==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-QSB
------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
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 84107
(Address of principal executive offices)
Registrant's telephone no., 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.
Common Stock outstanding at March 31, 1999 - 4,089,029 shares of no par value
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
==============================================================================
<PAGE>
FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 1999
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page of
Form 10-Q
---------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--March 31, 1999..................3
Condensed Consolidated Statements of Income--for six months
and three months ended March 31, 1999 and 1998.....................5
Condensed Consolidated Statements of Cash Flows--for the six months
ended March 31, 1999 and 1998.....................................6
Notes to Condensed Consolidated Financial Statements..................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................11
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C> <C>
Page
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6(a)Exhibits
Item 6(b)Reports on Form 8-K
</TABLE>
2
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
March 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 413,000
Accounts receivable - net 11,273,000
Current portion of long-term receivable 520,000
Inventory 3,466,000
Current deferred tax asset 701,000
Other current assets 141,000
-------------
Total current assets 16,514,000
Investment in undeveloped real estate 76,000
Property and equipment - net 7,036,000
Intangible assets - net 4,882,000
Other assets 367,000
-------------
$28,875,000
=============
3
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Checks written in excess of cash in bank $ 791,000
Current portion of long-term debt 3,247,000
Notes payable 5,081,000
Accounts payable 2,691,000
Accrued expenses 942,000
Income taxes payable 648,000
---------------
Total current liabilities 13,400,000
---------------
Deferred income taxes 416,000
Long-term deb 4,909,000
Total liabilities 18,725,000
Stockholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 4,089,029 shares issued
and outstanding 3,299,000
Additional paid-in capital -
Retained earnings 6,851,000
--------------
Total stockholders' equity 10,150,000
--------------
$28,875,000
==============
4
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income
For the Periods Ended March 31, 1999 and 1998
Six months ended Three months ended
March 31, March 31,
1999 1998 1999 1998
----------- --------- ---------- ----------
Revenue:
Net sales $6,859,000 $7,380,000 $3,441,000 $3,843,000
Net rental income 8,626,000 5,865,000 4,374,000 3,162,000
----------- --------- ---------- ----------
Total revenue 15,485,000 13,245,000 7,815,000 7,005,000
Cost of sales and rental 5,478,000 5,065,000 2,719,000 2,705,000
---------- ---------- ---------- ---------
Gross profit 10,007,000 8,180,000 5,096,000 4,300,000
----------- ---------- ---------- ----------
Selling, general, &
administrative expenses 8,437,000 6,930,000 4,270,000 3,632,000
----------- ---------- ---------- -----------
Income from operations 1,570,000 1,250,000 826,000 668,000
Other income (expense)
Interest expense (575,000) (446,000) (273,000) (220,000)
Interest income 175,000 55,000 70,000 29,000
Other (6,000) (5,000) (36,000) (5,000)
------------ ---------- ----------- -----------
Income before taxes 1,164,000 854,000 587,000 472,000
Income taxes 346,000 166,000 175,000 129,000
------------ ---------- ----------- -----------
Net income $ 818,000 $ 688,000 $ 412,000 $ 343,000
============ ========== =========== ============
Net income per share:
Basic $ 0.20 $ 0.17 $ 0.10 $ 0.08
============ ========== =========== ============
Fully diluted $ 0.20 $ 0.17 $ 0.10 $ 0.08
============ ========== =========== ============
Average number of shares outstanding:
Basic 4,089,000 4,082,000 4,089,000 4,089,000
============ ========== =========== ============
Fully diluted 4,114,000 4,092,000 4,114,000 4,100,000
============ ========== =========== ============
5
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1999 and 1998
Cash flows from operating activities: 1999 1998
---- ----
Reconciliation of net income to net cash
provided by operating activities:
Net income $818,000 $688,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,093,000 869,000
Gain from sale of office building (67,000) -
(Increase) decrease in:
Accounts receivable (826,000) (766,000)
Inventories 305,000 (170,000)
Other current assets (12,000) 68,000
Other assets (187,000) 14,000
Increase (decrease) in:
Accounts payable (109,000) (286,000)
Accrued expenses 175,000 275,000
Income tax payable (236,000) 140,000
------------ ------------
Net cash provided by
operating activities 954,000 832,000
------------ ------------
Cash flows from investment activities:
Collection of notes receivable 550,000 56,000
Cash used in acquisition - (136,000)
Purchase of property and equipment (1,298,000) (824,000)
Proceeds from sale of building 110,000 -
------------ ------------
Net cash (used in)
investing activities (638,000) (904,000)
------------ ------------
6
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - Continued
For the Six Months Ended March 31, 1999 and 1998
1999 1998
---- ----
Cash flows from financing activities:
Checks written in excess of cash in bank 20,000 13,000
Proceeds from notes payable 4,221,000 3,550,000
Payments on notes payable (3,631,000) (2,791,000)
Principal payments on long-term debt (1,557,000) (1,574,000)
Proceeds from long-term debt 791,000 752,000
Issuance of common stock - 54,000
------------- --------------
Net cash (used in)
provided by financing activities (156,000) 4,000
------------- --------------
Net increase (decrease)
in cash 160,000 (68,000)
Cash, beginning of period 253,000 902,000
------------ ----------
Cash, end of period $ 413,000 $ 834,000
============= ============
Supplemental schedule of non-cash investing and financing activities
During the six months ended March 31, 1999, the Company sold its investment
in the office building and undeveloped real estate. Of the total proceeds,
$448,000 was received as a note receivable. For the six months ended March 31,
1999 there were no acquisitions of unrelated companies.
During the six months ended March 31, 1998, the Company acquired certain
assets from unrelated companies. The purchased assets were funded by cash and
owner financing. The assets purchased consisted of the following:
Accounts receivable $ 1,176,710
Inventories 431,098
Note receivable 13,000
Capital equipment 1,433,200
Intangible assets 844,400
Other assets 23,300
----------
3,921,708
Less accounts payable 24,098
Less accrued expenses 7,473
----------
Net assets purchased 3,890,137
Less owner/bank financed portion 3,754,311
----------
Net cash invested $ 135,826
===============
7
<PAGE>
During the six months ended March 31, 1998, the Company sold a portion of its
rehab business to a former owner. The sold assets were finance with a note
receivable to the buyer. The assets sold consisted of the following:
Inventory $ 37,163
Property and equipment 22,535
Intangible assets 190,302
-------
Net assets sold 250,000
Note receivable 250,000
Net cash received $ 0
===============
8
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Presentation
The condensed consolidated unaudited financial statements included the
accounts of Interwest Home Medical and subsidiaries (Interwest) and
include all adjustments (consisting of normal recurring items) which are
in the opinion of management necessary to present fairly the financial
position as of March 31, 1999 and the results of operations for the six
months and three months ended March 31, 1999 and 1998 and cash flows for
the six months ended March 31, 1999 and 1998. The results of operations
for the six months and three months ended March 31, 1999 and 1998 are not
necessarily indicative of the results to be expected for the entire year.
(2) Acquisition and proforma information
During the three months and six months ended March 31, 1999, the Company
did not complete any acquisitions.
(3) Lines of Credit
The Company has lines of credit of $6.0 million available as of May 10,
1999. At that date $4,713,000 was outstanding on those lines.
(4) Legal
In April 1998, Link Medical, Inc. ("Link") commenced litigation against the
Company and several other parties which was filed in the District Court, 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 March 29, 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 Counter claim 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 consts. 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. As of May 10, 1999, the parties had signed a letter agreement to
settle the litigation wherein the Company would pay $120,000 to the parties and
all parties will sign complete releases. This amount is adequately covered by
accrued reserves.
9
<PAGE>
In June 1998, American Springs Development ("ASD") commenced litigation against
the Company which was filed in the Fourth District Court in Provo, Utah. 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 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 March 31, 1999, was
past due in the amount of approximately $77,500. On January 22, 1999, the
Company received a $95,000 payment from ASD. As of May 11, 1999, the parties had
agreed in principle to settle the litigation wherein the Company will be paid
substantially all of its principal balance by June 30, 1999.
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
March 20, 1996, and for indemnification, seeking to hold Link liable for any
amounts that Interwest may be required to pay to Buckeye.
No amounts for losses have been accrued in the financial statements and
management is not able to determine the final outcome as the various pieces of
litigation are in the preliminary stages.
10
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's revenue and income are derived from home medical equipment and
services. The Company's products and services include home oxygen and
respiratory care services, home medical equipment, supplies, and rehabilitation
products and services.
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 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
Consolidated
Net revenues for the three months ended March 31, 1999 and 1998 increased 12%
to $7,815,000 from $7,005,000. The net increase of $810,000 consists of: (1)
revenues generated from existing stores in continuing product lines of
approximately $441,000 or 54%; (2) reduced by revenues sold or terminated from
the quarter ended March 31, 1998 due to the Company's focus to provide more
respiratory services of approximately $315,000 or 39%; and (3) revenues
contributed by acquired operations of approximately $676,000 or 83%.
Net revenues for the six months ended March 31, 1999 and 1998 increased 17%
to $15,485,000 from $13,245,000. The net increase of $2,240,000 consists of: (1)
revenues generated from existing stores in continuing product lines of
approximately $1,404,000 or 63%; (2) reduced by revenues sold or terminated from
the quarter ended March 31, 1998 due to the Company's focus to provide more
respiratory services of approximately $940,000 or 42%; and (3) revenues
contributed by acquired operations of approximately $1,776,000 or 79%.
Sales Revenue
Net revenues from sales for the three months ended March 31, 1999 and 1998
decreased to $3,441,000 from $3,843,000 in 1998.The decrease of $432,000
consists of: (1) net sales contributed by acquired operations of approximately
$60,000; (2) reduced by net sales, primarily of rehabilitation products, which
were sold or terminated of approximately $385,000; and (3) net sales that were
lost from existing stores in continuing product lines of approximately $107,000
due to the Company's focus to provide more respiratory services.
Net revenues from sales decreased to $6,859,000 for the six months ended
March 31, 1999 as compared to $7,380,000 for the same period ended 1998. The net
decrease of $521,000 consists of: (1) net sales contributed by acquired
operations of approximately $460,000; (2) reduced by net sales, primarily of
rehabilitation products, which were sold or terminated of approximately
$860,000; and (3) net sales that were lost from existing stores in continuing
product lines of approximately $121,000 due to the Company's focus to provide
more respiratory services.
Rental Revenue
Net revenues from rentals for the three months ended March 31, 1999 and 1998
increased 39% to $4,374,000 from $3,162,000. The net increase of $1,212,000
consists of: (1) net rentals contributed by acquired operations of approximately
$745,000 or 61%; and (2) net rentals generated from existing stores in
continuing product lines of approximately $467,000 or 39%. Rental revenue as a
percentage of total revenue for the three months ended
11
<PAGE>
March 31, 1999 and 1998 increased to 56% compared to 46%. Sales revenue had
a corresponding reduction to 44% from 55% for the same period.
For the six months ended March 31, 1999 and 1998 rental revenue increased 47%
to $8,626,000 from $5,865,000 The net increase of $2,761,000 consists of: (1)
net rentals contributed by acquired operations of approximately $1,445,000 or
52%; and (2) net rentals generated from existing stores in continuing product
lines of approximately $1,361,000 or 48%. Rental revenue as a percentage of
total revenue for the six months ended March 31, 1999 and 1998 increased to 56%
compared to 45%. Sales revenue had a corresponding reduction to 45% from 56% for
the same period. 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 62%, 31% and
7%, respectively, for the quarter ended March 31, 1999 compared to 54%, 32% and
14%, respectively for the quarter ended March 31, 1998. Home oxygen and
respiratory care services, home medical equipment and rehabilitation products
revenues (both sales and rentals) represent 61%, 32% and 7%, respectively, for
the six months ended March 31, 1999 compared to 52%, 32% and 16%, respectively
for the six months ended March 31, 1998. Increases in home oxygen and
respiratory care services and home medical equipment product lines are due
primarily to increased strategic focus in both marketing and acquisitions. The
decrease in rehabilitation products revenue is due primarily to the sale or exit
in rehabilitation products by the Company in Colorado and Las Vegas where
reimbursement rates and/or payment terms are inadequate.
The Balanced Budget Act of 1998 ("BBA") was signed into law on August 5,
1998. 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
effect of the BBA to the Company was reduction of revenue of approximately
$350,000 in the quarter ended March 31, 1999 and approximately $600,000 for the
six months ended March 31, 1999 compared to the 1997 fee schedule amounts.
The BBA freezes the Consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1999 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 1999 through 2002.
Gross Margins
Gross margins were 65.0% and 61.0% for the three months ended March 31, 1999
and 1998, respectively. For the six months ended March 31, 1999 and 1998 gross
margins increased to 65.0% from 62.0%. Gross margins from net rental revenue in
the quarters ended March 31, 1999 and 1998 was 84% compared to 85%, and 85%
compared to 86% for the six months ended March 31, 1999 and 1998. Gross margins
from net sales revenue in the quarters and six months ended March 31, 1999 and
1998 was 46% compared to 45%. The increase in overall 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have increased in the six months
ended March 31, 1999 and 1998 to $8,437,000 from $6,930,000 or 22%. Selling,
general and administrative expenses increased as a percentage of net revenues to
55% in 1999 from 53% in 1998 primarily due to increased revenue from
acquisitions and internal growth and to staff increases to focus on the
collection of accounts receivable.
12
<PAGE>
Interest Expense
Interest expense increased for the three months ended March 31, 1999 to
$273,000 from $220,000. For the six months ended March 31, 1999 and 1998
interest expense increased to $575,000 from $446,000. Interest expense as a
percentage of revenue increased to 3.7% from 3.4% in the six months ended March
31, 1999 and 1998. 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 in fiscal 1998.
Acquisitions
There were no acquisitions during the six months ended March 31, 1999.
In the six months ended March 31, 1998, the Company acquired, in unrelated
transactions, certain operating assets of local competitors. The operation
purchased had aggregate annualized revenues of approximately $150,000 at the
time of acquisition. The cost of the purchased acquisition was approximately
$120,000 and was allocated to acquired assets as follows: $27,000 to current
assets, $23,000 to property and equipment, and $70,000 to goodwill. This
acquisition was merged into existing branches.
Liquidity and Capital Resources
At March 31, 1999, the Company's working capital was $3,114,000 compared to
$2,613,000 at September 30, 1999, an increase of $501,000 or 20%. The increase
is primarily due to approximately $450,000 increase in current portion of
long-term receivable due to a six month note issued in connection with the sale
of a commercial building and increases in accounts receivable from increased
revenues.
The Company's primary needs for capital are to fund acquisition, purchase
rental equipment, and cover debt service payments. For the six months ended
March 31, 1999, net cash provided by operating activities was $954,000 as
compared to $832,000 for the six months ended March 31, 1998, an increase of
$122,000. Significantly contributing to cash provided from operations in the
quarter ended March 31, 1999 were increased income and non cash expenses of
depreciation and amortization. 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 1999 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 ($638,000) and ($904,000)
for the six months ended March 31, 1999 and 1998, respectively. Activity in the
six months ended March 31, 1999 included the Company's investment in capital
equipment of $1,298,000.
Net cash (used in) provided by financing activities amounted to ($155,000)
and $4,000 for the six months ended March 31, 1999 and 1998, respectively.
Activity in the six months ended March 31, 1999 included the Company's proceeds
of $792,000 from long-term obligations, and payments of $1,557,000 related to
long-term obligations.
As of March 31, 1999, the Company's principal sources of liquidity consisted
of approximately $3.1 million of working capital and $919,000 available on its
$6.0 million revolving credit loans and lines of credit. The Company has a $5.0
million revolving operating line of credit with its principal bank expiring on
February 18, 2000 and an additional $1.0 million revolving operating line of
credit with its principal bank expiring August 30, 1999. 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 March 31, 1999 and
September 30, 1998, $5,081,000 and $4,491,000, respectively, were outstanding
under the lines of credit. The increase is primarily due to capital purchases
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 $2.0 million. The Company believes that it will be able to
generate sufficient funds internally, together with funds that may be borrowed
13
<PAGE>
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 8% to $11,273,000 at March 31, 1999 from
$10,447,000 at September 30, 1999. The increase was due to revenue growth from
existing stores during the year and billing delays encountered integrating trade
receivables from acquisition activities during the last half of fiscal 1999.
Billing delays contributed to the Company's average days sales in receivables
increasing to 126 days at March 31, 1999 from 111 days at September 30, 1998.
Inventories were $3,466,000 at March 31, 1999 compared to $3,771,000 at
September 30, 1998, a decrease of 9%. Inventories decreased $305,000 during the
six months primarily as a result of the Company's focus on rental revenues which
allows for lower inventory levels.
At March 31, 1999, the Company held property and equipment, net of
depreciation, used in its business amounting to $7,036,000 compared to
$6,745,000 at September 30, 1998. The increase in property and equipment is
attributable to patient rental equipment purchased to support increased rental
revenue.
Current liabilities increased 4% to $13,400,000 at March 31, 1999 compared to
$12,959,000 at September 30, 1998. Correspondingly, current assets grew 6% to
$16,514,000 from $15,572,000. The increase in current liabilities is due
additional borrowings under the Company's lines of credit to fund capital
growth. The increase in current assets is due primarily to increases in current
portion of long-term receivable from the sale of a commercial building and in
net accounts receivable due to 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 1999.
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 $60,000 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 and
has received correspondence from most of its primary payors with regard to Y2K
readiness or preparation.
14
<PAGE>
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.
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-QSB 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-QSB, 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-QSB. These forward-looking statements represent the Company's
judgment as of the date of this Form 10-QSB. 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 March 31, 1999, the Company had total stockholder's equity
of approximately $10.1 million and total indebtedness of approximately $18.7
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" in the Company's fiscal 1998
Form 10- KSB.
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" in the Company's fiscal 1998
Form 10-KSB.
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 1999 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
15
<PAGE>
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" in the
Company's fiscal 1998 Form 10-KSB.
Slow Reimbursements. At March 31, 1999, approximately 35% 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. 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" in the Company's fiscal 1998
Form 10-KSB.
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. See "Sales and Marketing" and "Government Regulation" in the
Company's fiscal 1998 Form 10-KSB.
Risks Related to Goodwill. At March 31, 1999, goodwill resulting from
acquisitions was approximately $4.9 million, approximately 17% 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
March 31, 1999 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.
Risks Associated with Acquisitions. While the Company completed eleven
acquisitions between fiscal 1998 and 1997, 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.
There has been no acquisition in fiscal 1999. 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 the Company's fiscal 1998 Form 10-KSB. 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
16
<PAGE>
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 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. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Statement No. 132 is effective for years beginning
after March 15, 1999. It is not expected that the adoption of this statement
will have a material impact on the Company's financial statements.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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
March 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. As of May 10, 1999, the parties had signed a letter
agreement to settle the litigation wherein the Company would pay
$120,000 to the parties and all parties will sign complete releases.
This amount is adequately covered by accrued reserves.
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 March 31, 1999 was
in a past due amount of approximately $77,500. On January 22, 1999, the
Company received a $95,000 payment from ASD. As of May 11, 1999, the
parties had agreed in principle to settle the litigation wherein the
Company will be paid substantially all of its principal balance by June
30, 1999.
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 March
20, 1996, and for indemnification, seeking to hold Link liable for any
amounts that Interwest may be required to pay to Buckeye.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None
Item 6(a)Exhibits. None.
Item 6(b)Reports on Form 8-K. None
18
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: May 13, 1999 INTERWEST HOME MEDICAL, INC.
By /s/ James E. Robinson
James E. Robinson
President
Principal Executive Officer
By /s/ Bret A. Hardy
Bret A. Hardy
Principal Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERWEST HOME MEDICAL, INC.'s FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 413,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 413,000
<SECURITIES> 0
<RECEIVABLES> 12,736,000
<ALLOWANCES> 1,463,000
<INVENTORY> 3,466,000
<CURRENT-ASSETS> 16,514,000
<PP&E> 7,036,000
<DEPRECIATION> 1,093,000
<TOTAL-ASSETS> 28,875,000
<CURRENT-LIABILITIES> 13,400,000
<BONDS> 0
0
0
<COMMON> 3,299,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 6,859,000
<TOTAL-REVENUES> 15,485,000
<CGS> 5,478,000
<TOTAL-COSTS> 8,262,000
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 575,000
<INCOME-PRETAX> 1,164,000
<INCOME-TAX> 346,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 818,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
