United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exhcange Act of 1934
HEALTH OUTCOMES MANAGEMENT, INC.
(Name of small business issuer in its charter)
Minnesota 41-1546471
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2331 University Avenue SE
Minneapolis, Minnesota 55414
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (612) 378-3053
Securities to be registered under Section 12(b)
of the Exchange Act: None
Securities to be registerd under Section 12(g)
of the Exchange Act: Common Stock, $.01 par value
____________________________
(Title of Class)
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
FORM 10-SB
INDEX
PART I Page
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Description of Properties 10
Item 4. Security Ownership of Certain Beneficial Owners
and Management 11
Item 5. Directors, Officers, Promoters & Control Persons 13
Item 6. Executive Compensation 14
Item 7. Certain Relationships and Related Transactions 16
Item 8. Description of Securities 16
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters 17
Item 2. Legal Proceedings 17
Item 3. Changes in and Disagreements with Accountants 17
Item 4. Recent Sales of Unregistered Securities 18
Item 5. Indemnification of Directors and Officers 19
PART F/S
Financial Statements and Supplementary Data 20
PART III
Item 1. Index to Exhibits 41
Item 2. Description of Exhibits 41
SIGNATURES
Signatures 42
<PAGE>
PART I
Item 1. Description of Business
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 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 promotion
of the practice of Patient Centered 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.
The Company
___________
The Company's mission statement is to improve the quality of patient outcomes in
healthcare - cost effectively using computer software and related 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 consulting, software, training and telephone support.
During the fiscal year ended February 28, 1998, the Company operated two
community pharmacies. The Company divested itself of both pharmacies during the
fiscal year ended February 28, 1998.
The Company markets its software services under the trade name "Assurance".
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
____________
PHARMACY PRACTICE SOFTWARE
The Assurance Patient-Centered Coordinated Comprehensive Pharmaceutical Care
System (tm) incorporates two components. The first component is software
designed to help the practitioner care for patients. The system is designed to
implement the Peter's Institute of Pharmaceutical Care (of the University of
Minnesota's) model of a generalist pharmaceutical care practice. The system
tracks patient outcomes, allows extensive documentation of professional services
performed, and generates billing and other supporting documents. The second
component is software for network and practice management. This product permits
information from many practice sites to be aggregated for analysis, quality
assurance, and reimbursement purposes. Together, the two components enable a
network of pharmacies to provide pharmaceutical care services to a broad base of
patients while demonstrating significant cost savings to third party payers on
an episode of care basis.
<PAGE>
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.
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 part of a
complete system with the Company's clinical documentation system.
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 that 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 pharmaco-
kinetic research.
Studies indicate that many patients in hospitals suffer 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
that 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
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 fiscal year 1998.
<PAGE>
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.
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
primarily of Carepoint, Encara, CareStream, JasCorp, Entaby and MedOutcomes.
Many pharmaceutical dispensing systems advertise that they also provide
pharmaceutical care. However, the Company believes that no competitive system
currently provides comprehensive generalist 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 healthcare 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 helpline (1-800-STAT-911) so that Health Outcomes Management
clinical and financial experts are available to provide clinical and
financial support services to its clients.
* Exhibit the Company's products and services at important national trade
shows and technical conventions.
* 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 prospects generated from magazine advertising,
trade shows, direct mailings and direct sales efforts.
<PAGE>
Significant Clients
___________________
During the years ended February 28, 1999 and February 28, 1998, no one client
accounted for a significant portion (10% or more) of the Company's revenues.
Research and Development
________________________
The Company spent approximately $127,000, $129,000 and $223,000 for research and
development efforts in the years ended February 28, 1999, 1998 and 1997,
respectively. For fiscal year 2000, the Company intends to fund software
development at approximately the same levels as fiscal year 1999.
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 reimburement 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 has filed for patent protection in relevant areas. Additionally,
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, 1999, the Company employed 15 staff members, 2 sales agents, 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 the 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>
Year 2000 Compliance
____________________
Background
Some computers, software, and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches and are commonly referred to as the "Millenium Bug" or "Year
2000 Problem".
Assessment
The Year 2000 Problem could affect computers, software and other equipment used,
operated, or maintained by the Company. Accordingly, the Company is reviewing
its internal computer programs and systems to ensure that the programs and
systems will be Year 2000 compliant. The Company presently believes that its
computer systems will be Year 2000 compliant in a timely manner. However,
while the estimated cost of these efforts are not expected to be material to
the Company's financial position or any year's results of operations, there can
be no assurance to this affect.
Software Sold to Customers
The Company believes it has substantially identified and resolved all potential
Year 2000 Problems with any of the software products which it currently develops
and markets. Currently, the Company only develops and markets software products
which were originally developed as Year 2000 compliant. However, management
also believes that it is not possible to determine with complete certainty that
all Year 2000 Problems affecting the Company's software products have been
identified or corrected due to complexity of these products and the fact that
these products interact with other third party vendor products and operate on
computer systems which are not under the Company's control.
The Company has previously installed software clinical and financial management
solutions for nursing home and hospital customers which are not Year 2000
compliant. The Company has discussed with customers options to modify these
previously installed systems to comply with Year 2000 requirements. The Company
is currently working with its customers to implement solutions where
appropriate.
Internal Infrastructure
The Company believes that it has reviewed and assessed all of the major
computers, software applications, and related equipment used in connection with
its internal operations that would potentially require modification, upgrade,
or replacement to minimize the possibility of a material disruption to its
business. The Company's internal review of such systems did not identify any
material Year 2000 Problems.
Systems Other than Information Technology Systems
In addition to computers and related systems, the operations of office and
facilities equipment such as fax machines, photocopiers, telephone switches,
security systems, and other common devices may be affected by the Year 2000
problems.
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 approx-
imately $30,000. 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 estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations.
Disclaimer
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The Company's ability
to achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in ongoing internal
compliance reviews.
<PAGE>
Item 2. 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 consulting services to the healthcare industry. Revenues
are derived primarily from five main sources: (1) licensing computerized
clinical and financial information management software systems; (2) providing
ongoing software support services; (3) software training services;
(4) consulting services, and (5) data aggregation and analysis. License and
training fees are usually received at the beginning of the license term. Annual
and monthly support fees pay for periodic software updates, telephone helpline
support and software usage.
FISCAL 1999 v. FISCAL 1998
Revenue
For fiscal 1999, revenue from continuing operations was $1,378,000. Total
revenue from continuing operations increased by $217,000, or 19%, from
$1,161,000 in fiscal 1998. The Company recorded a net income from continuing
operations in fiscal 1999 of $32,000 compared to net loss of $373,000 from
continuing operations in fiscal 1998. The Company recorded net income,
including discontinued operations, in fiscal 1999 of $244,000, compared to net
loss of $702,000, including discontinued operations, in fiscal 1998, an increase
in income from continuing and discontinued operations combined of $947,000. The
revenue received from client support fees decreased by 2%, license fees
increased by 50%, software training fees increased by 477%, and consulting
revenue decreased to $0. The effects of inflation on the Company's revenue and
operating results were not significant.
Costs and Expenses
Total expenses from operations in fiscal 1999, including cost of sales,
interest, depreciation and amortization, decreased 12% to $1,346,000 from
$1,533,000 in fiscal 1998. Total operating expenses decreased 18% to $591,000
from $718,000 in fiscal 1998. Marketing expenses decreased significantly as
the Company redesigned its marketing efforts and product offerings. General
and Administrative expenses decreased 3% in fiscal 1999. Administrative
expenses have declined as the Company has implemented expense reduction efforts.
Net interest expense increased to $18,000 in fiscal 1999 from $9,000 in fiscal
1998. During fiscal 1999, the Company's interest costs related primarily to
trade creditors and leased equipment.
FISCAL 1998 v. FISCAL 1997
Revenue
For fiscal 1998, revenue from continuing operations was $1,161,000. Total
revenue from continuing operations decreased by $1,141,000, or 50%, from
$2,302,000 in fiscal 1997. The Company recorded a net loss from continuing
operations in fiscal 1998 of $373,000 compared to net income of $20,000 from
continuing operations in fiscal 1997. The Company recorded a net loss,
including discontinued operations, in fiscal 1998 of $702,000, compared to net
loss of $113,000, including discontinued operations in fiscal 1997, an increase
in loss from continuing and discontinued operations combined of $589,000 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%. 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 $9,000 from $12,000 in fiscal 1997. During
fiscal 1998 and fiscal 1997, the Company's interest costs related primarily to
leased computer and office equipment.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1999, the Company had a working capital deficit of $338,000
compared to a deficit of $718,000 at February 28, 1998, a decrease in deficit of
$380,000. The increase in working capital was substantially due to write-offs
of leases in connection to the discontinuation of the Company's pharmacy
business and the willingness of certain vendors of the pharmacy locations to
accept extended payment plans and write-offs 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 approx-
imately $30,000. 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 committments to purchase additional equipment, but
does plant 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
closing of both retail pharmacies in late fiscal 1998 has eliminated the ongoing
cash needs related to these operations with the exception of certain accounts
payable and promissory notes issued as part of the discontinuation of
operations. The Company's cash flow position has shown improvement since the
previous fiscal year, but has been negatively impacted by the remaining cash
requirements of the disposition of the retail pharmacy operations.
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,
third party payers and pharmacy groups in foreign countries.
* Expand its current strategy of locating additional strategic partners in
the pharmaceutical care marketplace that have 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 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 registration statement on Form
10-SB 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's 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 10-SB, for the
full disclosure.
In fiscal 1997, the Company was required to adopt Statement of Financial
Accounting Standards No. 121 (SFAS No. 121) Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed, 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.
Item 3. Properties
The Company leases its corporate office and training facilities, which are
located at 2331 University Avenue Southeast in Minneapolis, Minnesota. The
facilities are covered by an operating lease with an original term of two (2)
years commencing January 1, 1999. Rent is payable monthly in the amount of
$8,169. 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 6,500 square feet.
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table lists, as of February 28, 1999, 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. 1,442,000 (1) 15.67%
6650 Vernon Hills Road
Edina, Minnesota 55436
Sandra F. Pessin 616,000 6.94%
605 3rd
New York, New York 10158
Steven C. Wolf 550,000 6.20%
820 South 59th Street
Belleville, Illinois 62223
Officers and Directors:
Michael J. Frakes 381,549 (2) 4.30%
3712 Chatham Circle
Arden Hills, Minnesota 55112
Peter J. Zugschwert 215,430 (3) 2.43%
5500 Wayzata Boulevard, Suite 1075
Minneapolis, Minnesota 55416
Jonathan R. Gordon 70,600 (4) .80%
7300 France Avenue South
Edina, Minnesota 55435
Stanford M. Baratz 51,600 (4) .58%
5500 Wayzata Boulevard, Suite 1075
Minneapolis, Minnesota 55415
Matthew E. Goldberg 9,800 (4) .11%
119 North Fourth Street
Minneapolis, Minnesota 55401
B. Marie Cooper 8,750 (5) .10%
4549 Hay Lake Road South
Eagan, Minnesota 55123
All Officers and Directors as a group
(6 persons) 737,729 (6) 8.31%
</TABLE>
<PAGE>
(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 11,150 shares, which may be purchases pursuant to stock options,
which are exercisable within 60 days of the date hereof.
(4) Includes 6,600 shares, which may be purchased pursuant to stock options,
which are exercisable within 60 days of the date hereof.
(5) Includes 3,750 shares, which may be purchased pursuant to stock options,
which are exercisable within 60 days of the date hereof.
(6) Includes 186,300 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 5. Directors, Executive Officers, Promoters, and Control Persons
The following table sets forth information regarding the Company's executive
officers and directors as of May 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
___________________ ___ __________________________________
<S> <C> <C>
Peter J. Zugschwert 33 President, Chief Executive Officer
and Director
Stanford M. Baratz 43 Director
Jonathan R. Gordon 47 Director
Matthew E. Goldberg 32 Director
Michael J. Frakes 47 Vice President
B. Marie Cooper 31 Controller and Principal Accounting
Officer
</TABLE>
Peter J. Zugschwert, age 33, 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 43, 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. Mr. Baratz has been a director of the Company since September 1997.
Jonathan R. Gordon, age 47, has been President of The Vault, Inc., an Edina, MN
based document storage company, since 1988. Mr. Gordon is a Certified Public
Accountant. Mr. Gordon has been a director of the Company since September 1997.
Matthew E. Goldberg, age 32, was the President of In-Sight Optical, Inc. dba
InVision, a retail optical store chain, from 1996 through 1998. Between 1992
and 1996, Mr. Goldberg was an account manager with Campbell-Mithun Esty, a
Minneapolis based advertising agency. Mr. Goldberg has been a director of the
Company since September 1997.
Michael J. Frakes, Pharm.D., age 47, has served as Vice President of the Company
since May 1986. Mr. Frakes was a co-founder of Data Med, Inc. in 1985. 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.
B. Marie Cooper, age 31, joined the Company in April 1998 as its Controller
and Principal Accounting Officer. From June 1995 to March 1998, Ms. Cooper was
the Accounting Manager for Newcom Group, Inc., and its subsidiaries, as well as
The Express Pages, LLC. Ms. Cooper holds a BA degree in Accounting from
Augsburg College in Minneapolis, Minnesota.
<PAGE>
Item 6. Executive Compensation
Effective October 23, 1997, each member of the Board of Directors receives in
lieu of 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, 1999, Board of Director compensation totaled 6,400
shares. These shares have not yet been issued.
The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal years ended February 1999, 1998, and 1997,
to the President and Chief Executive Officer. No officer of the Company
received compensation in excess of $100,000.
<TABLE>
Summary Annual Compensation
___________________________
Annual Compensation Long Term Compensation
___________________________ __________________________________
Name and Restricted
Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
(a) (b) (c) (d) (e) (f) (g) (h) (i)
___________________ ____ ______ _____ ____________ ________ ____________ _______ ____________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter J. Zugschwert 1999 94,163 (1)
President & CEO 1998 27,050 47,050 (2)
1997
<FN>
(1) During fiscal year 1999, Mr. Zugschwert was retained as a consultant to act
as the President of the company. Mr. Zugschwert billed the Company $94,163
during fiscal year 1999. Of this amount, $26,613 was paid by the Company in
cash, $50,000 was converted into a note (see audited financials), and $17,550
remains due and payable.
(2) During fiscal year 1998, Mr. Zugschwert was retained as a consultant to act
as the President of the Company. While his total compensation was $47,050, he
accepted stock in lieu of cash compensation in the amount of $20,000.
</FN>
</TABLE>
The following table sets forth information concerning the value of stock options
and warrants granted to the Company's executive officer named in the
compensation table during the fiscal year ended February 28, 1999.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
_____________________________________
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
(a) (b) (c) (d) (e)
___________________ ____________ ____________ ___________ ___________
<S> <C> <C> <C> <C>
Peter J. Zugschwert 15,000 6% $0.10 10/05/03
President & CEO
</TABLE>
LONG TERM INCENTIVE PLANS
There were no Long-Term Incentive Plans - Awards in last fiscal year (table
omitted).
<PAGE>
The following table sets forth information concerning the value of stock options
and warrants held by the Company's executive officer named in the compensation
table as of February 28, 1999.
<TABLE>
<CAPTION>
Stock Options and Warrants Held and Fiscal Year End Option Values
_________________________________________________________________
Number of Unexercised Value of Unexercised (1)
Options/SARs at FYE In-The-Money Options at YE
Acquired on Value __________________________ __________________________
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(a) (b) (c) (d) (e) (f) (g)
___________________ ___________ ________ ___________ _____________ ___________ _____________
<S> <C> <C> <C> <C> <C> <C>
Peter J. Zugschwert 0 $0 11,150 15,450 $0 $0
President & CEO
<FN>
(1) Based upon the average of the bid and ask price of $.08 for the Company's
Common Stock on February 28, 1999, as reported by the National Quotation Bureau.
</FN>
</TABLE>
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, 2000. Under the employment agreement with Mr. Frakes, he 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, 1999. 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.
STOCK OPTIONS
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, 1999, incentive stock options for the
purchase of 224,815 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 Stock Option Plan.
On October 5, 1998, the Company, by resolution of its Board of Directors, issued
240,000 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. As of May 1, 1999, non-qualified options for the
purchase of 659,215 shares remained outstanding.
Options to purchase a total of 152,200 shares were held by the Company's
officers and directors as a group as of February 28, 1999. The Company's
current employees (including certain officers and directors) held options to
purchase a total of 884,030 shares at the same date.
WARRANTS
The Company issued no warrants in fiscal year 1999. As of May 1, 1999, warrants
for the purchase of 165,000 shares remained outstanding.
<PAGE>
Item 7. Certain Relationships and Related Transactions
As of February 28, 1999, the Company had outstanding accounts payable of $17,550
and a $50,000 note with Mr. Zugschwert related to consulting services rendered.
Item 8. Description of Securities
Authorized Capital Stock
The Company's authorized capital stock consists of 15,000,000 shares of Common
Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, no stated par
value. As of May 1, 1999, 9,198,761 shares of Common Stock and no shares of
Preferred Stock were issued and outstanding.
Preferred Stock may be issued in one or more series as determined from time to
time by the Board of Directors who, by resolution, may designate such shares as
senior to the Common Stock with respect to any distribution (as such term is
defined in Section 302A.011, Subd. 10, Minnesota Statutes), fix any other
designations, powers, preferences, rights, qualifications, limitations or
restrictions with respect to any particular series of Preferred Stock.
Except as otherwise required by law, the holders of the shares of Common Stock
have the sole voting rights of the Company.
There is no cumulative voting in election of directors by the holders of the
Common Stock and there are no preemptive, subscription, conversion or redemption
rights pertaining to the Common Stock or authorized Preferred Stock.
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder 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.
<TABLE>
<CAPTION>
STOCK PRICE
Fiscal 1999 Fiscal 1998
____________________________________________________________________________
Quarter High Low Quarter High Low
____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
First $.13 $.08 First $.13 $.13
Second $.13 $.08 Second $.13 $.08
Third $.14 $.06 Third $.21 $.08
Fourth $.12 $.06 Fourth $.18 $.10
As of May 1, 1999, 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 conditions, general
business conditions and other factors considered by the Board of Directors.
Item 2. Legal Proceedings
As of May 1, 1999, the Company was not involved in any material legal
proceedings.
Item 3. Changes in and Disagreements with Accountants
During the first quarter of fiscal year 1999, the Company dismissed its
principal independent accountant and retained a new independent accountant, as
reported on Form 8K filed May 4, 1998. The dismissal was not based upon any
disagreement concerning any matter of accounting practice or policy.
<PAGE>
Item 4. Recent Sales of Unregistered Securities
</TABLE>
<TABLE>
Number
Date of Name or Class of Type of of Shares Exercise
Issuance Person Acquiring Security Represented Price Consideration Exemption
________ __________________ ___________ ___________ _____ _____________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
(1) 02/28/96 Employees Shares 48,144 N/A N/A (2)
(3) 06/12/97 Frakes, Michael Warrant 30,000 $0.31 N/A (2)
(4) 06/12/97 Peter, William Warrant 115,000 $0.31 N/A (2)
(5) 10/23/97 Board Members Options 40,000 $0.08 N/A (2)
(6) 10/23/97 Greenstein, Victor Shares 189,894 N/A $23,921 (2)
(7) 10/23/97 Zugschwert, Peter Shares 158,730 N/A $20,000 (2)
(8) 11/05/97 Employees Options 162,000 $0.23 N/A (2)
(9) 02/28/98 Board Members Shares 25,200 N/A N/A (2)
(8) 10/05/98 Employees Options 240,000 $0.10 N/A (2)
(10) 02/04/99 Zugschwert, Peter Convertible 500,000 $0.10 $50,000 (2)
Note
(1) 02/28/99 Employees Shares 325,908 N/A N/A (2)
(11) 02/28/99 Board Member Shares 6,400 N/A N/A (2)
<FN>
(1) Shares issued to employees pursuant the Company's 401k plan.
(2) 4(2) and/or 4(6) of the Securities Act of 1934.
(3) Warrant issued to Mr. Frakes as compensation in lieu of wages.
(4) Warrant issued to Mr. Peter as compensation in lieu of wages.
(5) Options issued to new board members in lieu of cash compensation.
(6) Shares issued to Mr. Greenstein in relation to proxy.
(7) Shares issued to Mr. Zugschwert in lieu of cash compensation.
(8) Stock options issued to employees and/or consultants for incentive purposes.
(9) Shares issued to board members in lieu of cash compensation.
(10) Convertible note with a face value of $50,000 and a rate of 8% convertible
into stock at $0.10.
(11) Shares accrued to board members in lieu of cash compensation.
</FN>
</TABLE>
<PAGE>
Item 5. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Business Corporation Act requires the Company
to indemnify a person made, or threatened to be made, a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including reasonable expenses,
if such person: (i) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (ii) acted in good faith; (iii) received
no improper personal benefit, and statutory procedure has been followed in the
case of any conflict of interest by a director; (iv) in the case of any criminal
proceedings, had no reasonable cause to believe the conduct was unlawful; and
(v) in the case of acts or omissions occurring in the person's performance in
the official capacity of director or, for a person not a director, in the
official capacity of officer, committee member, employee or agent of the Company
as a director, officer, partner, trustee, employee or agent of another
organization or employee benefit plan, reasonably believed that the conduct was
not opposed to the best interests of the Company. In addition, Section 302A.521
Subd. 3, requires the Company to advance, in certain circumstances and upon
written request, reasonable expenses prior to final disposition. A decision as
to required indemnification is to be made by a disinterested majority of the
Board of Directors present at a meeting at which a quorum of disinterested
directors is present, or by a designated committee of the Board of Directors, by
special legal counsel, by the stockholders, or by a court.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
The Company's Articles of Incorporation limit personal liability for breach of
the fiduciary duty of its directors, to the fullest extent provided by the
Minnesota Business Corporation Act. The Articles of Incorporation eliminate the
personal liability of directors for damages occasioned by breach of fiduciary
duty, except for liability based on the director's duty of loyalty to the
Company, liability for acts or omissions not made in good faith, liability for
acts or omissions involving intentional misconduct, liability based on payments
of improper dividends, liability based on violations of state securities laws,
and liability for acts occurring prior to the date such provision was added.
<PAGE>
PART F/S
The following Consolidated Financial Statements of the Company and the
Independent Auditors' Report thereon are included on pages 19 through 37 of
this Form 10-SB.
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARES
CONSOLIDATED FINANCIAL REPORT
FEBRUARY 28, 1999
<PAGE>
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS 19
FINANCIAL STATEMENTS
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Changes in Stockholders' Deficit 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-37
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Health Outcomes Management, Inc.
Minneapolis, MN
We have audited the accompanying consolidated balance sheets of Health Outcomes
Management, Inc. and Subsidiaries as of February 28, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for the years 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 audits. The financial
statements for Health Outcomes Management, Inc. and Subsidiaries for 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
describes 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 taht 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 of the overall financial statement
presentation. We believe that our audits provide 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, 1999 and 1998, and the
results of their operations and their cash flows for the years 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.
SCHWEITEZER KARON & BREMER, LLC
Certified Public Accountants
Minneapolis, Minnesota
April 15, 1999
<PAGE>
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1999 1998
_________________________________________________________ ______________
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,034 $ 119,716
Trade receivables, less allowance for
doubtful accounts of $7,800 in 1999;
$13,400 in 1998 63,937 43,902
Prepaid Expenses 13,768 15,383
- - --------------------------------------------------------- -------------
Total current assets 107,739 179,001
PROPERTY AND EQUIPMENT, net 25,613 55,384
OTHER ASSETS, net of accumulated amortization
of $0 in 1999; $6,219 in 1998 0 17,073
- - --------------------------------------------------------- --------------
Total assets $ 133,352 $ 251,458
_________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 36,274 $ 7,500
Current installments of obligations under
capital leases 10,000 34,451
Accounts payable 156,611 470,385
Deferred revenue 186,928 326,075
Accrued compensation 36,731 35,478
Accrued payroll taxes 11,103 10,671
Accrued interest 329 0
Other current liabilities 8,148 12,814
- - --------------------------------------------------------- --------------
Total current liabilities 446,124 897,374
LONG-TERM DEBT, less current maturities 71,300 10,000
OBLIGATIONS UNDER CAPITAL LEASES, less current
installments 4,604 14,011
- - --------------------------------------------------------- --------------
Total liabilities 522,028 921,385
- - --------------------------------------------------------- --------------
COMMITTMENTS AND CONTINGENCIES (Note 7, 14 & 15)
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; authorized
15,000,000 shares; issued and outstanding
shares 9,198,761 in 1999 and 8,872,853 in
1998 91,988 88,729
Additional paid-in capital 4,803,742 4,770,194
Accumulated deficit (5,284,406) (5,528,850)
- - --------------------------------------------------------- --------------
Total stockholders' deficit (388,676) (669,927)
- - --------------------------------------------------------- --------------
Total liabilities and stockholders' deficit $ 133,352 $ 251,458
_________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
_______________________________________________________________________
1999 1998 1997
___________________________________________ ____________ ____________
<S> <C> <C> <C>
Revenues $ 1,377,990 $ 1,160,675 $ 2,301,626
Cost of revenue 737,342 806,928 1,399,522
___________________________________________ ____________ ____________
Gross Profit 640,648 353,747 902,104
- - -------------------------------------------- ------------ ------------
Operating Expenses:
Research and Development 127,236 128,740 223,437
Selling and Marketing 4,846 115,962 135,713
General and Administrative 458,932 472,814 511,256
- - -------------------------------------------- ------------ ------------
Operating income (loss) 49,634 (363,769) 31,698
Other income (expense):
Interest income 2,441 3,801 7,714
Interest expense (20,344) (12,740) (19,491)
- - -------------------------------------------- ------------ ------------
Income (loss) from continuing
operations 31,731 (372,708) 19,921
Operating income (loss) from
discontinued operations 212,713 (329,727) (133,165)
- - -------------------------------------------- ------------ ------------
Net Income (loss) $ 244,444 $ (702,435) $ (113,244)
________________________________________________________________________
Net Income (Loss) Per
Share Data:
Basic
Income (loss) from continuing
operations $ 0.00 $ (0.04) $ 0.00
Net income (loss) per share $ 0.03 $ (0.08) $ (0.01)
Shares used in per share
calculations 8,872,853 8,574,910 8,434,058
Diluted
Income (loss) from continuing
operation $ 0.00 $ (0.04) $ 0.00
Net income (loss) per share $ 0.03 $ (0.08) $ (0.01)
Shares used in per share
calculations 8,913,096 8,574,910 8,434,058
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
__________________________________________________________________________________________________________
Note
Additional Receivable
Preferred Stock Common Stock Paid In Accumulated from Total
_______________ _________________ Capital Deficit Officer Deficit
Shares Amount Shares Amount
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
February 29, 1996 0 $0 8,327,885 $83,279 $4,665,724 ($4,713,171) ($92,400) ($ 56,568)
Proceeds from
Options Exercised 0 $0 123,000 $ 1,230 $ 44,280 $ 0 $ 0 $ 45,510
Issuance of
Common Stock 0 $0 48,144 $ 481 $ 14,564 $ 0 $ 0 $ 15,045
Net Loss 0 $0 0 $ 0 $ 0 ($ 113,244) $ 0 ($113,244)
Payments Rec'd on
Note Receivable
from Officer 0 $0 0 $ 0 $ 0 $ 0 $22,900 $ 22,900
- - ----------------------------------------------------------------------------------------------------------
Balance
February 28, 1997 0 $0 8,499,029 $84,990 $4,724,568 ($4,826,415) ($69,500) ($ 86,357)
Issuance of
Common Stock 0 $0 373,824 $ 3,739 $ 45,626 $ 0 $ 0 $ 49,365
Net Loss 0 $0 0 $ 0 $ 0 ($ 702,435) $ 0 ($702,435)
Payments Rec'd on
Note Receivable
from officer 0 $0 0 $ 0 $ 0 $ 0 $69,500 $ 69,500
- - ----------------------------------------------------------------------------------------------------------
Balance
February 28, 1998 0 $0 8,872,853 $88,729 $4,770,194 ($5,528,850) $ 0 ($669,927)
Issuance of
Common Stock 0 $0 325,908 $ 3,259 $ 33,548 $ 0 $ 0 $ 36,807
Net Income 0 $0 0 $ 0 $ 0 $ 244,444 $ 0 $244,444
- - ----------------------------------------------------------------------------------------------------------
Balance
February 28, 1999 0 $0 9,198,761 $91,988 $4,803,742 ($5,284,406) $ 0 ($388,676)
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
_________________________________________________________________________________________
1999 1998 1997
_________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 244,444 (702,435) (113,244)
- - ------------------------------------------------------------- --------- ---------
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation 29,771 57,002 91,913
Amortization 17,073 40,264 32,764
Provision for losses on trade receivables 3,897 13,613 31,234
Net recoveries (write-offs) of bad debts (9,497) (35,213) 5,114
Loss (gain) on disposal of inventory and equipment (3,425) 49,048 0
Loss (gain) on disposal of segment (212,542) 208,550 0
Accrued severance exp converted to note payable 26,500 0 0
Interest on capital leases (1,522) 0 0
Accrued consulting fees converted to note payable 50,000 0 0
Stock issued as payment for services performed 0 49,365 15,045
Changes in operating assets and liabilities, net of
acquisitions:
Decrease (increase) in trade receivable (14,435) 70,100 11,469
Decrease (increase) in inventory 0 16,498 (18,405)
Decrease (increase) in prepaid expenses 1,615 1,983 26,439
Decrease (increase) in other current assets 0 0 679
Increase (decrease) in accounts payable (77,934) 161,634 (32,624)
Increase (decrease) in deferred revenue (139,147) 12,149 120,266
Increase (decrease) in accrued compensation 1,253 (21,069) (18,408)
Increase (decrease) in payroll taxes 432 (4,308) (5,243)
Increase (decrease) in accrued interest 329 0 0
Increase (decrease) in other current liabilities 32,141 (12,794) 9,389
- - -------------------------------------------------------------- ----------- ------------
Total adjustments (295,491) 606,822 269,632
- - -------------------------------------------------------------- ----------- ------------
Cash flows provided by (used in) operating activities (51,047) (95,613) 156,388
- - -------------------------------------------------------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 0 (21,698) (2,569)
Proceeds from the sale of equipment 3,425 2,310 0
Proceeds fron the sale of intangibles 0 14,091 0
Purchase of pharmacy assets 0 (10,000) (23,544)
- - -------------------------------------------------------------- ----------- ------------
Cash flows used in investing activities 3,425 (15,297) (26,113)
- - -------------------------------------------------------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments received on note receivable 0 69,500 22,900
Principal payments under capital lease obligations (19,799) (43,214) (54,538)
Prepayments of note payable assumed in acquisition (4,500) (4,684) (3,780)
Principal payments under other notes payable (17,761) 0 0
Proceeds from issuance of common stock 0 0 45,510
- - -------------------------------------------------------------- ----------- ------------
Cash flows provided by (used in) financing activities (42,060) 21,602 10,092
- - -------------------------------------------------------------- ----------- ------------
Increase in cash and cash equivalents (89,682) (89,308) 140,367
Cash and cash equivalents:
Beginning 119,716 209,024 68,657
- - -------------------------------------------------------------- ----------- ------------
Ending 30,034 119,716 209,024
_________________________________________________________________________________________
Cash paid during the year for interest: 21,537 19,415 23,027
_________________________________________________________________________________________
</TABLE>
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
Health Outcomes Management, Inc., (the Company) formerly know 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.
Property and equipment:
Property and equipment are recorded at cost. Expenditures for renewals and
betterments are capitalized. Repairs and maintenance costs are charged to
expense. Additionally, where required by generally accepted accounting
principles, all significant equipment leases are capitalized as installment
purchases. When items are disposed of, the cost and accumulated depreciation
are eliminated from the accounts, and any gain or loss is reflected in the
results of operations.
Depreciation and amortization:
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 seven years.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and convertible debt 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 $15,000 in 1999 and $30,000 in 1998 and
1997, respectively.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant accounting policies of the Company are summarized below: (Continued)
Cash and cash equivalents:
For purposes of the cash flow statement, the Company considers highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash.
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.
Comprehensive income:
The Company does not have any items of comprehensive income in any of the
periods presented.
New accounting pronouncements:
In October 1997, the AICPA issued Statement of Position (SOP) 97-2 on Software
Revenue Recognition that supersedes SOP 91-1. The SOP is effective for all
fiscal years beginning after December 15, 1997. The Company's adoption of this
statement for 1999 had no material effect on its net income.
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")
in the fiscal year ended February 28, 1999. SFAS establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. Since the closing of the
pharmacy operations, the Company has viewed its operations as principally one
segment, the sale and service of software to the healthcare industry. As a
result, the information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
The Company derives principally all of its sales throughout the United States.
Reclassifications:
Certain amounts for 1998 have been reclassified for comparative purposes to
conform with the presentation of the 1999 amounts. The reclassifications have
no effect on net income.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 from continuing operation of $372,708 during the year ended February 28,
1998, and an operating profit of $31,731 from continuing operations during the
year ended February 28, 1999. As of February 28, 1999, the Company had an
accumulated deficit of $5,284,406, a stockholders' deficit of $388,676, and a
working capital deficit of $338,385. 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.
Management has adopted the following plans for 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 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 continue to improve 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 continued
profitable operations and the resolution of its liquidity problems.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, payable by the Company in twelve
equal monthly installments, was paid off during 1998.
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, payable at $500 per month, matures in March 2000. The remaining
balance of $30,000, payable by the Company in eleven equal monthly installments,
was paid off during 1998. 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 (tm) software. During 1998 the Company discontinued
the operations of both the Edina and Eden Prairie facilities (see Note 17).
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
_________________________________________________________________________
1999 1998
_________________________________________________________________________
<S> <C> <C>
Property acquired under capitalized leases $ 41,649 $ 181,547
Furniture and equipment 588,555 480,338
- - -------------------------------------------------------------------------
630,204 661,885
Less accumulated amortization and depreciation,
including accumulated amortization on equipment
acquired under capital leases $29,889 and
$160,747, respectively (604,591) (606,501)
- - -------------------------------------------------------------------------
Net property and equipment $ 25,613 $ 55,384
_________________________________________________________________________
</TABLE>
NOTE 5. CAPITALIZED SOFTWARE
During 1996, the Company became licensed as an authorized reseller of financial
software. The software is for corporate use and inclusion into the Company's
software products. The Company is amortizing the $8,292 of software costs over
three years.
New software products, developed in 1998 and 1997, were expensed as incurred due
to lack of significant revenues generated from such products. No new software
products were developed during 1999, however, the Company continued to modify
and improve its existing products. Costs related to these improvements and Year
2000 compliance were expensed.
Amortization of capitalized computer software costs was $2,073, $2,764, and
$2,764 in 1999, 1998 and 1997, respectively.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
________________________________________________________________________
1999 1998
________________________________________________________________________
<S> <C> <C>
Note payable maturing March 2000, payable in
monthly installments of $500, including
interest at 8.0% $ 6,298 $ 17,500
Note payable maturing July 1999, payable in
monthly installments of $1,102, including
interest at 10.0%, secured by specific
computer equipment 5,376 0
Note payable maturing December 2000, payable
in average monthly installments of $1,167,
secured by inventory, receivables, equipment
and general intangibles 29,000 0
Note payable to related party maturing June
2000, including interest at 8.0%, and secured
by inventory, receivables, equipment and
general intangibles, fully subordinate to
other obligations of the Company as designated
by the Board of Directors, and convertible
into common stock at a conversion price of
$.10 per share 50,000 0
Note payable to former employee maturing
November 2000, payable in monthly installments
of $800, including interest at 10.0% 16,900 0
- - ------------------------------------------------------------------------
107,574 17,500
Less current maturities 36,274 7,500
- - ------------------------------------------------------------------------
Total long-term maturities $ 71,300 $ 10,000
________________________________________________________________________
</TABLE>
Scheduled principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
________________________________________________________________________
Year Amount
________________________________________________________________________
<S> <C>
2000 $ 36,274
2001 71,300
- - ------------------------------------------------------------------------
Total $ 107,574
________________________________________________________________________
</TABLE>
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LEASES
The Company currently leases its corporate office facility under an operating
lease agreement, which expires December 31, 1999, with an option for an
additional year.
Rental expense in 1999, 1998 and 1997 was $109,864, $150,069 and $144,753,
respectively.
Future minimum rental payments due under non-cancelable operating leases are
as follows:
<TABLE>
<CAPTION>
________________________________________________________
Amounts
________________________________________________________
<S> <C>
2000 $ 81,690
- - --------------------------------------------------------
Total $ 81,690
________________________________________________________
</TABLE>
Future minimum lease payments under capital lease obligations are as follows:
<TABLE>
<CAPTION>
_________________________________________________________
Amounts
_________________________________________________________
<S> <C>
2000 $ 11,592
2001 4,889
- - ---------------------------------------------------------
Total 16,481
Less amounts representing interest (1,877)
- - ---------------------------------------------------------
Present value of net minimum lease payments 14,604
Less current installments (10,000)
- - ---------------------------------------------------------
Obligations under capital leases,
excluding current installments 4,604
_________________________________________________________
</TABLE>
All equipment purchased under capital leases is pledged as collateral.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
There was no income tax expense or benefit amounts recorded for 1999, 1998 or
1997.
The provision for income taxes from continuing operations for the years ended
February 28, 1999, 1998 and 1997, differs from the statutory federal tax rate
applied as follows:
<TABLE>
<CAPTION>
____________________________________________________________________
1999 1998 1997
____________________________________________________________________
<S> <C> <C> <C>
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%
____________________________________________________________________
</TABLE>
Deferred taxes, calculated using an effective tax rate of 36% in 1999, 1998
and 1997, consists of the following:
<TABLE>
<CAPTION>
_____________________________________________________________________
1999 1998 1997
_____________________________________________________________________
<S> <C> <C> <C>
Deferred tax assets:
Capital leases $ (200) $ 11,000 $ 10,000
10,800 18,000 30,000
2,800 4,800 12,600
2,214,000 1,983,600 1,512,000
67,300 117,400 113,000
- - ---------------------------------------------------------------------
Gross deferred tax assets 2,294,700 2,134,800 1,677,600
(2,294,700) (2,134,800) (1,677,600)
- - ---------------------------------------------------------------------
$ 0 $ 0 $ 0
_____________________________________________________________________
</TABLE>
As of February 28, 1999, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $6,150,000, 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 9. NET INCOME (LOSS) PER SHARE
The following table presents the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
____________________________________________________________________
1999 1998 1997
____________________________________________________________________
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share - income
(loss) from continuing
operations $ 31,731 $(372,708) $ 19,921
Discontinued operations 212,713 (329,727) (133,165)
- - --------------------------------------------------------------------
Net income (loss) $ 244,444 $(702,435) $(113,244)
____________________________________________________________________
</TABLE>
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. NET INCOME (LOSS) PER SHARE (CONTINUED)
The following table presents the computation of basic and diluted net income
(loss) per share (continued):
<TABLE>
<CAPTION>
______________________________________________________________________________
1999 1998 1997
______________________________________________________________________________
<S> <C> <C> <C>
Reconciliation of shares used in basic and diluted per share calculations:
Denominator for basic income
per share - weighted average
common shares outstanding 8,872,853 8,574,910 8,434,058
Effect of dilutive securities:
Stock options 34,764 0 0
Warrants 0 0 0
Convertible debt 5,479 0 0
- - ------------------------------------------------------------------------------
Denominator for diluted net
income (loss) per share
adjusted weighted average
shares and assumed conversion 8,913,096 8,574,910 8,434,058
______________________________________________________________________________
Basic per share data:
Income (loss) from continuing
operations $ 0.00 $ (0.04) $ 0.00
Discontinued operations $ 0.03 $ (0.04) $ (0.01)
- - ------------------------------------------------------------------------------
Net income (loss) $ 0.03 $ (0.08) $ (0.01)
______________________________________________________________________________
Diluted per share data:
Income (loss) from continuing
operations $ 0.00 $ (0.04) $ 0.00
Discontinued operations $ 0.03 $ (0.04) $ (0.01)
- - ------------------------------------------------------------------------------
Net income (loss) $ 0.03 $ (0.08) $ (0.01)
______________________________________________________________________________
</TABLE>
NOTE 10. 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 1999 and 1997, 325,908 and 48,144 shares of common stock, respectively,
were issued as part of the Company match benefit for the 401(k) retirement plan.
Preferred stock:
The Company has authorized Series A, convertible preferred stock. 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, 1999.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCKHOLDERS' DEFICIT (CONTINUED)
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 non-employee 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 non-employee agents of the Company without
shareholder approval of a new stock option plan.
During 1999 and 1998, the Company granted non-qualified options to various
employees, board of directorss, and non-employee agents.
Information with respect to options for the Company's common shares is
summarized as follows:
<TABLE>
<CAPTION>
________________________________________________________________________________________
Non-Qualified
Incentive Options Options
_________________ _______________
Weighted Weighted
Price Per Average Average
Share Stock Exercise Stock Exercise
Range Options Price Options Price
________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance February 29, 1996 $0.25 $0.97 686,815 $0.47 133,000 $0.46
Granted 0 0
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
Granted $0.10 $0.10 0 246,400 $0.10
Exercised 0 0
Canceled $0.28 $0.97 (57,500) $0.47 (28,000) $0.32
- - ----------------------------------------------------------------------------------------
Balance February 28, 1999 $0.10 $0.97 224,815 $0.47 553,400 $0.21
________________________________________________________________________________________
</TABLE>
At February 1999, 1998 and 1997, currently exercisable options aggregated
497,215, 388,565, and 445,565 shares of common stock, respectively, and the
weighted-average exercise price of those options was $0.37, $0.37 and $0.41,
respectively.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock option plan: (Continued)
The weighted average fair values of options granted were as follows:
<TABLE>
<CAPTION>
______________________________________________________________________
Estimated
Weighted Average
Fair Value
______________________________________________________________________
<S> <C>
1998 grants $ 0.22
- - ----------------------------------------------------------------------
1999 grants $ 0.03
______________________________________________________________________
<FN>
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 1999 and 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
_____________________________________________________________________
1999 1998
_____________________________________________________________________
<S> <C> <C>
Risk-free interest rate 4.39% 6.18%
Expected live of options 7 years 9 years
Expected volatility .09% .52%
Expected dividend yield 0% 0%
_____________________________________________________________________
</TABLE>
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 1999 net income and earnings per share would have
been reduced by approximately $17,000, or $0.02 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 non-
employees 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:
<TABLE>
<CAPTION>
Average Exercise
Shares Price per Share
_______________________________________________________________________
<S> <C> <C>
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
Canceled 0
- - -----------------------------------------------------------------------
Balance February 28, 1999 165,000 $ 0.39
_______________________________________________________________________
</TABLE>
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. MAJOR CLIENTS
During fiscal 1999, 1998 and 1997, one client accounted for approximately 0%,
0% and 27%, 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 13 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. Revenue from the client was not material in 1998 or 1997.
NOTE 12. NOTE RECEIVABLE FROM OFFICER
At February 28, 1997, 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 the note receivable in 1997. At February 28, 1997, the
balance due on the note receivable was $69,500.
NOTE 13. MARKETING AGREEMENT
On February 1, 1995, an amendment to the agreement dated February 1, 1994, was
entered into with Option Care, Bannokburn, 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 know as FOCIS, to existing and future franchises of
Option Care. Additional terms of the amendment provided that Health Outcomes
Management receive 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.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental schedule of non-cash investing and financing activities:
In 1999, the Company issued 325,908 shares of common stock in payment of $36,807
matching contribution to the Company's 401(k) retirement plan.
In 1999, the Company entered into an installment contract obligation of $30,000,
with a vendor, as a result of the restructuring of an accounts payable
obligation with the same vendor.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
In 1999, the Company entered into an installment contract of $12,537, with a
lessor, as a result of the restructuring of a capital lease obligation, with the
same lessor, upon termination of the lease.
In 1998, the Company incurred a net installment contract obligation of $24,416
associated with the purchase of pharmacy assets and equipment.
In 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 of $14,973 associated with its
acquisition of certain assets of Edina Pharmacy.
In 1997, the Company issued 48,144 shares of common stock in payment of a
$15,045 matching contribution to the Company's 401(k) retirement plan.
NOTE 15. EMPLOYMENT AGREEMENT
On February 1, 1991, the Company entered into employment agreements with its
then President and Vice President which provided for their employment for a term
of three years with automatice 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 unregisterd 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 non-compete
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 16. RETIREMENT PLANS
On March 1, 1995, the Company established a defined contribution, 401(k),
retirement plan for substantially all of its employees. The Company matches
50% of the employee's contribution up to 6% of compensation, as defined. The
expense recognized in years ending 1999, 1998 and 1997 relating to the plan
totaled $13,000, $14,000 and $14,000, respectively. The Company issued 48,144
shares of the Company's common stock in 1997 as payment for the Company's 1996
matching contribution and 325,908 shares for its 1997, 1998 and 1999 matching
contribution.
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.
<PAGE>
HEALTH OUTCOMES MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. DISCONTINUED OPERATIONS (CONTINUED)
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 form discontinued operations. The current
components of net assets from discontinued operations included in the Company's
consolidated balance sheet at February 28, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
_________________________________________________________________________
1999 1998 1997
_________________________________________________________________________
<S> <C> <C> <C>
Cash $ 0 $ 0 $ 18,000
Accounts receivable 0 0 11,000
Inventories 0 0 52,000
Property and equipment - net 0 0 11,000
Accounts payable and other
current liabilities 48,718 (147,000) (15,000)
Provision for phase out costs 0 (208,000) 0
- - -------------------------------------------------------------------------
$ 48,718 $(355,000) $ 77,000
_________________________________________________________________________
</TABLE>
During 1999, the Company negotiated certain agreements relating to commitments
and liabilities anticipated to be incurred for the discontinuation of the
pharmacy operations. These agreements, most significantly its lease obligation
for the pharmacy, resulted in a reduction in the amounts accrued in 1998 for the
provision for phase out costs and accounts payable of $213,000.
<PAGE>
PART III
Item 1. Index to Exhibits
Exhibit Number Document Page
______________ ______________________________________________________ ____
2(a) Articles of Incorporation 43
2(b) Amendment to Articles of Incorporation (dtd. 11/15/95) 46
2(c) Amendment to Articles of Incorporation (dtd. 06/15/87) 47
2(d) Amendment to Articles of Incorporation (dtd. 02/19/98) 48
2(e) Corporate By-Laws 49
3 Instruments Defining Rights of Security Holders
- The only outstanding equity securities of the Company 16
are discussed in Item 8 of Part I of this filing
- The material elements of the outstanding debt of the 32
Company are discussed in Note 6 of the Company's
Audited Financial Statements which are included in
Part F/S of this filing
5 Voting Trust Agreements None
6 Material Contracts None
7 Material Foreign Patents None
<PAGE>
SIGNATURE
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, 1999
_______________________
<PAGE>
Exhibit 2(a)
Corporate Charter
ARTICLES OF INCORPORATION
OF
DATA MED CLINICAL SUPPORT SERVICES, INC.
The undersigned, for the purpose of forming a corporation under and pursuant to
the provisions of Chapter 302A, Minnesota Revised Statutes, and laws amendatory
thereof and supplementary thereto, does hereby adopt the following Articles of
Incorporation.
ARTICLE I
The name of this corporation shall be Data Med Clinical Support Services, Inc.
ARTICLE II
The registered office of this corporation in the State of Minnesota shall be at
2331 University Avenue S.E., Minneapolis, Minnesota 55414. The name of the
registered agent of the corporation at that address is William A. Peter, Jr.
ARTICLE III
3.01 This corporation shall have the authority to issue an aggregate of fifteen
million (15,000,000) shares of Common Stock, each with $.01 par value. Such
shares shall be designated as this corporation's "Common Stock".
3.02 This corporation shall have the authority to issue an aggregate of one
million (1,000,000) shares of Preferred Stock, which may be issued in one or
more series as determined from time to time by the Board of Directors. Such
shares shall be designated as the "Preferred Stock, Series _______________".
The shares of Preferred Stock of any series authorized for issuance by the Board
of Directors shall be senior to the Common Stock with respect to any
distribution (as such term is defined in Section 302A.011, Subd. 10, Minnesota
Statutes, if so designated by the Board of Directors upon issuance of the shares
of that series. The Board of Directors is hereby granted the express authority
to fix by resolution any other designations, powers, preferences, rights,
qualifications, limitations or restrictions with respect to any particular
series of Preferred Stock prior to issuance thereof.
3.03 Expect as otherwise required by law, the holders of the shares of Common
Stock shall have the sole voting rights of this corporation.
3.04 There shall be no cumulative voting by the holders of the Common Stock.
3.05 The shareholders shall take action by the affirmative vote of the holders
of a majority of the voting power of the shares represented and voting at a duly
held meeting, except where the affirmative vote of a greater number or the
affirmative vote of a majority of the voting power of all voting shares is
required by statute and except where the holders of a class or series are
entitled by statute to vote as a class or series whether or not such holders
are otherwise entitled to vote.
3.06 The shareholders of this corporation shall have no preemptive rights to
subscribe for or otherwise acquire any new or additional shares of stock of this
corporation of any class whether now authorized or authorized hereafter, or any
options or warrants to purchase, subscribe for or otherwise acquire any such
new or additional shares of any class or any shares, bonds, notes, debentures,
or other securities convertible into or carrying options or warrants to
purchase, subscribe for or otherwise acquire any such new or additional shares
of any class.
<PAGE>
ARTICLE IV
In addition to, and not by way of limitation of, the powers granted to the
Board of Directors by the Chapter 302A, Minnesota Statutes, the Board of
Directors of this corporation shall have the following powers and authority:
4.01 To fix by resolution and designation, power, preference, right,
qualification, limitation or restriction with respect to the issuance of any
series of the Preferred Stock of this corporation authorized by these Articles
of Incorporation.
4.02 To issue shares of a class or series to holder of shares of another class
or series to effectuate share dividends, splits, or conversion of its
outstanding shares.
4.03 To fix the terms, provisions and conditions of and to authorize the
issuance, sale, pledge or exchange of bonds, debentures, notes, or other
evidences of indebtedness of this corporation.
4.04 To adopt, amend or repeal all or any of the Bylaws of this corporation by
the vote of a majority of its members present at a duly held meeting, subject to
the power of the shareholders to adopt, amend or repeal such Bylaws.
4.05 As to any member of the Board, to give advance written consent or
opposition to a resolution stating an action to be taken by the Board. If such
member is not present at the meeting at which action is taken upon such
resolution, such consent or opposition does not constitute presence for
purposes of determining the existence of a quorum, but shall be counted as a
vote in favor of or against the resolution and shall be entered in the minutes
or other record of action taken by the Board at the meeting if the resolution
acted upon by the Board at the meeting is substantially the same or has
substantially the same effect as the resolution to which the member of the
Board has consented or objected.
4.06 To indemnify and to purchase and maintain insurance for officers,
directors, employees and agents against liability asserted against them and
incurred in any such capacity or arising out of their status as such to the
fullest extent permissible under the provisions of Chapter 302A, Minnesota
Statutes.
ARTICLE V
Section 302A.671, Minnesota Statutes, shall apply to any control share
acquisition of the capital stock of this corporation.
ARTICLE VI
The name and post office address of the sole incorporator, who is a natural
person of full age, is:
Name Address
_____________________ __________________________
William A. Peter, Jr. P.O. Box 1320
Kennebunkport, Maine 04646
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his signature
in Minneapolis, Minnesota, on this 4th day of February, 1986.
IN PRESENCE OF:
/s/ Janna Severance /s/ William A. Peter, Jr.
______________________________ ______________________________
William A. Peter, Jr.
STATE OF MINNESOTA)
)SS.
COUNTY OF HENNEPIN )
On this 4th day of February, 1986, before me personally appeared William A.
Peter, Jr., to me known to be the person described in, and who executed, the
foregoing instrument, and acknowledged that he executed the same act and deed.
/s/ Patti S. Boller
_______________________________
STATE OF MINNESOTA
DEPARTMENT OF STATE
I hereby certify that the within
instrument was filed for record
in this office on the 5th day of
Feb. A.D. 1986, at 4:30 o'clock
P.M., and was duly recorded in
Book F-66 of Incorporations, on
page 858.
/s/ Secretary of State
<PAGE>
Exhibit 2(b)
AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
DATA MED CLINICAL SUPPORT SERVICES, INC.
Data Med Clinical Support Services, Inc., by resolution of its Board of
Directors adopted on September 11, 1995 and by resolution of its shareholders
adopted on September 21, 1995, hereby amends its Articles of Incorporation, as
amended (the "Articles"), to change the name of the corporation as set forth
herein.
Accordingly, and in furtherance of the foregoing, Article I of the Articles is
hereby amended and restated in its entirety as follows:
ARTICLE I
The name of the corporation shall be Health Outcomes Management, Inc.
Except as specifically amended, as set forth above, the Articles are unchanged.
Dated: September 21, 1995
DATA MED CLINICAL SUPPORT SERVICES, INC.
STATE OF MINNESOTA By /s/ William A. Peter, Jr.
DEPARTMENT OF STATE __________________________________
FILED William A. Peter, Jr.
SEP. 28, 1995 President and CEO
/s/ Secretary of State And
By /s/ Russell Jackson
__________________________________
Russell Jackson
Secretary
STATE OF MINNESOTA
DEPARTMENT OF STATE
I hereby certify that this is
a true and complete copy of the
document as filed for record in
this office.
DATED 11/1/1995
_______________
/s/ Secretary of State
<PAGE>
Exhibit 2(c)
CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
DATA MED CLINICAL SUPPORT SERVICES, INC.
We, the undersigned, the President and Secretary, respectively, of Data Med
Clinical Support Services, Inc., a corporation subject to the provisions of
Chapter 302A, Minnesota Statutes, known as the Minnesota Business Corporation
Act, do hereby certify that at a meeting of the shareholders of the corporation
duly held on June 15, 1987, in accordance with the provisions of Sections
302A.431 and 302A.435, Minnesota Statutes, the following resolution providing
for the amendment of the Articles of Incorporation of said corporation was duly
adopted:
"RESOLVED: That the Articles of Incorporation of this corporation dated
February 4, 1986, and filed of record with the Secretary of State of Minnesota
on February 5 ,1986, in Book F-66, on page 858, shall be amended by the
amendment and restatement of Section 4.06 thereof as follows:
4.06 To adopt an indemnity plan and to purchase and maintain insurance for
officers, directors, employees and agents against liability asserted
against them and incurred in any such capacity or arising out of their
status as such to the fullest extent permissible under the provisions
of Chapter 302A, Minnesota Statutes. Except as expressly provided in
Section 302A.251, Subd. 4, Minnesota Statutes, a member of the Board
of Directors of this corporation shall have no personal liability to
this corporation or to the shareholders for monetary damages for breach
of fiduciary duty as a member of the Board of Directors.
IN WITNESS WHEREOF, we have set our signatures hereto this 25th day of June,
1987.
IN THE PRESENCE OF:
/s/ Michael Frakes /s/ William A. Peter, Jr.
_____________________________ ________________________________
William A. Peter, Jr., President
/s/ Michael Frakes /s/ Richard B. Thon
_____________________________ ________________________________
Richard B. Thon, Secretary
STATE OF MINNESOTA)
)SS.
COUNTY OF HENNEPIN )
On this 25th day of June, 1987, before me, a notary public, personally
appeared William A. Peter, Jr. and Richard B. Thon, to me known to be the
persons named and described as the President and Secretary, respectively, of
Data Med Clinical Support Services, Inc., and who executed the foregoing
Certificate of Amendment to the Articles of Incorporation, and having been
first duly sworn and under oath, did acknowledge and say that they executed
the foregoing Certificate as their free act and deed and the free act and deed
of said corporation for the uses and purposes therein expressed.
/s/ Connie Dow
_____________________________
Notary Public
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
JUNE 30, 1987
/s/ Secretary of State
<PAGE>
Exhibit 2(d)
Notice of Change of
___________________
Registered Office - Registered Agent or Both
By Health Outcomes Management, Inc.
Name of Corporation: Health Outcomes Management, Inc.
Pursuant to Minnesota Statutes, Section 302A.123, 404.10, 317.19, 317A.123 or
308A.025, the undersigned hereby certifies that the Board of Directors of the
above named Corporation has resolved to change the corporation's registered
office and/or agent to:
Agent's Name: Peter Zugschwert
Address: 2331 University Avenue SE
Minneapolis, MN 55414
Mailing Address:
(if different than address
above P.O. Box is acceptable)
The new address may not be a post office box. It must be a street address,
pursuant to Minnesota Statutes, Section 302A.011, Subd. 3, 303.02, Subd. 5,
317.02, Subd. 13, 317A.01, Subd. 2.
This change is effective on the day it is filed with the
Secretary of State, unless you indicate another date, no
later than 30 days after filing with the Secretary of
State, on this line ____________________________________.
I certify that I am authorized to execute this certificate and I further certify
that I understand that by signing this certificate I am subject to the penalties
of perjury as set forth in Section 609.48 as if I had signed this certificate
under oath.
Name of Officer or Other Authorized
Agent of Corporation: Jeffrey C. Robbins /s/ Jeffrey C. Robbins
__________________ __________________________
Signature
Title or Office: Secretary 2/19/98
_____________________ __________________________
Date
Filing Fee: $35.00 (For use by the Secretary of State)
Business Services Division STATE OF MINNESOTA
Office of the Secretary of State DEPARTMENT OF STATE
180 State Office Building FILED
St. Paul, MN 55155 FEB. 20, 1998
Telephone: 612-296-2803
/s/ Secretary of State
<PAGE>
Exhibit 2(e)
Corporate By-Laws
BYLAWS
OF
DATA MED CLINICAL SUPPORT SERVICES, INC.
ARTICLE I
OFFICES
_______
The registered office of the corporation shall be that set forth in the
Articles of Incorporation dated February 4, 1986, filed with the Secretary of
State of Minnesota on February 5, 1986, or in the most recent amendment thereof,
or in a statement of the Board of Directors filed with the Secretary of State of
the State of Minnesota changing the registered office in the manner prescribed
by law. The corporation may also have offices and places of business at such
other locations as the Board of Directors may from time to time designate, or
the business of the corporation may require.
ARTICLE II
SHAREHOLDER'S MEETINGS
______________________
Section 2.1 Time and Place of Meetings
Regular or special meetings of the shareholders, if any, shall be held on the
date and at the time and place fixed by the President/Chief Executive Officer
or the Board of Directors, except that a meeting called by, or at the demand of
a shareholder or shareholders, pursuant to Minnesota Statutes, Section 302A.431,
Subd. 2, shall be held in the county where the principal executive office is
located.
Section 2.2 Regular Meetings
An annual meeting of the shareholders shall be held at such place as the Board
of Directors shall designate, either within or without the State of Minnesota,
and on such date and at such time as may be determined by the Board of Directors
and communicated to the shareholders according to the requirements set forth
herein, for the purpose of electing directors and for the transaction of any
other business which may properly come before it. Additional regular meetings
of the shareholders may be held on a less frequent periodic basis. No meeting
shall be considered a regular meeting unless specifically designated as such in
the notice of meeting or unless all the shareholders are present in person or
by proxy and none of them objects to such designation. Any business appropriate
for action by the shareholders may be transacted at a regular meeting.
Section 2.3 Special Meetings
Special meetings of the shareholders may be held for any purpose or purposes,
unless otherwise prescribed by statute. Such a meeting may be called by the
President/Chief Executive Officer, the Chief Financial Officer or two or more
directors and shall be called by the President/Chief Executive Officer at the
request in writing of shareholders owning not less than ten percent (10%) or
more of the voting stock of the corporation.
Section 2.4 Notice of Meetings
Written notice of a meeting of the shareholders stating the time and place
thereof shall be mailed at least five (5) days but not more than sixty (60)
days prior to the meeting, except as otherwise provided by statute, to each
shareholder entitled to vote thereat to the last known address of such
shareholder as the same appears upon the books of the corporation.
Every notice of any special meeting shall state the purpose for which the
meeting has been called, and the business transacted at all special meetings
shall be confined to the purpose stated in the call, unless all of the
shareholders are present in person or by proxy and none of them objects to
consideration of a particular item of business.
Section 2.5 Record Date
The determination of shareholders entitled to vote at a regular or special
meeting shall be made on the date fixed by the Board of Directors for closing
of the books of the corporation. If no date is fixed by the Board, the date
for such determination shall be the date five (5) days before the date of
such meeting.
<PAGE>
Section 2.6 Waiver of Notice
Notice of the time, place and purpose of any meeting of shareholders, whether
required by statute, the Articles of Incorporation or these Bylaws, may be
waived by any shareholder. Such waiver may be given before, at, or after the
meeting, and may be given in writing, orally or by attendance.
Section 2.7 Action Without Meeting
Any action which may be taken at a meeting of the shareholders may be taken
without a meeting, if authorized in writing or writings signed by all
shareholders who would be entitled to notice of a meeting for such purpose.
Section 2.8 Quorum
The presence at any meeting, in person or by proxy, of the holders of a
majority of the shares entitled to vote, shall constitute a quorum for the
transaction of business. If, however, such majority shall not be present in
person or by proxy at any meeting of the shareholders, those present shall
have the power to adjourn the meeting from time to time, without notice other
than by announcement at the meeting, until the requisite amount of voting
shares shall be represented. At any such adjourned meeting at which the
required number of voting shares shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section 2.9 Voting
At all meetings of the shareholders, each shareholder having the right to vote
shall be entitled to vote in person or by proxy, duly appointed by an instrument
in writing subscribed by such shareholder. Each shareholder shall have one (1)
vote for each share having voting power standing in his name on the books of the
corporation. Upon the demand of any shareholder, the vote for directors or the
vote upon any question before the meeting shall be by ballot. All elections
shall be had and all questions decided by a majority vote except as otherwise
required by these Bylaws, the Articles of Incorporation, any applicable
shareholder agreement, or statute.
Section 2.10 Proxies
At all meetings of shareholders, a shareholder may vote by proxy executed in
writing by the shareholder of by his duly authorized attorney-in-fact. Such
proxy shall be filed with the Secretary of the corporation at or before the
time of the meeting. A proxy shall be valid for the period specified in the
proxy or, if no expiration date is provided in the proxy, for a period not to
exceed eleven months from the date of its execution. A proxy's authority
shall not be revoked by the death or incapacity of the maker unless, before the
vote is cast and the authority exercised, written notice of such death or
incapacity is given to the corporation.
ARTICLE III
BOARD OF DIRECTORS
__________________
Section 3.1 Election of Directors
The business and affairs of this corporation shall be managed by its Board of
Directors. The number of directors shall be the number last elected by a
majority vote of the shareholders which shall not be less than one (1) nor
more than seven (7) directors. Directors need not be shareholders. Each of
the directors shall hold office until the regular meeting of the shareholders
next held after its election, until a successor shall have been elected and
shall qualify, or until he shall resign or shall have been removed as
hereinafter provided.
Section 3.2 Board Meetings; Place and Notice
Meetings of the Board of Directors may be held from time to time at any place
within or without the State of Minnesota that the Board of Directors may
designate. In the absence of designation by the Board of Directors, Board
meetings shall be held at the principal executive office of the corporation,
except as may be otherwise unanimously agreeed orally or in writing or by
attendance. Any director may call a meeting of the Board of Directors by
giving two (2) days' notice to all directors of the date and time of the
meeting. The notice need not state the purpose of the meeting. Notice may be
given by mail, telephone, telegram or in person. If a meeting schedule is
adopted by the Board of Directors, or if the date and time of a Board of
Directors meeting has been announced at a previous meeting, no notice is
required.
Section 3.3 Waiver of Notice
Notice of the time, place and purpose of any meeting of the Board of Directors,
whether required by statute, the Articles of Incorporation, or these Bylaws,
may be waived by any director. Such waiver may be given before, at, or after
the meeting and may be given in writing, orally or by attendance. The
attendance of a director at a meeting and participation therein shall constitute
waiver of notice of such meeting unless the director attends for the express
purpose of objecting to the transaciton of business because the meeting is not
lawfully called or convened, the director so states at the meeting, and the
director does not thereafter participate in the meeting.
Section 3.4 Quorum and Action of Board
At all meetings of the Board of Directors, a majority of the directors shall
be necessary and sufficient to constitute a quorum for the transaction of
business; provided, that if less than a majority of the directors are present,
<PAGE>
a majority of those present may adjourn the meeting from time to time without
notice other than an announcement at the meeting at which adjournment is taken.
The directors present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
The act of a majority of the directors present at any meeting at which a
quorum is present, or at any meeting at which a quorum was present and at which
the remaining directors are authorized under this Section to continue to
transact business shall be the act of the Board of Directors.
Section 3.5 Electronic Communications
A conference among directors by any means of communication through which the
directors may simultaneously hear each other during the conference constitutes
a board meeting, if the same notice is given of the conference as required by
these Bylaws for a meeting, and if the number of directors participating in
the conference would be sufficient to constitute a quorum at a meeting.
Participation in a meeting by such electronic means of communication constitutes
presence in person at the meeting.
Section 3.6 Vacancies
Any vacancy occurring on the Board of Directors by reason of death, resignation,
disqualification, or increase in the number of directors, may be filled by a
majority of the remaining directors, though less than a quorum, at any regular
or special meeting, except that vacancies on the Board resulting from newly
created directorships may only be filled by a majority vote of the directors
serving at the time of the increase. Each director so elected shall hold office
until the next regular or special shareholder meeting or until his or her
successor is elected and qualified.
Section 3.7 Resignations
Any director of the corporation may resign at any time by giving writing notice
to the Chairman of the Board or to the President/Chief Executive Officer or
Secretary of the corporation. Unless a later date is specified in the notice
of resignation as the effective date of resignation, resignation shall take
effect on the date of receipt of the written notice by the Chairman, President/
Chief Executive Officer, or Secretary. Unless otherwise specified in such
notice, the acceptance of the resignation shall not be necessary to make it
effective.
Section 3.8 Removal
At a meeting of shareholders called expressly for that purpose, any director or
the entire Board of Directors may be removed, with or without cause, by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. Provided, however, that if less than the entire Board is to be
removed, no one of the directors may be removed if the votes cast against his
removal would be sufficient to elect him if then cumulatively voted at an
election of the entire Board of Directors.
Section 3.9 Absent Directors
A director may give advance written consent or opposition to a proposal to be
acted on at a Board meeting. If the director is not present at the meeting,
consent or opposition to a proposal does not constitute presence for purposes
of determining the existence of a quorum, but consent or opposition stated in
writing and delivered to the President/Chief Executive Officer or the Officer
or Director presiding at the meeting shall be counted as a vote in favor of
or against the proposal if the proposal acted on at the meeting is substantially
the same or has substantially the same effect as the proposal to which the
director has consented or objected. Such written consent or opposition shall
be entered in the minutes or other record of action at the meeting.
Section 3.10 Action without Meeting
Any action which is required or may be taken at a meeting of the Board of
Directors may e taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by a majority of all the directors entitled to
vote with repsect to the subject matter thereof, except as to matters that
require shareholder approval, in which case such consent in writing must be
signed by all of the directors. Action taken by such written consent shall
be effective on the date when signed by the required number of directors, or
such earlier effective date as set forth therein. When written action is
permitted to be taken by less than all of the directors, all directors shall
be notified immediately of its text and effective date. Failure to provide
the notice shall not invalidate the written action. A director who does not
sign or consent to the written action shall have no liability for the action
or actions taken thereby.
Section 3.11 Presumption of Assent
For purposes of any liability as a director, a director of the corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless:
<PAGE>
a. He objects at the beginning of the meeting to the transactions of
business because the meeting is not lawfully called or convened
and does not thereafter participate in the meeting;
b. He votes against the action at the meeting; or
c. He is prohibited from voting at the meeting due to a conflict of
interest.
Section 3.12 Committees
The Board of Directors may, by a majority vote, designate two or more of their
number to constitute an executive committee, which, to the extent determined by
the Board and allowed by law, shall have an exercise the authority of the Board
in the management of the business of the corporation. Such executive committee
shall act only in the interval between meetingss of the Board and shall be
subject at all times to the control and direction of the Board. The Board
of Directors by a majority vote may also appoint one or more natural persons
who need not be Board members to serve on such other committees as the Board
may determine. Such other committees shall have powers and duties as shall
from time to time be prescribed by the Board. A majority of the members of any
committee present at a meeting is a quorum for the transation of business. All
committees shall keep accurate minutes of their meetings, which minutes shall
be made available upon request to members of that committee and to any director.
Section 3.13 Chairman
The Board may elect one of their number to serve as Chairman, who shall preside,
when present, at all meetings of the Board.
Section 3.14 Compensation
The directors of the corporation and all members of committees shall serve
without salary, unless ordered by the directors; however, they shall be paid
the necessary expenses incurred in the execution of their duties. Nothing
herein shall preclude the paying by the corporation of a salary or other
compensation to an officer or employee who is also a director.
ARTICLE IV
OFFICERS
________
Section 4.1 Election of Officers
The Board of Directors shall, from time to time, elect a President/Chief
Executive Officer and a Treasurer/Chief Financial Officer. The Board of
Directors may, but shall not be required to, elect a Secretary and one (1)
or more Vice Presidents, as they may determine, one of whom may be designated
as an Executive Vice President. In addition, the Board of Directors may elect
such other officers and agents as it may determine necessary, including
Assistant Secretaries and Assistant Treasurers. Such officers shall exercise
such powers and perform such duties as are prescribed by the Articles of
Incorporation or the Bylaws or as may be otherwise determined from time to
time by the Board of Directors. Any number of offices or functions of those
officers may be held or exercised by the same person.
Section 4.2 Terms of Office
The officers of the corporation shall hold office for such terms as shall be
determined from time to time by the Board of Directors or until their
successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed by the affirmative vote
of a majority of the whole Board of Directors with or without cause.
Section 4.3 Salaries
The salaries of all officers and agents of the corporation shall be determined
by the Board of Directors.
Section 4.4 President/Chief Executive Officer
The President/Chief Executive Officer shall be the chief executive officer of
the corporation, and shall have the general direction of the affairs of the
corporation. He shall preside at all meetings of the shareholders and of the
Board of Directors. He shall direct general active management of the business
of the corporation, and shall see that all orders and resolutions of the Board
of Directors are carried into effect. He shall execute all contracts, mortgages
and other instruments of the corporation, and may appoint and discharge agents
and employees. He shall be ex officio a member of any executive committee which
may be constituted hereunder, and all other standing committees, and shall
perform all such other duties as are incident to his office, or are properly
required of him by the Board of Directors. As used herein or in other writings
of, or documents delivered on behalf of, the corporation, the titles "President"
and "Chief Executive Officer" shall mean one and the same person and shall be
interchangeable.
<PAGE>
Section 4.5 Vice Presidents
The Vice Presidents in the order designated by the Board of Directors shall
perform the duties and exercise the powers of the President/Chief Executive
Officer in his absence or incapacity. The Vice Presidents shall perform such
other duties as the Board of Directors shall from time to time prescribe.
Section 4.6 Secretary and Assistant Secretaries
The Secretary shall attend all sessions of the Board of Directors and all
meetings of the shareholderss, and record all votes and minutes for all
proceedings in a book kept for that purpose, and shall perform like duties
for the standing committees when required. He shall give or cause to be
given notice of all meetings of the shareholders and of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or the President/Chief Executive Officer under whose supervision he
shall be. He shall keep in safe custody the seal, if any, of the corporation,
and shall affix the same to any instrument requiring it.
The Assistant Secretary shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary, and shall perform
such other duties as the Board of Directors shall prescribe.
Section 4.7 Treasurer/Chief Financial Officer and Assistant Treasurers
The Treasurer/Chief Financial Officer shall have the custody of the corporate
funds and securities, and shall keep full and accurate account of receipt and
disbursements in books belonging to the corporation, and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated from time to time by the
Board of Directors; he shall disburse the funds of the corporation in discharge
of corporate liabilities and obligations as may be ordered by the Board of
Directors from time to time, taking the proper vouchers for such disbursements,
and shall render to the President and the Board of Directors whenever they may
require the same, an account of all of his transactions and of the financial
condition of the corporation; he shall give the corporation a bond, if required
by the Board of Directors, in such sum as the Board of Directors may be
resolution determine; and with one (1) or more sureties satisfactory to the
Board of Directors for the faithful performance of the duties of his office, and
for the restoration to the corporation in case of death, resignation, retirement
or removal from office of all books, vouchers, papers, money and other property
of whatsoever kind in his possession or under his control belonging to the
corporation. As used herein or in other writings of, or documents delivered
on behalf of, the corporation, the titless "Treasurer" and "Chief Executive
Officer" shall mean one and the same person and shall be interchangeable.
The Assistant Treasurer shall, in absence or disability of the Treasurer/Chief
Financial Officer, perform the duties and exercise the powers of the Treasurer/
Chief Financial Officer, and shall perform such other duties as the Board of
Directors shall prescribe.
Section 4.8 Vacancies
If the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise,
the Board of Directors, by a majority vote, shall choose a successor or
successors who shall hold office for the unexpired term in respect of which
such vacancy occurred.
Section 4.9 Delegation of Authority
An officer elected or appointed by the Board of Directors may delegate some or
all of the duties or powers of his office to other persons, provided that such
delegation is in writing.
Section 4.10 Contract Rights
The election or appointment of a person as an officer or agent does not, of
itself, create contract rights.
ARTICLE V
INDEMNIFICATION
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To the full extent permitted or required by Section 302A.521 of the Minnesota
Business Corporation Act, as now enacted or hereinafter amended, or by other
provisions of law, each person who was or is a party or is threatened to be
made a party to any threatened, pending, or pleaded action, suit, or proceeding,
whenever brought, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer or agent of the
corporation, or he is or was serving at the specific request of the corporation
as a director, officer, employee, fiduciary, or agent of another corporation,
partnership, joint venture, trust or other entity or enterprise, shall be
indemnified by the corporation against expenses, including attorneys' fees,
judgements, fines, and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit, or proceeding; provided,
however, that the indemnification with respect to a person who is or was
serving as a director, officer, employee, fiduciary, or agent of another
corporation, partnership, joint venture, trust, or other enterprise shall
apply only to the extent such person is not indemnified by such other
corporation, partnership, joint venture, trust or other entity or enterprise.
<PAGE>
Indemnification provided by this paragraph shall continue as to a person or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such person and shall apply whether or not the claim against such person
arises out of matters occurring before the adoption of this paragraph.
ARTICLE VI
SHARES
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Section 6.1 Issuance of Shares
The Board of Directors is authorized and empowered to issue shares of the
capital stock of the corporation to the full amount authorized by the
Articles of Incorporation and all amendments thereto in such amounts and at
such times as may be determined by the Board of Directors and as permitted by
law.
Section 6.2 Certificates
Certificates for shares of the capital stock of the corporation shall be in
such form or forms as may be determined by the Board of Directors or those
actually used in the event the Board fails to act. There shall be no
uncertificated shares. Each shareholder shall be entitled to a certificate
representing his or her shares of stock, signed by the President/Chief
Executive Officer or a Vice President, and by the Secretary or an Assistant
Secretary, if one has been elected or appointed, otherwise, by the Treasurer/
Chief Financial Officer or an Assistant Treasurer; provided, however, that
where a certificate is countersigned by a transfer agent or an assistant
transfer agent or by a transfer clerk acting on behalf of the corporation
and registered by a registrar, the signatures of said officers on such
certificates for shares may be facsimilies. If a person signs or has a
facsimilie signature place upon a certificate while an officer, transfer
agent, or registrar of the corporation, the certificate may be issued by the
corporation even if the person has ceased to have that capacity before the
certificate is issued with the same effect as if the person had that capacity
at the date of issue. All certificates for shares shall be consecutively
numbered or otherwise identified, and shall state the name of the corporation,
that it is organized under the laws of the State of Minnesota, the name of the
person to whom the shares are issued, the number and class of shares, and the
designation of the series, if any, that the certificate represents. The name
of the person to whom the shares are issued with the number of shares and
date of issue shall be entered on the books of the corporation.
Section 6.3 Transfer of Shares
The shares of stock of the corporation shall be transferable upon its books
only by persons named in the certificates or by attorney lawfully constituted
in writing, and upon surrender to the corporation of the old stock certificates,
properly endorsed, to the person in charge of the stock and transfer books
and designate, by whom they shall be cancelled. New certificates for the
shares shall thereupon be issued to the person entitled to such new
certificates. A record shall be made of each transfer, and whenever a transfer
shall be made for collateral security, and not absolutely, it shall be so
expressed in the entry of the transfer.
Section 6.4 Lost Certificates
Any shareholder claiming a certificate of shares to be lost, stolen or
destroyed shall make an affidavit or affirmation of that fact in such form as
the Board of Directors may require, and shall, if the Board of Directors so
requires:
(a) advertise such fact in such manner as the Board of Directors may
require
(b) give to the corporation and its transfer agent and registrar, if
any, a bond of indemnity in open penalty as to amount or in such
other sum as the Board of Directors may direct, in form satisfactory
to the Board of Directors and to the transfer agent and registrar
of the corporation, if any, and with or without such sureties as
the Board of Directors with the approval of the transfer agent and
registrar, if any, may prescribe; and
(c) satisfy such other requirement as may be imposed by the Board.
If notice by the shareholder of the loss, destruction, or wrongful taking of
a certificate is received by the corporation before the corporation has received
notice that the shares represented by such certificate have been acquired by
a bona fide purchaser, and if the foregoing requirements imposed by the Board
are satisfied, then the Board of Directors shall authorize the issuance of a
new cerificate for shares of the same tenor and for the same number of shares
as the one alleged to have been lost or destroyed.
Section 6.5 Dividends
The Board of Directors may declare dividends to the extent permitted by
Section 302A.551 of the Minnesota Business Corporation Act as and when it
deems expedient. Before declaring any dividend, there may be reserved out
of the accumulated profits such sums as the Board of Directors from time to
time, in its discretion, thinks proper for working capital or as a reserve
<PAGE>
fund to meet contingencies or for equalizing dividends, or for such other
purposes as the Board of Directors shall think conducive to the interests
of the corporation.
Shareholders entitled to payment of such dividend shall be those shareholders
of record on the date fixed by the Board for closing of the books of the
corporation. If no date for closing of the books is fixed by the Board, the
shareholders entitled to payment of the dividend shall be the shareholders of
record on the date on which the resolution declaring such dividend is adopted
by the Board.
ARTICLE VII
MISCELLANEOUS
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Section 7.1 Books of Account
The corporation shall keep such books of account as are required by Section
302A.461 of the Minnesota Business Corporations Act and every shareholder shall
have a right to examine such books, in person or by agent or attorney, to the
extent provided in such Section.
Section 7.2 Corporate Seal
If so directed by the Board of Directors, the corporation may use a corporate
seal. The failure to use such seal, however, shall not affect the validity of
any documents executed on behalf of the corporation. The seal need only include
the word "seal", but it may also include, at the discretion of the Board of
Directors, such additional wording as is permitted by law.
Section 7.3 Checks and Documents
All checks or demands for money and notes of the corporation and all other
instrument, documents or deeds of every kind, nature and description required
to be executed in the name and in behalf of the corporation shall be signed by
such of the officers or agents of the corporation as the Board of Directors
may from time to time by resolution designate and determine.
Section 7.4 Fiscal Year
The fiscal year of this corporation shall be as determined by resolution of
the Board of Directors.
Section 7.5 Amendments to Bylaws
These Bylaws may be amended or altered by the vote of a majority of the Board
of Directors present at any meeting provided that notice of such proposed
amendments shall have been given in the notice given to the directors of such
meeting. Such authority of the Board of Directors is subject to the power of
the shareholders to change or repeal such Bylaws as prescribed by statute to
any other limitations on such authority prescribed by statute.
THESE BYLAWS WERE ADOPED ON
July 16, 1986
BY RESOLUTION OF THE BOARD OF DIRECTORS OF
DATA MED CLINICAL SUPPORT SERVICES, INC.
/s/ Richard B. Thon
_________________________________
Secretary
