U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
INTERWEST HOME MEDICAL, INC.
(Name of Small Business Issuer as specified in its charter)
Utah 87-0402042
----------------- ---------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification No.)
235 East 6100 South
Salt Lake City, UT
(Zip Code)
84107-7349
(Address of principal executive offices)
Issuer's telephone number, including area code: (801) 261-5100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: No Par
Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x/ No
.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The Issuer's revenues for the fiscal year ended September 30, 1998 were
$28,636,000.
As of December 15, 1998, 4,089,029 shares of the Issuer's common stock
were issued and outstanding of which 1,849,442 were held by non-affiliates. As
of December 15, 1998, the aggregate market value of shares held by
non-affiliates (based upon the closing price reported by the NASD's SmallCap
Market System of $ 2.63) was approximately $ 4,854,785.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Interest Home Medical, Inc. and subsidiaries ("Interwest" or the
"Company") provide a diversified range of home health care services and
products. The Company currently conducts its business from twenty-eight (28)
locations in the States of Utah, Colorado, Idaho, Arizona, Nevada, California
and Alaska and serves over 20,000 customers. The Company divides its products
and services into three general categories:
1. Home Oxygen and Respiratory Care Services. The Company primarily
provides oxygen and other respiratory therapy services to patients in the
home. Interwest Home Medical has more than 20 respiratory therapists on
staff whose focus is training and monitoring patients in the proper use of
home oxygen equipment, nebulizers and unit dose medications, apnea
monitors, sleep disorder equipment, ventilators, home phototherapy, and
other respiratory services.
2. Home Medical Equipment and Supplies. The Company provides a wide
variety of home medical equipment including items such as hospital beds,
manual and powered wheelchairs, patient lifts, commodes, bathroom aids and
safety equipment, powered scooters, walkers, canes, and other home medical
supplies.
3. Rehabilitation Services. The Company provides custom
rehabilitation equipment and services which include custom fitted and
adaptive wheelchairs, seating systems, home and workplace lifts,
specialized beds, and physical therapy equipment.
Many of Interwest's customers suffer from chronic obstructive pulmonary
disease ("COPD"), such as emphysema, chronic bronchitis or asthma, and require
supplemental oxygen or other respiratory therapy services in order to alleviate
the symptoms and discomfort of respiratory dysfunction. Others suffer from
causes incident to aging or debilitating conditions which require recuperation
in a non-critical care setting. Some of the Company's customers have permanent
disabilities which require adaptive equipment to allow the individual to attain
and acceptance degree of independence.
The Company's business is impacted by extensive political, economic and
regulatory influences, which continue to subject the health care industry in the
United States to fundamental change. During fiscal 1998, significant changes to
the Medicare system of reimbursement were enacted in connection with the
Balanced Budget Act of 1997 ( "BBA"). Reductions in Medicare oxygen services
reimbursement rates which resulted from the BBA have had and are expected to
continue to have an adverse impact on the Company's current and future
operations. Recent regulatory changes proposed by the Health Care Financing
Administration ("HCFA"), if enacted, could result in additional changes in the
system of Medicare reimbursement. The uncertainty of the outcome of additional
legislative and regulatory changes facing the industry have had a significant
impact on the industry.
The Company's revenues are generated from selling and renting home
medical equipment and supplies and from providing a variety of services to
customers. Revenues and income for the last five fiscal years were as follows:
2
<PAGE>
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
Revenues (in 000's) $28,636 $24,845 $22,426 $17,829 $12,490
Pre-tax Income Before $1,961 $1,479 $697 $1,486 $591
Accounting Charge
Net Income $1,426 $657 $595 $1,346 $421
Currently, revenues are divided between sales and equipment rentals. For
the fiscal years ended September 30, 1998 and 1997 sales were 51% and 58% of
total revenues while rentals represented 49% and 42% of total revenues,
respectively.
The Company completed 17 acquisitions and one merger in both existing and
new markets between fiscal 1996 and 1998, including five acquisitions in fiscal
1998. As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company may
in the foreseeable future slow its growth through acquisition.
History of the Company
From its inception in 1983 to February 1995, the Company was primarily
engaged in the management of certain real estate assets. In February 1995, the
Company acquired Interwest Medical Equipment Distributors, Inc., a Utah-based
regional provider of Home Medical Equipment products and services since 1957, in
a reverse merger and changed its name to Interwest Home Medical, Inc. The
Company's primary current operations involve home medical equipment services and
any operating results from the management of real estate assets other than sales
of real estate assets are immaterial.
Industry Overview
The importance of home health care is increasing as a result of
significant economic pressures within the health care industry. Total
expenditures within the health care industry, which have increased at twice the
rate of inflation in recent years, were approximately $1.3 trillion in 1997. The
ongoing pressure to contain health care costs, while maintaining high quality
care, is accelerating the growth of alternate site care, such as home health
care, that reduces hospital admissions and lengths of hospital stays. Home
health care, one of the fastest growing segments of the health care industry,
had estimated total expenditures in 1997 of approximately $37 billion, including
$25 billion for nursing and related patient services, $6 billion for infusion
therapy services, $3.5 billion for home respiratory therapy services, and $2
billion for durable medical equipment.
The growth in home health care is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home health care often results in lower costs, which is
increasingly important under managed care. In addition, home health care has
grown rapidly as a result of (i) advances in medical technology, which have
facilitated the delivery of services in alternate sites, (ii) demographic
trends, such as the increasing proportion of the population over the age of 65,
and (iii) a strong preference among patients to receive health care in their
homes.
The home health care industry has been highly fragmented and characterized
by local providers that typically do not offer a comprehensive range of
cost-effective services and products. These local providers often do not have
the capital necessary to expand their operations or the range of services and
products offered,
3
<PAGE>
which limits their ability to compete for managed care contracts and other
referrals and to realize efficiencies in their operations. As managed care has
become more prevalent, payors increasingly are seeking home health care
providers that offer cost-effective, comprehensive services in each market
served, which further inhibits the ability of local providers to compete
effectively. As a result of these economic and competitive pressures, the home
health care industry is undergoing rapid consolidation, a trend the Company
expects to continue.
Strategy
The Company's objective is to increase its market share through internal
growth and acquisitions. Interwest focuses primarily on growth within its
existing geographic markets, which the Company believes is generally more
profitable than adding additional operating centers in new markets. In addition,
the company expands into new geographic markets on a selective basis, either
through acquisitions or by opening new operating centers, when it believes such
expansion will enhance its business. Management seeks to establish a regional
concentration of centers in order to develop the market penetration and critical
mass necessary to position the Company as a cost-effective provider of selective
home medical equipment services to managed care and other third-party payors.
As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company may
in the foreseeable future slow its growth through acquisition and concentrate
primarily upon internal growth.
The Company believes the market for home respiratory and durable medical
equipment services is highly fragmented on both a national and regional basis,
and most participants are "mom and pop" companies with limited market share. The
Company believes by combining small participants into a single larger company,
product purchasing, accounting, claims processing and marketing could be
centralized and aggregate operations would be more efficient. The Company
estimates there are over 3,000 home respiratory and/or durable medical equipment
companies suitable and available for acquisition. The Company intends to grow in
part by acquiring some of these companies.
The Company's business strategy is to develop an efficient and effective
organization that specializes in providing selected home medical equipment
services and products. The Company's future growth is projected to be derived
from two principal sources: (i) increased services and product sales and rentals
from its existing operations, and (ii) revenues generated by businesses which
may be acquired in the future. During the last five years, the Company's
revenues increased by approximately 130% from the $12,490,000 for the year ended
September 30, 1994.
During fiscal 1998 Interwest acquired the assets of five (5) other
businesses and sold assets and operations of one business all of which
contributed to the 15% net increase of fiscal 1998 revenues over fiscal 1997
revenues. The total purchase price paid by the Company for such acquisitions was
approximately $4.4 million paid in cash, notes and assumption of debt. The
operations acquired in 1998 had aggregate annualized revenues of approximately
$7.5 million at the time of acquisition. These acquisitions resulted in the
addition of 4 new branches.
Products and Services Offered to Customers
The Company provides a wide variety of home respiratory and durable
medical equipment products and services on a sale or monthly rental basis.
Customers are usually referred by a physician, hospital
4
<PAGE>
discharge planner, other medical professional, or insurance contract. The
Company's customer representative obtains the necessary medical and insurance
coverage information and coordinates the delivery of the Company's services and
products to the patient. The services provided include delivering and installing
medical equipment, training patients and their care givers in the proper use of
products in the home, monitoring patients' compliance with their individualized
treatment plans, reporting to the physician and/or managed care organization,
maintaining equipment and processing claims to third party payors. The customer
remains under the physician's care and medical supervision. The company employs
respiratory therapists to perform certain training and other functions who are
licensed where required by applicable law.
The following table sets forth the percentage of net revenues represented
by each line of business for the periods presented:
Percent of Revenues
1998 1997 1996 1995
---- ---- ---- ----
Home oxygen and respiratory care
services 55 44 39 39
Home medical equipment and supplies 34 29 28 30
Rehabilitation products 11 27 33 31
--- --- --- ---
Total 100 100 100 100
=== === === ===
Home Oxygen and Respiratory Care Services. Industry-wide home respiratory
market revenues were an estimated $3.5 billion in 1997, having grown by an
estimated 8% to 10% per year over the last five years. This growth reflects the
significant increase in the number of persons afflicted with chronic obstructive
pulmonary disease, which is attributable, to a large extent, to the increasing
proportion of the population over the age of 65.
The Company's home oxygen and respiratory care services primarily consist
of:
o Oxygen systems to assist patients with breathing. There are three
types of oxygen systems: (I) oxygen concentrators, which are
stationary units that filter ordinary air to provide a continuous
flow of oxygen; (ii) liquid oxygen systems, which are portable,
thermally-insulated containers of liquid oxygen; and (iii) high
pressure oxygen cylinders, which are used for portability with
oxygen concentrators. Oxygen systems are used to treat patients with
chronic obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems.
o Nebulizers and prescribed medications to deliver aerosol medications
to patients. Nebulizers are used to treat patients with asthma,
chronic obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems.
o Home ventilators to sustain a patient's respiratory function
mechanically in cases of severe respiratory failure when a patient
can no longer breathe normally.
o Non-invasive positive pressure ventilation ("NPPV") to provide
nocturnal ventilatory support for neuromuscular and COPD patients.
This therapy improves daytime function and decreases incidents of
acute illness.
5
<PAGE>
o Continuous positive airway pressure ("CPAP") therapy to maintain
open airways in patients suffering from obstructive sleep apnea
("OSA") by providing airflow at prescribed pressures during sleep.
o Apnea monitors to monitor and warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome.
o Home sleep screenings and studies to detect sleep disorders and the
magnitude of such disorders.
o Home phototherapy which provides UV light to help newborn systems
eliminate above normal levels of bilirubin.
The Company provides technicians who deliver and/or install the
respiratory care equipment, instruct the patient in its use, refill the high
pressure and liquid oxygen systems as necessary and provide continuing
maintenance of the equipment.
Home Medical Equipment and Supplies. These products include patient room
equipment (such as hospital beds, patient lifts and commodes), manual and
powered wheelchairs, ambulatory aids (such as walkers and canes), bathroom aids
and safety equipment, and various medical supplies. The Company maintains retail
stores and showrooms where customers may select from alternatives the needed
products and/or supplies. The products offered by the Company range in price
from a few cents to customized wheelchairs priced at $20,000 and above.
Rehabilitation Products. The Company is one of a limited number of
providers of adaptive rehabilitation equipment. Its rehabilitation technology
specialists work in conjunction with physicians, physical and occupational
therapists, special education teachers, case managers and association personnel
to design and adapt wheelchairs and other therapy equipment for use by
physically challenged persons. During 1998, the Company sold or substantially
reduced its provision of rehabilitation products in all branches except for Utah
and Alaska due to payment or profitability difficulties.
The Company's rehabilitation services include custom fitting, adapting and
repairing wheelchairs and related seating systems for persons affected with
cerebral palsy, muscular dystrophy and its related conditions, spinal cord
injuries, head injuries, arthritis, and other disabling diseases. The Company
also sells and installs specialized wheelchair elevators and stairway lifts in
commercial buildings primarily through successful competitive bids which are
installed and maintained by a few trained service technicians who are certified
through a national dealer organization. Some of the Company's facilities include
a national "Certified Repair Center" which provides warranty, maintenance and
repair services for most home medical equipment.
Organization and Operations
Management. The Company is managed at the executive level as a system of
locally managed businesses. The Company seeks to address the local market needs
of the home health care industry through its branch office network. Each branch
office conducts local marketing efforts, negotiates contracts with
6
<PAGE>
local referral sources, recruits personnel and coordinates patient care. Since
the provision of home health care services is generally a local business, the
Company provides its branch office managers with training, comprehensive
policies and procedures and standardized operating systems, while allowing them
sufficient autonomy to address local needs. Incentive plans are designed to
reward performance based upon revenue increases, earnings contribution and
accounts receivable collection primarily for branch teams. The central corporate
office provides support in marketing, sales and staff training, contracting with
managed care organizations, purchasing and accounting functions.
MIS. Each of the Company's branch locations are equipped with computer
systems that are on-line with the central corporate computer. The software is
provided and maintained by an industry leading software vendor. This system has
enabled the Company to standardize operating processes, track operating
performance by branch, control and manage accounts receivable, process customer
orders, improve inventory management, reduce administrative overhead, facilitate
interbranch communications and gather statistical data in order to provide
patient management information to managed care organizations. Medicare and many
third-party payor claims are billed electronically, thereby facilitating the
collection of accounts receivable. The Company also focuses upon quickly
integrating the information systems of acquired businesses as a part of its
overall integration efforts.
The Company currently sells and rents equipment and/or provides services
from the following retail locations:
Year Opened
State City Or Acquired
Colorado Colorado Springs 1995
Denver 1994
Greeley 1996
Fort Collins 1996
Fort Morgan 1996
Idaho Boise 1987
Idaho Falls 1991
Twin Falls 1994
Nevada Las Vegas/Henderson 1992
Reno 1996
Fallon 1996
Utah Murray (Main Office) 1978
Ogden 1989
Pleasant Grove 1983
Price 1988
Salt Lake Downtown 1995
Vernal 1994
St. George 1996
Cedar City 1997
Logan 1998
7
<PAGE>
California Quincy 1997
Chester 1997
Alaska Anchorage 1997
Regional Interwest Home Pharmacy 1997
Arizona Phoenix (2) 1998
Mesa 1998
Scottsdale 1998
Sales and Marketing
The Company believes the sales and marketing skills of its employees have
been instrumental in its growth to date and are critical to its future success.
The Company emphasizes to its employees the importance of patient base growth
and retention by providing quality service to physicians and their patients.
Approximately 50 of the Company's employees are actively involved in sales and
marketing either in full or in part, of the Company's products to health care
organizations and other customers. Key marketing targets include, but are not
limited to, managed care organizations, hospital-based health care
professionals, physicians and their staffs, home care agencies, private practice
therapists and case managers. Sales representatives receive regular clinical and
technical training to represent the Company's major product lines of products
and services. The Company's sales representatives maintain continual contact
with medical professionals in order to strengthen these relationships.
Given the shift toward managed health care, an integral component of the
Company's overall sales strategy is to seek preferred provider contracts with
various managed care organizations. Managed care organizations have grown
substantially in terms of the percentage of the population covered by such plans
and their influence over an increasing portion of the health care economy. These
contracts typically designate the Company as one of a limited number of
preferred providers of certain services in selected areas but do not establish
an exclusive relationship. The Company currently has approximately 100 preferred
provider agreements that are both local and regional in scope to provide home
medical equipment services and supplies to the beneficiaries of these managed
care entities. Total revenue generated from these agreements amounted to
approximately 24% and 20% of total revenues for the years ended September 30,
1998 and 1997.
During fiscal 1998 the Company terminated relationships with certain
managed care organizations and is in the process of reviewing its managed care
contracts The Company's contracts with managed care organizations will change
from time to time as either the Company or a managed care organization
determines not to continue with such contract. The Company will continue to
enter additional managed care contracts with managed care organizations seeking
new providers. As a result, the Company's relationships with its managed care
referral sources may continue to change. There can be no assurance the Company
will be able to successfully maintain existing referral sources or develop and
maintain new referral sources. The loss of any significant referral sources or
the failure to develop any new referral sources could have a material adverse
effect on the Company's financial condition or results of operations.
Quality of service is emphasized throughout the Company's organization both
in the hiring and training of its clinical personnel and the manner in which its
home health care services are delivered. Quality
8
<PAGE>
assurance and training are directed and monitored by a Director of Quality
Improvement, who is an experienced health care professional. The Company has
received accreditation from the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), a nationally recognized organization that has
established voluntary standards for the provision of home health care services.
The Company believes the JCAHO accreditation of its branch offices is an
important factor in its sales and marketing efforts. Accreditation by JCAHO (the
program began in 1988) is one of the few indicators that referral sources have
for judging the standard of quality of a home health care provider and is
increasingly being considered a prerequisite for entering into contracts with
managed care organizations. The Company was the first company located west of
the Mississippi River to complete its accreditation, which occurred in 1988. As
of December 1998, 18 of the Company's branches are accredited by JCAHO, 4 in
Arizona are awaiting the result of survey completed during 1998, and 5 satellite
branches are not separately accredited as they are managed by an accredited
branch. JCAHO does not accredit mail-order pharmacy operations and accordingly,
the Company's respiratory mail-order pharmacy operations are not eligible for
such accreditation. Upon acquiring companies in existing or new regions which
are non-accredited, the Company may choose to have a particular company/branch
undergo the JCAHO accreditation process, generally within twelve to eighteen
months after acquisition.
Reimbursement for Services
A substantial percentage of the Company's revenues are derived from
payments made by third party payors including Medicare, Medicaid and private
insurance companies. For the years ended September 30 as indicated, the
Company's revenues from these sources were allocated as follows:
Payor Percent of Total Revenues
1998 1997 1996 1995
---- ---- ---- ----
Medicare 33 30 28 33
Medicaid 6 6 9 6
Managed care organizations 24 20 18 17
Private insurance companies 12 20 19 18
Private pay (includes patient copays) 17 17 18 19
Over-the-counter sales 8 7 8 7
----- ----- ----- -----
Total 100 100 100 100
===== ===== ===== =====
Reimbursement is a complicated process which involves submission of claims
to multiple payors, each having its own claims documentation requirements. The
Company has substantial expertise at processing claims and continues to create
and improve systems to manage third-party reimbursements, produce clean claims
and obtain timely reimbursements by third-party payors. Currently, the Company
electronically submits over 45% of its billings to third party payors. The
billing and claims processing departments work closely with reimbursement
officers at branch locations and third-party payors and are responsible for the
review of patient coverage, the adequacy and timeliness of documentation and the
follow-up with third-party payors to expedite reimbursement payments.
The Company has achieved increased operating revenue in home respiratory
and other medical equipment operations despite increased regulation and certain
reimbursement reductions (see further
9
<PAGE>
discussion under "Government Regulation"). While the increased regulation tends
to reduce the amount of reimbursement from government sources for individual
cases, the Company believes the continued increased regulation also benefits the
Company by reducing the competition from joint ventures and fee revenue sharing
arrangements, which the Company has historically avoided.
The Company's levels of operating revenue and profitability, like other
health care companies, are affected by the continuing efforts of third-party
payors to contain or reduce health care costs by lowering reimbursement rates
and increasing case management review of services. Home health care, which is
generally less costly to third-party payors than hospital-based care, has
benefitted from those cost containment objectives. However, as expenditures in
the home health care market continue to grow, initiatives are increasingly aimed
at reducing the health care delivery costs at non-hospital sites. Changes in
reimbursement policies by third-party payors, or the reduction in or elimination
of such reimbursement programs, could have a material adverse impact on the
Company's revenues. Various state and federal health care reform initiatives may
lead to additional changes in reimbursement programs.
Purchasing
Each branch office is responsible for determining its inventory needs and
submitting requisitions to a centralized purchasing department. Using this
input, personnel located at the Company's headquarters select and purchase
virtually all equipment and supplies. Purchased inventory is shipped by vendors
to the specific location instructed by the Company. In fiscal 1998, the Company
purchased products from over 700 suppliers. The Company believes it has good
relationships with its suppliers and has alternative sources to purchase nearly
all the products it provides to customers.
The Company is an authorized dealer of The MED Group, Lubbock, Texas, a
national organization of home medical equipment service providers. The MED Group
arranges national pricing agreements with certain manufacturers, assists with
national networks and contracting with managed care organizations, conducts
specialty training programs and provides certain marketing materials and other
services for its dealers. The arrangement is annually renewable and may be
canceled by either party with sixty (60) days written notice. The Company
intends to continue its participation for the foreseeable future.
Interwest Home Medical has no long-term contracts for the purchase of
inventory although it has pricing agreements with several suppliers, many of
which are arranged through its affiliation with The MED Group. The Company
believes its relationships with suppliers are good and that alternative sources
of supply exist, at similar costs and on similar terms for most of the products
purchased.
10
<PAGE>
Competition
The home respiratory and durable medical equipment market is highly
competitive and fragmented. The barriers to enter into the market are low and,
accordingly, competition is intense. While there are four national providers and
approximately ten regional providers, the vast majority of the Company's
competition comes from small, locally owned firms. Quality of service is the
single most important competitive factor. Other competitive factors in the
market are the ability to develop and maintain contractual relationships with
managed care organizations, price of services, ease of doing business with the
provider, the mix of products and services offered and the reputation with
referring persons. The Company believes it competes effectively in each of its
lines of business with respect to these factors.
Other types of health care providers including hospitals, home health
agencies, physicians and new health "super stores" have entered, and may
continue to enter, the Company's various lines of business. However, the Company
believes its wide variety of home medical equipment products and services
broadens its appeal to managed care organizations and local health care
professionals.
The entire health care and medical product and service market is under
pressure to reduce costs and increase efficiencies. The Company intends to
attempt to reduce costs and increase efficiencies through its growth strategy.
The Company believes it currently competes effectively in the market and will
continue to take all action necessary to remain competitive. Certain of the
Company's competitors and potential competitors have significantly greater
financial, technical and marketing and sales resources than the Company and may,
in certain locations, possess licenses or certificates that permit them to
provide services that the Company cannot currently provide nor has any plans to
provide. There can be no assurance that the Company will not encounter increased
competition in the future that could limit the Company's ability to maintain or
increase its business which could adversely affect the Company's operating
results.
Governmental Regulation
The Company's business is subject to extensive federal, state and local
regulation.
The operations of the Company's branches are subject to federal and state
laws covering the repackaging and dispensing of drugs (including oxygen),
operating of pharmacies and regulating of interstate motor-carrier
transportation. Certain of the Company's employees are subject to state laws and
regulations governing the professional practice of respiratory therapy, pharmacy
and nursing.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid fraud and abuse laws. These
laws, among other things, prohibit any payment, kickback or rebate in return for
the referral of Medicare or Medicaid patients. Violations of these provisions
may result in civil and criminal penalties and exclusion from participation in
the Medicare and Medicaid programs.
Health care is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and
the amount of reimbursement by government and third-party payors. The Omnibus
Budget Reconciliation Act of 1987 ("OBRA 1987") created six categories of
durable medical equipment for purposes of reimbursement under the Medicare Part
B program. There is a separate fee schedule for each category. OBRA 1987 also
controls whether durable medical equipment products will be paid for on a rental
or sale basis and established fixed payment rates for oxygen service as well as
a 15-month rental ceiling on
11
<PAGE>
certain medical equipment. An interim final rule implementing the payment
methodology under the fee schedules recently was published in the Federal
Register. Payment based on the fee schedules is effective with covered items
furnished on or after January 1, 1989. Generally, Medicare pays 80% of the lower
of the supplier's actual charge for the item or the fee schedule amount, after
adjustment for the annual deductible amount. OBRA 1990 made changes to Medicare
Part B reimbursement that were implemented in 1991. The substantive change was
the standardization of Medicare rates for certain equipment categories. Laws and
regulations often are adopted to regulate new products, services and industries.
The Balanced Budget Act of 1997 ("BBA"), enacted in August 1997, reduces
the Medicare national payment limits for oxygen and oxygen equipment used in
home respiratory therapy by 30%, with 25% effective January 1, 1998 and an
additional 5% effective January 1, 1999 from the 1997 fee schedule. Compounding
these reductions is a freeze on reimbursement rates for all other equipment and
supplies through 2002. The BBA also reduces payments for covered drugs and
biologicals to 95 percent of the average wholesale price of such covered items
for each of the years 1998 through 2002. Approximately 21% and 15% of the
Company's total revenues for the years ended September 30, 1998 and 1997 were
derived from the provision of oxygen services to Medicare patients.
The BBA also extends to the Health Care Financing Administration ("HCFA")
authority to alter certain reimbursement rates that are not inherently
reasonable. As of December 15, 1998, HCFA is proposing additional cuts to the
following Medicare payment rates that affect the Company: a 10.5% reduction for
albuterol (a respiratory drug) as of January 1, 1999. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative health care delivery and payment systems and may in the future
propose and adopt legislation effecting fundamental changes in the health care
delivery system. The Company cannot predict the ultimate timing, scope or effect
of any legislation concerning health care reform. Any proposed Federal
legislation, if adopted, could result in significant changes in the
availability, delivery, pricing and payment for health care services and
products. Various state agencies also have undertaken or are considering
significant health care reform initiatives. Although it is not possible to
predict whether any health care reform legislation will be adopted or, if
adopted, the exact manner and the extent to which the Company will be affected,
it is likely that the Company will be affected in some fashion, and there can be
no assurance that any health care reform legislation, if and when adopted, will
not have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations.
The BBA authorizes the Department of Health and Human Services ("HHS") to
conduct up to five competitive bidding demonstration projects for the
acquisition of durable medical equipment and requires that one such project be
established for oxygen and oxygen equipment. Each demonstration project is to be
operated over a three-year period and is to be conducted in not more than three
competitive acquisition areas. The only project announced as of December 15,
1998 will be conducted in Polk County, Florida. Additionally, the Company will
be required to have surety bonds of at least $50,000 for each durable medical
equipment company that it operates.
Fraud and Abuse Laws. The Company is subject to Federal and state laws
prohibiting direct or indirect payments for patient referrals for items and
services reimbursed under Medicare, Medicaid and state programs as well as in
relation to private payors. The Company also is subject to Federal and state
laws governing certain financial relationships with physicians and other fraud
and abuse laws prohibiting the submission of false claims.
The Federal Medicare and Medicaid "Anti-kickback Statute" prohibits
certain conduct involving improper payments in connection with the delivery of
items or services covered by a number of Federal and
12
<PAGE>
state health care programs. Among other things, these prohibitions apply to
anyone who knowingly and willfully solicits, receives, offers, or pays any
remuneration in return for referring an individual to another person for the
furnishing, or arranging for the furnishing, of any item or service that may be
paid, in whole or in part, by the Medicare, Medicaid or other Federal health
care programs. To date, courts have interpreted the Anti-kickback Statute to
apply to a broad range of financial relationships between providers and referral
sources, including physicians and other direct health care providers, as well as
persons who do not have a direct role in the provision of health care services.
Violations of the statute may result in criminal penalties, including fines of
up to $25,000 and imprisonment for up to five years for each violation,
exclusion from participation in the Medicare and Medicaid programs, and civil
penalties of up to $50,000 and treble the amount of remuneration for each
violation. The BBA increases accountability and strengthens program integrity
through additional fraud and abuse penalties.
HHS's Office of Inspector General ("OIG") has adopted regulations
creating "safe harbors" from Federal criminal and civil penalties under the
Anti-kickback Statute by identifying certain types of ownership interests and
other financial arrangements that do not appear to pose a threat of Medicare and
Medicaid program abuse. Additional safe harbors have also been proposed, and the
OIG has recently solicited proposals for developing new and modifying existing
safe harbors. Transactions covered by the Anti-kickback Statute that do not
conform to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute, but such arrangements would risk scrutiny and may be
subject to civil sanctions or criminal enforcement action.
The Federal self-referral or "Stark Law" provides that where a
physician has a "financial relationship" with a provider of "designated health
services" (including, among other things, parenteral and enteral nutrients,
equipment and supplies, outpatient prescription drugs and home medical
equipment, which are products and services provided by the Company), the
physician is prohibited from referring a Medicare patient to the health care
provider, and that provider is prohibited from billing Medicare, for the
designated health service. The Stark Law has certain statutory exceptions. In
August 1995, regulations were issued pursuant to the Stark Law as it existed
prior to significant amendments enacted in 1993. The preamble to these
regulations states that HCFA intends to rely on the language and interpretations
in the regulations when reviewing compliance under the Stark Law, as amended
(the "Amended Stark Law"). Certain exceptions from the referral prohibitions are
available under the Amended Stark Law, including the referral of patients to
providers owned by certain qualifying publicly-traded companies in which a
referring physician owns an investment security. At this time, the Company
believes that its investments will qualify for the publicly-traded securities
exception because it has shareholder equity of at least $75,000,000. Submission
of a claim that a provider knows or should know is for services for which
payment is prohibited under the Amended Stark Law, and which does not meet an
exception could result in refunds of any amounts billed, civil money penalties
of not more than $15,000 for each such service billed, and possible exclusion
from the Medicare program. In addition, a state cannot receive Federal financial
participation payments under the Medicaid program for designated health services
furnished to an individual on the basis of a physician referral that would
result in a denial of payment under Medicare if Medicare covered the services to
the same extent as under a state Medicaid plan.
A number of Federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false claim. In addition, a
civil penalty of up to $15,000 may be assessed for engaging in other activities
prohibited by this statute. Actions to enforce the False Claims Act may be
commenced by a private citizen on behalf of the Federal government, and such
private citizens receive between 15 and 30 percent of the recovery. Recent
government efforts have been made (with mixed success) to assert that any claim
resulting
13
<PAGE>
from a relationship in violation of the Anti-kickback Statute or the Amended
Stark Law is false or fraudulent under the False Claims Act. The Company
carefully monitors its submissions of Medicare and Medicaid claims and all other
claims for reimbursement to assure that they are not false or fraudulent, and as
noted above, believes that it is in substantial compliance with the
Anti-kickback Statute or the Amended Stark Law.
The OIG instituted "Operation Restore Trust" ("ORT") in May 1995 in the
five states with the highest Medicare expenditures (California, Florida, New
York, Texas and Illinois) and has since been expanded to all fifty states.
Operation Restore Trust is intended to counter health care fraud, waste and
abuse in targeted areas that HHS believes to be particularly vulnerable to fraud
and abuse, including home health care, nursing homes and home medical equipment.
The OIG also has issued "Fraud Alerts" relating to improper business practices
in the provision of medical supplies to nursing homes, and is expected to issue
additional Fraud Alerts in the future as a means of advising the public of
suspect business arrangements and practices in the health care industry. In
addition, providers of home medical equipment, wound care supplies and other
products and services are expected to be subject to increased scrutiny for
practices involving fraud and abuse.
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with health care providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Sanctions for violating these state restrictions may include loss of
licensure and civil and criminal penalties. Certain states also have begun
requiring health care practitioners and/or other providers to disclose to
patients any financial relationship with a provider, including advising patients
of the availability of alternative providers.
The Company continues to review all aspects of its operations and
believes that it is in substantial compliance with all material respects with
applicable provisions of the Anti-kickback Statute, the Amended Stark Law, False
Claims and applicable state laws, although because of the broad and sometimes
vague nature of these laws, there can be no assurance that an enforcement action
will not be brought against the Company or that the Company will not be found to
be in violation of one or more of these provisions. The Company intends to
monitor developments under these Federal and state fraud and abuse laws. At this
time, the Company cannot anticipate what impact, if any, subsequent
administrative or judicial interpretation of the applicable Federal and state
fraud and abuse laws may have on the Company's business, financial condition,
cash flows or results of operations.
As part of ORT, HHS has contracted with ChoicePoint, an independent
organization, to conduct on-site surveys of home respiratory and durable medical
equipment companies in order to determine compliance with certain minimum
standards of participation as required by HHS. As of December 15, 1998, nearly
one-half of the Company's locations had been visited by representatives of
ChoicePoint and no notices of deficiency had been received by Interwest.
On June 3, 1998, HHS issued a federal Medicare regulation, commonly
referred to as the Incentive Program for Fraud and Abuse Information, which will
make citizens who alert Medicare of possible acts of fraud and abuse eligible
for rewards if their information leads directly to the recovery of Medicare
money. The program will be launched in January 1999 and will reward the
individual reporting the fraud the lesser of 10% of the recovered payment or
$1,000.
Management believes that the Company operations are in material compliance
with applicable laws. The Company, however, is unable to predict what additional
government regulations, if any, affecting its business may be enacted in the
future, how existing or future laws and regulations might be interpreted or
whether the Company will be able to comply with such laws and regulations either
in the markets in which it
14
<PAGE>
presently conducts, or wishes to commence, business. The Company also is subject
to routine and periodic surveys and audits by various governmental agencies.
Year 2000 Compliance
The Company installed software upgrades for its accounting and data
processing systems in the fourth fiscal quarter of 1998 that are warranted by
the vendor to be Y2K compatible. In addition, the Company has determined that
some of its telephone systems require software upgrades and has begun efforts to
upgrade its remaining telephone systems or purchase compatible systems as
necessary. The aggregate costs to upgrade systems for Y2K compliance appear to
be below $100,000, of which approximately $45,000 has been incurred to date, and
will be amortized over five years. There do not appear to be any other material
internal issues at this time.
The Company has communicated with its primary vendors and has determined
that all are making significant progress toward their Y2K compliance, and that
the Company has sufficient alternatives to obtain the necessary products and
services.
However, the Company has not yet been able to determine the Y2K compliance
of its customers nor its payers (e.g., Medicare, various state Medicaid
programs, insurance companies, etc.). The failure by a significant government or
private payor to adequately correct Y2K systems issues, to the extent that such
issues delay or prevent timely or appropriate payment of claims, could have a
material impact on the Company's cash flow from operations. The Company is
monitoring the Y2K progress of its payors to determine the potential impact to
the Company.
The financial institutions with whom the Company has its material
relationships have represented to the Company that their Y2K compliance programs
are substantially under way with final testing to be completed in the first half
of 1999.
Insurance
In recent years, participants in the health care market have become
subject to an increasing number of malpractice and product liability lawsuits,
many of which involve large claims and significant defense costs. As a result of
the liability risks inherent in the Company's lines of business, including the
risk of liability due to the negligence of health care professionals employed by
or otherwise under contract to the Company, the Company maintains liability
insurance intended to cover such claims. There can be no assurance that the
coverage limits of the Company's insurance policies will be adequate, or that
the Company can obtain liability insurance in the future on acceptable terms or
at all.
The Company currently has in force general liability insurance, including
professional and products liability, with coverage limits of $4.0 million per
occurrence and in the aggregate annually (with no deductible either per
occurrence or in the aggregate annually). The Company's insurance policies
provide coverage on an "occurrence" basis, have certain immaterial exclusions
from coverage and are subject to annual renewal.
Environmental Matters
Medical facilities are subject to a wide variety of federal, state and
local environmental and occupational health and safety laws and regulations,
such as air and water quality control requirements, waste
15
<PAGE>
management requirements and requirements for training employees in the proper
handling and management of hazardous materials and wastes. The typical branch
office facility operations include, but are not limited to, the handling, use,
storage, transportation, disposal and/or discharge of hazardous, toxic,
infectious, flammable and other hazardous materials, wastes, pollutants or
contaminates. These activities may result in injury to individuals or damage to
property or the environment and may result in legal liability, damages,
injunctions, fines, penalties or other governmental agency actions. The Company
is not aware of any pending or threatening claim, investigation or enforcement
action regarding environmental issues which if determined adversely to the
Company, would have an adverse effect upon the capital expenditures, earnings,
or competitive position of the Company. The annual costs of compliance with
environmental laws are not considered by the Company to be material.
Employees
As of December 1998, the Company had approximately 300 full-time
equivalent employees. The Company's employees are not currently represented by a
labor union or other labor organization. As the Company's business grows, it
will hire additional employees as may be reasonably necessary to conduct its
business. The Company believes the relations between its management and its
employees are good.
ITEM 2. PROPERTIES
Headquarters
The Company's headquarters and retail facilities are located in Salt Lake
City, Utah. The Company leases a 26,000 square foot facility at 235 East 6100
South. The facilities are leased from a third party pursuant to a lease expiring
December 21, 2008. The Company has options to renew the lease for an additional
15 years. Rent is currently $14,281 per month on a triple net basis and
increases to $18,000 per month in July 2007.
Other Retail and Office Facilities
In addition to its headquarters, the Company leases twenty-seven (27)
other facilities which range in size from 1,000 square feet to 8,000 square
feet. Most of these leases are for terms of three-to five years and most have
renewal options. The aggregate annual lease payments for these other facilities
were $627,000 for the year ended September 30, 1998. See further disclosure in
Note 10 - Lease Obligations in the financial statements.
Real Property Owned
The Company owns five acres of undeveloped property in Provo, Utah,
approximately 40 miles south of Salt Lake City.
At September 30, 1998, the Company owned a three-level office building
known as the Securities Savings and Loan Building located at 170 South Main
Street, Pleasant Grove, Utah. The building was sold on October 15, 1998 for 20%
cash and a six-month note for the balance. The building consists of
approximately 9,500 square feet and was originally used as a bank. As of
September 30, 1998, the building was leased to various tenants. The leases are
net leases whereby the tenants pay monthly rents which total approximately
$6,000 per month, and the Company pays taxes and insurance.
16
<PAGE>
The Company intends to sell its properties and use the proceeds as working
capital. There are no material liens or other limitations on ownership of any
property held by the Company other than a general lien from the Company's bank
under the general credit line which is disclosed in Note 8 - Long Term Debt in
the financial statements.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, Link Medical, Inc. ("Link") commenced litigation against
the Company and several other parties which was filed in the District Court
County, County of Arapahoe, Colorado. Link contends that Interwest defaulted on
a Promissory Note and breached the terms of the Asset Purchase Agreement entered
into between Link and Interwest on December 20, 1996. Link seeks to recover
$600,000, plus interest at 8% per annum, and attorney's fees and costs.
Interwest believes that it owes no additional money to Link because there has
been a material failure of consideration under the terms of the Asset Purchase
Agreement, or in the alternative, because Interwest entered into the Purchase
Agreement based on fraudulent misrepresentation. Interwest has also filed a
Counterclaim against Link alleging breach of contract and breach of covenant of
good faith and fair dealing, and intentional intervention with contractual
rights, and seeking to recover at least $500,000 plus interest, attorney's fees
and costs. In addition, Interwest has filed Cross Claims against the other
Defendants and third party claims against the principal shareholders in Link and
another related party. Those claims are varied in nature, but include such
things as breach of contract, breach of various non-compete agreements, breach
of the Uniform Trade Secret Act, and conspiracy, and generally seek to recover
at least $500,000.
In June 1998, American Springs Development ("ASD") commenced litigation
against the Company which was filed in the Fourth District Court in Provo, UT.
ASD claims that the Company breached a warranty of title in connection with the
sale of real property, and that it has suffered damages it estimates to be at
least $50,000. The Company has counterclaimed against the ASD alleging that the
deed should be reformed and denying any liability. ASD remains indebted to the
Company for the purchase price of the property which, as of December 1998 was in
a past due amount of approximately $168,500.
In October 1998, Interwest was served with an Amended Complaint filed by
Buckeye Welding Supply Company ("Buckeye") in district Court, Weld County,
Colorado. Buckeye contends that Interwest owes it $113,546 on open account and
for the fair market value of certain oxygen cylinders (allegedly in excess of
$60,000) which Buckeye contends Interwest has not returned to it. Interwest
denies that it owes Buckeye the amount of the claim and has also ascertained
that it has returned to Buckeye all oxygen cylinders owned by Buckeye. Interwest
has filed Cross Claims against Link for breach of the Asset Purchase Agreement,
dated December 20, 1996, and for indemnification, seeking to hold Link liable
for any amounts that Interwest may be required to pay to Buckeye.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for a vote during
the last quarter of the year ended September 30, 1998.
17
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the National Association of Security Dealer's SmallCap
Market System under the Symbol IWHM. Currently there is only limited trading
activity in the Company's common stock and the quotations set forth below
reflect such activity. There can be no assurance that quotations will not
fluctuate greatly in the future in the event trading activity increases or
decreases. The information contained in the following table was obtained from
the NASD and from various broker-dealers and shows the range of representative
bid prices for the Company's common stock for the periods indicated. The prices
represent quotations between dealers and do not include retail mark, mark-down
or commission and do not necessarily represent actual transactions:
Bid Price
-----------
1998(1)
-------
High Low
------ -------
First Quarter $4.19 $2.75
Second Quarter $4.00 $2.75
Third Quarter $4.13 $3.50
Fourth Quarter $3.81 $2.75
1997(1)
-------
High Low
------- -------
First Quarter $5.75 $3.75
Second Quarter $4.63 $3.75
Third Quarter $4.25 $3.25
Fourth Quarter $5.63 $3.25
(1) Calendar Quarters.
Shares Issued in Unregistered Transactions
During the last three fiscal years, the Company issued its securities in
non-registered transactions pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. The Company did not pay a commission
or any finders fees in connection with such transactions nor did any general
solicitation occur in any transaction. The securities issued in such
transactions (all with restrictive legends) were as follows:
In February 1995, the Company issued 1,952,968 shares (adjusted for the
1-for-4 reverse split) shares of common stock to the shareholders of Interwest
Medical Equipment Distributors, Inc. ("IMED") in exchange for all of the
outstanding shares of IMED in order to acquire the IMED.
In March 1995, the Company issued 300,000 shares of Series "A" preferred
stock in connection with the acquisition of Mountain Rehabilitation Equipment,
Inc. ("MRE") to the shareholders of MRE in exchange for all of the outstanding
shares of MRE. In August 1997, these preferred stock shares were converted to
112,500 shares of common stock in accordance with the formula stated in the
signed Purchase Agreement and in the Company's Amended Articles of
Incorporation.
18
<PAGE>
In January 1997, the Company issued 105,140 shares of common stock for
$450,000 and warrants to purchase an additional 105,140 shares to Merlin G.
Kirby, M.D., in connection with an Option Agreement executed in November 1996.
The warrants may be exercised at $4.28 per share if paid during the first
warrant year, $4.75 per share if paid during the second warrant year, and $5.25
if paid during the third warrant year. The Option Agreement became effective
November 22, 1996 and was terminated as of October 12, 1998.
In August 1997, the Company issued 465,000 shares of common stock in
connection with the acquisition of Northwest Homecare, Inc. to the shareholders
of NHI in exchange for all of the outstanding shares of NHI.
In September 1997, the Company completed issuance of 57,126 shares of
common stock for $244,500 and warrants to purchase an additional 57,126 shares
to Jerry D. Kennett, M.D., in connection with an Option Agreement executed in
November 1996. The warrants may be exercised at $4.28 per share if paid during
the first warrant year, $4.75 per share if paid during the second warrant year,
and $5.25 if paid during the third warrant year. The Option Agreement became
effective November 22, 1996 and was terminated as of October 12, 1998.
In September 1997, the Company issued 50,992 shares of common stock for
$20,000 to James U. Jensen in connection with a Stock Option Agreement purchased
from Interwest Medical Equipment Distributors, Inc., a predecessor company, in
November 1987.
In January 1998, the Company issued 8,484 shares of common stock for
$36,312 and warrants to purchase an additional 8,484 shares to Jeffrey F. Poore,
D.D.S., in connection with an Option Agreement executed September 30, 1997. The
warrants may be exercised at $4.28 per share if paid during the first warrant
year, $4.75 per share if paid during the second warrant year, and $5.25 if paid
during the third warrant year. The Option Agreement was terminated as of
September 30, 1998.
In January 1998, the Company issued 5,000 shares of common stock for
$21,400 and warrants to purchase an additional 5,000 shares to James U. Jensen,
in connection with an Option Agreement executed September 30, 1997. The warrants
may be exercised at $4.28 per share if paid during the first warrant year, $4.75
per share if paid during the second warrant year, and $5.25 if paid during the
third warrant year. The Option Agreement was terminated as of September 30,
1998.
In January 1998, the Company issued 500 shares of common stock for $2,140
and warrants to purchase an additional 500 shares to Jerald L. Nelson, in
connection with an Option Agreement executed September 30, 1997. The warrants
may be exercised at $4.28 per share if paid during the first warrant year, $4.75
per share if paid during the second warrant year, and $5.25 if paid during the
third warrant year. The Option Agreement was terminated as of September 30,
1998.
Holders
As of December 15, 1998, there were 4,089,029 shares of common stock
outstanding and approximately 793 stockholders of record of common stock. The
number of stockholders of record does not include an indeterminate number of
stockholders whose shares are held by brokers in "street name." Management
believes there are in excess of 850 beneficial stockholders of the Company's
common stock.
19
<PAGE>
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The Company's revenue and income are derived from a diversified range of
home health care products and services. The Company divides its products and
services into three general categories: (1) home oxygen and respiratory care
services, (2) home medical equipment and supplies and (3) rehabilitation
services. In August 1997, the Company completed a merger with Northwest Homecare
(Northwest) by exchanging 465,000 shares of the Company's common stock for all
of the issued and outstanding common stock of Northwest. The transaction was
accounted for as a pooling-of-interests and as such, the consolidated financial
statements presented prior to the merger have been restated to present those of
Company for the year ended September 30, 1997 and Northwest for the nine months
ended September 30, 1997.
The Company's objective is to increase its market share through internal
growth and acquisitions. Interwest focuses primarily on growth within its
existing geographic markets, which the Company believes is generally more
profitable than adding additional operating centers in new markets. In addition,
the Company expands into new geographic markets on a selective basis, either
through acquisitions or by opening new operating centers, when it believes such
expansion will enhance its business. Management seeks to establish a regional
concentration of centers in order to develop the market penetration and critical
mass necessary to position the Company as a cost-effective provider of selective
home medical equipment services to managed care and other third-party payors.
As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company may
in the foreseeable future slow its growth through acquisition and concentrate
primarily upon internal growth.
Net Revenues
Net revenues increased 15% to $28,636,000 in 1998 from $24,845,000 in
1997. Approximately $3.3 million or 13% of the increase was generated by same
store growth from continuing product lines. The increase was offset by
approximately $2.5 million or 10% of fiscal 1997's revenues which were sold or
terminated due to the Company's focus to provide more respiratory services.
Approximately $3.3 million or 13% of the increase in revenues was contributed by
acquired operations.
Net sales were essentially flat from $14,495,000 in 1997 to $14,492,000
in 1998. Approximately $1.4 million of net sales was contributed by acquired
operations and approximately $1.1 million of net sales were generated by same
store growth from continuing product lines. The increases were offset by
approximately $2.5 million of net sales, primarily of rehabilitation products,
which were sold or terminated. The same store increases were due primarily due
to increased marketing efforts in the company's core respiratory products.
20
<PAGE>
Net rental revenue increased from $10,350,000 in 1997 to $14,144,000 in
1998, an increase of 36%. Approximately $2.1 million or 20% increase of net
rental revenue was contributed by acquired operations and approximately $1.7
million or 16% increase of net rental revenue was generated by same store
growth. Rental revenue as a percentage of total revenue increased to 49% at 1998
compared to 42% at 1997. Sales revenue had a corresponding reduction to 51% in
1998 from 58% in 1997. The Company's strategy has been to increase its rental
revenue because of higher gross margins. Management has targeted acquisitions
whose product mix is primarily respiratory rental revenue. Additionally, the
Company has expanded its marketing staff, emphasizing development of the
respiratory rental market.
Home oxygen and respiratory care services, home medical equipment and
rehabilitation products revenues (both sales and rentals) represent 55%, 34% and
11%, respectively, in 1998 compared to 44%, 29% and 27%, respectively. Increases
in home oxygen and respiratory care services and home medical equipment product
lines are due primarily to increased strategic focus on these segments in both
marketing and acquisitions. The decrease in rehabilitation products revenue is
due primarily to the sale or exit by the Company in Colorado and Las Vegas where
reimbursement rates and/or payment terms are inadequate.
The Balanced budget Act of 1997 ("BBA") was signed into law on August 5,
1997. The legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year thereafter
are reduced to 70 percent of the fee schedule amounts in effect during 1997. The
BBA reduced revenue to the Company approximately $750,000 in fiscal 1998.
The BBA freezes the consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1998 through
2002 while limiting fees for parenteral and enteral nutrients, supplies and
equipment to 1995 reasonable charge levels over the same period. The BBA reduces
payment amounts for covered drugs and biologicals to 95 percent of the average
wholesale price of such covered items for each of the years 1998 through 2002.
Gross Margins
Gross margins were 63.0% in 1998 and 59.9% in 1997. Gross margin from
net rental revenue was 81% in 1998 compared to 83% in 1997. Gross margin from
net sales revenue was 46% in 1998 compared to 42% in 1997. The increase in gross
margin is primarily due to increases in rental revenue, with higher margins, as
percentage of total revenue partially offset by lower margins on rental revenue
due to the BBA reduction in payment for home oxygen services provided to
Medicare beneficiaries. Additionally, the increase in gross margin from net
sales is primarily due to the elimination of certain low margin products. The
managed care market fosters competition which has had an adverse effect on
reimbursement rate with resultant decrease in margins on rental revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have increased 9.8% to
15,253,000 for fiscal 1998 compared to $13,888,000 for fiscal 1997. Selling,
general and administrative expenses decreased as a percentage of net revenues
from 55.5% in 1997 to 53.3% in 1998 primarily due to a $750,000 pretax asset
impairment charge recorded in fiscal 1997.
21
<PAGE>
During the fourth quarter of fiscal 1997, the Company adopted Statement
of Financial Accounting Standards No. 121 - "Accounting for Impairment of
Long-Lived Assets to be Disposed of." The statement requires that long-lived
assets and certain intangibles be analyzed to determine if estimated future cash
flows is less than the carrying value of the asset. The Company has determined
that an impairment exists for goodwill recorded as part of certain acquisitions.
Accordingly, the Company has recognized a pretax charge of $750,000 as a
reduction of the net carrying value of goodwill. The impairment is primarily due
to an alleged breach of certain non-compete agreements, anticipation of a 30%
(25% and 5% reduction effective January 1, 1998 and 1999, respectively)
reduction in Medicare oxygen reimbursement as a result of enactment of The
Balanced Budget Act of 1998, and less than anticipated results from acquired
operations in Las Vegas, Nevada, Denver and Greeley, Colorado.
Interest Expense
Interest expense increased 19% to $1,046,000 in fiscal 1998 compared to
$880,000 in fiscal 1997. Interest expense as a percentage of revenue increased
to 3.7% for 1998 from 3.5% for 1997.The Company's interest expense consists of
interest on borrowings under its bank credit agreement, its capital equipment
line of credit and bank/seller financing agreements to fund acquisitions. The
increase was primarily attributable to approximately $4.4 million of new and
assumed borrowings to fund acquisition activities.
Non-recurring Items
During the third quarter of fiscal 1997, the Company sold, for $780,000,
approximately 40 acres of undeveloped real estate, with a basis of $217,500.
After commissions and closing costs, the Company recognized a non-recurring gain
of $516,000.
Acquisitions
In fiscal 1998, the Company acquired, in unrelated transactions, certain
operating assets of 5 local competitors. The operations acquired in fiscal had
aggregate annualized revenues of approximately $8.0 million at the time of
acquisition. The cost of these acquisitions was approximately $4.4 million and
was allocated to acquired assets as follows: $1.9 million to current assets,
$1.6 million to property and equipment, and $.9 million to goodwill. These
acquisitions resulted in the addition of 4 new operating branches.
In fiscal 1997, the Company acquired, in unrelated transactions, certain
operating assets of 5 local competitors and merged with 1 company which was
accounted for as a pooling of interests. The operations purchased in fiscal 1997
had aggregate annualized revenues of approximately $3.0 million at the time of
acquisition. The cost of the purchased acquisitions was approximately $3.1
million and was allocated to acquired assets as follows: $196,000 to current
assets, $619,000 to property and equipment, and $1.47 million to goodwill. These
acquisitions and the merger resulted in the addition of 5 new operating
branches.
Liquidity and Capital Resources
At September 30, 1998 and 1997 the Company's working capital was
$2,613,000 and $2,645,000, respectively, a decrease of $32,000 or 1%. The
decrease is primarily due to increases in debt related to acquisition activities
which were greater than the corresponding increases in current assets.
The Company's primary needs for capital are to fund acquisition,
purchase rental equipment, and cover debt service payments. For the year ended
September 30, 1998, net cash provided by operating
22
<PAGE>
activities was $2,854,000 as compared to $817,000 for the year ended September
30, 1997, an increase of $2,037,000 or 249%. Significantly contributing to cash
provided from operations in fiscal 1998 were increased income and non cash
expenses of depreciation and amortization. For the year ended September 30,
1997, cash provided from operations also included a $750,000 write off of
impaired assets. A significant portion of the Company's assets consists of
accounts receivable from third party payors that provide reimbursement for the
services provided by the Company. The Company has encountered billing delays in
its efforts to integrate trade receivables from acquisition activities during
the last half of fiscal 1998 and to receive payments from certain managed care
organizations. The Company includes accounts receivable as security for its
lines of credit.
Net cash used in investing activities amounted to $1,752,000 and
$618,000 for the years ended September 30, 1998 and 1997, respectively. Activity
in the year ended September 30, 1998 included the Company's investment in
capital equipment of $2,071,000.
Net cash used in financing activities amounted to $1,750,000 and
$161,000 for the years ended September 30, 1998 and 1997, respectively. Activity
in the year ended September 30, 1998 included the Company's proceeds of
$1,090,000 from long-term obligations, and payments of $2,811,000 related to
long-term obligations.
As of September 30, 1998, the Company's principal sources of liquidity
consisted of $2.6 million of working capital and $859,000 available on its $5.35
million revolving credit loans and lines of credit. The Company has a $4.35
million revolving operating line of credit with its principal bank expiring on
February 12, 1999 and an additional $1.0 million revolving operating line of
credit with its principal bank expiring August 30, 1999. The Company is
currently negotiating the renewal of its primary operating line of credit.
Borrowing under the Company's lines of credit are secured and limited to 80% of
eligible accounts receivable and 50% of inventory. Interest on both lines of
credit is payable quarterly at the bank's prime lending rate minus .50%. As of
September, 30, 1998 and 1997, $4,491,000 and $3,363,000, respectively, were
outstanding under the lines of credit. The increase is primarily due to
increases in inventory and accounts receivable which contributed to additional
borrowings under the Company's working capital credit facilities.
The Company anticipates that capital expenditures for fiscal 1999 will
be approximately $1.5 million. The company believes that it will be able to
generate sufficient funds internally, together with funds that may be borrowed
under its credit facilities, to meet its anticipated short-term and long-term
capital requirements for the foreseeable future.
The Company's future liquidity will continue to be dependent upon its
operating cash flow and management of accounts receivable. The Company is not
aware of any impact on liquidity due to pending litigation arising in the
ordinary course of business.
Financial Condition
Net accounts receivable increased 45% to $10,447,000 from $7,215,000 at
September 30, 1998 and 1997, respectively. The increase was due to acquired
receivables, revenue growth from existing stores during the year and billing
delays encountered integrating trade receivables from acquisition activities
during the last half of fiscal 1998. Billing delays contributed to the Company's
average days sales in receivables increasing from 93 days to 111 days at
September 30, 1997 and 1998, respectively. Correspondingly, the
23
<PAGE>
allowance for doubtful accounts increased to $1,760,000 from $593,000 at
September 30, 1998 and 1997, respectively.
Inventories were $3,771,000 and $3,444,000, an increase of 9%, at
September 30, 1998. Inventories increased $327,000 during 1998 primarily as a
result of acquired inventories. Year to year percentage increases in inventory
levels have declined as a results of a shift in product mix toward rentals
revenue which requires lower inventory levels.
At September 30, 1998, the Company had notes receivable, including
current portion, of $617,000 compared to $447,000 at September 30, 1997. The
increase is due to $263,000 primarily from sale of rehab business operations
offset by $93,000 of payments. The notes receivable originated from the sales of
undeveloped real estate, an apartment complex and sale of rehab business
operations. The Company continues to receive payments on its notes receivable
and is in the process of working with one of the debtors to receive full
consideration for the note which is currently in default.
At September 30, 1998, the Company held property and equipment, net of
depreciation, used in its business amounting to $6,745,000 compared to
$5,006,000 at September 30, 1997. The increase in property and equipment is
attributable to the fair market value of assets acquired in acquisition
activities and patient rental equipment purchased to support increased rental
revenue.
Current liabilities increased 35% to $12,959,000 at September 30, 1998
compared to $9,580,000 at September 30, 1997. Correspondingly, current assets
grew 27% from $12,225,000 to $15,572,000. The increase in current liabilties is
primarily due to increases in current portion of long-term debt and notes
payable related to current portion of new borrowings to fund acquisitions and
checks drawn against the Company's revolving operating line of credit to fund
current operations including the purchase of patient rental equipment. The
increase in current assets is due primarily to increases in net accounts
receivable due to acquired receivables, revenue growth from existing stores
during the year and billing delays encountered integrating trade receivables
from acquisition activities during the last six months of fiscal 1998.
Correspondingly, the allowance for doubtful accounts increased to $1,760,000
from $593,000 at September 30, 1998 and 1997, respectively.
Option Agreements
On December 9, 1996, the Company entered into an option agreement with
eight private investors. The terms of the agreement provide the investors the
right to purchase, pursuant to options and warrants, up to an aggregate of
1,170,714 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If the optionees elected to exercise their rights in full, the total
proceeds to the Company would be approximately $5.9 to 6.5 million. On December
19, 1996, the investors paid $100,000 option fee providing the right to exercise
options to purchase 162,500 shares of common stock at a price $4.28 within 180
days. During the year ended September 30, 1997, the optionees exercised the
option by paying $694,500 in exchange for 162,266 shares of the Company common
stock and issuance of warrants for 162,266 shares of common stock exercisable
for three years at $4.28 during the first warrant year, $4.75 during the second
year, and $5.25 during the third warrant year. Additionally, a member of the
board of directors exercised an option to purchase 50,992 shares of common stock
at a total exercise price of $20,000. The total equity of $714,500 was raised
from these transaction. As of October 12, 1998, all of the terms of this option
agreement had expired without any further exercise.
24
<PAGE>
On September 30, 1997, the Company entered into an option agreement with
each of its outside Directors. The terms of the agreements provide the Directors
the right to purchase, pursuant to options and warrants, up to an aggregate of
198,000 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If each Director elected to exercise his rights in full, the total
proceeds to the Company would be approximately $1.02 to $1.12 million. On
October 10, 1997, each Director paid a $1,000 option fee providing each Director
the right to exercise options to purchase 8,250 shares of common stock at a
price $4.28 within 180 days. During the year ended September 30, 1998, the
Directors exercised options by paying $59,852 in exchange for 13,984 shares of
the Company common stock and issuance of warrants for 13,984 shares of common
stock exercisable for three years at $4.28 during the first warrant year, $4.75
during the second year, and $5.25 during the third warrant year. As of September
30, 1998, all of the terms of this option agreement had expired without any
further exercise.
There have been no other significant changes in capitalization or
financial status during the past two years that are not reflected in the
financial statements.
Inflation
Inflation continues to apply modest upward pressure on the cost of goods
and services provided by Interwest Home Medical. Because of restrictions on
reimbursement by government and private medical insurance programs and the
pressures to contain the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation.
Year 2000
The Company installed software upgrades for its accounting and data
processing systems in the fourth fiscal quarter of 1998 that are warranted by
the vendor to be Y2K compatible. In addition, the Company has determined that
some of its telephone systems require software upgrades and has begun efforts to
upgrade its remaining telephone systems or purchase compatible systems as
necessary. The aggregate costs to upgrade systems for Y2K compliance appear to
be below $100,000, of which approximately $45,000 has been incurred to date, and
will be amortized over five years. There do not appear to be any other material
internal issues at this time.
The Company has communicated with its primary vendors and has determined
that all are making significant progress toward their Y2K compliance, and that
the Company has sufficient alternatives to obtain the necessary products and
services.
The Company has not yet been able to determine the Y2K compliance of its
customers nor its payers (e.g., Medicare, various state Medicaid programs,
insurance companies, etc.). The failure by a significant government or private
payor to adequately correct Y2K systems issues, to the extent that such issues
delay or prevent timely or appropriate payment of claims, could have a material
impact on the Company's cash flow from operations. The Company is monitoring the
Y2K progress of its payors to determine the potential impact to the Company.
The financial institutions with whom the Company has its material
relationships have represented to the Company that their Y2K compliance programs
are substantially under way with final testing to be completed in the first half
of 1999.
25
<PAGE>
Forward Outlook and Risks
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological development, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in any of the
Company's forward- looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (a) the failure to
obtain additional borrowed and/or equity capital on favorable terms for
acquisitions and expansion; (b) adverse changes in federal and state laws, rules
and regulations relating to home health care industry, to government
reimbursement policies, to private industry reimbursement policies and to other
matters affecting the Company's industry and business; (c) the availability of
appropriate acquisition candidates and the successful completion of
acquisitions; (d) the demand for the Company's products and services; and (e)
other risks detailed in the Company's Securities and Exchange Commission
filings.
This Form 10-KSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of the Company. All statements, other than statements of
historical facts, included in this Form 10-KSB, including those regarding market
trends, the Company's financial position, business strategy, projected costs,
and plans and objectives of management for future operations, are
forward-looking statements. In general, such statements are identified by the
use of forward- looking words or phrases including, but not limited to,
"intended," "will," "should," "may," "expects," "expected," "anticipates," and
"anticipated" or the negative thereof or variations thereon or similar
terminology. These forward-looking statements are based on the Company's current
expectations. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to be correct. Because forward-looking statements
involve risks and uncertainties, the Company's actual results could differ
materially. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed hereunder and elsewhere
in this Form 10-KSB. These forward-looking statements represent the Company's
judgment as of the date of this Form 10-KSB. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements. The Company disclaims, however,
any intent or obligation to update its forward-looking statements.
High Leverage. As of September 30, 1998, the Company had total
stockholder's equity of $9.3 million and total indebtedness of $19 million.
Accordingly, the Company's balance sheet is highly leveraged. This, in turn, has
important consequences to the Company. The Company's ability to obtain
additional financing may be impaired. Additionally, a substantial portion of the
Company's cash flows from operations may be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
for operations. The Company's leverage will substantially increase the Company's
vulnerability to changes in the industry or adverse changes in the Company's
business. See "Liquidity and Capital Resources" and the Company's fiscal 1998
consolidated financial statements, included herein.
Changing Regulatory Environment. The Company's business is subject to
extensive federal, state and local regulation. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. See "Government Regulation."
26
<PAGE>
Changes in System of Medicare Reimbursement. The BBA provided for a 25%
reduction in home oxygen reimbursement from Medicare effective January 1, 1998
and a further reduction of 5% effective January 1, 1999. Compounding these
reductions was a freeze on consumer price index updates for the next five years.
Approximately 15% of the Company's net revenues were derived from reimbursement
of oxygen services prior to this reduction in reimbursement. The reduction in
oxygen reimbursement during fiscal 1998 had an adverse impact on the Company's
net revenues. The additional reduction to be effective January 1, 1999 is also
expected to adversely impact the Company's net revenues and results of
operations. Additionally, payments will be frozen for durable medical equipment,
excluding orthotic and prosthetic equipment, and payments for certain
reimbursable drugs and biologicals will be reduced. See "Reimbursement for
Services" and "Government Regulation."
Slow Reimbursements. At September 30, 1998, approximately 36% of the
Company's net revenues were derived from managed care and other non-governmental
third party payors. The increase in the length of time required to collect
receivables owed by managed care and other non-governmental third party payors
is an industry-wide issue. A continuation of the lengthening of the amount of
time required to collect accounts receivables from managed care organizations or
other payors or the Company's inability to decrease days net sales outstanding
could have a material adverse effect on the Company's financial condition or
results of operations. During fiscal 1998 the Company terminated relationships
with certain managed care organizations and is in the process of reviewing its
managed care contracts. There can be no assurance that the Company's days net
sales outstanding will not continue to increase if these payors continue to
delay or deny payments to the Company for its services. See "Reimbursement for
Services" and "Liquidity and Capital Resources."
Pricing Pressures. Medicare, Medicaid and other payors, including
managed care organizations and traditional indemnity insurers, are attempting to
control and limit increases in health care costs and, in some cases, are
decreasing reimbursement rates. While the Company's net revenues from managed
care and other non-governmental payors have increased and are expected to
continue to increase, payments per service from managed care organizations
typically have been lower than Medicare fee schedules and reimbursement from
other payors, resulting in reduced profitability on such services. Other payor
and employer groups, including Medicare, are exerting pricing pressure on home
health care providers, resulting in reduced profitability. Such pricing
pressures could have a material adverse effect on the Company's financial
condition or results of operations. During fiscal 1998 the Company terminated
relationships with certain managed care organizations and is in the process of
reviewing its managed care contracts. See "Sales and Marketing" and "Government
Regulation."
Risks Related to Goodwill. During fiscal 1997, the Company wrote-off
$750,000 of goodwill recorded in connection with certain acquisitions. See
"Non-recurring items." At September 30, 1998, after recording this writedown,
goodwill resulting from acquisitions was approximately $4.9 million, or
approximately 17.4% of total assets. Goodwill is the excess of cost over the
fair value of the net assets of businesses acquired. There can be no assurance
that the Company will ever realize the value of such goodwill. This goodwill is
being amortized on a straight-line basis over 5 to 40 years. The Company will
continue to evaluate on a regular basis whether events or circumstances have
occurred that indicate all or a portion of the carrying amount of goodwill may
no longer be recoverable, in which case an additional charge to earnings would
become necessary. Although at September 30, 1998 the net unamortized balance of
goodwill is not considered to be impaired under generally accepted accounting
principles, any such future determination requiring the write-off of a
significant portion of unamortized goodwill could have a material adverse effect
on the Company's financial condition or results of operations.
27
<PAGE>
Risks Associated with Acquisitions. While the Company completed eleven
acquisitions between fiscal 1997 and 1998, as a result of the uncertainty of the
outcome of additional legislative and regulatory changes in the system of
Medicare reimbursement, the Company has slowed its growth through acquisitions.
See "Strategy." Management believes that as a result of Medicare legislative and
regulatory changes and managed care and other competitive pressures, the home
health care industry will continue to consolidate.
When evaluating acquisitions, the Company focuses primarily on growth
within its existing geographic markets, which the Company believes is generally
more profitable than adding additional operating centers in new markets. See
"Strategy." In attempting to make acquisitions, the Company competes with other
providers, some of which have greater financial resources than the Company. In
addition, since the consideration for acquired businesses may involve cash,
notes or the issuance of shares of common stock, options or warrants, existing
stockholders may experience dilution in the value of their shares of common
stock in connection with such acquisitions. There can be no assurance that the
Company in the future will be able to negotiate, finance or integrate
acquisitions without experiencing adverse consequences that could have a
material adverse effect on the Company's financial condition or results of
operations. Acquisitions involve numerous short and long-term risks, including
loss of referral sources, diversion of management's attention, failure to retain
key personnel, loss of net revenues of the acquired companies, inability to
integrate acquisitions (particularly management information systems) without
material disruptions and unexpected expenses, the possibility of the acquired
businesses becoming subject to regulatory sanctions, potential undisclosed
liabilities and the continuing value of acquired intangible assets. There can be
no assurance that any given acquisition will be consummated, or if consummated,
will not materially adversely affect the Company's financial condition or
results of operations. Additionally, because of matters discussed herein that
may be beyond the control of the Company, there can be no assurance that
suitable acquisitions will continue to be identified or that acquisitions can be
consummated on acceptable terms.
Competition. The home medical equipment services industry is highly
competitive and includes national, regional and local providers. The Company
competes with a large number of companies in all areas in which its operations
are located. The Company's competitors include major national and regional
companies, hospital-owned companies, and numerous local providers. Some current
and potential competitors have or may obtain significantly greater financial and
marketing resources than the Company. Accordingly, other companies, including
managed care organizations, hospitals, long-term care providers and health care
providers that currently are not serving the home health care market, may become
competitors. As a result, the Company could encounter increased competition in
the future that may limit its ability to maintain or increase its market share
or otherwise materially adversely affect the Company's financial condition or
results of operations.
Regulatory Compliance. The Company is subject to extensive regulation
which govern financial and other arrangements between healthcare providers at
both the federal and state level. At the federal level, such laws include (I)
the Anti-Kickback Statute, which generally prohibits the offer, payment,
solicitation or receipt of any remuneration in return for the referral of
Medicare and Medicaid patients or the purchasing, leasing, ordering or arranging
for any good, facility services or items for which payment can be made under
Medicare and Medicaid, federal and state health care programs, (ii) the Federal
False Claims Act, which prohibits the submission for payment to the federal
government of fraudulent claims, and (iii) "Stark legislation," which generally
prohibits, with limited exceptions, the referrals of patients by a physician to
providers of "designated health services" under the Medicare and Medicaid
programs, including durable medical equipment, where the physician has a
financial relationship with the provider. Violations of these provisions may
result in civil and criminal penalties, loss of licensure and exclusion from
participation in the Medicare and Medicaid programs. Many states have also
adopted statutes and regulations which prohibit provider referrals to an entity
in which
28
<PAGE>
the provider has a financial interest, remuneration or fee-splitting
arrangements between health care providers for patient referrals and other types
of financial arrangements with health care providers. See "Government
Regulation."
The federal government, private insurers and various state enforcement
agencies have increased their scrutiny of provider business practices and
claims, particularly in the areas of home health care services and products in
an effort to identify and prosecute parties engaged in fraudulent and abusive
practices. In May 1995, the Clinton Administration instituted Operation Restore
Trust ("ORT"), a health care fraud and abuse initiative focusing on nursing
homes, home health care agencies and durable medical equipment companies. ORT,
which initially focused on companies located in California, Florida, Illinois,
New York and Texas, the states with the largest Medicare populations, has been
expanded to all fifty states. See "Government Regulation." While the Company
believes that it is in material compliance with such laws, there can be no
assurance that the practices of the Company, if reviewed, would be found to be
in full compliance with such laws or interpretations of such laws.
While the Company believes that it is in material compliance with the fraud
and abuse and self-referral laws, there can be no assurance that the practices
of the Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. Although the
Company does not believe it has violated any fraud and abuse laws, there can be
no assurance that future related legislation, either health care or budgetary,
related regulatory changes or interpretations of such regulations, will not have
a material adverse effect on the future operations of the Company.
Recent Accounting Pronouncements
The Financial Accounting Standards board has issued Statement of Financial
Accounting Standard No. 130, "Reporting comprehensive Income", Statement No.
131, "Disclosures about Segments on an Enterprise and Related Information" and
statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Statements No. 130 and No. 131 are effective for years
beginning after December 15, 1997. Statement No. 132 is effective for years
beginning after December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial statements.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Interest Home Medical, Inc. Financial Statements Page
Report of Independent Accountants ....................................31
Consolidated Balance Sheets...........................................32
September 30, 1998 and 1997
Consolidated Statements of Income.....................................34
Years ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity.......................35
Years ended September 30 , 1998 and September 30, 1997
Consolidated Statements of Cash Flows.................................36
Years ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements............................39
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Interwest Home Medical, Inc.
We have audited the accompanying consolidated balance sheet of Interwest Home
Medical, Inc. and subsidiaries, as of September 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Interwest Home Medical, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements, in 1997 the
Company adopted Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of.
TANNER+Co.
Salt Lake City, Utah
December 22, 1998
31
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 253,000 $ 901,000
Accounts receivable, net of allowance for
doubtful accounts of $1,760,000 and $593,000 10,447,000 7,215,000
Inventories 3,771,000 3,444,000
Current portion of notes receivable 243,000 251,000
Other current assets 157,000 173,000
Deferred tax asset 701,000 241,000
-----------------------------------
Total current assets 15,572,000 12,225,000
Notes receivable 374,000 196,000
Investment in undeveloped real estate 125,000 125,000
Investment in office buildings, net of depreciation
of $176,000 and $161,000 447,000 451,000
Property and equipment - net 6,745,000 5,006,000
Intangible assets, net 4,967,000 4,370,000
Other assets 151,000 168,000
-----------------------------------
$ 28,381,000 $ 22,541,000
------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C> <C>
Checks written in excess of cash in bank $ 771,000 $ 942,000
Current portion of long-term debt 3,246,000 2,188,000
Notes payable 4,491,000 3,363,000
Accounts payable 2,800,000 2,337,000
Accrued expenses 767,000 587,000
Income taxes payable 884,000 163,000
-----------------------------------
Total current liabilities 12,959,000 9,580,000
-----------------------------------
Deferred tax liability 416,000 267,000
Long-term debt 5,674,000 4,848,000
-----------------------------------
Total liabilities 19,049,000 14,695,000
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized and -0- shares issued and outstanding - -
Common stock, no par value; 50,000,000 shares
authorized, 4,089,029 shares and 4,074,249 shares
issued and outstanding 3,299,000 3,239,000
Retained earnings 6,033,000 4,607,000
-----------------------------------
Total stockholders' equity 9,332,000 7,846,000
-----------------------------------
$ 28,381,000 $ 22,541,000
-----------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years Ended September 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Revenue:
<S> <C> <C>
Net sales $ 14,492,000 $ 14,495,000
Net rental income 14,144,000 10,350,000
-----------------------------------
Total revenue 28,636,000 24,845,000
Cost of sales and rental 10,582,000 9,965,000
-----------------------------------
Gross profit 18,054,000 14,880,000
-----------------------------------
Selling, general and administrative expenses 15,253,000 13,888,000
-----------------------------------
Income from operations 2,801,000 992,000
Other income (expense):
Gain on sale of undeveloped real estate - 516,000
Interest income 206,000 101,000
Interest expense (1,046,000) (880,000)
-----------------------------------
Income before income taxes 1,961,000 729,000
Income tax benefit (expense):
Current (846,000) (233,000)
Deferred 311,000 160,000
-----------------------------------
Total income taxes (535,000) (73,000)
-----------------------------------
Net income $ 1,426,000 $ 656,000
-----------------------------------
Net income per share:
Basic $ .35 $ .17
-----------------------------------
Fully diluted $ .35 $ .17
-----------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended September 30, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-in Retained
----------------------------------------------------
Shares Amount Shares Amount Capital Earnings
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1996 300,000 $ 3,000 3,748,491 $ 2,074,000 $ 447,000 $ 3,951,000
Conversion of preferred stock
to common (300,000) (3,000) 112,500 450,000 (447,000) -
Issuance of common stock - - 213,258 715,000 - -
Net income - - - - - 656,000
------------------------------------------------------------------------------
Balance, September 30, 1997 - - 4,074,249 3,239,000 - 4,607,000
Issuance of common stock - - 14,780 60,000 - -
Net income - - - - - 1,426,000
------------------------------------------------------------------------------
Balance, September 30, 1998 - $ - 4,089,029 $ 3,299,000 $ - $ 6,033,000
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended September 30,
- -----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from operating activities:
Reconciliation of net income to net cash
provided by operating activities:
<S> <C> <C>
Net income $ 1,426,000 $ 656,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,042,000 1,496,000
Write off of impaired assets - 750,000
Loss (gain) on disposal of assets 28,000 (56,000)
Gain on sale of undeveloped real estate - (516,000)
(Increase) decrease in:
Accounts receivable (1,884,000) (1,627,000)
Inventories 164,000 (43,000)
Other current assets 16,000 (35,000)
Other assets 40,000 (28,000)
Deferred tax asset (460,000) (107,000)
Increase (decrease) in:
Accounts payable 439,000 243,000
Accrued expenses 173,000 96,000
Income taxes payable 721,000 41,000
Deferred income taxes 149,000 (53,000)
-----------------------------------
Net cash provided by
operating activities 2,854,000 817,000
-----------------------------------
Cash flows from investment activities:
Collection of notes receivable 93,000 686,000
Proceeds from sale of undeveloped real estate - 168,000
Proceeds from sale of equipment 437,000 456,000
Increase in investment in office building (11,000) -
Purchase of property and equipment (2,071,000) (1,923,000)
Purchase of intangible assets (200,000) (5,000)
-----------------------------------
Net cash used in
investing activities (1,752,000) (618,000)
-----------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- -----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from financing activities:
<S> <C> <C>
Checks written in excess of cash (171,000) 416,000
Proceeds from notes payable (12,677,000) (9,876,000)
Payments on notes payable 13,805,000 10,069,000
Proceeds from long-term debt 44,000 474,000
Net cash received in merger/acquisition - (55,000)
Payments on long-term debt (2,811,000) (1,582,000)
Issuance of common stock 60,000 715,000
-----------------------------------
Net cash (used in)
financing activities (1,750,000) 161,000
-----------------------------------
Net (decrease) increase in cash (648,000) 360,000
Cash, beginning of year 901,000 541,000
-----------------------------------
Cash, end of year $ 253,000 $ 901,000
-----------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,021,000 $ 858,000
-----------------------------------
Income taxes $ 125,000 $ 182,000
-----------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
1998
- ----
During the year ended September 30, 1998, the for Company acquired assets and
assumed certain liabilities from companies in Utah and Arizona for long-term
debt. The net assets purchased for long-term debt consist of the following:
Accounts receivable, net $ 1,348,000
Inventory 491,000
Note receivable 13,000
Property and equipment 1,548,000
Intangible assets 744,000
Other assets 23,000
Accounts payable and accrued liabilities (31,000)
-----------------
Net assets purchased with long-term debt $ 4,136,000
-----------------
The Company sold a segment of its business in Nevada to the former owner of the
business in exchange for a note receivable in the amount of $250,000.
The Company also financed the purchase of property and equipment in the amount
of $515,000 with long-term debt.
1997
- ----
During the year ended September 30, 1997, the Company acquired assets and
assumed certain liabilities from companies in Utah, California, Nevada, and
Colorado for cash and notes. The net assets purchased consisted of the
following:
Accounts receivable $ 130,000
Inventory 55,000
Property and equipment 681,000
Intangible assets 2,282,000
Debt (284,000)
-----------------
Net assets purchased 2,864,000
Less amount financed with debt 2,809,000
-----------------
Net cash investment $ 55,000
-----------------
The Company also sold property during the year ended September 30, 1997, in
exchange for other consideration and a $555,000 note receivable.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Description of Business
Interwest Home Medical Equipment, Inc., and subsidiaries ("Interwest" or the
"Company") provides a diversified range of home health care services and
products. The Company currently conducts its business from twenty-eight (28)
locations in the States of Utah, Colorado, Idaho, Nevada, California, Alaska,
and Arizona. The Company divides its products and services into three general
categories: (1) home oxygen and respiratory care services, (2) home medical
equipment and supplies, and (3) rehabilitation services.
Principles of Consolidation
The consolidated financial statements include the financial information of
Interwest Home Medical, Inc., and its wholly owned subsidiaries (Interwest
Medical Equipment Distributors, Inc., Interwest Home Pharmacy, Inc., Northwest
Home Care, Inc., and Interwest Home Medical - Arizona, Inc.). All material
intercompany transactions and balances have been eliminated in consolidation of
the companies.
Business Combination and Basis of Presentation
In July 1997, Interwest completed a merger with Northwest Home Care (Northwest)
by exchanging 465,000 shares of Interwest's restricted common stock for all of
the issued and outstanding common stock of Northwest.
The merger constituted a tax-free reorganization and has been accounted for as
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of Northwest as though it had always been a part of Interwest.
The year-end of Northwest was December 31 and, therefore, the consolidated
financial statements have been stated to present those of Interwest for the
years ended September 30, 1998 and 1997 and Northwest for the twelve months
ended September 30, 1998 and nine months ended December 31, 1997.
There were no transactions between Interwest and Northwest prior to the
combination. All merger related costs were included in a general and
administrative expense. See note 2.
- --------------------------------------------------------------------------------
39
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies Continued
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term securities purchased with a maturity of three months or less to be
cash equivalents.
Inventories
Inventories consist of medical equipment and supplies held for sale and are
stated at the lower of average cost (FIFO basis) or market.
Investments in Undeveloped Real Estate
Investments in undeveloped real estate are recorded at the lower of cost or
market. When it is determined that future estimated cash flows are lower than
recorded values for long-term investments, these investments are written down to
estimated net fair market value and the amount of the write-down is accounted
for as a current period loss.
Investment in real estate consists of one parcel of undeveloped land and a
house. The parcel of undeveloped land is located in the state of Utah in Utah
County.
Property and Equipment
Property and equipment, consisting of rental equipment, equipment, furniture and
fixtures, vehicles and leasehold improvements, is stated at historical cost.
Depreciation and amortization is computed using the straight-line method over
estimated useful lives or the term of the lease agreement.
Intangible Assets
Intangible assets, consisting of purchased customer lists, supplier lists,
non-competition agreements and goodwill are stated at cost. The Company
evaluates goodwill and other intangible assets by using an operating income
realization test. In addition, the Company considers the effects of changes in
the business environment, including competitive pressures, market changes, and
technological and regulatory changes. Amortization is computed using the
straight-line method over five to forty years, or the term of the agreement.
Income Taxes
The Company accounts for income taxes under the provision of SFAS 109
"Accounting for Income Taxes." This method requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between tax bases and financial reporting bases of other assets and
liabilities.
- --------------------------------------------------------------------------------
40
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies Continued
Revenue Recognition
Revenues are recognized for as follows:
- - Patient revenues are recognized net of contractual adjustments related to
third party payers when services are rendered. The amount paid by third
party payor is dependent upon the benefits included in the patient's
policy.
- - Other revenues are recognized as the services are rendered or the sales are
made.
Net Income Per Share
Net income per share is based on weighted average shares outstanding of
approximately 4,085,000 and 3,961,000 shares for the years ended September 30,
1998 and 1997, respectively. There is no difference on earnings per share on a
fully diluted basis under the Treasury Stock method.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of individuals in the Western
United States. Substantially all revenues are from these customers. Accounts
receivable include those of the individuals and their third party payors,
including insurance companies, Medicare, and Medicaid.
Use of Estimates in the preparation of Financial Statements
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.
Reclassification
Certain amounts in the financial statements for 1997 have been reclassified to
conform with the current year presentation.
- --------------------------------------------------------------------------------
41
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Acquisitions
During the year ended September 30, 1998 the Company acquired five companies
which were accounted for as purchases and, accordingly, are included in the
consolidated financial statements since their respective dates of acquisition.
The aggregate purchase price of $4,385,000, which was financed through cash
resources and long-term debt, has been allocated to the assets of the Company
based upon their respective fair market values. The excess of the purchase price
over assets acquired of $944,000 has been included in goodwill and is being
amortized over periods of ten to forty years.
During the year ended September 30, 1997 the Company acquired five companies
which were accounted for as purchases and, accordingly, are included in the
consolidated financial statements since their respective dates of acquisition.
The aggregate purchase price of $2,864,000, which was financed through cash
resources and long-term debt, has been allocated to the assets of the Company
based upon their respective fair market values. The excess of the purchase price
over assets acquired of $2,282,000 has been included in goodwill and is being
amortized over periods of five to forty years.
The following unaudited pro forma consolidated results of operations have been
prepared as if the 1998 and 1997 acquisitions had occurred at the beginning of
fiscal 1997:
Pro Forma Results of
Operations
-----------------------------------
1998 1997
-----------------------------------
Total revenue $ 32,209,000 $ 34,069,000
Total expenses $ 30,597,000 $ 32,924,000
-----------------------------------
Net income $ 1,612,000 $ 1,145,000
-----------------------------------
Net income per share $ 0.39 $ 0.29
-----------------------------------
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
- --------------------------------------------------------------------------------
42
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Pooling of Interests
In July 1997, the Company completed a merger with Northwest, which has been
accounted for as a pooling of interest. The results of operations for the
separate companies of Interwest and Northwest for the year ended September 30,
1997 and the combined accounts presented in the consolidated financial
statements are as follows:
Interwest Northwest Combined
-------------------------------------------------
Total Revenue 1997
Year ended
September 30, 1997 $ 23,201,000 $ - $ 23,201,000
Nine months ended
September 30, 1997 - 1,644,000 1,644,000
-------------------------------------------------
Total $ 23,201,000 $ 1,644,000 $ 24,845,000
-------------------------------------------------
Interwest Northwest Combined
-------------------------------------------------
Net Income 1997
Year ended
September 30, 1997 $ 593,000 $ - $ 593,000
Nine months ended
September 30, 1997 - 63,000 63,000
-------------------------------------------------
Total $ 593,000 $ 63,000 $ 656,000
-------------------------------------------------
4. Notes Receivable
Notes receivable consist of the following at September 30, 1998 and 1997:
1998 1997
-----------------------------------
Notes receivable in connection
with the sale of a segment of the
business due in monthly
installments of $5,633, including
interest at 8.5%. The note is due
in October 2002 and is unsecured $ 231,000 $ -
- --------------------------------------------------------------------------------
43
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Notes Receivable Continued
Mortgage receivable, due in
monthly installments of $1,765,
including interest at 9.5%,
maturing March 1, 2000, secured
by apartment building 194,000 199,000
Note receivable in connection with
the sale of property. The note was
due in March 1997, including
interest of 9%, and is secured by
real estate. The Company is
currently pursuing legal remedies
to collect the outstanding amount 179,000 248,000
Note receivable acquired in
connection with the purchase of
another company, due in 1998 13,000 -
-----------------------------------
617,000 447,000
Less current portion 243,000 251,000
-----------------------------------
$ 374,000 $ 196,000
-----------------------------------
- --------------------------------------------------------------------------------
44
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Property and Equipment
Property and equipment at September 30, 1998 and 1997 consist of the following:
Life 1998 1997
---------------------------------------------
Rental equipment 3-10 years $ 10,514,000 $ 7,681,000
Equipment and signs 3-10 years 1,095,000 838,000
Furniture and fixtures 3-10 years 412,000 454,000
Vehicles 2-5 years 636,000 700,000
Leasehold improvements 3-5 years 501,000 245,000
-------------------------------
13,158,000 9,918,000
Less accumulated
depreciation and
amortization 6,413,000 4,912,000
-------------------------------
$ 6,745,000 $ 5,006,000
-------------------------------
6. Intangible Assets
Intangible assets at September 30, 1998 and 1997 consist of the following:
Life 1998 1997
--------------------------------------------
Goodwill 5-40 years $ 4,958,000 $ 4,204,000
Noncompete agreements 5-7 years 399,000 399,000
Other 5 years 30,000 30,000
-----------------------------
5,387,000 4,633,000
Less accumulated
amortization 420,000 263,000
-----------------------------
$ 4,967,000 $ 4,370,000
-----------------------------
During the year ended September 30, 1997, the Company wrote down $750,000 of
goodwill (see note 18).
- --------------------------------------------------------------------------------
45
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Notes Payable
Notes payable at September 30, 1998 and 1997, consist of the following:
1998 1997
-----------------------------------
Line of credit in the amount of
$4,350,000 payable to a financial
institution due February 12, 1999;
with interest payments at the
bank's prime rate (8.25% at
September 30, 1998) minus 0.50%
payable quarterly, secured by
accounts receivable and inventory $ 3,691,000 $ 2,764,000
Line of credit in the amount of
$1,000,000 payable to a financial
institution due August 30, 1999,
with interest at prime (8.25% at
September 30, 1998) minus 0.50%
payable quarterly; secured by
accounts receivable and inventory 800,000 599,000
-----------------------------------
$ 4,491,000 $ 3,363,000
-----------------------------------
8. Long-term Debt
Long-term debt at September 30, 1998 and 1997, consist of the following:
1998 1997
---------------------------------
Notes payable to a bank requiring
aggregate monthly payments of
$183,558 including interest at a rate
of 8.0% to prime (8.25% at
September 30, 1998) plus 1.25%,
secured by accounts receivable,
inventory and equipment $ 6,388,000 $ 3,696,000
- --------------------------------------------------------------------------------
46
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Long-term Debt Continued
1998 1997
--------------------------------
Notes payable in connection with the
acquisition of companies requiring
aggregate monthly payments of
$35,827 including interest at rates of
8% to 9%, unsecured 894,000 990,000
Note payable to an individual in
connection with the acquisition of a
company requiring annual payments
of $200,000 plus interest at a rate of
8%, secured by property and
equipment. This amount is currently
in dispute by the Company 600,000 600,000
Notes payable requiring aggregate
monthly payments of $21,741
including interest at prime (8.25% at
September 30, 1998) plus 1.25% to
13%, secured by equipment 367,000 613,000
Installment contracts payable in
aggregate monthly installments
totaling $4,195 including interest
ranging from prime (8.25% at
September 30, 1998) to 10.99%,
secured by vehicles 78,000 117,000
- --------------------------------------------------------------------------------
47
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Long-term Debt Continued
1998 1997
-------------------------------
Notes payable to a financial institution,
payable aggregate monthly
installments of $33,590 including
interest at 8.25% to 15.5%, secured by
certain pieces of property and
equipment - 497,000
Capital lease obligations (see note 10) 593,000 523,000
-------------------------------
8,920,000 7,036,000
Less current portion 3,246,000 2,188,000
-------------------------------
Long-term debt $ 5,674,000 $ 4,848,000
-------------------------------
Future maturities of long-term debt at September 30, 1998 were as follows:
Year ending September 30:
1999 $ 3,246,000
2000 2,291,000
2001 1,890,000
2002 1,126,000
2003 367,000
-----------------
$ 8,920,000
-----------------
- --------------------------------------------------------------------------------
48
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Income Taxes
The provisions for income taxes differ from the amount computed at federal
statutory rates as follows:
1998 1997
-----------------------------------
Tax at statutory rates $ (667,000)$ (248,000)
State tax (117,000) (45,000)
Change in valuation allowance 279,000 221,000
Other (30,000) (1,000)
-----------------------------------
$ (535,000)$ (73,000)
-----------------------------------
The deferred income tax benefit (liability) for the years ended September 30,
1998 and 1997 is as follows:
1998 1997
-----------------------------------
Short-term:
Allowance for bad debts $ 669,000 $ 237,000
Employee benefits 56,000 45,000
Deferred gain (43,000) (62,000)
Accrued expenses 19,000 21,000
-----------------------------------
Deferred tax asset $ 701,000 $ 241,000
-----------------------------------
1998 1997
----------------------------------
Long-term:
Depreciation $ (416,000)$ (267,000)
Net operating loss carryforward 603,000 882,000
Valuation allowance (603,000) (882,000)
----------------------------------
Deferred tax liability $ (416,000)$ (267,000)
----------------------------------
At September 30, 1998, the Company has approximately $1,600,000 of net operating
losses to use to offset future income. These net operating losses expire in the
years 1999 through 2009. If certain substantial changes in the Company's
ownership should occur, there would be an annual limitation of the amount of net
operating loss carryforwards which could be utilized.
- --------------------------------------------------------------------------------
49
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Income Taxes Continued
It is not possible to estimate the utilization of carrying forward the available
net operating losses to future periods to offset income. The amount of the net
operating losses which can be used are limited by the future operations and the
tax laws in effect at the time of the utilization. Consequently, a valuation
allowance has been established to offset any tax asset.
10. Lease Obligations
The Company leases certain equipment under terms accounted for as capital
leases. The Company also leases small equipment under noncancellable operating
leases. At September 30, 1998 and 1997, the total cost of all assets currently
under capital lease is $969,000 and $623,000, respectively. Accumulated
depreciation at that date amounted to $351,000 and $110,000, respectively. The
following summarizes future minimum lease payments under leases at September 30,
1998:
Operating Capital
Year Ending September 30: Leases Leases
----------------------------------
1999 $ 839,000 $ 336,000
2000 688,000 286,000
2001 519,000 47,000
2002 351,000 -
2003 and
thereafter 1,327,000 -
----------------------------------
$ 3,724,000 669,000
-----------------
Less amounts representing interest 76,000
-----------------
Present value of future minimum
lease payments $ 593,000
-----------------
Total rent expense for operating leases was approximately $925,000 and $827,000
for the years ended September 30, 1998, and 1997, respectively.
- --------------------------------------------------------------------------------
50
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at September
30, 1998 and 1997, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable
judgement is necessarily required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
12. 401(K) Savings Plan
The Company has a contributory 401(K) savings plan covering all employees who
are at least 21 years of age, work at least 1,000 hours per year, and have a
minimum of one year of service to the Company. All contributions by the Company
are fully discretionary. The Company made contributions of $50,000 and $-0- in
1998 and 1997, respectively.
13. Stock Options and Warrants Employee Options
In February 1995, the Company adopted a stock option plan. Under the plan, stock
options aggregating 312,500 shares of common stock may be granted to employees
and other persons to purchase the Company's common stock. No individual may be
granted stock options exceeding $100,000 fair market value in any one year. The
stock options vest at varying rates, are exercisable within the time or upon the
events determined by the option agreement and terminate after five years from
the date of grant for stockholders owing more than 10 percent of all classes of
stock and after 10 years for all others. At September 30, 1998, options to
purchase 223,750 shares remain unexercised under this agreement.
- --------------------------------------------------------------------------------
51
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants Continued
Director Options
In February 1995, the Company adopted a stock option plan. Under the plan, stock
options aggregating 75,000 shares of common stock may be granted to non-employee
directors to purchase the Company's common stock. No individual may be granted
more than one stock option per year, nor more than 11,000 shares on the exercise
of all options granted pursuant to this agreement. The stock options are
exercisable within six months after the grant date and terminate after five
years from the date of grant. At September 30, 1998, options to purchase 24,500
shares remained unexercised under this agreement.
On September 30, 1997, the Company entered into an option agreement with each of
its outside Directors. The terms of the agreements provide the Directors the
right to purchase, pursuant to options and warrants, up to an aggregate of
198,000 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If each Director elected to exercise his rights in full, the total
proceeds to the Company would be approximately $1.02 to $1.12 million. On
October 10, 1997, each Director paid a $1,000 option fee providing each Director
the right to exercise options to purchase 8,250 shares of common stock at a
price of $4.28 within 180 days. During the year ended September 30, 1998, the
Directors exercised options by paying approximately $60,000 in exchange for
13,984 shares of the Company common stock and issuance of warrants for 13, 984
shares of common stock exercisable for three years at $4.28 during the first
warrant year, $4.75 during the second year, and $5.25 during the third warrant
year. As of September 30, 1998, all of the terms of this options agreement had
expired without any further exercise.
In addition, the Company has issued options to purchase an aggregate of 120,000
shares to three board members. The options are exercisable beginning one year
after issuance and terminated five years from the date of grant. As of September
30, 1998, none of the options were exercised.
- --------------------------------------------------------------------------------
52
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants Continued
Other
During November 1996, the Company entered into an agreement with several
investors to sell up to 1,170,714 shares of the Company's common stock for
prices ranging from $4.28 to $7.00 per share. During 1997 the Company issued
162,266 shares of common stock plus warrants for an additional 162,266 shares of
common stock exercisable for 3 years at yearly prices of $4.28 in the first
year, to $5.25 in year three. No warrants had been exercised and the agreement
is terminated as of September 30, 1998
A schedule of the options and warrants at September 30, 1998 and 1997 is as
follows:
Number of Price Per
--------------------------------
Options Warrants Share
------------------------------------------------
Outstanding at
October 1, 1996 18,000 - $ 4.00 - 5.52
Granted 362,266 162,266 .40 - 4.75
Exercised (213,258) - .40 - 4.28
Expired (54,024) - 3.00 - 4.75
------------------------------------------------
Outstanding at
September 30, 1997 274,984 162,266 4.00 - 5.52
Granted 192,266 13,984 3.00 - 4.28
Exercised (13,984) - 4.00 - 4.28
Expired (85,016) - 4.00 - 4.28
------------------------------------------------
Outstanding at
September 30, 1998 368,250 176,250 $ 3.00 - 5.25
------------------------------------------------
- --------------------------------------------------------------------------------
53
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock-Based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1998 and 1997
consistent with the provisions of FAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
September 30,
------------------------------------
1998 1997
------------------------------------
Net Income - as reported $ 1,426,000 $ 656,000
Net Income - pro forma $ 1,301,000 $ 483,000
Earnings per share - as reported $ .35 $ .17
Earnings per share - pro forma $ .32 $ .13
------------------------------------
The fair value of each option grant is estimated in the date of grant using the
Black-Scholes option pricing model with the following assumptions:
September 30,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 42 % 42 %
Risk-free interest rate 4.4% 4.5%
Expected life of options 1-5 years 1-5 years
-----------------------------------
The weighted average fair value of options granted during 1998 and 1997 are
$1.44 per share and $1.48 per share, respectively.
- --------------------------------------------------------------------------------
54
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock-Based Compensation Continued
The following table summarizes information about fixed stock options outstanding
at September 30, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 9/30/98 (Years) Price 9/30/98 Price
- --------------------------------------------------------------------------------
$ 3.00 to 4.28 362,734 3.0 $ 3.75 210,234 $ 3.93
4.75 to 5.52 181,766 1.6 4.81 181,766 4.81
- --------------------------------------------------------------------------------
$ 3.00 to 5.52 544,500 2.5 $ 4.10 392,000 $ 4.34
- --------------------------------------------------------------------------------
15. Employee Stock Purchase Plan
During the year ended September 30, 1996, the Company adopted a Stock Purchase
Plan (the "Plan"). The Plan is designed to provide employees of the Company with
an opportunity to purchase shares of the Company's common stock through
accumulated payroll deductions. The purchase price may be established at 85% of
the fair market price. The number of shares which may be purchased under the
Plan is 500,000. At September 30, 1998 and 1997, 16,751 shares and 6,031 shares,
respectively, of common stock had been cumulatively purchased under the plan.
16. Commitments and Contingencies
In October 1991, an officer of the Company retired and a trust was created which
purchased 429,544 shares of the Company's common stock from the officer. In
exchange for the stock, a note was entered into between the trust and the
retired officer in the principal amount of $305,000. The note requires monthly
payments over ten years of $4,000, including principal and interest at an annual
rate of 8 percent. Certain employees of the Company have entered into an
agreement to purchase the shares of stock from the trust under similar terms. At
the employees' option, shares can be issued as they are purchased. The Company
has guaranteed the collectibility of amounts due the trust by the employees. The
outstanding balance of the note was $121,000 at September 30, 1998.
- --------------------------------------------------------------------------------
55
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments and Contingencies Continued
Litigation
The Company is a party to litigation resulting from one of its acquisitions and
from normal operations. The litigation relating to one of its acquisitions
revolves around breach of contract, breach of the asset purchase agreement and
default on a promissory note.
The Company believes it has meritous defenses and has filed counter claims to
the litigation. Although the trials have not taken place and, therefore, a final
determination is not known, the Company believes that there will be no material
effect on the financial condition of the Company.
Government Regulation
The health care industry, in which the Company operates, is regulated by Federal
and State government authorities, and has been the subject of certain scrutiny
in recent years. Specifically, a significant amount of accounts receivable is
collected from Federal Medicare and State Medicaid programs. The Company is also
subject to Medicare and Medicaid rate adjustments on services provided.
Beginning January 1, 1998, Medicare reduced its oxygen reimbursement rate by
25%. An additional 5% reduction is effective January 1, 1999. Management has
taken what it believes to be appropriate steps to mitigate any financial impact
on the Company's financial condition related to the changes and regulations of
the health care industry.
17. Preferred Stock
Preferred stock has voting rights of one vote for one share. The preferred stock
is convertible at the option of the holder into common stock based upon the
trading value of the common stock. The conversion rate varies from one share for
one share up to receiving three shares of common stock for one share of common
stock.
During the year ended September 30, 1997, the holder of the preferred stock
converted the 300,000 shares of preferred stock to 112,500 shares of common
stock. The conversion was made under terms of the preferred stock. As of
September 30, 1998 and 1997 there were no shares of preferred stock issued or
outstanding.
- --------------------------------------------------------------------------------
56
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Adoption of Accounting Change
In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 121 - "Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of FAS 121." This statement requires that
long-lived assets and certain intangibles held and used by an entity to be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When such events or
changes in circumstances indicate as asset may not be recoverable, a company
must estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of such expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is required to be recognized in an amount by which
the asset's net book value exceeds its fair market value. For purposes of
assessing impairment under this standard, assets are required to be grouped at
the lowest level for which there are separately identifiable cash flows.
To comply with the new standard, the Company identified all long-lived assets
where there has been, or there is expected to be, a change in use in the recent
past or foreseeable future which could affect the recoverability of such
long-lived assets and intangible assets.
The Company has determined that impairment exists for goodwill recorded as part
of certain acquisitions. That impairment in the value is primarily due to an
alleged breach of certain noncompete agreements, anticipation of a 30% (25% in
1998 and 5% in 1999) reduction in Medicare oxygen reimbursement, and less than
anticipated results from certain acquired operations. In evaluating the recovery
values of these assets in accordance with the adoption of FAS 121, the Company
recorded a pretax charge of $750,000. The charge is reflected as a reduction of
the net carrying value of goodwill and those long-term assets acquired in the
acquisitions.
19. Sale of Undeveloped Real Estate
During the year ended September 30, 1997, the Company sold a portion of its
investment in undeveloped real estate with a book value of $218,000. The
proceeds from the sale of $780,000 was received in the form of cash of $225,000
and a note receivable for $555,000, which was fully satisfied by the end of the
fiscal year. The resulting gain on the sale, net of selling expenses, was
$516,000.
- --------------------------------------------------------------------------------
57
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
20. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive
Income", Statement No. 131, "Disclosures about Segments on an
Enterprise and Related Information" and Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits."
Statements No. 130 and No. 131 are effective for years beginning after
December 15, 1997. Statement No. 132 is effective for years beginning
after December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial
statements.
- --------------------------------------------------------------------------------
58
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The current
directors and officers of the Company, who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
Name Age Position
James E. Robinson 47 CEO /President/Chairman
James U. Jensen 54 Director
Dr. Jeffrey F. Poore 50 Director
Jerald L. Nelson 56 Director
Que H. Christensen 43 COO/Vice President
Serena Falgoust 51 Secretary
James E. Robinson. Mr. Robinson has been president and a director of the
Company since February 1995. Mr. Robinson has been President (CEO) and Chairman
of the Board of Interwest Medical Equipment Distributors, Inc. since October
1982. He also acted as Treasurer until 1990. Mr. Robinson graduated from Brigham
Young University with a Master of Accountancy degree in 1975. He worked until
July 1977 with Haskins & Sells at which time he joined Robinson's Medical Mart
(a predecessor company to Interwest Medical) as its Vice President and
Treasurer. Mr. Robinson was elected to the Board of Directors of the National
Association of Medical Equipment Suppliers (NAMES) in 1984 where he served as
Treasurer from 1986 until 1990, Chair from 1990 to 1991, Immediate Past-Chairman
from 1991 to 1992, and continues as an "Ex-Officer" Board member. He was also
elected to the Board of Directors of Medical Equipment Distributors, Inc. (The
MED Group) in 1985 and served as its Chair from 1988 until 1992. Mr. Robinson
has been active in many local, regional, and national organizations which
represent individuals with disabilities. He is currently serving as the Chair of
the Utah Assistive Technology Foundation (UATF).
James U. Jensen. Mr. Jensen has been a director of the Company since
February 1995. Mr. Jensen has been Vice President, Corporate Development and
Legal Affairs for NPS Pharmaceuticals, Inc. since July 1991. He was Secretary
and a director of Interwest Medical Equipment Distributors, Inc. from 1987 to
1995. From 1988 to July 1991 Mr. Jensen was a partner in the law firm of
Woodbury, Jensen, Kesler & Swinton, P.C. concentrating on technology transfer
and licensing and corporate finance. From 1983 until July 1985 he served as
outside general counsel for a software company. From July 1985 to October 1986
he served as it's Chief Financial Officer. From 1980 to 1983 Mr. Jensen served
as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of
Pitney Bowes, Inc. He serves as a director of NPS Pharmaceuticals, Inc., a
public company and of Wasatch Advisors Funds, Inc., a publicly registered
investment company. Mr. Jensen received
59
<PAGE>
a B.A. in English/Linguistics from the University of Utah and a J.D. and an
M.B.A. degree from Columbia University.
Jeffrey F. Poore D.D.S. Dr. Poore has been a director of the Company since
February 1995. Presently, Dr. Poore is a court appointed receiver and custodian
over several companies. Dr. Poore was previously President, CEO, and Chairman of
the Board of Healthchair Group, Inc. He served as President of CompHealth from
1995 through 1996. He is also a 20-year veteran of the health care industry and
an early champion of the concept of managed care. Prior to joining CompHealth,
he coordinated mergers, acquisitions and development in the office of the CEO at
FHP International, Inc., a health maintenance organization. During his tenure at
FHP he also directed staff in the organization's operational finance, financial
services, marketing, sales, medical, PPO/IPA, and contracting divisions. He also
has experience as a health care lobbyist and provider. He was in private dental
practice for many years. He earned his DDS from Loyola Medical Center in 1976,
and a BA in Economics from Brigham Young University in 1971.
Jerald L. Nelson Ph.D. Dr. Nelson served as a director of the Company from
April 1990 to February 1995, and was reappointed a director in August, 1995. In
1997, he was instrumental in starting a long distance phone company, Family
Telecommunications, Inc., which was recently sold to I-Link, Inc., a Utah based,
publicly traded telecommunications firm where he serves as Vice President -
Corporate Development. He graduated from the University of Utah with a B.A. in
business and holds a Ph.D. in Economics from North Carolina State University.
Dr. Nelson has over twenty-five years of experience as an economist, business
executive and financial analyst. His career began in 1972 in NYC with TWA. Later
he advised Fortune 500 firms as a consultant with Date Resources, Inc. and then
directed planning efforts at U.S. Industries, Inc. He has served on numerous
Boards of Directors including Arrow Dynamics, Gentner Communications and
One-2-One Communications, where he also served as Chairman and CEO.
Que H. Christensen, CPA. Mr. Christensen was appointed an officer of the
Company in February 1995. Mr. Christensen joined Interwest Medical Equipment
Distributors, Inc. as the controller in October 1990. He has been an officer and
director of Interwest Medical Equipment Distributors, Inc. since October 1991.
From 1980 to 1988 he worked as a CPA for Main Hurdman and KPMG Peat Marwick.
From 1988 to 1990 he was vice president of a Utah based financial institution.
Mr. Christensen graduated from the University of Utah with a Bachelor of Science
degree in Accounting in 1980.
Serena J. Falgoust. Mrs. Falgoust was appointed Secretary of the Company in
January 1998. Mrs. Falgoust has been involved with the Company since the
organization of Beacon Financial in 1983 and previously served as
Secretary/Treasurer from 1984 to 1990 and from 1993 to 1995.. She is a graduate
of Utah Valley State College with a degree in Business Management and has worked
in the business of credit and collection management since 1973.
B. Significant Employees. None
C. Family Relationships. There are no family relationships among the
Company's officers and directors.
60
<PAGE>
D. Other Involvement in Certain Legal Proceedings. There have been no
events under any bankruptcy act, no criminal proceedings and no judgments or
injunctions material to the evaluation of the ability and integrity of any
director or executive officer during the last five years.
E. Compliance With Section 16(a). Section 16 of the Securities Exchange
Act of 1934 requires the filing of reports for sales of the Company's common
stock made by officers, directors and 10% or greater shareholders. A Form 4 must
be filed within ten days after the end of the calendar month in which a sale or
purchase occurred. Based upon the review of the Form 4's filed with the Company,
no disclosure is required relating late filings.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Commissions Restrict
and Other Annual Stock Options/
Bonuses Compensation Awards SAR's
Name and Principal Year Salary ($) ($) ($) (#)
Position -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James E. Robinson 1998 $150,000 $36,735 (2) -0- -0-
President/CEO 1997 $150,000 $15,750 (2) -0- 50,000(1)
1996 $150,000 $16,875 (2) -0- -0-
1995 $135,000 $12,273 (2) -0- 62,500(1)
Que H. Christensen
Vice President/COO(3) 1998 $ 95,000 $23,265 (2) -0- -0-
1997 $ 95,000 $ 9,975 (2) -0- 25,000(1)
1996 $ 95,000 $10,688 (2) -0- -0-
1995 $ 90,000 $ 8,188 (2) -0- 31,250(1)
</TABLE>
(1) These Options were granted under the Company's 1995 Employee
Stock Option Plan. No SAR's have been granted by the Company.
(2) Does not include the value of perquisites provided to certain
executive officers which in the aggregate did not exceed the lesser of
$50,000 or 10% of such officer's salary and bonus.
(3) In December 1997, Mr. Christensen was promoted to Vice President and
Chief Operating Officer (COO) from Chief Financial Officer.
Stock Options
There were no options granted during fiscal 1998 to the named executive
officers. The following table sets forth certain information concerning stock
options granted during fiscal 1997 to the named executive officers.
61
<PAGE>
Options Grants in the Year Ended September 30, 1997
<TABLE>
<CAPTION>
Percentage
Number of of Total Exercise or
Securities Options Granted to Base Price
Underlying Employees in Per Share Expiration
Name Options Granted (#) Fiscal Year ($) Date
<S> <C> <C> <C> <C>
James E. Robinson 50,000(1) 60% $3.25 6/30/2002
Que H. Christensen 25,000(1) 30% $3.25 6/30/2002
</TABLE>
(1) Consists of stock options granted on July 1, 1997, under the
Company's 1995 Employee Stock Option Plan. The options vest
1/3 on 7/1/98, 1/3 on 7/1/99, and 1/3 on 7/1/00. All options
vest immediately if the Company is acquired.
The following table sets forth information concerning the number and value
of options held at September 30, 1998 by each of the named executive officers.
No options held by such executive officers were exercised during 1998.
Option Values at September 30, 1998
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
September 30, 1998(#) At September 30, 1998($)(1)
-----------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
James E. Robinson 62,500 (2) -0- $15,625 (2) -0-
16,667 33,333 -0- -0-
Que H. Christensen 31,250 (2) -0- $ 7,183 (2) -0-
8,333 16,667 -0- -0-
(1) An "In-the-Money" stock option is an option for which the
market price of the Company's common stock underlying the
option on September 30, 1998 exceed the option price. The
value shown represents stock price appreciation since the date
of grant. The market price was based upon the closing price of
the Company's common stock on the NASD SmallCap Market on
September 30, 1998. The price per share was $2.75.
(2) This stock option was granted at an exercise price of $4.00
per share and was repriced by the Board of Directors on
October 22, 1998 to an exercise price of $2.50 per share which
was the closing price of the Company's common stock on the
NASD SmallCap Market on that date. The values shown are
calculated at the adjusted exercise price.
1995 Employee Stock Purchase Plan
On November 6, 1995, the Company's Board of Directors adopted the
Company's 1995 Stock Purchase Plan (the "Plan"). The Plan is designed to provide
employees of the Company with an opportunity to purchase shares of the Company's
common stock through accumulated payroll deductions. The purchase price may be
established at 85% of the fair market price. The number of shares which may be
purchased under the Plan is 500,000. At December 15, 1998, 16,751 shares of
common stock had been purchased under the plan.
1995 Employee Stock Option Plan
On February 24, 1995, the Company's Board of Directors adopted the
Company's 1995 Stock Option Plan (the "Plan") which provides for the issuance of
a maximum 312,500 shares of
62
<PAGE>
common stock pursuant to the exercise of options granted under the Plan. The
Options granted under the Plan may be Incentive Stock Options pursuant to
Section 422 of the Internal Revenue Code of 1986 ("ISO's") or Non-Qualified
Stock Options ("NSO's"). The Plan is administered by the Board of Directors'
Compensation Committee. The Option price and terms is to be set for each Option
by the Committee administering the Plan. NSO options granted under the Plan may
have a term not exceeding ten years. ISO options granted under the Plan may have
a term not exceeding five years. The Committee may grant options to employees
(including officers and directors, or consultants. Options to purchase 250,000
shares of stock have been granted and options to purchase 223,750 shares of
stock were outstanding as of September 30, 1998.
Compensation of Directors
The Company's non-employee directors are paid $500 for each Board of
Directors meeting attended and $400 for each Committee Meeting attended. On
February 24, 1995, the Company adopted, and the shareholders approved at the
Annual Meeting on February 16, 1996, the 1995 Non- Employee Director's Stock
Option Plan. The Plan provides that each non-employee director who was a
director as of February 24, 1995, or who became a director thereafter, was and
will be issued an option to purchase 5,000 shares of the Company's common stock
at $4.00 per share. Additionally, each non-employee director is automatically
granted an option to purchase 1,500 shares at market prices on April 1st of each
year commencing April 1, 1997. As of April 1, 1997, the annual grant was
terminated and each non-employee director was granted an option to purchase
40,000 shares at $4.00 per share with one-third of the shares vesting at March
31, 1998 and each additional one-third vesting in the two subsequent years. No
initial options granted by the Company under this plan in 1995 may be exercised
until the Company achieves cumulative before-tax income of $1,500,000,
commencing February 22, 1995.
Employment Agreements
The Company is currently a party to the following Employment Agreements:
James E. Robinson. On May 3, 1995, the Company entered into an Employment
Agreement with its President/CEO, James E. Robinson. The Agreement replaced and
superseded a previously executed agreement. The Agreement may be terminated by
the Company without notice and without cause. The Agreement may be terminated by
Mr. Robinson upon thirty day written notice. The Agreement provides for a base
annual salary of $150,000 and incentive salary based upon pre-tax profits,
revenue growth and acquisition incentives. The Agreement contains a 12 month
non-competition restriction following termination and provisions relating to
death and disability during the term of employment. The Company is obligated to
compensate Mr. Robinson for 120 days past termination in the event the Company
terminates the agreement. The Compensation Committee of the Board of Directors
amended the annual base salary to $175,000 effective October 1, 1998.
Que H. Christensen. On May 3, 1995, the Company entered into an Employment
Agreement with its Chief Financial Officer, Que H.. Christensen. The Agreement
replaced and superseded a previously executed agreement. The Agreement may be
terminated by the Company without notice and without cause. The Agreement may be
terminated by Mr. Christensen upon thirty day written notice. The Agreement
provides for a base annual salary of $95,000 and incentive salary based upon
pre-tax profits, revenue growth and
63
<PAGE>
acquisition incentives. The Agreement contains a 12 month non-competition
restriction following termination and provisions relating to death and
disability during the term of employment. The Company is obligated to
compensate Mr. Christensen for 90 days past termination in the event the
Company terminates the agreement. The Compensation Committee of the Board
of Directors amended the annual base salary to $115,000 effective October
1, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock beneficially owned as of December 15, 1998 by: (i) each
officer and director of the Company; (ii) all officers and directors as a group;
and (iii) each person known by the Company to beneficially own 5 percent or more
of the outstanding shares of the Company's common stock.
Name Amount
and Address and Nature Percent
of Beneficial of Beneficial of Class(1)
Owner Ownership Ownership
James E. Robinson (2) 1,273,583 28.83%
235 East 6100 South
Salt Lake City, UT 84107
James U. Jensen(3) 145,924 2.93%
420 Chipeta Way
Salt Lake City, UT 84108
Dr. Jeffrey F. Poore(4) 44,468 .57%
4536 Abinadi Road
Salt Lake City, UT 84124
Jerald L. Nelson(5) 53,565 .78%
10242 Ashley Hills Circle
Sandy, UT 84092
Que H. Christensen(6) 157,469 3.27%
235 East 6100 South
Salt Lake City, UT 84107
Val D. Christianson(7) 331,812 7.71%
3065 S. 2850 East
Salt Lake City, UT 84107
64
<PAGE>
Charles Davis(8) 445,000 10.35%
3439 E. Tudor Road, #39
Anchorage, AK 99508
Serena J. Falgoust(9) 30,576 0.71%
1620 N. 1250 W.
Provo, UT 84604
I-Med Shareholders(10) 309,094 7.19%
Share Purchase Trust
235 East 6100 South
Salt Lake City, UT 84107
All Officers and Directors 1,595,585 37.10%
as a Group (6 Persons)
Unless otherwise indicated in the footnotes below, the Company has been
advised that each person above has sole voting power over the shares indicated
above. All of the individuals listed above are officers and directors of the
Company.
(1) As of December 15, 1998, there were 4,089,029 shares of the Company's
common stock issued and outstanding. There are also outstanding
exercisable options and warrants to purchase 212,234 shares of the
Company's common stock which are owned by officers and directors.
Therefore, for purposes of the above set forth chart, 4,301,263 shares are
deemed to be issued and outstanding in accordance with Rule 13d-3 adopted
by the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended. This amount does not include options owned by
officers and directors which are not currently exercisable.
(2) Includes (I) 22,500 shares owned of record by the five children of Mr.
Robinson (4,500 shares each); (ii) 892,798 shares owned by J&J Medical
Investments, Ltd., (iii) 279,118 shares owned of record by Mr. Robinson
and (iv) 79,167 shares which may be acquired by Mr. Robinson pursuant to
stock options which are currently exercisable.
(3) Includes (I) 88,538 shares owned of record by Mr. Jensen of which
55,992 shares were purchased through the exercise of stock options; (ii)
25,886 shares which are beneficially owned through the I-Med Shareholder
Share Purchase Trust; and 31,500 shares which may be issued pursuant to
other stock options and warrants which are currently exercisable.
(4) Includes 9,484 shares owned of record by Dr. Poore of which 8,484
shares were purchased through the exercise of stock options and 34,984
shares which may be acquired pursuant to stock options and warrants which
are currently exercisable.
(5) Includes (I) 500 shares which are owned of record by Mr. Nelson which
were purchased through the exercise of stock options; (ii) 27,000 shares
which may be issued pursuant to stock options and warrants which are
currently exercisable; and (iii) 26,065 shares which are owned of record
by Mr. Nelson's spouse.
(6) Includes (I) 15,000 shares owned of record by Mr. Christensen; (ii)
92,886 shares which are beneficially owned through the I-Med Shareholders
Share Purchase Trust; (iii) 10,000 shares owned of record by the four
children of Mr. Christensen (2,500 shares each) and (iv) 39,583 shares
which may be acquired pursuant to stock options which are currently
exercisable.
(7) Includes (I) 54,328 shares owned of record by Mr. Christianson jointly
with his spouse; (ii) 154,099 shares which are owned of record by Mr.
Christianson jointly with his spouse and held in a brokerage account;
65
<PAGE>
(iii) 100,885 shares which are beneficially owned through the I-Med
Shareholders Share Purchase Trust; and (iv) 22,500 shares owned of record
by the four children of Mr. Christianson (2,500 shares each) .
(8) Includes 230,500 shares owned of record by Mr. Davis and 214,500
shares owned jointly with his spouse.
(9) Includes 29,385 shares owned jointly with her spouse and 1,191 shares
which are owned through the Interwest Home Medical Employee Stock Purchase
Plan.
(10) The I-Med Shareholders Share Purchase Trust was established in
October 1991 to purchase shares of Interwest Medical Equipment
Distributors, Inc. common stock from a retiring officer/employee. The
Trust's shares were exchanged for the Company's shares in connection with
a merger effected February 22, 1995. The purchase price is payable in 120
monthly payments. The purchase price for the shares is funded by Trust
participants who contribute monthly payments to purchase a pro-rata
portion of such shares. There are currently 9 persons purchasing shares
pursuant to the Trust arrangement. These persons have the right to vote
the shares attributable to their pro-rata portion of the total shares
being purchased from the Trust. It is anticipated that the Trust will
distribute shares paid for to the Trust beneficiaries from time-to-time as
requested by purchasers. Interwest Medical has guaranteed payment of the
unpaid balance of the purchase price for the shares purchased by the
Trust.
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Board of Directors Stock Option Purchase Plan
On September 30, 1997, the Company's Board of Directors adopted a
financing Plan which provides a stock purchase right and warrant purchase right
to each of its three non-employee directors (the "Holders"). The maximum number
of shares issuable under the Plan is 66,000 shares per Holder, of which up to
33,000 shares per Holder may be purchased as "Purchase Shares" and up to 33,000
shares per Holder may be purchased as "Warrant Shares". This Plan is modeled on
a similar financing arrangement earlier negotiated between the Company and third
party investors. The Plan for the non-employee directors is intended to
encourage long term investment in the Company by the non-employee directors but
is not considered by the Company as "compensation" to the non-employee
directors. The prices and terms provided are deemed fair market value because
the Plan uses substantially the same prices and terms as were previously
negotiated in good faith between the Company and third party investors.
By October 30, 1997, each of the Holders had purchased the first option
right (the "First Purchase Right") by paying the required $1,000. This purchase
of the First Purchase Right entitles each Holder to purchase up to 8,250 shares
of the Company's common stock (the "First Purchase Shares") at a price of $4.28
per share if purchased on or before April 5, 1998, when the First Purchase Right
expires. To the extent the Holder purchases shares of the First Purchase Shares
on or before December 29, 1997, however, (rather that waiting until the end of
the First Purchase Period, April 5, 1998) the Holder is then entitled to
exercise a warrant (the "First Purchase Warrant") to purchase the same number of
shares (up to 8,250 shares, the "First Warrant Shares") during the
66
<PAGE>
ensuing three year period at prices of $4.28 per share during the first year,
$4.75 in the second year, and $5.25 per First Warrant Share during the third
year.
The Plan repeats this arrangement for three additional Purchase Periods,
for a total of four such purchase periods. The following Table show the basic
content of the non-employee director financing Plan.
<TABLE>
<CAPTION>
Last Date for Last Date to Last Date
Exercise Price Shares Option Fee Obtain Warrants without Warrant Prices
Warrants
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Option 4.28 8,250 10/30/97 12/29/97 4/5/98 4.28, 4.75, 5.25
Second Option 4.78 8,250 1/28/98 Date Option Fee 6/9/98 4.78, 5.25, 5.75
paid + 90 days
Third Option 5.50 8,250 4/26/98 Date Option Fee 9/7/98 5.50, 6.00, 6.50
paid + 90 days
Fourth Option 6.00 8,250 7/25/98 Date Option Fee 12/6/98 6.00, 6.50, 7.00
paid + 90 days
</TABLE>
* Warrant prices change on the annual anniversary of the date the Option
Fee is paid.
As of September 30, 1998, Dr. Poore had purchased 8,250 shares, Dr. Nelson
had purchased 500 shares, and Mr. Jensen had purchased 5,000 shares. Each
director received warrants equal to the number of shares purchased. No other
option fees were paid and all the remaining options and warrants had terminated
as a result.
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of the Exchange
Act, are the officers and directors of the Company. For information regarding
the share holdings of the Company's officers and directors, see Item 11.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
8-K
A. The Exhibits which are filed with this Report or which are incorporated
herein by reference are set forth in the Exhibits Index which appears on
page 68.
B. The Company filed no Form 8-K during the fiscal year ended September 30,
1998.
67
<PAGE>
Exhibits to Form 10-KSB
Sequentially
Exhibit Numbered
Number Exhibit Page
- ---------- -------- --------------
2.1 Agreement and Plan of Merger - N/A
Interwest Medical Equipment Distributors, Inc.
effective February, 1995.
(Incorporated by reference to Form 8-K filed
February 1995)
2.2 Agreement and Plan of Merger - N/A
Mt Rehabilitation Services
May 1995 (Incorporated by reference
to Form 8-K dated May 1995)
3.1 Amended and Restated Articles of Incorporation* N/A
3.2 Bylaws* N/A
10.1 Form of 1995 Stock Option Plan* N/A
10.2 Form of 1995 Non-Employee Directors' Stock Option Plan* N/A
10.3. Form of 1995 Stock Purchase Plan* N/A
10.4. Employment Agreement - James E. Robinson* N/A
10.5. Employment Agreement - Val D. Christianson* N/A
10.6. Employment Agreement - Que H. Christensen* N/A
10.7. Loan Documentation* N/A
10.8 Non-employee Director Stock Option Purchase Agreement* N/A
11.1 Schedule of Weighted Average Shares 70
21.1 Subsidiaries of Registrant 71
23.1 Consent of Independent Accountant 72
*Incorporated by reference to Form 10-KSB for year ended September 30, 1995.
**Incorporated by reference to Form 10-KSB for year ended September 30, 1997.
68
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Interwest Home Medical, Inc.
Date: December 29, 1998 By/s/ James E. Robinson
James E. Robinson
President/CEO
Date: December 29, 1998 By/s/ Bret A. Hardy
Bret A. Hardy
Controller
Principal Financial Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ James E. Robinson CEO/Director December 29, 1998
James E. Robinson
/s/ James U. Jensen Director December 29, 1998
James U. Jensen
/s/ Dr. Jeffrey F. Poore Director December 29, 1998
Dr. Jeffrey F. Poore
/s/ Jerald L. Nelson Director December 29, 1998
Jerald L. Nelson
69
Exhibit 11.1.
INTERWEST HOME MEDICAL, INC.
Schedule of Weighted Average Shares
1998 1997 1996
------ ------ ------
Weighted average shares:
Issued common shares 4,085,000 3,898,000 3,749,000
Common stock equivalents -0- 63,000 34,000
----------- ----------- -----------
Total weighted average per share 4,085,000 3,961,000 3,783,000
====-====== =========== ===========
70
Exhibit 21.1
Subsidiaries of Registrant
Interwest Medical Equipment Distributors, Inc.
Interwest Home Pharmacy, Inc.
Northwest Homecare, Inc.
Interwest Home Medical - Arizona, Inc.
71
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-6049) pertaining to the Interwest Home Medical, Inc. 1995
Stock Option Plan; 1995 Non-Employee Director Stock Option Plan; and 1995 Stock
Purchase Plan of our report dated December 22, 1998 with respect to the
consolidated financial statements of Interwest Home Medical, Inc., included in
the Annual Report (Form 10-KSB) for the year ended September 30, 1998.
Tanner + Co.
Salt Lake City, Utah
January 4, 1999
72
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTS FROM
INTERWEST HOME MEDICAL, INC.'S FINANCIAL STATEMENTS AND IS QUALIRIFED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 253,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 253,000
<SECURITIES> 0
<RECEIVABLES> 12,207,000
<ALLOWANCES> 1,760,000
<INVENTORY> 3,771,000
<CURRENT-ASSETS> 15,572,000
<PP&E> 13,158,000
<DEPRECIATION> 6,413,000
<TOTAL-ASSETS> 28,381,000
<CURRENT-LIABILITIES> 12,959,000
<BONDS> 0
0
0
<COMMON> 3,299,000
<OTHER-SE> 6,033,000
<TOTAL-LIABILITY-AND-EQUITY> 28,381,000
<SALES> 28,636,000
<TOTAL-REVENUES> 28,636,000
<CGS> 10,582,000
<TOTAL-COSTS> 10,582,000
<OTHER-EXPENSES> 15,253,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,046,000
<INCOME-PRETAX> 1,961,000
<INCOME-TAX> 535,000
<INCOME-CONTINUING> 1,426,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,426,000
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
