U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
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INTERWEST HOME MEDICAL, INC.
(Name of Small Business Issuer as specified in its charter)
Utah 87-0402042
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(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 December 31, 1998 - 4,089,029 shares of no par value
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
For the Quarter Ended December 31, 1998
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
Page of
Form 10-Q
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--December 31, 1998.......... 3
Condensed Consolidated Statements of Income--for three months
ended December 31, 1998 and 1997................................ 5
Condensed Consolidated Statements of Cash Flows--for the
three months ended December 31, 1998 and 1997................ 6
Notes to Condensed Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6(a). Exhibits 17
Item 6(b). Reports on Form 8-K 17
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INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
December 31, 1998
Assets
Current assets:
Cash and cash equivalents $ 320,000
Accounts receivable - net 10,866,000
Current portion of long-term receivable 630,000
Inventory 3,665,000
Current deferred tax asset 701,000
Other current assets 175,000
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Total current assets 16,357,000
Notes receivable 190,000
Investment in undeveloped real estate 76,000
Property and equipment - net 6,789,000
Intangible assets - net 4,925,000
Other assets 349,000
$28,686,000
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Liabilities and Stockholders' Equity
Current liabilities:
Checks written in excess of cash in bank $ 788,000
Current portion of long-term debt 3,246,000
Notes payable 4,713,000
Accounts payable 2,703,000
Accrued expenses 845,000
Income taxes payable 581,000
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Total current liabilities 12,876,000
Deferred income taxes 416,000
Long-term debt 5,656,000
Total liabilities 18,948,000
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 6,439,000
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Total stockholders' equity 9,738,000
$28,686,000
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INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income
Three Months Ended December 31, 1998 and 1997
1998 1997
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Revenue:
Net sales $3,417,000 $3,538,000
Net rental income 4,253,000 2,694,000
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Total revenue 7,670,000 6,232,000
Cost of sales and rental 2,759,000 2,360,000
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Gross profit 4,911,000 3,872,000
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Selling, general and administrative expenses 4,166,000 3,298,000
Income from operations 745,000 574,000
Other income (expense):
Interest expense (303,000) (226,000)
Interest income 105,000 26,000
Other 30,000 -0-
Income before taxes 577,000 374,000
Income taxes 171,000 37,000
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Net income $406,000 $337,000
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Net income per share:
Basic $0.10 $0.08
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Fully Diluted $0.10 $0.08
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INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
Three Months Ended December 31, 1998 and 1997
Cash flows from operating activities: 1998 1997
---- ----
Reconciliation of net income to net cash
provided by operating activities:
Net income $406,000 $337,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 582,000 313,000
Gain from sale of office building (67,000) -
(Increase) decrease in:
Accounts receivable (419,000) (141,000)
Inventories 106,000 203,000
Other current assets (18,000) 60,000
Other assets (198,000) 9,000
Increase (decrease) in:
Accounts payable (95,000) (313,000)
Accrued expenses 78,000 183,000
Income tax payable (303,000) 61,000
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Net cash provided by
operating activities 72,000 712,000
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Cash flows from investment activities:
Collection of notes receivable 247,000 5,000
Cash used in acquisition - (60,000)
Purchase of property and equipment (581,000) (538,000)
Increase in long term receivable 1,000
Proceeds from sale of building 110,000 -
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Net cash (used in)
investing activities (224,000) (592,000)
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INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - Continued
Three Months Ended December 31, 1998 and 1997
1998 1997
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Cash flows from financing activities:
Checks written in excess of cash in bank 17,000 (532,000)
Proceeds from notes payable 2,637,000 1,928,000
Payments on notes payable (2,417,000) (1,801,000)
Principal payments on long-term debt (796,000) (579,000)
Proceeds from long-term debt 778,000 554,000
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Net cash provided from
(Used in) financing activities 219,000 (430,000)
Net (decrease) increase
in cash 67,000 (310,000)
Cash, beginning of period 253,000 902,000
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Cash, end of period $ 320,000 $ 592,000
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Supplemental schedule of non-cash investing and financing activities
During the three months ended December 31, 1998, the Company sold its
investment in the office building and undeveloped real estate. Of the total
proceeds, $540,000 was received as a note receivable.
During the three months ended December 31, 1997, the Company acquired certain
assets from an unrelated Utah based company. The purchased assets were funded by
cash and owner financing. The assets purchased consisted of the following:
Accounts receivable $ 26,710
Capital equipment 23,200
Intangible assets 70,090
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Net assets purchased 120,000
Less owner financed portion 60,000
Net cash invested $ 60,000
============
During the three months ended December 31, 1997, 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
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Net assets sold 250,000
Note receivable 250,000
Net cash received $ 0
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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 December 31, 1998 and the results of
operations and cash flows for the three months ended December 31, 1998
and 1997. The results of operations for the three months ended
December 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for the entire year.
(2) Acquisition and proforma information
During the three months ended December 31, 1998, the Company did not
complete any acquisitions.
(3) Lines of Credit
The Company has lines of credit of $5.35 million available as of
February 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
December 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 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, 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 December 1998, was past
due in the amount of approximately $168,000. On January 22, 1999, the
Company received a $95,000 payment from ASD.
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.
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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.
(5) Weighted Average
Income per share is based on the weighted average number of shares
outstanding during the period. Weighted average shares are as follows:
Three months ended December 31,
1998 1997
Weighted average number of
common shares outstanding:
Basic 4,089,000 4,075,000
========= =========
Fully Diluted 4,114,000 4,085,000
========= =========
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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
Net revenues for the quarters ended December 31, 1998 and 1997 increased
23% to $7,670,000 from $6,232,000. The net increase of $1,438,000 consists of:
(1) revenues generated from existing stores in continuing product lines of
approximately $963,000 or 67%; (2) reduced by revenues sold or terminated from
the quarter ended December 31, 1997 due to the Company's focus to provide more
respiratory services of approximately $625,000 or 43%; and (3) revenues
contributed by acquired operations of approximately $1.1 million or 76%.
Net revenues from sales for the quarters ended December 31, 1998 and 1997
decreased to $3,417,000 from $3,538,000 in 1997. The net decrease of $121,000
consists of: (1) net sales contributed by acquired operations of approximately
$400,000; (2) reduced by net sales, primarily of rehabilitation products, which
were sold or terminated of approximately $475,000; and (3) net sales that were
lost from existing stores in continuing product lines of approximately $46,000
due to the Company's focus to provide more respiratory services.
Net revenues from rentals for the quarters ended December 31, 1998 and 1997
increased 58% to $4,253,000 from $2,694,000. The net increase of $1,559,000
consists of: (1) net rentals contributed by acquired operations of approximately
$700,000 or 45%; and (2) net rentals generated from existing stores in
continuing product lines of approximately $859,000 or 55%. Rental revenue as a
percentage of total revenue for the quarters ended December 31, 1998 and 1997
increased to 55% compared to 43%. Sales revenue had a corresponding reduction to
45% from 57% 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 60%, 33% and
7%, respectively, for the quarter ended December 31, 1998 compared to 52%, 35%
and 13%, respectively for the quarter ended December 31, 1997. 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 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
effect
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of the BBA to the Company was reduction of revenue of approximately $250,000 in
the quarter ended December 31, 1998 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 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 64.0% and 62.1% in the quarters ended December 31, 1998
and 1997, respectively. Gross margin from net rental revenue in the quarters
ended December 31, 1998 and 1997 was 84% compared to 83%. Gross margin from net
sales revenue in the quarters ended December 31, 1998 and 1997 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 quarters
ended December 31, 1998 and 1997 to $4,166,000 from $3,298,000 or 26%. Selling,
general and administrative expenses increased as a percentage of net revenues to
54% in 1998 from 53% in 1997 primarily due to staff increases to focus on the
collection of accounts receivable.
Interest Expense
Interest expense increased in the quarters ended December 31, 1998 and 1997
to $303,000 from $226,000. Interest expense as a percentage of revenue increased
to 4.0% from 3.6% in the quarters ended December 31, 1998 and 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 in fiscal 1998.
Acquisitions
There were no acquisitions in the quarter ended December 31, 1998.
In the quarter ended December 31, 1997, the Company acquired, in unrelated
transactions, certain operating assets of a local competitor. 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 December 31, 1998, the Company's working capital was $3,481,000 compared
to $2,613,000 at September 30, 1998, an increase of $868,000 or 33%. 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 quarter ended
December 31, 1998, net cash provided by operating activities was $72,000 as
compared to $712,000 for the quarter ended December 31, 1997, a decrease of
$640,000. Significantly contributing to cash provided from operations in the
quarter ended December 31, 1998 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
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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 ($224,000) and ($592,000)
for the quarters ended December 31, 1998 and 1997, respectively. Activity in the
quarter ended December 31, 1998 included the Company's investment in capital
equipment of $581,000.
Net cash provided by (used in) financing activities amounted to $219,000
and ($430,000) for the quarters ended December 31, 1998 and 1997, respectively.
Activity in the quarter ended December 31, 1998 included the Company's proceeds
of $778,000 from long-term obligations, and payments of $796,000 related to
long-term obligations.
As of December 31, 1998, the Company's principal sources of liquidity
consisted of approximately $3.5 million of working capital and $637,000
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 December 31, 1998 and September 30, 1998, $4,713,000 and $4,491,000,
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 $2.0 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 4% to $10,866,000 at December 31, 1998
from $10,447,000 at September 30, 1998. 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
1998. Billing delays contributed to the Company's average days sales in
receivables increasing to 124 days at December 31, 1998 from 111 days at
September 30, 1998. Correspondingly, the allowance for doubtful accounts
increased to $1,778,000 at December 31, 1998 from $1,760,000 at September 30,
1998.
Inventories were $3,665,000 at December 31, 1998 compared to $3,771,000 at
September 30, 1998, a decrease of 3%. Inventories decreased $106,000 during the
quarter primarily as a result of the Company's focus on reducing emphasis on
lower margin sales. 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 December 31, 1998, the Company had notes receivable of $820,000 compared
to $617,000 at September 30, 1998. The increase is due to approximately $450,000
from the sale of a commercial building offset by $247,000 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 December 31, 1998, the Company held property and equipment, net of
depreciation, used in its business amounting to $6,789,000 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 decreased 1% to $12,876,000 at December 31, 1998
compared to $12,959,000 at September 30, 1998. Correspondingly, current assets
grew 5% to $16,357,000 from $15,572,000. The decrease in current liabilities
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is due to payments on notes without increases from acquisition activity. 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 1998. Correspondingly, the
allowance for doubtful accounts increased to $1,778,000 at December 31, 1998
from $1,760,000 at September 30, 1998.
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.
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
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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 December 31, 1998, the Company had total stockholder's
equity of approximately $9.7 million and total indebtedness of approximately $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" 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 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" in the Company's fiscal 1998 Form 10-KSB.
Slow Reimbursements. At December 31, 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. 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
14
<PAGE>
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 December 31, 1998, 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
December 31, 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.
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 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 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
15
<PAGE>
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 December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial statements.
16
<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 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. On January
22, 1999, the Company received a $95,000 payment from ASD.
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 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
17
<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: February 12, 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
18
<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> 320,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 320,000
<SECURITIES> 0
<RECEIVABLES> 10,866,000
<ALLOWANCES> 1,778,000
<INVENTORY> 3,665,000
<CURRENT-ASSETS> 16,357,000
<PP&E> 6,789,000
<DEPRECIATION> 1,778,000
<TOTAL-ASSETS> 28,686,000
<CURRENT-LIABILITIES> 12,876,000
<BONDS> 0
0
0
<COMMON> 3,299,000
<OTHER-SE> 6,439,000
<TOTAL-LIABILITY-AND-EQUITY> 28,686,000
<SALES> 7,670,000
<TOTAL-REVENUES> 7,670,000
<CGS> 2,759,000
<TOTAL-COSTS> 4,166,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303,000
<INCOME-PRETAX> 577,000
<INCOME-TAX> 171,000
<INCOME-CONTINUING> 406,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
