US SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 0-15936
HEALTH OUTCOMES MANAGEMENT, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1546471
(State or other jurisdiction of (IRS Employer
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
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No ____
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at January 10, 1997, was 8,499,029.
INDEX
HEALTH OUTCOMES MANAGEMENT, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
May 31, 1997 and February 28, 1997.
Condensed Consolidated Statements of Operations -
Three months ended May 31, 1997 and 1996.
Consolidated Statements of Cash Flows -
Three months ended May 31, 1997 and 1996.
Notes to Consolidated Financial Statements -
May 31, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Securities Holders.
Item 6 - Exhibits and Reports on Form 8-K.
SIGNATURES
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31,
1997 February 28,
(Unaudited) 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 122,366 209,024
Trade receivables, less allowance for doubtful
accounts of $14,000 and $35,000, respectively 113,598 92,402
Inventory 138,370 52,436
Prepaid expenses 15,492 17,366
Other current assets 381 --
----------- -----------
Total current assets 390,207 371,228
Property and equipment, net of accumulated depreciation 102,990 104,009
Other assets, net of accumulated amortization of
$329,489 and $319,631, respectively 73,889 49,837
----------- -----------
Total assets $ 567,086 525,074
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
May 31,
1997 February 28,
(Unaudited) 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to bank 35,000 --
Notes payable, current portion 7,043 6,904
Current installments of obligation under capital leases 55,759 60,974
Accounts payable 337,145 102,827
Deferred revenue 219,563 313,926
Accrued compensation 37,988 56,547
Accrued payroll taxes 15,011 14,979
Other current liabilities 31,927 25,608
----------- -----------
Total current liabilities 739,436 581,765
----------- -----------
Notes payable, excluding current portion 2,475 4,289
Obligation under capital leases, excluding
current installments 17,773 25,377
----------- -----------
Total liabilities 759,684 611,431
----------- -----------
Stockholders' deficit:
Series A, convertible preferred stock, $.01 par value:
Authorized - 1,000,000
Issued and outstanding shares - none -- --
Common stock--$.01 par value:
Authorized - 15,000,000
Issued and outstanding shares - 8,499,029 84,990 84,990
Additional paid-in capital 4,724,567 4,724,568
Accumulated deficit (4,953,655) (4,826,415)
Note receivable from officer (48,500) (69,500)
----------- -----------
Total stockholders' deficit (192,598) (86,357)
----------- -----------
Total liabilities and stockholders' deficit $ 567,086 525,074
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
HEALTH OUTCOMES MANAGEMENT, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
May 31,
1997 1996
----------- -----------
Revenues $ 586,567 697,614
Cost of revenues 445,008 451,746
----------- -----------
Gross profit 141,559 245,868
----------- -----------
Operating expenses:
Research and development 28,382 109,979
Selling and marketing 38,460 48,873
General and administrative 199,646 112,289
----------- -----------
Total operating expenses 266,488 271,141
----------- -----------
Loss from operations (124,929) (25,273)
----------- -----------
Other (income) expense
Interest income (2,104) (2,154)
Interest expense 4,416 5,356
----------- -----------
2,312 3,202
----------- -----------
Net loss $ (127,241) (28,475)
=========== ===========
Loss per common share $ (.01) .00
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 8,499,029 8,443,239
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
HEALTH OUTCOMES MANAGEMENT, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
May 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(127,241) (28,475)
--------- ---------
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 20,463 22,362
Amortization 10,088 8,191
Provision for losses on accounts receivable 2,613 --
Recoveries of bad debts 1,267 --
Changes in operating assets and liabilities, net of
acquisitions
Decrease (increase) in trade receivables (25,076) 10,284
Increase in inventory (85,934) --
Decrease in prepaid expenses 1,874 27,475
Increase in other current assets (381) (4,517)
Increase in accounts payable 214,365 346
Decrease in deferred revenue (94,362) (75,450)
Decrease in accrued compensation (18,558) (267)
Increase (decrease) in accrued payroll taxes 31 (3,804)
Increase in other current liabilities 6,319 9,858
--------- ---------
Total adjustments (32,709) (5,522)
--------- ---------
Cash used in operating activities (94,532) (33,997)
--------- ---------
Cash flows from investing activities:
Capital expenditures (13,584) (1,179)
Cash paid for acquisitions (20,048) --
--------- ---------
Cash flows used in investing activities (33,632) (1,179)
--------- ---------
Cash flows from financing activities:
Principal payments received from note receivable 21,000 --
Principal payments under capital lease obligations (12,819) (8,714)
Loans from bank 35,000 --
Repayment of note payable assumed in the --
Edina Pharmacy acquisition (1,675) --
--------- ---------
Cash flows provided by (used in) financing activities 41,506 (8,714)
--------- ---------
Decrease in cash and cash equivalents (86,658) (43,890)
Cash and cash equivalents at beginning of period 209,024 68,657
--------- ---------
Cash and cash equivalents at end of period $ 122,366 24,767
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,616 5,356
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
HEALTH OUTCOMES MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1997
(1) BASIS OF PRESENTATION
The unaudited financial statements presented herein include the accounts of
Health Outcomes Management, Inc. and Subsidiaries after elimination of material
intercompany accounts and transactions. These statements do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the year
ended February 28, 1997. In the opinion of management such financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to summarize fairly the Company's financial position and results of
operations. The results of the three month period ended May 31, 1997, may not be
indicative of the results that may be expected for the year ending February 28,
1998.
(2) PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
Property under capitalized leases $ 310,005
Furniture and equipment 376,296
----------
686,301
Less accumulated depreciation 583,311
----------
Net property and equipment $ 102,990
==========
(3) NOTES PAYABLE
In July 1996, the Company assumed a $14,973 note payable related to the
acquisition of Edina Pharmacy. As of May 31, 1997, the Company had an
outstanding balance of $9,518 on this note payable.
As of May 31, 1997, the Company had borrowed $35,000 on the line of credit with
a bank.
(4) CAPITALIZED COMPUTER SOFTWARE
The Company capitalizes software production costs after technological
feasibility has been established and prior to general release to clients.
(5) MASTER LICENSE AGREEMENT
On April 21, 1995, the Company had signed a twelve month Master License
Agreement with AmeriSource Health Corporation (AmeriSource) of Malvern, PA for
the Company's Assurance Community Pharmaceutical Care System(TM). Pursuant to
the terms of the agreement, the Company granted to AmeriSource an exclusive
license to market and license the software system to retail pharmacies
throughout the United States directly or through its affiliate, Pharmacy Care
Management Group (PCMG). As consideration for the Company granting these rights
to AmeriSource, the Company received $200,000 cash upon signing the agreement.
As further consideration, AmeriSource agreed to license a minimum specified
number of new retail pharmacies over the term of the agreement in order to
maintain the exclusive status of the Master License Agreement. Additional
provisions of the agreement provided for the payment of monthly license and
support fees to the Company for each retail pharmacy licensing the software.
During April 1996, the Company terminated its relationship with AmeriSource in
order to pursue other marketing arrangements. Upon termination of the agreement,
the Company no longer receives payments for license and support fees. Revenues
received under this agreement constituted approximately 16% of the Company's
total fiscal 1997 first quarter revenue.
(6) LINE OF CREDIT AGREEMENT
On April 4, 1996, the Company entered into a $50,000 Line of Credit agreement
with a bank. Amounts borrowed under the agreement will be used for working
capital purposes. All outstanding borrowings bear interest at a reference rate
plus 1.5%. The agreement expires April 1, 1997. The agreement is secured by all
accounts receivable, equipment not covered under financing agreements,
inventory, if any, and general intangibles. The agreement also requires the
Company to maintain certain financial covenants, including but not limited to,
maintaining a minimum net worth.
On April 1, 1997, the Company renewed its line of credit agreement. All
outstanding borrowings bear interest at the fixed rate of 6.5%. The agreement
expires April 1, 1998. The agreement is secured by selected corporate assets
including a $50,000 certificate of deposit which must remain on deposit at the
bank for the entire loan term. As of May 31, 1997, the Company had an
outstanding balance of $35,000 under this line of credit.
(7) ACQUISITIONS
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 remaining balance of $30,000
will be paid by the Company in 11 equal monthly installments.
The transaction was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements include results of operations of
the acquired assets from the date of acquisition. Due to the nature of the
transaction under which the Company purchased only certain assets of Preserve
Rexall Drug, meaningful pro-forma financial information is not available.
This pharmacy is being developed into a prototype store applying patient care
concepts utilizing the Company's Assurance Coordinated Pharmaceutical Care
System(TM) software.
On July 19,1996, the Company acquired certain assets of Edina Pharmacy, a
community pharmacy located in Minneapolis, Minnesota. Assets acquired include
inventory, fixtures and equipment, and the patient list. The purchase price was
$47,408, of which $12,000 was paid in cash. A note payable of $14,973 was
assumed. The remaining balance of $20,435 will be paid by the Company in 12
equal monthly installments.
The transaction was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements include results of operations of
the acquired business from the date of acquisition. Due to the nature of the
transaction under which the Company purchased only certain assets of Edina
Pharmacy, owned by an individual reporting financial information on an income
tax basis, meaningful pro-forma financial information is not available.
As of June 27, 1997, this pilot community pharmacy located in Minneapolis,
Minnesota has been consolidated into the larger community pharmacy located in
Eden Prairie that the Company acquired certain assets of in April 1997.
(8) MAJOR CLIENT
On January 31, 1997, the marketing agreement between the Company and Option
Care, Inc., one of the Company's major clients, terminated. On October 31, 1996,
the Company and Option Care signed a "transition agreement" which 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 and a payment of
$15,000 for training services. These amounts were included in fiscal 1997
revenue. During fiscal 1997, Option Care accounted for approximately 27% of
total revenue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE FIRST QUARTER ENDED MAY 31, 1997, COMPARED WITH THE FIRST QUARTER ENDED
MAY 31, 1996:
REVENUE. Revenues for the first quarter ended May 31, 1997, decreased $111,047
to $586,567, a decrease of 15.9% when compared to prior fiscal year first
quarter revenues of $697,614. The Company recorded a first quarter net loss of
$127,241, compared to a net loss of $28,475, in the prior fiscal year period, an
increase of $98,766 or 346.9%. The loss resulted from a decrease in revenue.
Revenues for the current fiscal period were primarily generated by prescription
and over-the-counter drug sales at the Company's community pharmacies and by
continuing client support fees from all the Company's software systems products.
Revenue from client support fees decreased by 35.6%, license fee revenue
decreased by 93.5% and software training fee revenue decreased by 87.0%.
Approximately 52.5% of the decrease in client support fee revenue and
approximately 60.0% of the decrease in license fee revenue resulted from the
termination in January 1997 of a marketing agreement with Option Care, Inc.
Decreased revenues from the Assurance Community Pharmaceutical Care System(TM)
accounted for approximately 28.8% of the decline in support fees and
approximately 17.2% of the decline in license fees, primarily the result of the
Company terminating its marketing relationship with AmeriSource Health
Corporation. Revenues from prescription and over-the-counter drug sales at the
community pharmacies and increased consulting revenue partially offset the
decreases in other revenues.
Revenues from the Company's Homecare products declined approximately $224,000,
or 98.4% when compared to the prior fiscal period. This decline is primarily due
to the termination of a marketing agreement with Option Care. License fee
revenue from the Assurance Long-Term Care System(TM) decreased approximately
$43,000, or 75%, primarily the result of a weak market caused by delays in the
implementation schedules of federal regulations. Client support fee revenue
generated by the Company's Long-term Care products remained stable when compared
to the prior fiscal year period.
The effects of inflation on the Company's revenue and operating results were not
significant.
COSTS AND EXPENSES. Total costs and expenses incurred during the quarter ended
May 31, 1997, including interest, depreciation and amortization expense,
decreased by $12,281 or 1.7% to $713,808 when compared to prior fiscal year
expenses of $726,089. Cost of revenues which included the cost of product for
the community pharmacies, decreased by approximately $6,700, or 1.5% when
compared to the prior fiscal year period. Compensation, benefits and payroll
taxes decreased by approximately $104,000 or 27.3% when compared to the prior
year period. The decrease in payroll expenses is primarily due to staff
reductions which are the result of staff attrition and involuntary termination
of seven employees during fiscal 1997.
Administrative expenses such as telephone expense, supplies, postage,
accounting, legal and equipment maintenance decreased by approximately 4.3% when
compared to the prior fiscal year period. Administrative expenses have declined
as the Company has implemented expense reductions in an attempt to offset
reductions in revenue. Commissions paid to commissioned sales representatives
decreased by approximately 82.6%, primarily due to the decrease in
commissionable software license fees. Expenses associated with advertising,
marketing and trade shows decreased approximately 34%. In an effort to reduce
costs during a period of reduced revenues, the Company has cut back on the
creation of new marketing literature. Fees paid to outside consultants decreased
by approximately 28.9% when compared to the prior year period. Rent and
occupancy expenses have increased approximately 19.5% due to the acquisitions of
the community pharmacies. Depreciation and amortization expense, including
amortization of covenants and a client list, decreased by approximately 7.8% to
$21,247 from $23,053. This decrease was primarily due to the completion of
depreciation periods on various capitalized office equipment.
Net interest expense decreased 27.8% to $2,312 from $3,202, primarily due to the
lessening amounts of interest on various capitalized leases which are nearing
completion of the lease period.
LIQUIDITY AND FINANCIAL CONDITION
WORKING CAPITAL. The Company had a working capital deficit of ($349,229) at May
31, 1997, compared to a deficit of ($210,537) at February 28, 1997; an increase
of $138,692. The increase in working capital deficit is primarily due to the net
loss for the quarter, capital lease obligation payments and payments made for
the April 1997 acquisition of certain assets and a client list of Preserve
Rexall Drug. These increases were partially offset by payments received on a
note receivable.
Improved capital availability will ultimately depend on improved sales
performance and containment of all operational costs. There can be no assurance
that sales results will improve and 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.
ADDITIONAL CAPITAL REQUIREMENTS. The Company believes that it will have
short-term cash needs. The Company will supplement its cash requirements with
the available line of credit and call all or a portion of the demand note
receivable from an officer of the Company. The Company plans to continue
operating expense reductions currently underway. If revenue continues to fall
short of Company needs and the Company is unable to generate sufficient cash
flow from operations the Company will need to explore raising additional
capital.
PART II
Item 4 - Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of the security holders.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 Schedule showing calculation of earnings per share.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Outcomes Management, Inc.
(registrant)
Date: July 15, 1997 By: /s/ William A. Peter, Jr.
-------------- ------------------------------
William A. Peter, Jr.
President, CEO
Date: July 15, 1997 By: /s/ Rosemary Salzwedel
--------------- ------------------------------
Rosemary Salzwedel
Controller
Index to Exhibits
Exhibit
11 Schedule showing calculation of earnings per share.
27 Financial Data Schedule
Exhibit 11
HEALTH OUTCOMES MANAGEMENT, INC. & SUBSIDIARIES
Calculation of Earnings Per Share(1)
(Unaudited)
Three months ended
May 31,
1997 1996
----------- -----------
Earnings used in calculations:
Net loss used in per
share calculation $ (127,241) (28,475)
=========== ===========
Shares used in calculation:
Average number of shares outstanding 8,499,029 8,327,885
Additional shares issuable assuming
exercise of outstanding stock options -- 63,687
Additional shares issuable assuming
exercise of outstanding warrants -- 51,667
----------- -----------
Weighted average number of common and
common equivalent shares outstanding 8,499,029 8,443,239
=========== ===========
Loss per common share (.01) .00
=========== ===========
(1) Earnings per share assuming full dilution are not different from primary
earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 122,366
<SECURITIES> 0
<RECEIVABLES> 127,598
<ALLOWANCES> 14,000
<INVENTORY> 138,370
<CURRENT-ASSETS> 390,207
<PP&E> 686,301
<DEPRECIATION> 583,311
<TOTAL-ASSETS> 567,086
<CURRENT-LIABILITIES> 739,436
<BONDS> 20,248
0
0
<COMMON> 84,990
<OTHER-SE> (277,588)
<TOTAL-LIABILITY-AND-EQUITY> 567,086
<SALES> 586,567
<TOTAL-REVENUES> 586,567
<CGS> 445,008
<TOTAL-COSTS> 711,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,416
<INCOME-PRETAX> (127,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (127,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,241)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
