standards for electronic health transactions and
the
data elements used in such transactions. The Secretary has adopted safeguards
to
ensure the integrity and confidentiality of such health information. Violation
of the standards is punishable by fines and, in the case of wrongful disclosure
of individually identifiable health information, imprisonment. Although CONMED
intends to comply with all applicable laws and regulations regarding medical
information privacy, failure to do so could have an adverse effect on CONMED’s
business.
OUR
ABILITY TO SECURE NEW CONTRACTS TO PROVIDE HEALTHCARE AND MEDICAL SERVICES
TO
CORRECTIONAL AND DETENTION FACILITIES DEPENDS ON MANY FACTORS OUTSIDE OUR
CONTROL. Our
growth is generally dependent upon our ability to obtain new contracts to
provide healthcare medical services to correctional and detention facilities.
This possible growth depends on a number of factors we cannot control, including
crime rates and sentencing patterns in various jurisdictions and acceptance
of
privatization. The demand for our services could be adversely affected by the
relaxation of enforcement efforts, leniency in conviction and sentencing
practices or through the decriminalization of certain activities currently
proscribed by our criminal laws. For instance, any changes with respect to
drugs
and controlled substances or illegal immigration could affect the number of
persons arrested, convicted and sentenced, thereby potentially reducing demand
for correctional facilities to house them, and thus, reduce the number of
inmates receiving medical services. Legislation has been proposed in numerous
jurisdictions that could lower minimum sentences for some non-violent crimes
and
make more inmates eligible for early release based on good behavior. Also,
sentencing alternatives under consideration could put some offenders on
probation with electronic monitoring who would otherwise be incarcerated.
Similarly, reductions in crime rates could lead to reductions in arrests,
convictions and sentences requiring incarceration at correctional
facilities.
In
January 2005, the Supreme Court declared the federal sentencing guidelines,
previously considered mandatory, as unconstitutional, stating they violate
defendants’ rights under the Sixth Amendment to be tried by a jury. The Supreme
Court advised that federal judges should continue to use the federal sentencing
guidelines as suggestions rather than mandatory guidelines. Although it is
too
early to predict the impact, if any, on our business, the ruling could lead
to
federal sentences becoming more varied which could lead to a reduction in the
length of sentences at correctional facilities.
GOVERNMENT
AGENCIES MAY INVESTIGATE AND AUDIT OUR CONTRACTS AND, IF ANY IMPROPRIETIES
ARE
FOUND, WE MAY BE REQUIRED TO REFUND REVENUES WE HAVE RECEIVED, REQUIRED TO
FOREGO ANTICIPATED REVENUES, AND SUBJECT TO PENALTIES AND
SANCTIONS.
Certain governmental agencies have the authority to audit and investigate our
contracts. As part of that process, government agencies may review our
performance of the contract, our pricing practices, our cost structure and
our
compliance with applicable laws, regulations and standards. For contracts that
actually or effectively provide for reimbursement of expenses, if an agency
determines we have improperly allocated costs to a specific contract, we may
not
be reimbursed for those costs, and we could be required to refund the amount
of
any such costs that have been reimbursed. If a government audit asserts improper
or illegal activities by us, we may be subject to civil and criminal penalties
and administrative sanctions, including termination of contracts, forfeitures
of
profits, suspension of payments, fines and suspension or disqualification from
doing business with certain government entities.
34
THERE
ARE LARGE COMPETITORS IN THE HEALTHCARE INDUSTRY THAT COULD CHOOSE TO COMPETE
AGAINST CONMED REDUCING CONMED’S PROFIT MARGINS.Existing
national correctional healthcare contract companies, localized and regional
contracting companies, hospitals and integrated Health Systems are potential
competitors of CONMED. These companies include well-established companies which
may have greater financial, marketing and technological resources than CONMED,
such as PHS, CMS and Wexford Health. Increased price competition could reduce
CONMED’s profit margins and have a material adverse effect on the
Company.
THERE
ARE BARRIERS TO ENTRY INTO THE CORRECTIONAL HEALTHCARE SERVICES MARKET WHICH
COULD BE OVERCOME RESULTING IN GREATER COMPETITION.The
barriers to entrance to compete for contracts are typically 5 years experience
providing the same services and demonstrated financial stability. Although
a new
startup company would be unable to meet the experience criteria, it would be
possible for an investor to purchase an existing experienced company, add
capital and quickly become competitive on a national scale.
WE
ARE DEPENDENT ON GOVERNMENT APPROPRIATIONS.
Our cash flow is subject to the receipt of sufficient funding of, and timely
payment by, contracting governmental entities. If the appropriate governmental
agency does not receive sufficient appropriations to cover its contractual
obligations, it may terminate our contract or delay or reduce payment to us.
Any
delays in payment, or the termination of a contract, could have an adverse
effect on our cash flow and financial condition. In addition, as a result of,
among other things, recent economic developments, federal, state and local
governments have encountered, and may encounter, unusual budgetary constraints.
As a result, a number of state and local governments are under pressure to
control additional spending or reduce current levels of spending. Accordingly,
we may be requested in the future to reduce our existing per diem contract
rates
or forego prospective increases to those rates. In addition, it may become
more
difficult to renew our existing contracts on favorable terms or
otherwise.
CONMED’S
INABILITY TO REACT EFFECTIVELY TO CHANGES IN THE HEALTHCARE INDUSTRY COULD
ADVERSELY AFFECT ITS OPERATING RESULTS.In
recent
years, the healthcare industry has undergone significant change driven by
various efforts to reduce costs, including potential national healthcare reform,
trends toward managed care, cuts in Medicare reimbursements, and horizontal
and
vertical consolidation within the healthcare industry. Proposed changes to
the
U.S. healthcare system may increase governmental involvement in healthcare
and
ancillary health services, and otherwise change the way payers, networks and
providers conduct business. Healthcare organizations may react to these
proposals and the uncertainty surrounding them by reducing or delaying purchases
of cost control mechanisms and related services that CONMED provides. Other
legislative or market-driven changes in the healthcare system that CONMED cannot
anticipate could also materially adversely affect CONMED’s business. CONMED’s
inability to react effectively to these and other changes in the healthcare
industry could adversely affect its operating results. CONMED cannot predict
whether any healthcare reform efforts will be enacted and what effect any such
reforms may have on CONMED or its customers. The inability of CONMED to react
effectively to changes in the healthcare industry may result in a material
adverse effect on its business.
35
THE
CONTINUED SERVICES AND LEADERSHIP OF CONMED’S SENIOR MANAGEMENT IS CRITICAL TO
ITS ABILITY TO MAINTAIN GROWTH AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY
AFFECT ITS BUSINESS.The
future of the business of CONMED depends to a significant degree on the skills
and efforts of its senior executives, in particular, Dr. Richard Turner, its
President andChief
Executive Officer, Ronald Grubman, its former President and Chief Executive
Officer (anticipated to be Executive Vice President of Strategic Development
immediately after the Closing Date) and Howard Haft, MD, MMM, CPE, its Chief
Medical Officer, (anticipated to be Executive Vice President and Chief Medical
Officer immediately after the Closing Date). If CONMED loses the services of
any
of its senior executives, and especially if any of its executives joins a
competitor or forms a competing company, CONMED’s business and financial
performance could be seriously harmed.
The
Company has
executed
employment agreements with Mr. Grubman, Dr. Haft and Dr. Turner, effective
as of the closing of the Acquisition, which
include, except for Dr. Turner’s employment agreement, noncompetition
clauses
that expire three (3) years after termination of employment, or
during
the period that
such
employee is
an
owner of any issued and outstanding
stock of
the Company. If, for any reason, we lose any of our executive officers’ skills,
knowledge of the industry, contacts and expertise, it could result in a setback
to the Company operating plan.
CONMED
WILL INCUR ADDITIONAL COSTS AS AN INDEPENDENT PUBLIC COMPANY AND MAY BE UNABLE
TO OPERATE PROFITABLY AS A STAND-ALONE COMPANY.CONMED
will incur significant additional costs as a separate and independent public
company. These costs include, among other things, the payment of a salary to
CONMED’s Chief Executive Officer, Dr. Richard Turner and additional legal and
accounting costs incurred as a result of becoming a public company. Furthermore,
CONMED may not be able to put in place the financial, administrative and
managerial structure necessary to operate as a public company, or the
development of such structure may require a significant amount of management’s
time and other resources including financial resources, which could hinder
CONMED’s ability to operate profitably.
CONMED’S
REVENUE MARGINS MAY DECREASE DUE TO FIXED REVENUE BASE. CONMED’s
existing contracts are primarily structured as fixed fee contracts. The costs
of
inmate healthcare may fluctuate from what was anticipated by CONMED
due to
several variables, including increases in inmate population and increased inmate
illness. Such additional costs may not be easily passed through under those
contracts containing a fixed fee structure, and therefore, CONMED
may not
always have sufficient revenue to cover such increased costs. As a result,
CONMED’s
revenue margins may fall. If CONMED’s
revenue margins decrease more than 1 or 2 percentage points, CONMED’s
ability to perform under its contracts may be limited, which could negatively
impact CONMED’s
business operations and financial performance.
CONMED
MAY BE UNSUCCESSFUL IN THE HIRING AND RETENTION OF SKILLED
PERSONNEL.The
future growth of CONMED’s business depends on successful hiring and retention of
skilled personnel, and CONMED may be unable to hire and retain the skilled
personnel it needs to succeed. Qualified personnel are in great demand
throughout the healthcare industry, thus it is difficult to predict the
availability of qualified personnel or the compensation levels required to
hire
and retain them. CONMED faces stiff competition for staffing, which may increase
its labor costs and reduce profitability. CONMED competes with other healthcare
and service providers in recruiting qualified management and staff personnel
for
the day-to-day operations of its business, including nurses and other healthcare
professionals. In some markets, the scarcity of nurses and other medical support
personnel has become a significant operating issue to healthcare businesses.
This scarcity may require CONMED to enhance wages and benefits to recruit and
retain qualified nurses and other healthcare professionals. Because a
significant percentage of CONMED’s existing contracts are structured as fixed
fee contracts, CONMED has a limited ability to pass along increased labor costs
to existing customers. The failure of CONMED to attract and retain sufficient
skilled personnel at economically reasonable compensation levels may limit
CONMED’s ability to perform under its contracts, which could lead to the loss of
existing contracts or its ability to gain new contracts, and may impair CONMED’s
ability to operate and expand its business, as well as harm its financial
performance.
36
CONMED
MAY EXPERIENCE UNBUDGETED INCREASES IN COSTS RELATED TO THE PROVISION OF
HEALTHCARE.Currently,
CONMED predicts the costs of healthcare based on prior experience and projected
increases. The projections for future increases are based on historical trends
and expected increases related to the development of new healthcare initiatives,
treatments and disease states. For example recent increases in the use of high
cost psychiatric medications have triggered increases in the projected costs
of
those medications in the bid process. However, mid cycle increases, such as
those associated with the need to use a more expensive antibiotic for a drug
resistant infection, or the development of a standard treatment for Hepatitis
C,
for example, would produce significant cost overruns in pharmacy budgeted
expenses.
WE
ARE SUBJECT TO NECESSARY INSURANCE COSTS. Workers’
compensation, employee health, medical professional and general liability
insurance represent significant costs to us. Because we significantly
self-insure for workers’ compensation, employee health, medical professional and
general liability risks, our insurance expense is dependent on claims
experience, our ability to control our claims experience, and in the case of
workers’ compensation and employee health, rising health care costs in general.
Further, additional terrorist attacks, such as those on September 11, 2001,
and concerns over corporate governance and corporate accounting scandals, could
make it more difficult and costly to obtain liability and other types of
insurance. Unanticipated additional insurance costs could adversely impact
our
results of operations and cash flows, and the failure to obtain or maintain
any
necessary insurance coverage could have a material adverse effect on
us.
WE
MAY BE ADVERSELY AFFECTED BY INFLATION.
Many of our medical services contracts provide for fees that increase by only
small amounts during their terms. If, due to inflation or other causes, our
operating expenses, such as wages and salaries of our employees, insurance,
medical, and food costs, increase at rates faster than increases, if any, in
our
contract fees, then our profitability would be adversely affected.
CONMED
MAY EXPERIENCE LIABILITY SUITS.The
Company’s medical services to correctional and detention facilities exposes it
to potential third-party claims or litigation by inmates or other persons for
adverse outcomes (medical malpractice) as well as suits related to infringement
of their 8th
amendment rights (deliberate indifference). It is likely that as the company
grows it will be exposed to additional healthcare liability issues. CONMED
currently maintains medical professional liability insurance to cover potential
losses, in the amounts of $1,000,000 per incident, $3,000,000 per physician
or
location aggregate, and $5,000,000 in the aggregate. Such insurance is
expensive, subject to various coverage exclusions and deductibles and may not
be
obtainable in the future on terms acceptable to the Company, or at all. A
successful claim against us in excess of our insurance coverage could materially
harm our business.
RISKS
ASSOCIATED WITH ACQUISITIONS. The
Company intends to grow through internal expansion and through selective
acquisitions. There can be no assurance the Company will be able to identify,
acquire or profitably manage acquired operations or that operations acquired
will be profitable or achieve levels of profitability that justify the related
investment. Acquisitions involve a number of special risks, including possible
adverse short-term effects on the Company’s operating results, diversion of
management’s attention from existing business, dependence on retaining, hiring
and training key personnel, risks associated with unanticipated problems or
legal liabilities, and amortization of acquired intangible assets, any of which
could have a material adverse effect on the Company’s financial condition,
results of operations and liquidity.
37
WE
DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE. We
currently intend to retain all future earnings, if any, to finance our current
and proposed business activities and do not anticipate paying any cash dividends
on our Common Stock in the foreseeable future. Although there are only a small
number of shares of our preferred stock outstanding, the holders of our
preferred stock have rights senior to the holders of our Common Stock with
respect to any dividends. We may also incur indebtedness in the future that
may
prohibit or effectively restrict the payment of cash dividends on our Common
Stock.
THE
LIABILITY OF OUR OFFICERS AND DIRECTORS IS LIMITED. The
applicable provisions of the Iowa Corporation Law and our Certificate of
Incorporation limit the liability of our officers and directors to the Company
and our stockholders for monetary damages for breaches of their fiduciary
duties, with certain exceptions, and for other specified acts or omissions
of
such persons. In addition, the applicable provisions of the Iowa Corporation
Law
and of our Certificate of Incorporation and By-Laws provide for indemnification
of such persons under certain circumstances. As part of the Plan of
Recapitalization, we plan to reincorporate as a Delaware corporation and we
plan
to provide the officers and directors of the Company indemnification to the
fullest extent allowed under the Delaware General Corporation Law. In addition,
we plan to enter into an indemnification agreement with our officers and
directors in 2007 which will provide for expanded indemnification rights for
such individuals. As a result of the foregoing, stockholders may be unable
to
recover damages against our officers and directors for actions taken by them
which constitute negligence, gross negligence or a violation of their fiduciary
duties and may otherwise discourage or deter our stockholders from suing our
officers or directors even though such actions, if successful, might otherwise
benefit us and our stockholders.
THE
COMPANY IS NOT CURRENTLY COMPLIANT WITH THE SARBANES-OXLEY ACT.
The
enactment of the Sarbanes-Oxley Act in July 2002 created a significant number
of
new corporate governance requirements and additional requirements may be enacted
in the future. Since the Common Stock is currently quoted on the OTC Bulletin
Board, it is not currently subject to a number of such governance requirements.
Although the Company expects to implement the requisite changes to become
compliant with existing requirements, and new requirements when they do apply
to
the Company, the Company may not be able to do so, or to do so in a timely
manner. If the Company does not come into compliance with the Sarbanes-Oxley
governance requirements, it may not be able to list its securities on either
AMEX or Nasdaq markets in the event the Company ever attempts to do
so.
CERTAIN
STOCKHOLDERS CAN EXERT CONTROL OVER CONMED AND MAY NOT MAKE DECISIONS THAT
FURTHER THE BEST INTERESTS OF ALL STOCKHOLDERS.
The
Company’s officers, directors and principal stockholders (greater than 5%
stockholders) together own a majority of the Company’s issued and outstanding
common stock. Consequently, these stockholders, if they act individually or
together, may exert a significant degree of influence over the Company’s
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change of control of the Company and might affect the market price of the
Company’s Common Stock, even when a change of control may be in the best
interest of all stockholders. Furthermore, the interests of this concentration
of ownership may not always coincide with the Company’s interests or the
interests of other stockholders, and accordingly, they could cause the Company
to enter into transactions or agreements which the Company would not otherwise
consider.
38
Risks
Related to Our Securities
TRADING
IN OUR COMMON STOCK OVER THE LAST 12 MONTHS HAS BEEN LIMITED, SO INVESTORS
MAY
NOT BE ABLE TO SELL AS MANY OF THEIR SHARES AS THEY WANT AT PREVAILING PRICES.
Shares
of our Common Stock are traded on the OTC Bulletin Board. Approximately
16,533 shares were traded on an average daily trading basis for the twelve
(12)
months ended September 30, 2006. If limited trading in our Common Stock
continues, it may be difficult for investors once and if the securities are
registered, to sell the securities acquired by them upon the conversion of
the
Series B Preferred Stock at any given time at prevailing prices. Also, the
sale
of a large block of our Common Stock could depress the market price of our
Common Stock to a greater degree than a company that typically has a higher
volume of trading of its securities.
THE
MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE. Our
Common Stock is currently traded on the OTC Bulletin Board under the symbol
“PCES”. The quotation of our Common Stock on the OTC Bulletin Board does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many companies
like ours. Our Common Stock is thus subject to this volatility. Sales of
substantial amounts of our Common Stock, or the perception that such sales
might
occur, could adversely affect prevailing market prices of our Common
Stock.
AN
ACTIVE AND VISIBLE TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.
We
cannot
predict whether an active market for our Common Stock will develop in the
future. In the absence of an active trading market:
·
investors
may have difficulty buying and selling or obtaining market
quotations;
·
market
visibility for our Common Stock may be limited;
and
·
a
lack of visibility for our Common Stock may have a depressive effect
on
the market price for our Common
Stock.
The
OTC
Bulletin Board is an unorganized, inter-dealer, over-the-counter market that
provides significantly less liquidity than NASDAQ, and quotes for stocks
included on the OTC Bulletin Board are not listed in the financial sections
of
newspapers, as are those for the NASDAQ Stock Market. The trading price of
the
Common Stock is expected to be subject to significant fluctuations in response
to variations in quarterly operating results, changes in analysts’ earnings
estimates, announcements of innovations by the Company or its competitors,
general conditions in the industry in which we operate and other factors. These
fluctuations, as well as general economic and market conditions, may have a
material or adverse effect on the market price of our Common Stock.
OUR
COMMON STOCK IS SUBJECT TO, AND OUR ADDITIONAL FINANCING REQUIREMENTS COULD
RESULT IN, DILUTION TO EXISTING STOCKHOLDERS.
Our
Common Stock is subject to dilution from shares reserved for issuance.
Additional financings which we may require have and may in the future be
obtained through one or more transactions which have diluted or will dilute
(either economically or in percentage terms) the ownership interests of our
stockholders. Further, we may not be able to secure such additional financing
on
terms acceptable to us, if at all. We have the authority to issue additional
shares of Common Stock and preferred stock, as well as additional classes or
series of ownership interests or debt obligations which may be convertible
into
any one or more classes or series of ownership interests. The issuance of
additional warrants or options, and the exercise of such warrants or options,
may also cause further dilution of the ownership interests of our
stockholders.
39
PENNY
STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
OUR
COMMON STOCK. The
Commission has adopted regulations which generally define a “penny stock” to be
any equity security that has a market price of less than $5.00 per share or
an
exercise price of less than $5.00 per share, subject to certain exceptions.
As a
result, our Common Stock, which qualifies as “penny stock”, is subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of such securities and have received the
purchaser’s written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer’s presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the “penny stock” rules may
restrict the ability of broker-dealers to sell our securities and may affect
the
ability of investors to sell our securities in the secondary market and the
price at which such purchasers can sell any such securities.
Stockholders
should be aware that, according to the Commission, the market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns
include:
·
Control
of the market for the security by one or a few broker-dealers that
are
often related to the promoter or
issuer;
·
Manipulation
of prices through prearranged matching of purchases and sales and
false
and misleading press releases;
·
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
·
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
·
The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with
the
inevitable collapse of those prices with consequent investor
losses.
Purchasers
of penny stocks may have certain legal remedies available to them in the event
the obligations of the broker-dealer from whom the penny stock was purchased
violates or fails to comply with the above obligations or in the event that
other state or federal securities laws are violated in connection with the
purchase and sale of such securities. Such rights include the right to rescind
the purchase of such securities and recover the purchase price paid for them.
Application of these penny stock regulations to our Common Stock could adversely
affect the market liquidity of the shares, which in turn may affect the ability
of holders of our Common Stock to resell the stock.
ADDITIONAL
AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT
THE MARKET. The
Company is authorized to issue 20,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. As of the date hereof, there were 8,316,074 shares
of
Common Stock, 2,875,000 shares of Series A Preferred Stock, 15,000 shares of
Series B Preferred Stock and 8,000 shares of Series C Preferred Stock issued
and
outstanding. However, the total number of shares of Common Stock issued and
outstanding does not include shares reserved for issuance upon the exercise
of
outstanding options or warrants or shares reserved for issuance under the
Company’s 2007 Stock Option Plan (the “Stock
Option Plan”).
As of
the date hereof, the Company had outstanding stock options and warrants to
purchase an aggregate of 4,053,000 shares of our Common Stock, and we have
reserved shares of our Common Stock for issuance in connection with the
potential exercise thereof.
40
After
effectiveness of the Plan of Recapitalization and upon conversion of the Series
A, Series B and Series C Preferred Stock into Common Stock, there will be
11,800,000 shares of Common Stock issued and outstanding, in addition to
warrants to purchase 1,500,000 shares of Common Stock, exercisable at $0.30
per
share, and expiring5
years
from the grant date, and warrants to purchase 500,000 shares of Common Stock,
exercisable at $2.50 per share, expiring 5 years from the grant date, all of
which were issued to investors in the Private Placement. The total number of
shares of Common Stock issued and outstanding also does not include shares
reserved for issuance upon the exercise of outstanding options or warrants
or
shares reserved for issuance under the Stock Option Plan. Giving effect to
the
Plan of Recapitalization, the Company will have outstanding warrants to purchase
an aggregate of 250,000 shares of our Common Stock, the exercise prices of
which
are $0.30 per share, and we have reserved shares of our Common Stock for
issuance in connection with the potential exercise thereof. Further, the Company
issued warrants to purchase 300,000 shares of Common Stock to the placement
agent in the Private Placement, at an exercise price equal to $2.75 per share.
In addition, the Board of Directors has approved the Stock Option Plan which
reserves up to 1,600,000 shares of our Common Stock for issuance under its
terms, of which 1,503,000 has been authorized by written consent of the Board
of
Directors for issuance at the time of the Acquisition, at an exercise price
of
$2.01 per share, subject to shareholder approval of the 2007 Stock Option Plan
and the Plan of Recapitalization. To the extent shares of our Common Stock
are
issued or options or warrants are exercised, investors in our securities will
experience further dilution and the presence of such derivative securities
may
make it more difficult to obtain any future financing. In addition, in the
event
any future financing should be in the form of, or be convertible into or
exchangeable for, equity securities, upon the issuance of such equity
securities, investors may experience additional dilution.
ALTHOUGH
WE ARE REQUIRED TO USE OUR BEST EFFORTS TO HAVE AN EFFECTIVE REGISTRATION
STATEMENT COVERING THE ISSUANCE OF THE SHARES UNDERLYING THE WARRANTS AT THE
TIME THAT OUR WARRANT HOLDERS EXERCISE THEIR WARRANTS, WE CANNOT GUARANTEE
THAT
A REGISTRATION STATEMENT WILL BE EFFECTIVE, IN WHICH CASE OUR WARRANT HOLDERS
MAY NOT BE ABLE TO EXERCISE OUR WARRANTS. Although
we have undertaken to use our best efforts to maintain a current registration
statement covering the shares underlying the warrants following completion
of
the Private Placement, we cannot assure that we will be able to do so. In
addition, we have agreed to use our reasonable efforts to register the shares
underlying the warrants under the blue sky laws of the states of residence
of
the exercising warrant holders, to the extent an exemption is not available.
The
value of the warrants may be greatly reduced if a registration statement
covering the shares issuable upon the exercise of the warrants is not kept
current or if the securities are not qualified, or exempt from qualification,
in
the states in which the holders of warrants reside. Holders of warrants who
reside in jurisdictions in which the shares underlying the warrants are not
qualified and in which there is no exemption will be unable to exercise their
warrants and would either have to sell their warrants in the open market or
allow them to expire unexercised, in which case the warrants would be
automatically exercised using a cashless conversion.
SHARES
ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. From
time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of our Common Stock by means of ordinary brokerage transactions
in
the open market pursuant to Rule 144, subject to certain limitations. All the
shares outstanding, post Plan of Recapitalization and prior to the conversion
of
the Series B Preferred Stock and Series C Preferred Stock, have been issued
for
more than two years and are eligible for sale in compliance with Rule 144,
without regard to the volume limitations thereunder, except for any shares
held
by our affiliates within the meaning of Rule 144.
41
In
general, pursuant to Rule 144, a stockholder (or stockholders whose shares
are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of Common
Stock
or the average weekly trading volume of the class during the four calendar
weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the
sale
of securities, without any limitation, by a non-affiliate of the Company that
has satisfied a two-year holding period. Any substantial sale of our Common
Stock pursuant to Rule 144 or pursuant to any resale prospectus may have an
adverse effect on the market price of our publicly traded
securities.
42
DESCRIPTION
OF SECURITIES
The
Company is authorized to issue 25,000,000 shares of capital stock divided into
(i) 20,000,000 shares of common stock, no par value and (ii) 5,000,000 shares
of
preferred stock, par value $0.01 per share.
Common
Stock
As
of
January 26, 2007, there are 8,316,074 shares of Common Stock issued and
outstanding. The total number of shares of Common Stock issued and outstanding
does not include shares reserved for issuance upon the exercise of outstanding
options or warrants or shares reserved for issuance under the Company’s Stock
Option Plan or conversion of preferred stock. As of today, the Company had
outstanding stock options and warrants to purchase an aggregate of 4,053,000
shares of our Common Stock, and we have reserved shares of our Common Stock
for
issuance in connection with the potential exercise thereof.
After
approval and adoption of the Plan of Recapitalization, the Company will be
authorized to issue 40,000,000 shares of Common Stock. After effectiveness
of
the Plan of Recapitalization and upon conversion of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock into Common Stock,
there will be 11,800,000 shares
of Common Stock issued and outstanding. The total number of shares of Common
Stock issued and outstanding does not include shares reserved for issuance
upon
the exercise of outstanding options or warrants or shares reserved for issuance
under the Company’s Stock Option Plan. Giving effect to the Plan of
Recapitalization, the Company will have outstanding warrants to purchase an
aggregate of 250,000 shares of the Company’s Common Stock, exercisable at $0.30
per share. Additionally, the Company issued to investors warrants to purchase
an
aggregate of 1,500,000 shares of the Company’s Common Stock, exercisable at
$0.30 per share, warrants to purchase an aggregate of 500,000 shares of the
Company’s Common Stock, exercisable at $2.50 per share, warrants
to purchase 300,000 shares of Common Stock to the Placement Agent, at an
exercise price equal to $2.75 per share
and the Company reserved shares of its Common Stock for issuance in connection
with the potential exercise thereof. In addition, the Board approved and
authorized the issuance of 1,503,000 employee stock options upon closing of
the
Acquisition, exercisable at a price per share equal to $2.01
per share,
and expiring 10 years from the grant date,
pursuant to the 2007 Stock Option Plan which reserves up to 1,600,000 shares
of
the Company’s Common Stock for issuance. Such issuance is subject to shareholder
approval of the Plan of Recapitalization and the 2007 Stock Option Plan which
will take place at the next shareholder meeting
The
holders of the Company’s Common Stock are entitled to one vote for each share
held of record in the election of directors and in all other matters to be
voted
on by the stockholders. There is no cumulative voting with respect to the
election of directors. As a result, the holders of more than 50% of the shares
voting for the election of directors can elect all of the directors. Holders
of
Common Stock are entitled:
·
to
receive any dividends as may be declared by the Board of Directors
out of
funds legally available for such purpose after payment of accrued
dividends on the outstanding shares of preferred stock;
and
·
in
the event of the Company’s liquidation, dissolution, or winding up, to
share ratably in all assets remaining after payment of liabilities
and
after provisions have been made for each class of stock having preference
over the Common Stock.
All
of
the outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. Holders of the Company’s Common Stock have no preemptive right to
subscribe for or purchase additional shares of any class of the Company’s
capital stock.
43
Preferred
Stock
Our
Board
of Directors has the authority, within the limitations set forth in our
certificate of designations and certificate of incorporation to provide by
resolution for the issuance of preferred stock, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. As of January 26, 2007, there are
2,875,000 shares of Series A Preferred Stock outstanding, 15,000 shares of
Series B Preferred Stock outstanding and 8,000 shares of Series C Preferred
Stock outstanding. After
effectiveness of the Plan of Recapitalization, and following conversion of
the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock into Common Stock, the Company will be authorized to designate
the rights and preferences and issue up to 5,000,000 shares of preferred
stock.
Series
A Convertible Preferred Stock
The
Series A 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 Series A 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 Series A 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 Series A Preferred Stock, subject to adjustment when Common Stock
has been proportionately adjusted. Upon conversion, all accumulated and unpaid
dividends to the conversion date on the Series A 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.
The
holders of the Series A 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
Series A Preferred Stock. Series A Preferred Stock is entitled to two votes
per
share (reflecting its 2-for-1 conversion feature) on all matters submitted
to a
vote of the holders of Common Stock. In January, 2007, the Company issued
2,600,000 shares of Common Stock to holders of Series A Preferred Stock in
satisfaction of 50% of the accrued but unpaid dividends owed to holders of
Series A Preferred Stock as of December 31, 2006.
As
part
of the Plan of Recapitalization, the Series A Preferred Stock will be converted
or exchanged into 4,584,196 shares of Common Stock immediately after the 1
for
20 exchange or reverse stock split pursuant to the Plan of Recapitalization,
and
the
holders of Series A Preferred Stock will waive any remaining accrued and unpaid
dividends thereon.
Series
B Convertible Preferred Stock
At
any
time after approval of the Plan of Recapitalization but prior to satisfaction
of
all conditions necessary for the mandatory conversion set forth below, holders
of the Series B Preferred Stock may convert the Series B Preferred Stock into
shares of Common Stock, at their option, in whole or part, at an initial
conversion price equal to $2.50 per shareof
Common
Stock (the “Conversion
Price”),
such
Conversion Price being effective after giving effect to the Plan of
Recapitalization.
44
Holders
of the Series B Preferred Stock will be obligated to convert their Series B
Preferred Stock into shares of Common Stock at the Conversion Price following
such time as the Plan of Recapitalization has been approved by the stockholders
of the Company and adopted by the Board of Directors, subject to Company
compliance with certain conditions as set forth in the Certificate of
Designation establishing the terms of the Series B Preferred Stock.
Upon
the
occurrence of certain triggering events (as set forth in the Certificate of
Designation with respect to the Series B Preferred Stock), holders of the Series
B Preferred Stock shall have the right to have all shares of Series B Preferred
Stock then held by them redeemed for cash in an amount per share equal to
the
sum of (i) the greater of (A) 115% of the Stated Value and (B) the product
of
(a) the VWAP (as defined in the Certificate of Designation) on the trading
day
immediately preceding the date of the triggering event and (b) the Stated Value
divided by the conversion price and (ii) all liquidated damages and other costs,
expenses or amounts due in respect of the Series B Preferred Stock.
Except
as
required by law, the Series B Preferred Stock shall
have voting rights equal to the number of shares of Common Stock such Series
B
Preferred Stock is convertible into as of the record date for such vote (such
conversion rate assumes the Plan of Recapitalization has been approved by the
stockholders of the Company).
There
are
no dividends payable on the Series B Preferred Stock unless declared payable
by
the Board of Directors of the Company.
Upon
an
Event of Liquidation, holders of any then unconverted shares of the Series
B
Preferred Stock will be entitled to receive the Liquidation Preference Amount
before holders of Common Stock are entitled to receive any portion of the
consideration available from the liquidation of the Company. If there are
insufficient assets available for distribution to pay such holders of Series
B
Preferred Stock the full amount to which they are entitled, holders of Series
B
Preferred Stock will share ratably 100% of the liquidation consideration
available with the holders of our Series C Preferred Stock in any distribution
of our assets. The “Liquidation
Preference Amount”
shall
be equal to the sum of: (i) the Stated Amount of any then unconverted Series
B
Preferred Stock, and (ii) any accrued and unpaid dividends, fees or damages
owing thereon. For purposes hereof, an “Event
of Liquidation”
shall
mean any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary.
For
so
long as any shares of Series B Preferred Stock are outstanding, the Company
shall be prohibited from taking certain actions without the prior written
consent of the holders of a majority in interest of the Series B Preferred
Stock
then outstanding, as set forth in the Certificate of Designation.
Series
C Convertible Preferred Stock
Holders
of the Series C Preferred Stock will be obligated to convert the Series C
Preferred Stock into shares of Common Stock (the “Series
C Conversion Shares”),
after
the Plan of Recapitalization has been approved by the stockholders of the
Company and adopted by the Board of Directors at an initial conversion price
equal to $2.50 per shareof
Common
Stock (the “Series
C Conversion Price”),
after
giving effect to the Plan of Recapitalization.
Except
as
required by law, the Series C Preferred Stock shall
have no voting rights. In addition, there
are
no dividends payable on the Series C Preferred Stock unless declared payable
by
the Board of Directors of the Company.
45
Upon
an
Event of Liquidation, holders of any then unconverted shares of the Series
C
Preferred Stock will be entitled to receive the Series C Liquidation Preference
Amount before holders of Common Stock are entitled to receive any portion of
the
consideration available from the liquidation of the Company. If there are
insufficient assets available for distribution to pay such holders of Series
C
Preferred Stock the full amount to which they are entitled, holders of Series
C
Preferred Stock will share ratably 100% of the liquidation consideration
available with the holders of our Series B Preferred Stock in any distribution
of our assets. The “Series
C Liquidation Preference Amount”
shall
be equal to $250.00 per share of any then unconverted Series C Preferred
Stock.
Warrants
and Options
Common
stock warrants
Existing
Warrants @ $0.30 per share
On
October 24, 2005, the Company issued 750,000 warrants to purchase Common Stock.
Of these warrants, 600,000 were issued to John Pappajohn and the remaining
150,000 warrants were issued to his designees. The warrants were issued as
compensation for past services rendered and all warrants were immediately
vested. The warrants have an exercise price of $0.50, which exceeded the market
price of the Company’s common stock at the time of issuance. The value of the
warrants was separately estimated at $0.01 per share or $10,000 based on the
Black-Scholes valuation of the call option associated with a five year warrant.
As part of the financing, Mr. Pappajohn relinquished the 600,000 warrants that
were issued to him, and the remaining 150,000 warrants issued to his designees
will be adjusted to 250,000 warrants to purchase common stock exercisable at
$0.30 per share.
Investor
Warrants @ $0.30 per share
In
connection with the private placement consummated recently (and described under
“Recent Sales of Unregistered Securities” below), each investor received a
warrant to purchase up to a number of shares of Common Stock equal to 25% of
such investor’s subscription amount divided by the Conversion Price (as defined
in the Certificate of Designation establishing the Series B Preferred Stock),
with an exercise price equal to $0.30. After
approval and adoption of the Plan of Recapitalization,
the
Company will have issued to
investors warrants to purchase an aggregate of 1,500,000 shares of Common Stock,
exercisable at $0.30 per share, expiring five years from the
date
the Plan of Recapitalization has been approved by the stockholders of the
Company.
Investor
Warrants @ $2.50 per share
In
connection with the private placement consummated recently (and described under
“Recent Sales of Unregistered Securities” below), each investor received a
warrant to purchase up to a number of shares of Common Stock equal to 8.3%
of
such investor’s subscription amount divided by the Conversion Price (as defined
in the Certificate of Designation establishing the Series B Preferred Stock),
with an exercise price equal to $2.50 per share. After
approval and adoption of the Plan of Recapitalization,
the
Company will have issued to
investors warrants to purchase an aggregate of 500,000 shares of Common Stock,
exercisable at $2.50 per share, expiring five years from the
date
the Plan of Recapitalization has been approved by the stockholders of the
Company.
Placement
Agent Warrants @ $2.75 per share
In
connection with the private placement consummated recently (and described under
“Recent Sales of Unregistered Securities” below), the Company issued to the
Placement Agent (as defined below) a warrant to purchase 5% of the Common Stock
issuable upon conversion of the Series B Preferred Stock at each Closing at
an
exercise price equal to $2.75 per share. After approval of the Plan of
Recapitalization, the Company will have issued to the Placement Agent warrants
to purchase 300,000 shares of the Common Stock, exercisable at $2.75 per share,
and expiring five years from the date of grant.
46
In
sum,
after effectiveness of the Plan of Recapitalization, the Company will have
outstanding warrants to purchase an aggregate of 2,550,000 shares of the
Company’s Common Stock (2,000,000 warrants associated with the sale of the
Series B Preferred Stock and 250,000 warrants remaining from the warrants issued
on October 14, 2005, the exercise prices of which are $2.50 per share pertaining
to 500,000 of such warrants and the exercise prices of which are $0.30 per
share
for the remaining warrants, as well as 300,000 Placement Agent Warrants), and
the Company has reserved shares of its Common Stock for issuance in connection
with the potential exercise thereof.
Common
stock options
The
Board
of Directors has adopted the 2007 Stock Option Plan, subject to the
effectiveness of the Plan of Recapitalization (the “Stock
Option Plan”).
The
Stock Option Plan will provide for the grant of 1,600,000 incentive stock
options, nonqualified stock options, restricted stock, stock bonuses and stock
appreciation rights. The Stock Option Plan will be administered by the Board
of
Directors which has the authority and discretion to determine: (1) the persons
to whom the options will be granted; when the options will be granted; the
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.
The
Board
of Directors has approved and authorized the issuance from the Stock Option
Plan
of 1,503,000 stock options to certain employees of CONMED
at
the
Closing of the Acquisition, exercisable at $2.01 per share, which the Board
determined to be equal to the fair market value at the time of closing, and
expiring10
years
from the grant date, such issuance subject to shareholder approval of the Plan
of Recapitalization and the Stock Option Plan at the next shareholder
meeting.
Transfer
Agent and Registrar
Our
transfer agent and registrar for our common stock is Wells Fargo Shareowner
Services, P.O. Box 64875, St. Paul, MN55164-0875.
Changes
in and Disagreements with Accountants
None
Recent
Sales of Unregistered Securities
In
January 2007, holders of Pace’s Series A Preferred Stock converted 50% of the
accrued but unpaid dividends on their Series A Preferred Stock into an aggregate
of 2,600,000 shares of Common Stock. All the holders of Series A Preferred
Stock
have agreed to waive the remaining accrued and unpaid dividends on their shares
of Series A Preferred Stock at the consummation of the Plan of Recapitalization.
In
connection with the sale of the Units, the Company retained Maxim Group LLC,
an
NASD member broker-dealer as its exclusive placement agent (the “Placement
Agent”).
The
Placement Agent received the following compensation: (i) a cash fee of 10%
of
the gross proceeds delivered at each Closing (an aggregate of $1,500,000) and
(ii) a warrant to purchase 5% of the common stock that is issuable upon
conversion of the Units, at an exercise price equal to $2.75 per share of common
stock. In addition, the Company reimbursed the Placement Agent for its
accountable expenses in the amount of $50,000, as well as any filing fees
associated with Blue Sky filings, in an amount of $5,000.
The
Company agreed to provide investors in the Units with a Registration Rights
Agreement whereby it will use its best efforts to register the resale of the
Common Stock to be issued upon conversion of the Series B Preferred Stock and
exercise of the warrants contained in the Units within one hundred (100) days
after the final closing date of the Acquisition. In the event such registration
is not effective on or before the 180th
day
following such final closing date (the “Effectiveness
Date”),
the
Company will pay a cash penalty equal to 1% per month of the gross proceeds
received from the sale of the Units (or the ratable portion thereof for a
partial month) for each month following the Effectiveness Date that there shall
fail to be an effective registration statement for the Common Stock up to a
maximum of 10%.
Indemnification
of Directors and Officers
Iowa
law provides for mandatory indemnification of directors in the case where a
director is wholly successful, on the merits or otherwise, in the defense of
any
proceeding to which the director was a party because the director is or was
a
director of the corporation. In addition, a corporation may indemnify a director
or officer against liability incurred in a proceeding if either (a) the director
or officer acted in good faith; and (b) the director or officer reasonably
believed that the conduct was in or at least not opposed to the best interest
of
the corporation; or (c) the director or officer engaged in conduct for which
broader indemnification has been made permissible under a corporation’s articles
of incorporation. Indemnification is available in a criminal action only if
the
person seeking indemnity had no reasonable cause to believe that the person’s
conduct was unlawful.
Iowa
law generally does not allow indemnification in connection with a proceeding
with respect to conduct for which a director or officer receives a financial
benefit for which he or she was not entitled, whether or not the director or
officer was acting in his or her official capacity. A director or officer can
also not be indemnified in connection with a proceeding by or in the right
of
the corporation, except for reasonable expenses if it is determined that the
director or officer has met the relevant standard of conduct.
The
Bylaws of the Company provide for indemnification to the fullest extent provided
by Iowa law.
Item
8.01 Other
Events.
On
January 15, 2007, Pace’s Board of Directors approved a Plan of Recapitalization
for the Company, which it expects to submit for shareholder approval. Under
the
proposed plan of recapitalization Pace expects, as soon as practicable, to
effect some or all of the following:
48
·
A
reverse split or exchange of 1 share for each 20 shares of common
stock.
·
Conversion
of the existing Series A Preferred Stock of Pace into 4,584,196 shares
of
common stock (immediately after the 1 for 20 exchange or reverse
stock
split) in exchange for conversion of and waiver of remaining accrued
and
unpaid dividends.
·
Reincorporation
in the state of Delaware.
·
Implementing
a stock option plan.
Pace
expects to file a preliminary proxy statement as required under applicable
SEC
rules in the near future. Assuming the preliminary proxy statement is approved
by the SEC, a final proxy statement will be mailed to shareholders of record
for
the meeting of shareholders to approve the Plan of
Recapitalization.
Following
the Acquisition, Pace’s executive offices moved from Des Moines, Iowa to La
Plata, Maryland.
49
Item
9.01.Financial
Statements and Exhibits.
(a)
Financial
statements of Pace and CONMED.
The
financial statements of Pace as of and for the years ended December 31, 2005
and
2004 have been previously included in a Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 2006, and are hereby incorporated by
reference. The unaudited financial statements of Pace as of and for the nine
months ended September 30, 2006 and 2005 have been previously included in a
Form
10-QSB as filed with the Securities and Exchange Commission on November 14,2006, and are hereby incorporated by reference.
The
audited financial statements and notes to the financial statements of CONMED
as
of and for the years ended December 31, 2005 and 2004 are included as Exhibit
99.1 to this Report on Form 8-K.
The
unaudited financial statements and notes to the financial statements of CONMED
as of and for the nine months ended September 30, 2006 and 2005 are included
as
Exhibit 99.2 to this Report on Form 8-K.
(b)
Pro
forma financial information.
The
unaudited condensed pro forma combined balance sheet as of September 30, 2006,
unaudited condensed pro forma combined statement of operations for the nine
months ended September 30, 2006, unaudited condensed pro forma combined
statement of operations for the twelve months ended December 31, 2005 and notes
to unaudited condensed pro forma combined financial statements are included
as
Exhibit 99.3 to this Report on Form 8-K.
Audited
financial statements and notes to the financial statements of CONMED
as of
and for the years ended December 31, 2005 and 2004
99.2
Unaudited
financial statements and notes to the financial statements of CONMED
as of
and for the nine months ended September 30, 2006 and 2005.
99.3
Unaudited
condensed pro forma combined balance sheet as of September 30,2006,
unaudited condensed pro forma combined statement of operations
for the
nine months ended September 30, 2006, unaudited condensed pro forma
combined statement of operations for the twelve months ended December31,2005 and notes to unaudited condensed pro forma combined financial
statements.
This
Current Report on Form 8-K may contain, among other things, certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, (i) statements
with respect to the Company’s plans, objectives, expectations and intentions;
and (ii) other statements identified by words such as “may”, “could”, “would”,
“should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”
or similar expressions. These statements are based upon the current beliefs
and
expectations of the Company’s management and are subject to significant risks
and uncertainties. Actual results may differ from those set forth in the
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties that are subject to change based on various factors
(many of which are beyond the Company’s control).
51
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
