U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 0-15936
HEALTH OUTCOMES MANAGEMENT, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1546471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2331 UNIVERSITY AVENUE S.E.
MINNEAPOLIS, MINNESOTA 55414
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (612) 378-3053
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No __
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenue for its most recent fiscal year was $1,160,675.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1998, was approximately $676,524.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at February 28, 1998 was 8,872,853.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Exhibit Index Page: 39 Page 1 of 49
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
FORM 10-KSB
INDEX
Part I: Page
----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 7
Item 3. Legal proceedings............................................. 7
Item 4. Submission of matters to a vote of
security holders.......................................... 7
Part II:
Item 5. Market for registrant's common stock and
related stockholder matters.............................. 8
Item 6. Management's discussion and analysis of financial
condition and results of operations...................... 9
Item 7. Financial statements and supplementary data................... 13
Item 8. Disagreements on accounting and financial disclosure.......... 32
Part III:
Item 9. Directors and officers of the registrant...................... 33
Item 10. Executive compensation........................................ 34
Item 11. Security ownership of certain beneficial owners
and management............................................ 37
Item 12. Certain relationships and related transactions................ 38
Item 13. Compliance with Section 16(a) of the Exchange Act............. 38
Part IV:
Item 13. Exhibits, financial statement schedules,
and reports on Form 8-K................................... 39
<PAGE>
PART I
Item 1. Business
The Company
Health Outcomes Management, Inc. (the "Company" or "Health Outcomes Management")
was incorporated in Minnesota in February 1986. Until September 1995, the
Company operated under the name "Data Med Clinical Support Services, Inc". The
term the "Company" or "Health Outcomes Management" as used herein includes
Health Outcomes Management, Inc. and subsidiaries, unless otherwise indicated.
The Company's executive offices are located at 2331 University Avenue Southeast,
Minneapolis, Minnesota 55414. The Company's telephone number is 612-378-3053.
On June 15, 1994, the Company formed Pharmaceutical Care Outcomes, Inc. as a
wholly owned subsidiary. The primary purpose of the new corporation is to
continue to refine the Assurance Coordinated Pharmaceutical Care System(TM),
market it to pharmacies across the United States and work closely with the
Peters Institute of Pharmaceutical Care at the University of Minnesota in the
practice of comprehensive Pharmaceutical Care.
During July 1996 and April 1997, the Company acquired certain assets of two
community pharmacies located in the Minneapolis, Minnesota metropolitan area.
During fiscal year 1998, the Company divested itself of these pharmacies.
Description of Business
The Company's mission statement is to improve the quality of patient outcomes in
healthcare - cost effectively using modern computer software technology.
The Company's primary business consists of licensing its proprietary clinical
support and financial software services to long-term care facilities, home
healthcare agencies, retail pharmacies and hospitals. The principal elements of
these services include software, training and 24-hour telephone support.
During fiscal year 1998, the Company operated two community pharmacies. The
Company divested itself of both pharmacies during the fiscal year.
The Company markets its software services under the trade name "ASSURANCE 2001".
These comprehensive services are designed to give health care professionals the
assurance that productivity and costs are being carefully managed. These
services also give clinicians the assurance that patient care is optimized by
using some of the most advanced technology available to provide successful
patient healthcare outcomes.
The Products
Long-Term Care Software
The Company markets computer software services to long-term care facilities to
provide the clinical documentation required by federal regulation. A shortage of
nurses also makes computerized clinical records desirable. The Assurance
Long-Term Care System(TM) utilizes a relational database. The Company also
provides Point-of-Care remote data collection software for use at nursing
stations. The Company's Assurance Financial System(TM) software may be installed
singularly or as a complete system with the clinical documentation system.
During fiscal year 1998, the Company entered into an agreement with Advanced
Information Management (AIM) of Appleton, WI. As part of this relationship, the
Company resells AIM's Windows(TM) based long term care program, trains new
customers on how to use the program, and provides on going telephone support to
customers.
<PAGE>
Home Healthcare Agencies Software
The Assurance Homecare System(TM) is designed for the collection and analysis of
information needed to manage homecare patients when they no longer need to be in
a hospital and are being cared for at home. Nurses can record their findings at
a patient's home using Health Outcomes Management's unique Point-of-Care
Software(TM) and a notebook computer. All information is then made available to
the homecare agency and to the physicians via a relational database for
activities such as clinical trend analysis and prompt billing. The Company's
Assurance Financial System(TM) software may be installed alone or as a part of a
complete system with the Company's clinical documentation system.
Community Pharmacy Software
The Assurance Coordinated Pharmaceutical Care System(TM) utilizes pharmacy
protocols that have been developed for the most cost effective treatment of
patients who are using multiple drugs, prescribed by more than one physician,
plus over-the-counter drugs. This system is a quality assurance and continuous
quality improvement approach to caring for patients. The system provides a major
step forward in the everyday practice of pharmacy in community pharmacies. A
major emphasis of this system is outcome management to enhance the patient's
quality of life, cost effectively.
Hospital Software
Hospitals may utilize several of the Company's software services. Rehabilitation
hospitals utilize a customized computerized system specifically for the needs of
the rehabilitation market segment. Procedures and reports are specific for the
needs of treating acute care, long-term care and outpatient rehabilitation
patients. Outcome management techniques are included to improve the likelihood
of successful patient health outcomes.
Pharmacokinetics is the study of how drugs get into and out of a patient's body
and the changes which take place while they are in the body. The Assurance
Kinetics System(TM) makes it easier, faster and less costly to calculate proper
dosages, and to track schedules of commonly monitored drugs. The heart of Health
Outcomes Management's Assurance Kinetics System(TM) is the unique Health
Outcomes Management software, updated with the latest findings in
pharmacokinetic research.
Studies indicate that many patients in hospitals are suffering from
malnutrition. The patient's nutritional status plays a major role in determining
the outcome of any medical intervention. Health Outcomes Management's Assurance
Nutrition System(TM) allows an institution or physician to provide a nutritional
consult which is specifically geared to the severity of the patient's
nutritional status.
Continuing Support Services
All computerized Health Outcomes Management systems are licensed with an
agreement for Health Outcomes Management to provide continuing support services
on a 24-hour-a-day, 7 day-a-week basis via the Company's telephone helpline
(1-800-STAT-911).
Community Pharmacy Stores
At the Company's community pharmacy locations prescription and over-the-counter
drugs were sold at the retail level. The Company divested itself of both
pharmacies during the fiscal year.
Competition
The market for clinical information and financial software systems and services
continues to undergo rapid development and is highly competitive. Although no
one company directly competes with Health Outcomes Management's entire line of
services, many companies offer services that compete directly with individual
Health Outcomes Management services, or offer alternatives to such services.
<PAGE>
The Company's principal competition in the market for the Assurance Long-Term
Care System(TM) and Assurance Financial System(TM) include Care Computer, MCS,
Beechwood, AA Data Systems, Achieve, Melyx, and Long-Term Care Computer Systems
as well as approximately eighty-five other suppliers.
The Assurance Homecare System(TM) has principally the following competitors:
Infomed, Sandata, Delta, Kiyo, ProMac, RX:Home and Mesta Med.
In the market for the drug dosing and nutritional support, competition consists
of Simkin, Cedar Systems and the Diagnostics Division of Abbott. The Abbott
product is intended primarily to serve as a complement to Abbott's laboratory
instruments.
In the area of Pharmaceutical Care, competition consists primarily of Carepoint,
Encara, CareStream and MedOutcomes. Many pharmacy dispensing systems advertise
that they also provide pharmaceutical care. However, the Company believes that
dispensing systems do not provide comprehensive patient care and drug outcomes
measurement.
Company management believes that the Company's comprehensive clinical services
distinguish its products from the competition. The Company believes that
competitors could introduce new competing comprehensive clinical services and
products but not without significant investments of time and capital. Many of
the Company's competitors, however, do have greater financial and marketing
resources than the Company.
Sales and Marketing
The Company's products are presently marketed through direct marketing efforts.
The direct approach consists of efforts by Company personnel and commissioned
sales representatives in the promotion and sales of products and services into
all of the Company's markets.
The Company's marketing objective is to establish itself as a leader in
providing clinical support services by placing a major emphasis on the service
component of its business. To accomplish this, the Company has implemented the
following strategies:
* Offer a wide variety of clinical and financial support services that
are adaptable to multiple health care applications and settings such
as long-term care facilities, community pharmacies, home healthcare
agencies and hospitals.
* Distinguish Health Outcomes Management as a technology leader. The
Company's expert staff of Doctors of Pharmacy and Registered Nurses
enable Health Outcomes Management to stay on the leading edge of
patient outcome management technology.
* Provide a 24-hour-a-day helpline (l-800-STAT-911) so that Health
Outcomes Management clinical and financial experts are available on a
seven day, 24-hour basis to provide excellent clinical and financial
support services to its clients.
* Exhibit the Company's products and services at important national
trade shows and technical convocations.
* Develop strategic alliances with healthcare providers.
The ASSURANCE 2001 systems are stand alone services which can be integrated, but
are designed to meet specific productivity and outcome management needs of
practitioners and clinicians. They are generally licensed directly by the
Company to existing clients and to prospects generated from magazine
advertising, trade shows, direct mailings and direct sales efforts.
<PAGE>
Significant Clients
During the year ended February 28, 1998, no one client accounted for a
significant portion of the Company's revenues. During the year ended February
28, 1997, one client accounted for approximately 27% of total revenue. In
January 1997, the Company's relationship with this client terminated at the end
of the three year agreement.
Research and Development
The Company spent approximately $129,000, $223,000 and $503,000 for research and
development efforts in the years ended February 28, 1998, 1997 and 1996,
respectively. For fiscal year 1999 the Company intends to fund software
development at approximately the same levels as fiscal year 1998.
Government Regulation
Medical products and devices are subject to extensive federal regulations by the
United States Food and Drug Administration (the "FDA") and are also subject to
state regulations. To date, the FDA has not adopted any substantive regulation
on computer software or related services and, currently, none of the Company's
products or services is subject to FDA oversight.
Changes in reimbursement formulas and in the types of items eligible for
reimbursement under government funded health care programs, and the availability
and timing of funding appropriations for such programs, have affected the health
care industry generally and may, directly or indirectly, affect the market for
the Company's products and services.
Copyrights, Patents and Trademarks
Computer software systems, which form an integral part of the Company's products
and services, may, in general, be copyrighted, but copyright laws do not provide
complete protection from unauthorized use.
The Company currently holds no patents with respect to any of its products or
services, but may seek patent protection in the future. Currently, the Company
seeks to protect proprietary information regarding its products and services as
trade secrets by utilizing nondisclosure agreements with its employees, clients
and others who are permitted access to such information.
Employees
On May 1, 1998, the Company employed 14 staff members and 2 contract employees.
In addition, the Company was utilizing the services of 2 independent marketing
representatives. The Company is not subject to any collective bargaining
agreements and considers its relationships with employees to be good.
Insurance
The Company currently maintains insurance for general property and liability
insurance claims in an aggregate amount which it believes to be sufficient given
the nature of its business. These policies generally provide coverage on a
claims made or occurrence basis and have certain exclusions from coverage. These
insurance policies must be renewed annually. There can be no assurance that
insurance coverage will be adequate to cover liability claims that may be
asserted against the Company or that adequate insurance will be available in the
future at acceptable cost. The Company does not have insurance against
liabilities arising in connection with errors and omissions in its computer
software.
<PAGE>
Item 2. Properties
The Company leases its corporate office and training facilities which are
located at 233l University Avenue Southeast in Minneapolis, Minnesota. The
facilities are covered by an operating lease with an original term of three (3)
years commencing January 1, 1992. Under an amendment signed December 23, 1996,
and effective February 28, 1997, the Company terminated a portion of this lease.
The lease term for the remaining office space has been extended to December 31,
1998, with two additional one year options. Rent is payable monthly in the
amount of $9,507. In addition to such rent, the Company is obligated to pay
certain operating costs and increases in real property taxes. Such facility
consists of approximately 7,477 square feet.
The Company leases a community pharmacy site located at 9611 Anderson Lake
Parkway, Eden Prairie, Minnesota. The site is covered by an operating lease with
a term of five (5) years commencing on April 3, 1997. For lease years one
through three the rent is payable monthly in the amount of $2,405. For the lease
years four and five the rent is payable monthly in the amount of $2,672. In
addition to such rent, the Company is obligated to pay certain operating costs
and increases in real property taxes. Such facility consists of approximately
604 square feet. While the Company is currently attempting to sublease this
property, there can be no assurance that this will be accomplished prior to the
completion of the lease. As part of the discontinuation of its retail Pharmacy
business, the Company expensed the entire cost of this lease in its 1997 fiscal
year.
Item 3. Legal Proceedings
As of May 1, 1998, the Company was not involved in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of stockholders during the Company's fourth
quarter.
<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market and is
quoted by the National Quotation Bureau. The following tables reflect the
quarterly high and low bid quotations for the Company's stock. These quotations
represent inter-dealer prices, without retail markup, markdown or commission,
and may not necessarily represent actual transactions.
STOCK PRICE
FISCAL 1998 FISCAL 1997
- --------------------------------------------------------------------------------
QUARTER HIGH LOW QUARTER HIGH LOW
---- --- ---- ---
First $ .13 $ .13 First $ .44 $ .31
Second $ .13 $ .08 Second $ .38 $ .19
Third $ .21 $ .08 Third $ .19 $ .08
Fourth $ .18 $ .10 Fourth $ .16 $ .13
As of May 31, 1998, there were approximately 330 shareholders "of record" (as
defined in Rule 12g5-1 of the Securities Exchange Act of 1934) of the Company's
common stock.
To date, the Company has paid no dividends, and it does not intend to pay
dividends in the foreseeable future. Future dividend policy with respect to the
common stock will depend on conditions existing at the time, including the
Company's earnings, (if any), capital needs, financial condition, general
business conditions and other factors considered by the Board of Directors.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL. Health Outcomes Management, Inc., is a developer and supplier of
proprietary computer software and services to the healthcare industry. In
addition, during fiscal 1998, the Company operated two community pharmacies.
Revenues are derived primarily from five sources: (1) licensing computerized
clinical and financial information management software systems; (2) providing
on-going software support services; (3) software training services; (4)
consulting services and (5) prescription and over-the-counter drug sales.
License and training fees are usually received at the beginning of the license
term, which is generally from one to three years in duration. Annual and monthly
support fees pay for periodic software updates, telephone helpline support and
software usage.
FISCAL 1998 v. FISCAL 1997
REVENUE. For fiscal 1998, revenue from continuing operations was $1,160,675.
Total revenue from continuing operations decreased by $1,140,951, or 49.6%, from
$2,301,626 in fiscal 1997. The Company recorded a net loss from continuing
operations in fiscal 1998 of $372,708 compared to net income of $19,921 from
continuing operations in fiscal 1997. The Company recorded a net loss, including
discontinued operations, in fiscal 1998 of $702,435, compared to net loss of
$113,244, including discontinued operations in fiscal 1997, an increase in loss
from continuing and discontinued operations combined of $589,191 or 520%.
The fiscal 1998 decrease in revenue was substantially impacted by the sale of
the Company's two pharmacy locations. The sales were treated as a
discontinuation of a division of the Company. While the revenues from
prescription and over-the-counter drug sales at the pharmacies operated in
fiscal 1998 increased by 300%, these revenues were of low margin and contributed
little to the Company's income. The revenue received from client support fees
decreased by 25%, license fees decreased by 81%, software training fees
decreased by 85%, and consulting revenue decreased by 42%.
Revenue from license fees, support, and training of the Company's Long-Term Care
products decreased by $164,000 or 15%. Revenue from license fees, support, and
training of the Company's pharmacokinetics and nutrition products decreased by
$50,000 or 34%. Revenue from license fees, support, and training of the
Company's Assurance Community Pharmaceutical Care System(TM) decreased by
$123,000 or 49.7%.
The effects of inflation on the Company's revenue and operating results were not
significant.
COSTS AND EXPENSES. Total expenses in fiscal 1998, including cost of sales,
interest, depreciation and amortization, decreased 33% to $1,533,000 from
$2,282,000 in fiscal 1997. Total operating expenses decreased 17% to $718,000
from $870,000 in fiscal 1997. General and administrative expenses decreased 8%
in fiscal 1998. Administrative expenses have declined significantly as the
Company has implemented expense reductions in an attempt to offset reductions in
revenue.
Net interest expense decreased 24% in fiscal 1998 to $8,939 from $11,777 in
fiscal 1997. During fiscal 1998 and fiscal 1997, the Company's interest costs
related primarily to leased computer and office equipment.
FISCAL 1997 v. FISCAL 1996
REVENUE. For fiscal 1997, revenue as adjusted for discontinued operations was
$2,301,626. Total revenue decreased by $881,092, or 28%, from $3,182,718 in
fiscal 1996. The Company recorded a net loss as adjusted for discontinued
operations in fiscal 1997 of $113,244, compared to net income of $95,615 in
fiscal 1996, a decrease of $208,859 or 218.4%. The fiscal 1997 decrease was
primarily the result of the termination of a one year marketing relationship
with one of the Company's major clients in April 1996 and the expenses
associated with the startup and operation of the pharmacy acquired in July 1996.
Revenue received from client support fees decreased by 8.6%, license fees
decreased by 33.7%, software training fees decreased by 73.6%, consulting
revenue decreased by 69.9% and other revenue decreased by 37.5%.
<PAGE>
Support fee revenue from the Company's Long-Term Care and Homecare products
increased by 7.3%. Decreased revenues from the Assurance Community
Pharmaceutical Care System(TM) accounted for 50.1% of the decline in license
fees, 96.2% of the decline in training fees, and all of the decline in support
fees and in other revenue, primarily the result of the Company terminating its
marketing relationship with one of its largest clients.
Consulting fee revenue decreased 69.9%, primarily reflecting changes in the
method of reimbursement by the Company's largest client. During part of fiscal
1996, the Company received monthly retainer fees; for the remainder of fiscal
1996 and all of fiscal 1997 the Company received reimbursement based on the
number of Homecare systems licensed and trained. See Note 11 to the 1997
Consolidated Financial Statements for discussion of this arrangement.
During fiscal 1997, the Company received a one-time payment of $159,000 pursuant
to the terms of a "transition agreement" between the Company and its largest
client. See Note 11 to the Consolidated Financial Statements for discussion of
this "transition agreement".
The effects of inflation on the Company's revenue and operating results were not
significant.
COSTS AND EXPENSES. Total expenses in fiscal 1997, including discontinued
operations, interest, depreciation and amortization, decreased 15.1% to
$2,622,266 from $3,087,103 in fiscal 1996. Total operating expenses, including
the expenses of the pharmacy acquired in fiscal 1997, decreased 13.6% to
$1,032,390 from $1,194,859 in fiscal 1996. Compensation, benefits and payroll
taxes decreased 22.8% in fiscal 1997. The decrease in payroll expenses is
primarily due to the approximate 35% staff reduction from the prior fiscal
period, reductions in health insurance benefit costs and a 10% voluntary salary
reduction by the President and Vice President. Staff reductions are the result
of staff attrition and the involuntary termination of seven (7) employees.
Administrative expenses such as telephone, accounting, legal, postage, supplies,
education and equipment maintenance decreased 17.3% in fiscal 1997.
Administrative expenses have declined significantly as the Company has
implemented expense reductions in an attempt to offset reductions in revenue.
Commissions paid to sales representatives in fiscal 1997 decreased 17.3% due to
decreases in commissionable license fees. Travel expenses and fees paid to
outside consultants also decreased in fiscal 1997 when compared to fiscal 1996.
Depreciation and amortization expenses decreased 27.3% in fiscal 1997 to
$124,678 from $171,531 in fiscal 1996. Amortization of various capitalized
software costs was completed in fiscal 1995.
Net interest expense decreased 40.6% in fiscal 1997 to $15,395 from $25,927 in
fiscal 1996, primarily due to interest income earned on the note receivable from
an officer of the Company. During fiscal 1997 and fiscal 1996, the Company's
interest costs related primarily to leased computer and office equipment.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1998, the Company had a working capital deficit of $(718,000)
compared to a deficit of $(211,000) at February 29, 1997, an increase in deficit
of $507,000. The decline in working capital was substantially due to write off
of leases in connection to the discontinuation to the Company's pharmacy
business and the willingness of certain vendors of the pharmacy locations to
accept extended payment plans for inventory that was purchased prior to
divestiture.
The Company has identified an exposure to the "Year 2000 Problem". Management
currently estimates the total cost of internal reprogramming of its software
products and the upgrading of purchased hardware and software to be
approximately $20,000. While this is management's best current estimate, items
outside management's control relating to the "Year 2000 Problem" may impact the
Company.
The Company does not have commitments to purchase additional equipment, but does
plan to continue to fund software development efforts at approximately the same
levels as the past year.
The Company believes that it will continue to have short-term cash needs. The
Company's cash flow position has not shown improvement since the previous fiscal
year and has been negatively impacted by the cash requirements of the retail
pharmacy operations. The closing of both retail pharmacies in late fiscal 1998
has eliminated the cash needs related to these operations (except for continuing
lease obligations, certain accounts payable, and promissory notes issued as part
of the discontinuation of operations).
<PAGE>
Improved capital availability will ultimately depend on improved sales
performance and continued cost containment of all operational costs. There can
be no assurance that sales results will improve or that the Company will
experience profitable operations. The financial statements do not include any
adjustments that might result should the Company be unable to continue as a
going concern.
Management intends to continue to implement the following initiatives during the
coming year:
* Continue to market the Company's Assurance Coordinated Pharmaceutical Care
System(TM) to community pharmacies, pharmacy benefit managers, and third
party payers.
* Expand its current strategy of locating a strategic partner in the
pharmaceutical care marketplace that has the financial strength to bring
the company's product to market a substantially increased pace, thus adding
stability to the Company's balance sheet.
* Continue to strengthen its relationship with Advanced Information
Management (AIM) through additional sales of AIM's software to its clients
and to new prospects.
* Reduce operating costs and ensure that the effectiveness of remaining
expenditures is consistent with support of the Company's client base.
If operations and cash flow can be improved through these efforts, management
believes that the Company's liquidity problems will be resolved and that the
Company can continue to operate. However, no assurance can be given that
management's actions will result in profitable operations or the resolution of
liquidity problems.
The independent auditors report included in this report on Form 10-KSB states
that the Company's working capital deficiency and stockholder's deficit raise
substantial doubts about the Company's ability to continue as a going concern.
<PAGE>
FORWARD LOOKING INFORMATION
Except for the historical information contained herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties.
These include but are not limited to: the availability of sufficient working
capital should the Company experience continuing operating losses; increased
market acceptance and market penetration of the Company's Assurance Coordinated
Pharmaceutical Care System(TM); improved sales performance of all of the Company
products; changes in government regulations; and continued containment of
operational costs. In addition, the market for clinical information and
financial software systems and services is highly competitive and the Company
may be adversely affected by the actions of existing or future competitors, who
may introduce new products or technologies in competition with the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Company adopted the disclosure requirements under
Statement of Financial Accounting Standards No. 123 (SFAS No. 123). ACCOUNTING
FOR STOCK-BASED COMPENSATION. See Note 1 in the Consolidated Financial
Statements of the Company, included in this Report on Form 10KSB, for the full
disclosure.
In fiscal 1997, the Company was required to adopt Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF which prescribes accounting and
reporting standards when circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. SFAS No. 121 had no impact on the
Company's financial statements.
<PAGE>
Item 7. Financial Statements and Supplementary Data.
The following Consolidated Financial Statements of the Company and the
Independent Auditors' Report thereon are included on pages 14 through 29 of this
Form 10-KSB
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
FEBRUARY 28, 1998
CONTENTS
PAGE
INDEPENDENT ACCOUNTANT'S REPORT ON THE FINANCIAL STATEMENTS..............14
FINANCIAL STATEMENTS
Consolidated balance sheets...........................................15
Consolidated statements of operations.................................16
Consolidated statements of changes in stockholder's deficit...........17
Consolidated statements of cash flows.................................18
Notes to consolidated financial statements.......................19 - 31
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Health Outcomes Management, Inc.
Minneapolis, MN
We have audited the accompanying consolidated balance sheet of Health Outcomes
Management, Inc. and Subsidiaries as of February 28, 1998, and the related
consolidated statements of income, changes in stockholders' deficit, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements for
Health Outcomes Management, Inc. and Subsidiaries for the two years in the
period ended February 28, 1997 were audited by other auditors whose report,
dated April 18, 1997, on those financial statements included an explanatory
paragraph that described factors which raise substantial doubt about the
entity's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluation the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Outcomes
Management, Inc. and Subsidiaries as of February 28, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Health Outcomes Management, Inc. will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the entity's
operating loss, net working capital deficiency and stockholders' deficit raise
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SCHWEITZER RUBIN KARON & BREMER
Certified Public accountants
Minneapolis, Minnesota
May 21, 1998
<PAGE>
Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
February 28, 1998 and February 28, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- -----------
FEBRUARY 28, 1998 1997
- ---------------------------------------------------------------------------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 119,716 $ 209,024
Trade receivables, less allowance for doubtful
accounts of $13,400 in 1998; $35,000 in 1997 43,902 92,402
Inventory 0 52,436
Prepaid expenses 15,383 17,366
- ---------------------------------------------------------------------------------- -----------
TOTAL CURRENT ASSETS 179,001 371,228
PROPERTY AND EQUIPMENT, net of accumulated depreciation 55,384 104,009
of $606,501 in 1998; $579,928 in 1997
OTHER ASSETS, net of accumulated amortization
of $6,219 in 1998; $3,455 in 1997 17,073 49,837
- ---------------------------------------------------------------------------------- -----------
TOTAL ASSETS $ 251,458 $ 525,074
====================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, current portion $ 7,500 $ 6,904
Current installments of obligations under capital leases 34,451 60,974
Accounts payable 470,385 102,827
Deferred revenue 326,075 313,926
Accrued compensation 35,478 56,547
Accrued payroll taxes 10,671 14,979
Other current liabilities 12,814 25,608
- ---------------------------------------------------------------------------------- -----------
TOTAL CURRENT LIABILITIES 897,374 581,765
NOTES PAYABLE, less current portion 10,000 4,289
OBLIGATIONS UNDER CAPITAL LEASES, less current installments 14,011 25,377
- ---------------------------------------------------------------------------------- -----------
TOTAL LIABILITIES 921,385 611,431
- ---------------------------------------------------------------------------------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6, 13, & 15)
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; authorized 15,000,000 shares;
issued 8,872,853 in 1998; 8,499,029 in 1997 88,729 84,990
Additional paid-in capital 4,770,194 4,724,568
Accumulated deficit (5,528,850) (4,826,415)
Note receivable from officer 0 (69,500)
- ---------------------------------------------------------------------------------- -----------
TOTAL STOCKHOLDERS' DEFICIT (669,927) (86,357)
- ---------------------------------------------------------------------------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 251,458 $ 525,074
====================================================================================================
</TABLE>
<PAGE>
Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended February 28, 1998, February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
REVENUES $ 1,160,675 $ 2,301,626 $ 3,182,718
COST OF REVENUES 806,928 1,399,522 1,866,317
- ----------------------------------------------------------------------- ------------ ------------
GROSS PROFIT 353,747 902,104 1,316,401
- ----------------------------------------------------------------------- ------------ ------------
OPERATING EXPENSES:
Research and development 128,740 223,437 502,627
Selling and marketing 115,962 135,713 195,668
General and administrative 472,814 511,256 496,564
- ----------------------------------------------------------------------- ------------ ------------
TOTAL OPERATING EXPENSES 717,516 870,406 1,194,859
- ----------------------------------------------------------------------- ------------ ------------
OPERATING INCOME (LOSS) (363,769) 31,698 121,542
OTHER INCOME (EXPENSE):
Interest income 3,801 7,714 641
Interest expense (12,740) (19,491) (26,568)
- ----------------------------------------------------------------------- ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS DISCONTINUED (372,708) 19,921 95,615
OPERATING INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (329,727) (133,165) 0
- ----------------------------------------------------------------------- ------------ ------------
NET INCOME (LOSS) $ (702,435) $ (113,244) $ 95,615
==========================================================================================================
NET INCOME (LOSS) PER SHARE DATA:
BASIC
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Net Income (loss) per share $ (0.08) $ (0.01) $ 0.01
Shares used in per share calculations 8,574,910 8,434,058 8,080,577
DILUTED
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Net Income (loss) per share $ (0.08) $ (0.01) $ 0.01
Shares used in per share calculations 8,574,910 8,434,058 8,720,983
</TABLE>
<PAGE>
Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended February 28, 1998, February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Note
------------------- ---------------------- Paid In Accumulated Receivable TOTAL
Shares Amount Shares Amount Capital Deficit From Officer DEFICIT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1996 0 $ 0 7,949,385 $ 79,494 $ 4,532,309 $(4,808,786) $ 0 $ (196,983)
Proceeds from stock 0 0 265,500 2,655 110,410 0 0 113,065
options exercised
Issuance of 0 0 113,000 1,130 23,005 0 0 24,135
common stock
Net income 0 0 0 0 0 95,615 0 95,615
Note receivable 0 0 0 0 0 0 (92,400) (92,400)
from officer
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, February 29, 1997 0 0 8,327,885 83,279 4,665,724 (4,713,171) (92,400) (56,568)
Proceeds from stock 0 0 123,000 1,230 44,280 0 0 45,510
options exercised
Issuance of 0 0 48,144 481 14,564 0 0 15,045
common stock
Net loss 0 0 0 0 0 (113,244) 0 (113,244)
Payments received 0 0 0 0 0 0 22,900 22,900
on note receivable
from officer
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, February 28, 1998 0 0 8,499,029 84,990 4,724,568 (4,826,415) (69,500) (86,357)
Issuance of 0 0 373,824 3,739 45,626 0 0 49,365
common stock
Net loss 0 0 0 0 0 (702,435) 0 (702,435)
Payments received 0 0 0 0 0 0 69,500 69,500
on note receivable
from officer
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 0 $ 0 8,872,853 $ 88,729 $ 4,770,194 $(5,528,850) $ 0 $ (669,927)
=================================================================================================================================
</TABLE>
<PAGE>
Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28, 1998, February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(702,435) $(113,244) $ 95,615
- ------------------------------------------------------------------------------------------ ---------- ----------
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation 57,002 91,913 110,893
Amortization 40,264 32,764 60,638
Provision for losses on trade receivables 13,613 31,234 36,160
Recoveries of bad debts 2,267 5,114 0
Loss on disposal of inventory and equipment 49,048 0 0
Loss on disposal of segment 208,550 0 0
Stock issued as payment for services performed 49,365 15,045 9,135
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in trade receivables 32,620 11,469 86,363
Decrease (increase) in inventory 16,498 (18,405) 0
Decrease (increase) in prepaid expenses 1,983 26,439 (30,576)
Decrease (increase) in other current assets 0 679 4,818
Increase (decrease) in accounts payable 161,634 (32,624) (100,998)
Increase (decrease) in deferred revenue 12,149 120,266 77,984
Increase (decrease) in accrued compensation (21,069) (18,408) (54,096)
Increase (decrease) in payroll taxes (4,308) (5,243) (87,440)
Increase (decrease) in other current liabilities (12,794) 9,389 (20,541)
- ------------------------------------------------------------------------------------------ ---------- ----------
Total adjustments 606,822 269,632 92,340
- ------------------------------------------------------------------------------------------ ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (95,613) 156,388 187,955
- ------------------------------------------------------------------------------------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (21,698) (2,569) (63,697)
Proceeds from the sale of equipment 2,310 0 0
Proceeds from the sale of intangibles 14,091 0 0
Purchase of pharmacy assets (10,000) (23,544) 0
- ------------------------------------------------------------------------------------------ ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES (15,297) (26,113) (63,697)
- ------------------------------------------------------------------------------------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments received on note receivable 69,500 22,900 0
Principal payments under capital lease obligations (43,214) (54,538) (47,938)
Repayments of note payable assumed in the
Edina Pharmacy acquisition (4,684) (3,780) 0
Repayments of bank loans assumed in the
Applied Micro Management, Inc. acquisition 0 0 (6,123)
Net repayment of loans to officer 0 0 (60,000)
Proceeds from issuance of common stock 0 45,510 35,665
- ------------------------------------------------------------------------------------------ ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,602 10,092 (78,396)
- ------------------------------------------------------------------------------------------ ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS (89,308) 140,367 45,862
CASH AND CASH EQUIVALENTS:
Beginning 209,024 68,657 22,795
- ------------------------------------------------------------------------------------------ ---------- ----------
Ending $ 119,716 $ 209,024 $ 68,657
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid during the year for interest $ 19,415 $ 23,027 $ 27,661
======================================================================================================================
</TABLE>
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Health Outcomes Management, Inc., (the Company) formerly known as
Data Med Clinical Support Services, Inc., and its wholly owned
subsidiaries, develop and supply computer software systems and
services to the healthcare industry and sell prescription and
over-the-counter drugs at the retail level. During 1998 the Company
disposed of its retail prescription and over-the-counter drug
operations.
The Company markets clinical and financial software systems and
related services used for the management of Community Pharmacies,
Long-Term Care Nursing Facilities, Homecare Facilities and Hospital
Departments.
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany
transactions and balances are eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
INCOME TAXES:
The Company utilizes Financial Accounting Standard No. 109,
Accounting for Income Taxes. Under the asset and liability method of
Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
INVENTORIES:
Inventories are valued at the lower of cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation of property
and equipment is provided over the useful lives of the respective
assets on a straight-line basis. The useful lives for financial
reporting purposes range from three to five years.
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
(CONTINUED)
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred.
REVENUE RECOGNITION:
Revenue from software systems and services is recognized upon
delivery of software and clients' completion of required training
programs. Revenue from prescription and over-the-counter drug sales
is recognized at the point of sale.
DEFERRED REVENUE:
Deferred revenue is recorded when payments are received from clients
in advance of software services being provided, usually pursuant to
long-term software systems contracts or annual support service
agreements. Deferred revenue is amortized monthly over the life of
the agreements, usually from one to three years.
NET INCOME (LOSS) PER COMMON SHARE:
The Company has adopted the provisions of statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128")
effective February 28, 1998. SFAS 128 requires the presentation of
basic and diluted net income (loss) per share. Basic net income
(loss) per share is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common
shares outstanding for that period. Diluted net income (loss) per
share is computed giving effect to all dilutive potential common
shares that were outstanding during that period. Dilutive potential
shares consist of incremental common shares issuable upon exercise
of stock options and warrants and conversion of preferred stock for
all periods. All prior period net income (loss) per share amounts
have been restated to comply with SFAS No. 128.
CAPITALIZED SOFTWARE:
The Company capitalizes software production costs after
technological feasibility has been established and prior to general
release to clients. Annual amortization of capitalized software is
based on the greater of the amount computed using the straight-line
method over the estimated 36-month economic product life or using
the ratio that current gross revenues for the software product bears
to the total of current and anticipated future gross revenues for
that product.
NON-COMPETE AGREEMENTS:
As a part of a purchase of certain assets of a business the Company
acquired non-compete agreements. These agreements are being
amortized over five years. The related amortization expense was
$30,000 in 1998, 1997, and 1996, respectively.
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, the Company considers highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
(CONTINUED)
STOCK BASED COMPENSATION:
The Company applies Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plan.
Accordingly, no compensation expense has been recognized for its
stock-based compensation plan. The Company has adopted the
disclosure requirements of Statements of Financial Accounting
Standards No.123 (SFAS No. 123), Accounting for Stock-Based
Compensation.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board (FSBA)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which changed the way companies calculated
their earnings per share (EPS). SFAS No. 128 replaced primary EPS
with basic EPS. Basic EPS is computed by dividing reported earnings
by weighted average shares outstanding, excluding potentially
dilutive securities. Fully diluted EPS, termed diluted EPS under
SFAS No. 128, is also to be disclosed. The Company adopted SFAS No.
128 in fiscal 1998, at which time all prior year EPS was restated in
accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The
Company will adopt the provisions of SFAS No. 130 in fiscal 1999.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2
on Software Revenue Recognition which supersedes SOP 91-1. The SOP
is effective for all fiscal years beginning after December 15, 1997
and will be effective for the Company's fiscal year 1999.
NOTE 2. CONTINUATION AS A GOING CONCERN
The accompanying consolidated financial statements are prepared
assuming the Company will continue as a going-concern. The Company
incurred an operating loss of $702,435 during the year ended
February 28, 1998. As of February 28, 1998, the Company had an
accumulated deficit of $5,528,850, a stockholders' deficit of
$669,927, and a working capital deficit of $718,373. Accordingly,
there is substantial doubt about the Company's ability to continue
in existence. The Company's continued existence is dependent upon
management's ability to return to profitable operations and resolve
its liquidity problems. Management anticipates profitability will
return and that liquidity problems will be resolved as a result of
the actions described below. The financial statements do not include
any adjustments that might result should the Company be unable to
continue as a going concern.
<PAGE>
NOTE 2. CONTINUATION AS A GOING CONCERN (CONTINUED)
Management has adopted the following plans for the coming year:
* Continue to market the Company's Assurance Coordinated
Pharmaceutical Care System to community pharmacies, pharmacy
benefit managers, and third party payers.
* Expand its current strategy of locating a strategic partner in
the pharmaceutical care marketplace that has the financial
strength to bring the Company's product to market at a
substantially increased pace.
* Continue to strengthen its relationship with Advanced
Information Management (AIM) through additional sales of AIM's
software to its clients and to new prospects.
* Reduce operating costs and ensure that the effectiveness of
remaining expenditures is consistent with support of the
Company's client base.
If operations and cash flows can be improved through these efforts,
management believes that the Company can continue to operate.
However, no assurance can be given that management's actions will
result in profitable operations and the resolution of its liquidity
problems.
NOTE 3. BUSINESS ACQUISITIONS
On July 19, 1996, the Company acquired certain assets of Edina
Pharmacy, a community pharmacy located in Minneapolis, Minnesota.
Assets acquired include inventory, fixtures and equipment, and the
patient list. The purchase price was $47,408 of which $12,000 was
paid in cash. A note payable of $14,973 was assumed. The remaining
balance of $20,435 will be paid by the Company in twelve equal
monthly installments.
The transaction was accounted for using the purchase method of
accounting. The accompanying consolidated financial statements
include results of operations of the acquired business from the date
of acquisition. Due to the nature of the transaction under which the
Company purchased only certain assets of Edina Pharmacy, owned by an
individual reporting financial information on an income tax basis,
meaningful pro-forma financial information is not available.
On April 1, 1997, the Company acquired certain assets of Preserve
Rexall Drug, a community pharmacy located in Eden Prairie, Minnesota
from Supplee Enterprises, Inc. The Company acquired some fixtures
and the patient list. The purchase price was $40,000 of which
$10,000 was paid in cash. The unpaid balance of $17,500 is payable
at $500 per month and matures in October 2000. The remaining balance
of $30,000 will be paid by the Company in eleven equal monthly
installments. Similar to Edina Pharmacy which was acquired in July
1996, the Company planned to develop this pharmacy into a prototype
store applying patient care concepts utilizing the Company's
Assurance Coordinated Pharmaceutical Care System software. During
1998 the Company discontinued the operations of both the Edina and
Eden Prairie facilities (see Note 17).
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Property under capitalized leases $ 181,547 $ 310,005
Furniture and equipment 480,338 373,932
--------------------------------------------------------------------
661,885 683,937
Less accumulated amortization and depreciation 606,501 579,928
--------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT $ 55,384 $ 104,009
====================================================================
NOTE 5. CAPITALIZED SOFTWARE
During 1996, the Company became licensed as an authorized reseller
of financial software from Solomon Software. The software is for
corporate use and inclusion into the Company's Windows based
software products presently under development. The Company is
amortizing the $8,292 of software costs over three years.
New software products, developed in 1998, 1997 and 1996, were
expensed as incurred due to the lack of significant revenues
generated from such products.
Amortization of capitalized computer software costs was $2,764,
$2,764 and $30,638 in 1998, 1997 and 1996, respectively.
NOTE 6. LEASES
The Company leases its corporate office facility under an operating
lease with an original term of three years commencing January 1,
1992. The Company exercised a one-year option to extend the lease
through December 31, 1995. Under an amendment signed December 23,
1996, and effective February 28, 1997, the Company terminated a
portion of this lease. The lease term for the remaining office space
has been extended to December 31, 1998, with an option for an
additional two years.
The Company leases its community pharmacy site under an operating
lease which will terminate on December 31, 2002.
Rental expense in 1998, 1997 and 1996 was $150,069, $144,753 and
$127,413, respectively.
Future minimum rental payments due under non-cancelable operating
leases are as follows:
-------------------------------------------------------------------
AMOUNTS
-------------------------------------------------------------------
1999 $ 121,554
2000 28,854
2001 29,388
2002 32,060
2003 26,717
-------------------------------------------------------------------
TOTAL $ 238,573
===================================================================
<PAGE>
NOTE 6. LEASES (CONTINUED)
The following summarizes assets under lease that have been
capitalized and included in property and equipment in the
accompanying consolidated balance sheets:
-------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------
Office and computer equipment $ 181,547 $ 310,005
Less accumulated amortization (160,747) (275,692)
-------------------------------------------------------------------
$ 20,800 $ 34,313
===================================================================
Future minimum lease payments under capital lease obligations are as
follows:
-------------------------------------------------------------------
AMOUNTS
-------------------------------------------------------------------
1999 $ 39,248
2000 10,578
2001 4,973
-------------------------------------------------------------------
Total 54,799
Less amounts representing interest (6,337)
-------------------------------------------------------------------
Present value of net minimum lease payments 48,462
Less current installments (34,451)
-------------------------------------------------------------------
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT
INSTALLMENTS $ 14,011
===================================================================
All equipment purchased under capital leases is pledged as
collateral.
NOTE 7. INCOME TAXES
There was no income tax expense or benefit amounts recorded for
1998, 1997 or 1996.
The provision for income taxes from continuing operations for the
years ended February 28, 1998, February 28, 1997, and February 29,
1996, differs from the statutory federal tax rate applied as
follows:
-------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------
Federal tax calculated at the statutory rate (34%) (34%) 34%
State taxes, net (2%) (2%) 2%
Change in valuation allowance 36% 36% (36%)
-------------------------------------------------------------------
0% 0% 0%
===================================================================
Deferred taxes, calculated using an effective tax rate of 36% in
1997, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Capital leases $ 11,000 $ 10,000 $ 23,500
Book depreciation greater than tax 18,000 30,000 42,500
Trade receivables 4,800 12,600 5,400
Net operating loss carryforwards 1,983,600 1,512,000 1,709,000
Deferred revenue 117,400 113,000 69,700
-------------------------------------------------------------------------------
Gross deferred tax assets 2,134,800 1,677,600 1,850,100
Less valuation allowance (2,134,800) (1,677,600) (1,850,100)
-------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 0 $ 0 $ 0
===============================================================================
</TABLE>
<PAGE>
NOTE 7. INCOME TAXES (CONTINUED)
As of February 28, 1998, the Company had net operating loss
carryforwards for tax reporting purposes of approximately $5,510,000
which expire beginning in 2002. Included in the above carryforward
amounts are approximately $670,000 of net operating losses
attributable to the former separate operations of STAT Systems,
Inc., utilization of which is restricted subject to the annual
limitations specified by the Internal Revenue Code of 1986 as
amended.
NOTE 8. NET INCOME (LOSS) PER SHARE
The following table presents the computation of basic and diluted
net income (loss) per share:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ (372,708) $ 19,921 $ 95,615
Discontinued operations (329,727) (133,165) -
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (702,435) $ (113,244) $ 95,615
============================================================================================================
RECONCILIATION OF SHARES USED IN BASIC AND DILUTED PER SHARE CALCULATIONS:
Weighted average common shares outstanding 8,574,910 8,434,058 8,080,577
Dilutive effect of stock options and warrants 0 0 640,406
------------------------------------------------------------------------------------------------------------
SHARES USED IN DILUTED NET INCOME
(LOSS) PER SHARE CALCULATION 8,574,910 8,434,058 8,720,983
============================================================================================================
BASIC PER SHARE DATA:
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Discontinued operations $ (0.04) $ (0.01) $ 0.00
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.08) $ (0.01) $ 0.01
============================================================================================================
DILUTED PER SHARE DATA:
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Discontinued operation $ (0.04) $ (0.01) $ 0.00
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.08) $ (0.01) $ 0.01
============================================================================================================
</TABLE>
<PAGE>
NOTE 9. STOCKHOLDERS' DEFICIT
STOCK ISSUANCES:
During 1998, 373,824 shares of common stock were awarded to related
parties, directors, associates and consultants as payment for
services performed.
During 1997, 48,144 shares of common stock were issued as part of
the Company match benefit for the 401(k) pension plan.
During 1996, 13,000 shares of common stock were awarded to related
parties, directors, associates and consultants as payment for
services performed.
PREFERRED STOCK:
The Company has one series of preferred stock: Series A, convertible
preferred. All preferred shares are non-voting, receive no dividends
and have liquidation preference over the Company's common stock. All
1,000,000 preferred shares are unissued and are undesignated as of
February 28, 1998.
STOCK OPTION PLAN:
In February 1986, the Company adopted a stock option plan providing
for the issuance of up to 1,200,000 shares of common stock to
associates, members of the board of directors and other nonemployee
agents of the Company. The exercise price of the options must be at
least 100% (110% for stockholders with 10% or more ownership) of the
fair market value of the common stock as of the date of grant.
Generally, options are exercisable for a period of ten years (five
years for shareholders with 10% or more ownership) commencing on the
date of grant.
During February 1996, the Company's 1986 stock option plan expired.
No additional stock options can be issued under this plan to
associates, members of the board of directors or other nonemployee
agents of the Company without shareholder approval of a new stock
option plan.
During 1998, the Company granted non-qualified options to various
employees and non-employee agents.
<PAGE>
NOTE 9. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTION PLAN: (CONTINUED)
Information with respect to options for the Company's common shares
is summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Non Qualified
Incentive Options Options
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRICE PER STOCK EXERCISE STOCK EXERCISE
SHARE OPTIONS PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance February 28, 1995 873,565 $0.36 134,000 $0.44
Granted in 1996 $0.59 $0.97 267,500 $0.97 14,000 $0.59
Exercised $0.37 $0.97 (250,500) $0.43 (15,000) $0.37
Canceled $0.25 $0.97 (203,750) $0.41 0
-------------------------------------------------------------------------------------------
Balance February 29, 1996 686,815 $0.47 133,000 $0.46
Exercised $0.37 $0.37 (123,000) $0.37 0
Canceled $0.25 $0.97 (151,000) $0.54 0
-------------------------------------------------------------------------------------------
Balance February 28, 1997 $0.25 $0.97 412,815 $0.48 133,000 $0.46
Granted $0.08 $0.23 0 202,000 $0.22
Exercised 0 0
Canceled $0.25 $0.97 (130,500) $0.51 0
-------------------------------------------------------------------------------------------
BALANCE FEBRUARY 28, 1998 $0.08 $0.97 282,315 $0.46 335,000 $0.29
===========================================================================================
</TABLE>
At February 28, 1998, February 28, 1997 and February 29, 1996,
currently exercisable options aggregated 388,565, 445,565 and
611,940 shares of common stock, respectively, and the
weighted-average exercise price of those options was $0.37, $0.41
and $0.38, respectively.
The weighted average fair values of options granted were as follows:
--------------------------------------------------------------------
Estimated Weighted
Average Fair Value
--------------------------------------------------------------------
1996 grants $ .56
1998 grants $ .22
====================================================================
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal
1998, 1997, and 1996:
--------------------------------------------------------------------
1998 1996
--------------------------------------------------------------------
Risk-free interest rate 6.18% 6.5%
Expected life of options 9 YEARS 9 years
Expected volatility .52% 6.3%
Expected dividend yield 0 3.0%
====================================================================
<PAGE>
NOTE 9. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTION PLAN: (CONTINUED)
The Company applies APB No.25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plan.
Accordingly, no compensation expense has been recognized for its
stock-based compensation plan. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No.123, Accounting for Stock-Based
Compensation, the Company's fiscal 1998 and 1997 net loss and loss
per share would have been increased by approximately $35,000 and
$43,000, or $0.01 per share for each year. Fiscal 1996 net income
and earnings per share would have been reduced by approximately
$82,000, or $0.01 per share.
Pro forma amounts reflect only options granted in 1996 and after.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma
net income amounts presented because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to March 1, 1995 is not considered.
WARRANTS:
From time to time the Company grants warrants to officers, employees
and nonemployees in consideration for loans extended to the Company
and for recognition of services performed.
Information with respect to warrants for the Company's common shares
is summarized as follows:
-------------------------------------------------------------------
Warrants outstanding
Weighted-average
exercise price
Shares per share
-------------------------------------------------------------------
Balance February 28, 1995 345,000 $ 0.25
Granted 30,000 1.00
Exercised (100,000) 0.15
-------------------------------------------------------------------
Balance February 29, 1996 275,000 0.37
Canceled (60,000) 0.38
-------------------------------------------------------------------
Balance February 28, 1997 215,000 0.37
Canceled 50,000 0.30
-------------------------------------------------------------------
BALANCE FEBRUARY 28, 1998 165,000 $ 0.39
===================================================================
<PAGE>
NOTE 10. MAJOR CLIENTS
During fiscal 1998, 1997, and 1996, one client accounted for
approximately 0%, 27% and 23%, respectively, of total revenues.
During January 1997, the Company's relationship with this client
terminated at the end of the three-year agreement. The Company
received a one-time payment of $159,000 in fiscal 1997 pursuant to a
"transition agreement" between the Company and this client. See Note
12 to the consolidated financial statements for discussion of this
"transition agreement". During April 1996, the Company terminated
its one-year marketing agreement with another of its major clients
in order to pursue other marketing arrangements. Revenues from this
client constituted approximately 21% of the Company's total 1996
revenue. Revenue from the client was not material in 1998 or 1997.
NOTE 11. NOTE RECEIVABLE FROM OFFICER
At February 28, 1997 and February 29, 1996, the Company had a 9.25%
secured note receivable from an executive officer, with interest
payable quarterly on the unpaid balance. Collateral consisted of
210,000 shares of the Company's common stock. Additional provisions
of the note require that the officer assign other personal assets as
additional collateral should the value of the then existing
collateral be insufficient to pay off the unpaid loan balance. The
officer paid the remaining balance of note receivable in 1997. At
February 28, 1997 and February 29, 1996, the balance due on the note
receivable was $69,500 and $92,500, respectively.
NOTE 12. MARKETING AGREEMENT
On February 1, 1995, an amendment to the agreement dated February 1,
1994, was entered into with Option Care, Bannockburn, IL. The terms
of the amendment appointed the Company as the exclusive marketing
representative to market and promote the licensing of Option Care's
private label clinical and financial software system, commonly known
as FOCIS, to existing and future franchises of Option Care.
Additional terms of the amendment provided that Health Outcomes
Management received 80% of the license fee charges to each Option
Care franchise rather than the monthly retainer payments provided
for in the original agreement. In addition to providing the
software, the Company performed all software training and client
support. The term of the original agreement was for a period of
three years. The amendment did not alter the termination date of the
agreement. The amendment also provided for the cancellation of an
unrelated marketing agreement effective June 15, 1994. The February
1, 1994, agreement canceled a software development and marketing
agreement effective November 29, 1991.
On January 31, 1997, the marketing agreement between the company and
Option Care, Inc. terminated. On October 31, 1996, the Company and
Option Care signed a "transition agreement" that, according to the
terms of the agreement, required Option Care to pay the Company a
one-time payment of $159,000 for consulting services and certain
software tools owned by the Company which is included in revenue in
the statement of operations. The Company also received an additional
$15,000 for training services provided.
<PAGE>
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental schedule of noncash investing and financing activities:
In 1998, the Company incurred a net installment contract obligation
of $24,416 associated with the purchase of pharmacy assets and
equipment.
During 1998, the Company received credits totaling $15,500 from
vendors for pharmacy inventory disposed of in connection with
disposition of the operations.
In 1997, the Company assumed a note payable obligation of $14,973
associated with its acquisition of certain assets of Edina Pharmacy.
In 1996, notes receivable from an officer for the purchase of common
stock totaled $92,400.
In 1996, capital lease obligations incurred for leases of new
equipment totaled $28,081.
In 1995, capital lease obligations incurred for leases of new
equipment totaled $106,841.
In 1995, the Company issued 100,000 shares of its restricted common
stock totaling $38,500 in value pursuant to the terms of its
acquisition of certain assets of AMM.
NOTE 14. EMPLOYMENT AGREEMENT
On February 1, 1991, the Company entered into employment agreements
with its president and vice president which provided for their
employment for a term of three years with automatic renewal of the
term for one-year periods thereafter, unless terminated by the
Company within provisions of the agreement, or by the president or
vice president for any reason upon twelve weeks advance notice. The
Company may be required to purchase all of the employees' common
shares including unregistered shares, unexercised stock options and
warrants at the average fair market value price at the time of the
termination. The agreements also contain certain restrictive
covenants including a noncompete covenant. The employment agreements
were being renewed for one-year periods pursuant to the automatic
renewal provisions of the original agreements. In December 1997 the
Company terminated the employment of its president. The Company's
commitments to purchase stock, warrants and options discussed above
lapsed subsequent to year end February 28, 1998.
NOTE 15. RETIREMENT PLANS
On March 1, 1995, the Company established a defined contribution,
401(k), pension plan for substantially all of its employees. The
Company matches 25% of the employee's contribution up to 6% of
compensation, as defined. The expense recognized in years ending
1998, 1997 and 1996 relating to the plan totaled $14,000, $14,000
and $15,000, respectively. The Company issued 48,144 shares of the
Company's common stock in 1997 as payment for the Company's 1996
matching contribution.
<PAGE>
NOTE 16. LINE OF CREDIT AGREEMENT
The Company has a $50,000 Line of Credit agreement with a bank for
working capital purposes. The agreement is secured by all accounts
receivable, equipment not covered under financing agreements,
inventory, if any, and general intangibles. The agreement also
requires the Company to maintain certain financial covenants,
including but not limited to, maintaining positive net worth.
On April 1, 1997, the Company renewed its line of credit agreement
which expired April 1, 1997. All outstanding borrowings bear
interest at the fixed rate of 6.5%. The agreement expires April 1,
1998. The agreement is secured by selected corporate assets
including a $50,000 certificate of deposit which must remain on
deposit at the bank for the entire loan term.
NOTE 17. DISCONTINUED OPERATIONS
In December 1997, the Company discontinued its operation of retail
prescription and over the counter drug sales. Accordingly, the
operating results of the drug sales operations including provision
for estimated lease termination costs, employee benefits and any
losses during the phase out period, of approximately $199,235, and a
write off of leasehold improvements and equipment of approximately
$9,300, are included with losses from discontinued operations on the
statement of operations.
The Company has restated its prior financial statements to present
the operating results of the retail drug operations as discontinued.
The Company has provided a valuation allowance for any tax benefits
which may be realized in the future from the carryforward of the
loss from discontinued operations. The current components of net
assets from discontinued operations included in the Company's
consolidated balance sheet at February 28, 1998 and 1997 are as
follows:
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Cash $ 0 $ 18,000
Accounts receivable 0 11,000
Inventories 0 52,000
Property and equipment - net 0 11,000
Accounts payable and other current liabilities (147,000) (15,000)
Provision for phase out costs (208,000) 0
--------------------------------------------------------------------
$ (355,000) $ 77,000
====================================================================
<PAGE>
Item 8. Disagreements on Accounting and Financial Disclosure.
During the first quarter of fiscal 1999, the Company dismissed its principal
independent accountant and retained a new independent accountant, as reported on
Form 8-k. See Item 13 in this Report on Form 10-KSB. The dismissal was not based
upon any disagreement concerning any matter of accounting practice or policy.
<PAGE>
Part III
Item 9. Directors and Officers of the Registrant
The following table sets forth information regarding the Company's executive
officers and directors as of May 1, 1998:
Name Age Position
---- --- --------
Peter J. Zugschwert 32 President, Chief Executive
Officer and Director
Stanford M. Baratz 42 Director
Jonathan R. Gordon 46 Director
Matthew E. Goldberg 31 Director
Michael J. Frakes 46 Vice President
Marie Cooper 30 Controller and Principal
Accounting Officer
Peter J. Zugschwert, age 32, has served as President of the company since
December 1997 and CEO of the Company since September 1997. Prior to joining the
Company, he had been the Senior Vice President of Operations for Baratz
Financial, Inc. since June 1995. Between 1993 and 1995, Mr. Zugschwert was a
private business consultant in Chicago and Minneapolis.
Stanford M. Baratz, age 41, has been the President of Baratz Financial, Inc., a
Minneapolis-based private investment firm, since founding the company in 1994.
Between 1985 and 1994, Mr. Baratz served in various capacities with the Welsh
Companies, a Minneapolis-based real estate firm, most recently as Executive Vice
President.
Jonathan R. Gordon, age 47, has been President of The Vault, Inc., an Edina,
Minnesota-based document storage company, since 1988. Mr. Gordon is a Certified
Public Accountant.
Matthew E. Goldberg, age 30, has been President of In-Sight Optical, Inc. dba
InVision, a retail optical store chain, since 1996. Between 1992 and 1996, Mr.
Goldberg was an account manager with Campbell-Mithun Esty, a Minneapolis based
advertising agency.
Michael J. Frakes, Pharm.D., has served as a Vice President of the Company since
May, 1986. Mr. Frakes was a cofounder of Data Med, Inc., and served as the vice
president of Data Med, Inc., from 1981 until joining the Company. Mr. Frakes has
primary responsibility for ongoing development of the Company's products and
services. Mr. Frakes holds a doctor of pharmacy degree from the University of
Minnesota.
Marie Cooper joined the Company on April 1998 as its Controller and Principal
Accounting Officer. From June 1995 to March 1998, Ms. Cooper was the accounting
manager for a the Newcom Group, Inc., and its subsidiaries, as well as The
Express Pages, LLC. Ms. Cooper holds a BS degree in Accounting from Augsburg
College, in Minneapolis, Minnesota.
On December 9, 1997, William A. Peter was removed as president and chief
executive officer. Mr. Peter had been with the Company since December 1985.
In April, 1998, Rosemary Salzwedel resigned her position as Controller. Ms.
Salzwedel had been with the Company since June 1993.
<PAGE>
Item 10. Executive Compensation.
Effective October 23, 1997, each member of the Board of Directors receives in
lieu cash compensation, 800 shares of the Company's common stock per meeting. In
addition, in consideration for their service, each of the new directors elected
at the annual meeting of the shareholders on September 19,1997 were granted a 5
year option to purchase 10,000 shares of the Company's stock exercisable at a
price of $.08 per share ($.08 was the price of the Company's stock on the day of
their agreement to serve, if elected). During the fiscal year ended February 28,
1998, Board of Director compensation totaled 25,200 shares, $1,520.00, and
options to purchase 40,000 shares.
The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal year ended February 28, 1998, to the
Presidents and Chief Executive officers, neither of whose total cash
compensation (including bonuses) exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
Restricted Securities LTIP
Other Annual Stock Underlying payouts All other
Name and Salary Bonus Compensation Award(s) Options/SARs Compensation
principal Year ($) ($) ($) ($) (#) ($) ($)
position
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------- ---- ------ ----- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter J. Zugschwert (1) 1998 27,050 20,000 (5)
President & CEO
William A. Peter, Jr. (2) 1998 97,960 1,734 (3) 26,500 (6)
Ex-President & CEO 1997 97,723 925 2,190 (3)
1996 10,388 (4) 104 2,190 (3)
</TABLE>
(1) Mr. Peter J Zugschwert was Chairman of the Board of Directors from September
19, 1997 through the end of the fiscal year and President & CEO from December 9,
1997 through the end of the fiscal year.
(2) Mr. William A. Peter was Chairman of the Board of Directors from March 1,
1997 through September 18, 1997 and President & CEO from March 1, 1997 through
December 8, 1997.
(3) Amount shown represents a health insurance allowance paid to Mr. Peter.
(4) Amount shown does not include salary totaling $74,787 for prior years which
was paid during the current year. This amount has been previously reported.
(5) During fiscal year Mr. Zugschwert accepted stock in lieu of cash
compensation in the amount of $20,000.
(6) Subsequent to the end of the fiscal year ended February 28, 1998, the
Company agreed to sign a note for $26,500 at an interest rate of 8% to settle
litigation with Mr. Peter relating to his termination on December 9, 1997 and
the resulting severance payment as per his employment agreement.
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the value of Stock Options
and Warrants granted to the Company's executive officers named in the
compensation table during the fiscal year ended February 28, 1998.
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of Percentage of total
Securities Options /SARs
underlying granted to Exercise or
Options/SARs employees in base price Expiration
Name granted (#) fiscal year ($/Sh) Date
(a) (b) (C) (d) (e)
- ------------------------ -------------------- ------------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Peter J. Zugschwert 10,000 5% $0.08 10/23/02
President & CEO
</TABLE>
There were no Long - Term Incentive Plans - Awards in Last Fiscal Year (Table
Omitted)
STOCK OPTIONS AND WARRANTS HELD AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the value of Stock Options
and Warrants held by the Company's executive officers named in the compensation
table as of February 28, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised in-the-money Options at
Shares Options/SARs at FY-end Year End(1)
acquired on Value ---------------------- -----------
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Zugschwert 0 $ 0 2,500 7,500 $-0- $-0-
President & CEO
William A. Peter, Jr. 0 $ 0 139,375(2) 3,125 $-0- $-0-
President & CEO
</TABLE>
(1) Based upon the average of the bid and ask price of $.10 for the Company's
Common Stock on February 28, 1998, as reported by the National Quotation Bureau.
(2) Includes warrants to purchase 115,000 shares of the Company's Common Stock.
Options covering 27,500 shares expired in March 1998, 90 days after the
termination of Mr. Peters' Employment.
<PAGE>
EMPLOYMENT AGREEMENTS
On February 1, 1991, the Company entered an employment agreement with Michael J.
Frakes, for a term of three years. The agreement provides for automatic renewals
for one-year periods, pursuant to which the agreement has been extended to
January 31, 1999. Under the employment agreement with Mr. Frakes, Mr. Frakes was
paid $8,412 per month from February 1, 1996 to January 31, 1997. Beginning May
1, 1996, Mr. Frakes took a 10% voluntary salary reduction which is still in
effect as of May 1, 1998. Mr. Frakes may also receive bonus compensation in the
form of cash or shares of common stock. The employment agreement between the
Company and Mr. Frakes contains certain restrictive covenants, including
prohibition of the use of proprietary information by Mr. Frakes and restrictions
on future competing employment. The restrictions on competing employment will be
enforceable following termination of employment by the Company only if the
Company continues to pay prescribed amounts each month during the period of
restriction. Certain provisions of the agreement may require the Company to
purchase all of Mr. Frakes' common shares including unregistered shares,
unexercised stock options and warrants at the average fair market value price
upon termination or an ownership control change exceeding 40% control by an
outside party.
Mr. Frakes has been granted incentive stock options under Division A of the
Company's Stock Option Plan for purchase of a total of 127,500 shares of Common
Stock of which 10,000 shares were exercisable until April 24, 1998, at $0.37 per
share; 20,000 shares are exercisable until March 23, 1999, at $0.34 per share;
50,000 shares are exercisable until January 18, 2000, at $0.37 per share; 10,000
shares are exercisable until September 28, 2000, at $0.25 per share; 10,000
shares are exercisable until January 7, 2001, at $0.40 per share; 5,000 shares
are exercisable until June 5, 2001, at $0.35 per share; 10,000 shares are
exercisable until June 11, 2002, at $0.31 per share; and 12,500 shares are
exercisable until February 4, 2006, at $0.59 per share.
STOCK OPTION PLAN
On February 17, 1986, the Board of Directors and the shareholders of the Company
adopted a Stock Option Plan (the "Stock Option Plan") that authorizes the
issuance of options to purchase an aggregate of 400,000 shares of the Company's
Common Stock. As a result of the three-for-one stock split effective June 15,
1987, the number of shares authorized and reserved for grant of options was
increased to 1,200,000. As of May 1, 1998, incentive stock options for the
purchase of 254,815 shares remained outstanding under the Stock Option Plan. As
of May 1, 1998, non-qualified options for the purchase of 133,000 shares
remained outstanding under the Stock Option Plan.During February 1996, the
Company's 1986 Stock Option Plan expired. No additional stock options can be
issued under the Plan.
On October 23, 1998, the Company, by resolution of its Board of Directors,
issued 162,000 non-qualified stock options to certain non-management employees
for incentive and retention purposes. These options were not issued pursuant to
any previously adopted plan.
Options to purchase a total of 167,500 shares were held by the Company's
officers and directors as a group as of February 28, 1998. The Company's
employees (including certain officers and directors) held options to purchase a
total of 809,630 shares at the same date. Options totaling 374,685 shares had
been exercised as of the end of the fiscal 1998.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table lists, as of February 28, 1998, the securities ownership of
all directors of the Company, the directors and officers of the Company as a
group, and all persons known by the Company to own beneficially more than 5% of
the issued and outstanding Common Stock of the Company. Unless otherwise
indicated, each person in the table has sole voting and investment power as to
the shares shown.
<TABLE>
<CAPTION>
Number Percentage
Name and Address of Shares Ownership
---------------- --------- ---------
<S> <C> <C>
Shareholders who own greater than 5% of the shares outstanding:
William A. Peter, Jr.
6650 Vernon Hills Road
Edina, Minnesota 55436 1,442,000(1) 16.25%
Steven C. Wolf
820 S. 59th Street
Belleville, Illinois 62223 550,000 6.20%
Officers & Directors:
Michael J. Frakes
3712 Chatham Circle
Arden Hills, Minnesota 55112 381,549(2) 4.30 %
Peter J. Zugschwert
5500 Wayzata Boulevard, Suite 1075
Minneapolis, Minnesota 55416 164,430(3) 1.85%
Jonathan R. Gordon
7300 France Avenue South
Edina, Minnesota 55435 66,500(3) .75%
Stanford M. Baratz
5500 Wayzata Boulevard, Suite 1075
Minneapolis, Minnesota 55416 47,500(3) .54%
Matthew E. Goldberg
119 North Fourth Street
Minneapolis, Minnesota 55401 5,700(3) .06%
ALL OFFICERS AND DIRECTORS AS A GROUP (5 PERSONS) 665,609(4) 7.50%
</TABLE>
(1) Includes 115,000 shares which may be purchased pursuant to warrants which
are exercisable within 60 days of the date hereof.
(2) Includes 30,000 shares which may be purchased pursuant to warrants and
121,250 shares which may be purchased pursuant to stock options which are
exercisable within 60 days of the date hereof.
(3) Includes 2,500 shares which may be purchased pursuant to stock options
which are exercisable within 60 days of the date hereof.
(4) Includes 161,250 shares which certain directors and officers have the right
to purchase pursuant to warrants and stock options which are exercisable
within 60 days of the date hereof.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
At February 29, 1996, the Company held a 9.25% secured note receivable from Mr.
Peter, with interest payable quarterly on the unpaid balance. Collateral
consisted of 210,000 shares of the Company's common stock. Additional provisions
of the note required that Mr. Peter assign other personal assets as additional
collateral should the value of the then existing collateral be insufficient to
pay off the unpaid loan balance. At February 28, 1998, the balance due on the
note receivable had been paid in full.
Item 13. Compliance with Section 16(a) of the Exchange Act.
The Securities Exchange Act of 1934 requires all executive officers and
directors to report any changes in the ownership of common stock of the Company
to the Securities and Exchange Commission and the Company.
Based solely upon a review of these reports, the Company believes that the
following reports were not filed on a timely basis in fiscal 1998 : each of the
current members of the Board of Directors failed to file form 5 within the
allotted time with respect to the grant of shares granted to board members, as
described above. As of the date of the filing of this report on form 10KSB, such
filing deficiencies have not been corrected.
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following Consolidated Financial Statements of the Company and the
Independent Auditor's Report thereon are included on pages 14 through 29 of this
Annual Report on Form 10-KSB:
Page
----
Independent Auditors' Report............................................. 14
Consolidated Balance Sheets - February 28, 1998 and February 28, 1997... 15
Consolidated Statements of Operations - Years Ended
February 28, 1998, February 28, 1997 and February 29, 1996............. 16
Consolidated Statements of Changes in Stockholders' Deficit - Years
Ended February 28, 1998, February 28, 1997 and February 29, 1996....... 17
Consolidated Statements of Cash Flows - Years Ended
February 28, 1998, February 28, 1997 and February 29, 1996............. 18
Notes to Consolidated Financial Statements.............................. 19 - 31
<PAGE>
(a)(3) Exhibits including those incorporated by reference:
Exhibit
Number Document
------ --------
*3(a) Restated Articles of Incorporation, as amended. (Filed as
exhibit 3(a) to registrant's quarterly report on Form 10-Q for
the quarter ended November 30,1995).
*3(b) By-laws (Filed as exhibit 3B to the Company's Registration
Statement on Form S-18 [Reg. No. 33-9417C] on October 10,
1986).
*3(c) Certificate of Designation of Non-Voting Convertible Preferred
Stock, Series A (Filed as exhibit 4(a) to registrant's
quarterly report on Form 10-Q for the quarter ended May 31,
1990).
*3(d) Articles of Incorporation of Pharmaceutical Care Outcomes,
Inc. (Filed as exhibit 3(a) to registrant's quarterly report
on Form 10-Q for the quarter ended August 31, 1994).
*3(e) By-laws of Pharmaceutical Care Outcomes, Inc. (Filed as
exhibit 3(b) to registrant's quarterly report on Form 10-Q for
the quarter ended August 31, 1994).
*3(f) Restated Articles of Incorporation of HO Management, Inc.
(Filed as exhibit 3(b) to registrant's quarterly report on
Form 10-Q for the quarter ended November 30, 1995).
*3(g) By-laws of HO Management, Inc. (Filed as exhibit 3(b) to
registrant's quarterly report on Form 10-Q for the quarter
ended August 31, 1995).
4(a) Note receivable dated February 1, 1995, due from William A.
Peter, Jr.
*10(a) Software development, installation and training agreement
between OPTION Care, Inc., and Data Med Clinical Support
Services, Inc., dated as of February 1, 1994 (Filed as exhibit
10(d) on Form 10-KSB for the year ended February 28, 1994).
*10(b) Consulting agreement between Data Med Clinical Support
Services, Inc., and OPTION Care, Inc., dated as of February
15, 1994 for consulting services performed during the period
from July 1, 1993, through December 31,1993 (Filed as exhibit
10(e) on Form 10-KSB for the year ended February 28, 1994).
<PAGE>
*10(c) Consulting agreement between Data Med Clinical Support
Services, Inc., and OPTION Care, Inc., dated as of November
15, 1993 for consulting services performed during the period
from January 1, 1993, through June 30,1993 (Filed as exhibit
10(d) on Form 10-KSB for the year ended February 28, 1994).
*10(d) Asset Purchase Agreement for the purchase of certain assets
and the client list of Applied Micro Management, Inc., of
Belleville, IL, on August 17, 1993. (Filed by registrant on
Form 8-K dated August 30, 1993).
*10(e) Amendment I to software development, installation and training
agreement between OPTION Care, Inc. and Data Med Clinical
Support Services, Inc., dated as of February 1, 1995.(Filed by
registrant on Form 10-KSB for the year ended February 29,
1996).
*10(f) Asset Purchase Agreement for the purchase of certain assets of
Edina Pharmacy on July 19, 1996.(Filed as exhibit 10(a) to
registrant's quarterly report on Form 10-QSB for the quarter
ended November 30, 1996).
*10(g) Transition Agreement between Health Outcomes Management, Inc.
and Option Care, Inc. dated as of October 31, 1996, for
consulting services and termination of Agreement dated
February 1, 1994, as amended by Amendment I effective as of
February 1, 1995.(Filed as exhibit 10(b) to registrant's
quarterly report on Form 10-QSB for the quarter ended November
30, 1996).
10(h) Asset Purchase Agreement for the purchase of certain assets of
Supplee Enterprises, Inc. on April 1, 1997.
10(i) Royalty Agreement with The University of Minnesota
11 Computation of earnings per share
27 Financial Data Schedule
* Incorporated herein by reference as indicated.
+ Not to be deemed a part of the filing except to the
extent specifically incorporated by reference herein.
(4) Reports on Form 8-K
The company filed a form 8-K on 5/11/98, a form 8-KA 5/15/98 and a form 8KA
5/21/98. All three filings were in the fourth quarter. All three filings related
to the changing of the Company's auditor from KPMG Peat Marwick LLP to
Schweitzer Ruben Karon & Bremer.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTH OUTCOMES MANAGEMENT, INC.
By: /s/ Peter J. Zugschwert
---------------------------
Peter J. Zugschwert
Chairman and President
Principal Executive Officer
Date: /s/ June 10, 1998
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant, in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter J. Zugschwert Chairman, President /s/ June 10, 1998
- ---------------------------- and Director -----------------
Peter J. Zugschwert (Principal Executive Officer)
/s/ Marie Cooper Controller and Principal /s/ June 10, 1998
- ---------------------------- Accounting Officer -----------------
Marie Cooper
/s/ Stanford M. Baratz Director /s/ June 10, 1998
- ---------------------------- -----------------
Stanford M. Baratz
/s/ Matthew Goldberg Director /s/ June 10, 1998
- ---------------------------- -----------------
Matthew Goldberg
/s/ Jonathan R. Gordon Director /s/ June 10, 1998
- ---------------------------- -----------------
Jonathan R. Gordon
<PAGE>
Index to Exhibits
-----------------
Page Number
Exhibit Reference
- ------- ---------
10(i) Royalty Agreement with The University of Minnesota 44
11 Calculation of earnings per share 48
27 Financial Data Schedule 49
EXHIBIT 10(i)
EXHIBIT 10(i)
AGREEMENT
Effective with the last authorization date on page 4, the Regents of the
University of Minnesota (hereafter referred to as "University"), a non-profit
corporation of the State of Minnesota with principal offices located at 100
Church Street S.E., Minneapolis, MN 55445 and Health Outcomes Management, Inc.
(hereafter referred to as "Health Outcomes"), with principal offices located at
2331 University Avenue S.E., Minneapolis, MN 55414, agree as follows:
* The purpose of this Agreement is to replace the previous Agreement of July
7, 1993 based on currently available information, and to clarify the
relationship between the "University" and "Health Outcomes".
* As information, Data Med Clinical Support Services, Inc., a publicly traded
corporation, changed its name to Health Outcomes Management, Inc. on
September 21, 1995.
* The staff of the Peters Institute of Pharmaceutical Care at the University
of Minnesota has been working cooperatively with "Health Outcomes". The
Peters Institute staff has provided many pharmaceutical care concepts and
pharmacy practice approaches. "Health Outcomes" has contributed its
knowledge of healthcare computer systems especially Outcomes Management
documentation techniques and data structures which are readily completed by
pharmacists in the course of their consultation with patients and the
provision of "Patient-Centered Pharmaceutical Care(TM)" at community
pharmacies.
* The term of this new Agreement will be three (3) years starting with the
last authorization date on page 4, with annual continuing terms thereafter
unless one party notifies the other in writing with sixty (60) days notice
of its desire to terminate.
* The software is the programming system consisting of screen design and
programming code which is owned "Health Outcomes" is called "Assurance
Coordinated Pharmaceutical Care System(TM)". Through analysis of the
"University's" data and working with the "Health Outcomes" program, the
"University" is able to provide recommendations as to how "Health Outcomes"
may improve the software.
* The practice of community pharmacy which is owned and marketed by "Health
Outcomes" is called "Patient-Centered Pharmaceutical Care(TM)".
* "Health Outcomes" agrees to work with no other university worldwide and the
Peters Institute ("University") agrees to work with no other computer
software supplier worldwide during the term of this Agreement on this
subject of software which addresses a coordinated pharmaceutical care
system.
* It is understood by both parties that the "University" will receive a
current working copy of the Assurance Coordinated Pharmaceutical Care
System(TM) for development work at the University's offices but not for
commercial use in the practice of a Community Pharmacist.
* Sire License Fees, Training Fees and Support Fees to Community Pharmacies
will be established by "Health Outcomes" for the software. Current fees
are:
Site License Fee: $150 per month per Community Pharmacy
Support Fee: $200 per month per Community Pharmacy
Training Fee: $900 for a three (3) day course for each trainee
conducted in Health Outcomes' training facilities.
* During the term of this updated Agreement, "Health Outcomes" has paid and
will pay a royalty fee to the University of Minnesota - Office of Research,
Technology and Transfer Administration. This royalty fee shall be paid on a
quarterly basis. The first quarter shall be from the signing of this
Agreement through December
<PAGE>
31, 1997. Payment for all royalties due from "Health Outcomes" during this
period shall be due and payable sixty (60) days after the close of the
quarter. Thereafter, each quarter will consist of three calendar months
(ending March 31, June 30, September 30 and December 31 for the remainder
of the term of this Agreement), and payment of all royalties due for any
quarter will be due to the "University" within sixty (60) days after the
end of said quarter. The royalty fees shall be paid according to the
following:
a. First 500 community pharmacies licensed worldwide: 20% of all Site
License Fees received by "Health Outcomes".
b. Next 500 community pharmacies licensed worldwide: 18% of all Site
License Fees received by "Health Outcomes".
c. All other community pharmacies beyond 1,000 licensed worldwide: 15% of
all Site License Fees received by "Health Outcomes".
* Health Outcomes shall keep and maintain records of sales, leases, and other
dispositions of the software. Such records shall be open to inspection at
reasonable times by a certified public accountant chosen by the
"University" and acceptable to Health Outcomes. Such inspection shall be
made at the "University's" expense. The "University" agrees to hold such
records confidential, except as may be necessary to maintain an action
against "Health Outcomes" for breach of this Agreement. The records
required by this paragraph shall be maintained and available for inspection
for a period of three (3) years following the calendar quarter to which
they pertain. This paragraph shall survive termination of this Agreement.
* Royalty payments will be made to "The Regents of the University of
Minnesota".
* Communications concerning payments, notices, or other administrative
matters concerning this agreement shall be addressed as follows:
In case of the "University":
Department of Software Marketing
Office of Patents and Technology
University of Minnesota
Suite 201
1100 Washington Avenue South
Minneapolis, MN 55415-1226
Ph: 612-624-9568
Fax: 612-624-6554
In case of Health Outcomes:
William A. Peter, Jr.
Health Outcomes Management, Inc.
2331 University Avenue S.E.
Minneapolis, MN 55414
Ph: 612-378-3053
Fax: 612-378-2930
* This Agreement is made between the two parties and is not assignable to any
other parties under any circumstances without written agreement by
"University" and "Health Outcomes".
* For "Health Outcomes", CONFIDENTIAL INFORMATION shall mean computer
programs, technical or business information or disclosed to "University".
<PAGE>
For the "University", CONFIDENTIAL INFORMATION shall mean data or data
analysis or business information furnished or disclosed to "Health
Outcomes".
CONFIDENTIAL INFORMATION that is disclosed to one party by the other shall
be either (I) in tangible form and clearly labeled or marked confidential,
proprietary or its equivalent, or (ii) if disclosed orally or visually and
designated as confidential, proprietary or its equivalent it shall be at
the time of its disclosure and reduced to writing and clearly marked
confidential, proprietary or its equivalent.
A party receiving CONFIDENTIAL INFORMATION shall restrict the use of the
CONFIDENTIAL INFORMATION to those purposes necessary for the performance of
the receiving party's obligations under this Agreement. Any external
communication of the other parties CONFIDENTIAL INFORMATION must be
approved in writing.
1. is in public domain by use and/or publication at the time of its
receipt from the disclosing party; or
2. was already in its possession prior to receipt from the disclosing
party or is developed independently of CONFIDENTIAL INFORMATION
received from the disclosing party; or
3. is properly obtained by recipient from a third party with a legal
right to disclose such CONFIDENTIAL INFORMATION and such third party
is not under a confidentiality obligation to the disclosing party; or
4. is required to be disclosed by law, regulation, or a properly issued
subpoena.
Any and all CONFIDENTIAL INFORMATION received by either party from the
other, upon request shall be promptly returned.
Both parties to this Agreement shall take all steps reasonable to protect
the CONFIDENTIAL INFORMATION to third parties or employees with appropriate
notice, agreement, and/or instruction with respect to use, copying
modification, and protection of the material.
* Both parties agree to keep the studies being conducted and the research
results that pertain to the development of the software system strictly
confidential between the parties. Any external communication must be
approved in writing by both parties.
* The data, results and analysis of the data related to or resulting from the
development of the Minnesota Pharmaceutical Care Project are the sole
property of the "University" and may be published, analyzed, or used in any
manner designed by the "University"..
* The "University" and "Health Outcomes" understand that the information
provided by the Assurance Coordinated Pharmaceutical Care System(TM) is
advisory only and that the pharmacist or physician has the complete and
final responsibility for determining the plan and/or dosage for the
patient. The "University" shall not be responsible for any negligence on
the part of "Health Outcomes" nor shall "Health Outcomes" be responsible
for any negligence on the part of the "University".
* "Health Outcomes" agrees to indemnify the "University" and hold the
"University" harmless against all liabilities, demands, expenses or losses
arising (I) from the manufacture, use, lease, sale, or other disposition of
the software by "Health Outcomes" (ii) from a third party's use of the
software or other product or service purchased, leased, or otherwise
acquired from "Health Outcomes", or (iii) from a third party's manufacture
of a product or provision of a service at the request of "Health Outcomes".
"Health Outcomes agrees to maintain liability insurance to insure against
any of the above liabilities. At the "University's" request, "Health
Outcomes" shall proved "University" with certification of such insurance.
The provisions of this article shall
<PAGE>
survive termination of this agreement.
* The signatures below represent the agreement of both parties to the terms
of this Agreement which replaces all previous Agreements concerning the
software system described in this Agreement.
HEALTH OUTCOMES MANAGEMENT, INC.
By: /s/ William A. Peter, Jr.
--------------------------
William A. Peter, Jr., President/CEO
Authorization Date: 8/25/97
---------------------
REGENTS OF THE UNIVERSITY OF MINNESOTA
By /s/ Winifred A. Schumi
------------------------------
Winifred A. Schumi, Interim Asst. Vice President
Office of Research and Technology Transfer Administration
Authorization Date: 10/29/97
---------------------
PETERS INSTITUTE OF PHARMACEUTICAL CARE-
UNIVERSITY OF MINNESOTA
By /s/ Robert Cipolle
------------------------------
Robert Cipolle, Pharm.D., Director: Peters Institute of Pharmaceutical Care
Authorization Date: 8/29/97
---------------------
EXHIBIT 11
Health Outcomes Management, Inc. and Subsidiaries
CALCULATION OF EARNINGS PER SHARE (1)
Years ended February 28, 1998, February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ (372,708) $ 19,921 $ 95,615
Discontinued operations (329,727) (133,165) -
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (702,435) $ (113,244) $ 95,615
============================================================================================================
RECONCILIATION OF SHARES USED IN BASIC AND DILUTED PER SHARE CALCULATIONS:
Weighted average common shares outstanding 8,574,910 8,434,058 8,080,577
Dilutive effect of stock options and warrants 0 0 640,406
------------------------------------------------------------------------------------------------------------
SHARES USED IN DILUTED NET INCOME
(LOSS) PER SHARE CALCULATION 8,574,910 8,434,058 8,720,983
============================================================================================================
BASIC PER SHARE DATA:
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Discontinued operations $ (0.04) $ (0.01) $ 0.00
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.08) $ (0.01) $ 0.01
============================================================================================================
DILUTED PER SHARE DATA:
Income (loss) from continuing operations $ (0.04) $ 0.00 $ 0.01
Discontinued operation $ (0.04) $ (0.01) $ 0.00
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.08) $ (0.01) $ 0.01
============================================================================================================
</TABLE>
(1) Earnings per share assuming full dilution are not different from primary
earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 119,716
<SECURITIES> 0
<RECEIVABLES> 57,302
<ALLOWANCES> 13,400
<INVENTORY> 0
<CURRENT-ASSETS> 179,001
<PP&E> 685,177
<DEPRECIATION> 612,720
<TOTAL-ASSETS> 251,458
<CURRENT-LIABILITIES> 897,374
<BONDS> 24,011
0
0
<COMMON> 88,729
<OTHER-SE> (758,656)
<TOTAL-LIABILITY-AND-EQUITY> 251,458
<SALES> 1,160,675
<TOTAL-REVENUES> 1,160,675
<CGS> 806,928
<TOTAL-COSTS> 717,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,939
<INCOME-PRETAX> (372,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (372,708)
<DISCONTINUED> (329,727)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (702,435)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
