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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 June 30, 1999
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
------------------ ------------------
(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 June 30, 1999 - 4,089,029 shares of no par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 1999
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
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Page of
Form 10-Q
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--June 30, 1999..... 3
Condensed Consolidated Statements of Income--for nine months and three
months ended June 30, 1999 and 1998......................... 5
Condensed Consolidated Statements of Cash Flows--for the nine months
ended June 30, 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
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Page
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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 18
Item 6(b)Reports on Form 8-K 18
</TABLE>
2
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 1999
Assets
Current assets:
Cash and cash equivalents $ 583,000
Accounts receivable - net 11,122,000
Inventory 3,095,000
Current deferred tax asset 701,000
Other current assets 98,000
-------------
Total current assets 15,599,000
Investment in undeveloped real estate 76,000
Property and equipment - net 7,243,000
Intangible assets - net 4,466,000
Other assets 318,000
-------------
$27,702,000
=============
3
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Checks written in excess of cash in bank $ 503,000
Current portion of long-term debt 3,246,000
Notes payable 5,531,000
Accounts payable 2,122,000
Accrued expenses 938,000
Income taxes payable 616,000
---------------
Total current liabilities 12,956,000
---------------
Deferred income taxes 416,000
Long-term debt 3,787,000
---------------
Total liabilities 17,159,000
Stockholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 4,089,029 shares issued
and outstanding 3,299,000
Retained earnings 7,244,000
---------------
Total stockholders' equity 10,543,000
---------------
$27,702,000
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4
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income
For the Periods Ended June 30, 1999 and 1998
Nine months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
------------ ----------- ---------- ----------
Revenue:
Net rentals $12,893,000 $ 9,488,000 $4,267,000 $3,624,000
Net sales income 10,511,000 11,481,000 3,652,000 4,101,000
------------ ----------- ---------- ----------
Total revenue 23,404,000 20,969,000 7,919,000 7,725,000
Cost of sales and rental 8,218,000 7,913,000 2,740,000 2,849,000
---------- ---------- ---------- ---------
Gross profit 15,186,000 13,056,000 5,179,000 4,876,000
----------- ---------- ---------- ----------
Selling, general, &
administrative expenses 12,782,000 10,969,000 4,345,000 4,039,000
Income from operations 2,404,000 2,087,000 834,000 837,000
Other income (expense)
Interest expense (843,000) (734,000) (268,000) (288,000)
Interest income 203,000 98,000 28,000 43,000
Other (45,000) (4,000) (39,000)
----------- ---------- ---------- ----------
Income before taxes 1,719,000 1,447,000 555,000 592,000
Income taxes 507,000 398,000 161,000 232,000
----------- ---------- ---------- ----------
Net income $1,212,000 $1,049,000 $ 394,000 $ 360,000
=========== ========== ========== ==========
Net income per share:
Basic $ 0.30 $ 0.26 $ 0.10 $ 0.09
=========== ========== ========== ==========
Fully diluted $ 0.30 $ 0.26 $ 0.10 $ 0.09
=========== ========== ========== ==========
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 Nine months Ended June 30, 1999 and 1998
Cash flows from operating activities: 1999 1998
---- ----
Reconciliation of net income to net cash
provided by operating activities:
Net income $1,212,000 $1,049,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,722,000 1,503,000
Gain from sale of office building (67,000) -
(Increase) decrease in:
Accounts receivable (675,000) (1,918,000)
Inventories 675,000 165,000
Other current assets 59,000 68,000
Other assets (167,000) 15,000
Increase (decrease) in:
Accounts payable (678,000) 253,000
Accrued expenses 171,000 275,000
Income tax payable (268,000) 344,000
------------ ------------
Net cash provided by
operating activities 1,984,000 1,754,000
------------ ------------
Cash flows from investment activities:
Collection of notes receivable 574,000 100,000
Cash used in acquisition - (196,000)
Purchase of property and equipment (1,223,000) (1,585,000)
Proceeds from sale of building 110,000 -
------------ -------------
Net cash (used in)
investing activities (539,000) (1,681,000)
-------------- --------------
6
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - Continued
For the Nine months Ended June 30, 1999 and 1998
1999 1998
---- ----
Cash flows from financing activities:
Checks written in excess of cash in bank (268,000) 188,000
Proceeds from notes payable 6,795,000 11,691,000
Payments on notes payable (5,755,000) (10,456,000)
Principal payments on long-term debt (2,957,000) (1,793,000)
Proceeds from long-term debt 1,070,000 346,000
Issuance of common stock - 54,000
--------------- --------------
Net cash (used in)
provided by financing activities (1,115,000) 30,000
-------------- --------------
Net increase (decrease)
in cash 330,000 103,000
Cash, beginning of period 253,000 902,000
-------------- --------------
Cash, end of period $ 583,000 $ 1,005,000
============== ==============
Supplemental schedule of non-cash investing and financing activities
During the nine months ended June 30, 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 nine months ended June 30,
1999 there were no acquisitions of unrelated companies.
During the nine months ended June 30, 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 $ 1,177,000
Inventories 431,000
Note receivable 13,000
Capital equipment 1,433,000
Intangible assets 844,000
Other assets 23,000
----------
3,921,000
Less accounts payable 24,000
Less accrued expenses 7,000
----------
Net assets purchased 3,890,000
Less owner/bank financed portion 3,694,000
----------
Net cash invested $ 196,000
=============
7
<PAGE>
During the nine months ended June 30, 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 $ 37,000
Property and equipment 23,000
Intangible assets 190,000
-------
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 June 30, 1999 and the results of operations for the nine
months and three months ended June 30, 1999 and 1998 and cash flows for
the nine months ended June 30, 1999 and 1998. The results of operations
for the nine months and three months ended June 30, 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 nine months ended June 30, 1999, the Company
did not complete any acquisitions.
(3) Lines of Credit
The Company has lines of credit of $6.0 million available. At June 30,
1999 $5,531,000 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. In June 1999, the Company forwarded payment to its attorney in
anticipation of that settlement.
9
<PAGE>
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 June 30, 1999 and 1998 increased 3%
to $7,918,000 from $7,725,000. The net increase of $193,000 consists of: (1)
ongoing revenues contributed by prior years' acquired operations of
approximately $590,000 (2) reduced by revenues sold or terminated from the
quarter ended June 30, 1998 due to the Company's focus to provide more
respiratory services of approximately $397,000.
Net revenues for the nine months ended June 30, 1999 and 1998 increased 12%
to $23,404,000 from $20,969,000. The net increase of $2,435,000 consists of: (1)
revenues generated from existing stores in continuing product lines of
approximately $1,120,000; (2) reduced by revenues sold or terminated from the
quarter ended June 30, 1998 due to the Company's focus to provide more
respiratory services of approximately $1,090,000; and (3) ongoing revenues
contributed by prior years' acquired operations of approximately $2,405,000.
Sales Revenue
Net revenues from sales for the three months ended June 30, 1999 and 1998
decreased to $3,653,000 from $4,101,000 in 1998.The decrease of $477,000
consists of: (1) ongoing net sales contributed by prior years' acquired
operations of approximately $100,000; (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 $192,000 due to the Company's focus to provide
more respiratory services.
Net revenues from sales decreased to $10,511,000 for the nine months ended
June 30, 1999 as compared to $11,481,000 for the same period ended 1998. The net
decrease of $521,000 consists of: (1) ongoing net sales contributed by prior
years' acquired operations of approximately $690,000; (2) reduced by net sales,
primarily of rehabilitation products, which were sold or terminated of
approximately $1,090,000; 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 June 30, 1999 and 1998
increased 18% to $4,267,000 from $3,624,000. The net increase of $643,000
consists of: (1) ongoing net rentals contributed by prior years' acquired
operations of approximately $386,000; and (2) net rentals generated from
existing stores in continuing product lines of approximately $257,000. Rental
revenue as a percentage of total revenue for the three months ended June 30,
1999 and 1998 increased to 53% compared to 47%. Sales revenue had a
corresponding reduction to 47% from 53% for the same period.
11
<PAGE>
For the nine months ended June 30, 1999 and 1998 rental revenue increased 36%
to $12,893,000 from $9,488,000. The net increase of $3,405,000 consists of: (1)
ongoing net rentals contributed by prior years' acquired operations of
approximately $2,000,000 ; and (2) net rentals generated from existing stores in
continuing product lines of approximately $1,405,000. Rental revenue as a
percentage of total revenue for the nine months ended June 30, 1999 and 1998
increased to 55% compared to 45%. Sales revenue had a corresponding reduction to
45% from 55% 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%, 29% and
9%, respectively, for the quarter ended June 30, 1999 compared to 56%, 28% and
16%, respectively for the quarter ended June 30, 1998. Home oxygen and
respiratory care services, home medical equipment and rehabilitation products
revenues (both sales and rentals) represent 61%, 29% and 9%, respectively, for
the nine months ended June 30, 1999 compared to 54%, 29% and 17%, respectively
for the nine months ended June 30, 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 June 30, 1999 and approximately $950,000 for the
nine months ended June 30, 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 63.0% for the three months ended June 30, 1999
and 1998, respectively. For the nine months ended June 30, 1999 and 1998 gross
margins increased to 65.0% from 62.0%. Gross margins from net rental revenue in
the quarters ended June 30, 1999 and 1998 was 85% compared to 85%, and 84%
compared to 83% for the nine months ended June 30, 1999 and 1998. Gross margins
from net sales revenue for the quarter ended June 30, 1999 and 1998 was 42%
compared to 45%. For the nine months ended June 30, 1999 and 1998 gross margins
were 41% 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have increased in the nine
months ended June 30, 1999 and 1998 to $12,782,000 from $10,969,000 or 16%.
Selling, general and administrative expenses increased as a percentage of net
revenues to 55% in 1999 from 52% 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
For the nine months ended June 30, 1999 and 1998 interest expense increased
to $843,000 from $734,000. Interest expense as a percentage of revenue increased
to 3.6% from 3.5% in the nine months ended June 30, 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 nine months ended June 30, 1999.
In the nine months ended June 30, 1998, the Company acquired, in unrelated
transactions, certain operating assets of four companies. The operations
purchased had aggregate annualized revenues of approximately $150,000 at the
time of acquisition. The cost of the purchased acquisition was approximately
$3,890,000 and was allocated to acquired assets as follows: $1,621,000 to
current assets, $1,457,000 to property and equipmentand other long term assets,
$844,000 to goodwill and reduced by 32,000 of accounts payable and accrued
expenses.
Liquidity and Capital Resources
At June 30, 1999, the Company's working capital was $2,643,000 compared to
$2,613,000 at September 30, 1999, an increase of $30,000. The increase is
primarily due to collections on short term notes receivable and increases in
accounts receivable from increased revenues offset by purchases of capital
equipment.
The Company's primary needs for capital are to fund acquisition, purchase
rental equipment, and cover debt service payments. For the nine months ended
June 30, 1999, net cash provided by operating activities was $1,984,000 as
compared to $1,754,000 for the nine months ended June 30, 1998, an increase of
$230,000. Significantly contributing to cash provided from operations in the
quarter ended June 30, 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 ($539,000) and ($1,681,000)
for the nine months ended June 30, 1999 and 1998, respectively. Activity in the
nine months ended June 30, 1999 included the Company's investment in capital
equipment of $1,223,000 and collections of notes receivable of 574,000.
Net cash (used in) provided by financing activities amounted to ($1,115,000)
and $30,000 for the nine months ended June 30, 1999 and 1998, respectively.
Activity in the nine months ended June 30, 1999 included the Company's proceeds
of $1,070,000 from long-term obligations, and payments of $2,957,000 related to
long-term obligations.
As of June 30, 1999, the Company's principal sources of liquidity consisted
of approximately $2.6 million of working capital and $469,000 available on its
$6.0 million revolving credit loans and lines of credit. The Companyat June 30,
1999 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
June 30, 1999 and September 30, 1998, $5,531,000 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. Subsequent to
June 30, 1999 the Company entered into an agreement with Zion's First National
Bank for it primary lending because of more favorable terms relating to the
Company's desire for growth.
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.
13
<PAGE>
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 6% to $11,122,000 at June 30, 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 127 days at June 30, 1999 from 111 days at September 30, 1998.
Inventories were $3,095,000 at June 30, 1999 compared to $3,771,000 at
September 30, 1998, a decrease of 22%. Inventories decreased $676,000 during the
nine months primarily as a result of the Company's focus on rental revenues
which allows for lower inventory levels and an increased focus on the sale of
existing inventories.
At June 30, 1999, the Company held property and equipment, net of
depreciation, used in its business amounting to $7,243,000 compared to
$6,745,000 at September 30, 1998. The primary increase in property and equipment
is attributable to patient rental equipment purchased to support increased
rental revenue. Also contributing were purchases of computer and communications
equipment to upgrade systems for Y2K readiness.
Current liabilities decreased slightly to $12,956,000 at June 30, 1999
compared to $12,959,000 at September 30, 1998. Current assets also grew slightly
to $15,599,000 from $15,572,000. The increase in current assets is due primarily
to increases 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 nine months of fiscal
1999. This is partially offset by decrease in inventories.
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 June 30, 1999, the Company had total stockholder's
equity of approximately $10.5 million and total indebtedness of approximately
$17.1 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 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.
15
<PAGE>
Slow Reimbursements. At June 30, 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 June 30, 1999, goodwill resulting from
acquisitions was approximately $4.5 million, approximately 16% 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
June 30, 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 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.
16
<PAGE>
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. Payment of
$120,000 was forwarded to the Company's attorney by Jun 30, 1999 in
anticipation of this settlement.
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: August 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> 583,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 583,000
<SECURITIES> 0
<RECEIVABLES> 12,429,000
<ALLOWANCES> 1,307,000
<INVENTORY> 3,095,000
<CURRENT-ASSETS> 15,599,000
<PP&E> 7,319,000
<DEPRECIATION> 7,573,000
<TOTAL-ASSETS> 27,702,000
<CURRENT-LIABILITIES> 12,956,000
<BONDS> 0
0
0
<COMMON> 3,299,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,702,000
<SALES> 10,511,000
<TOTAL-REVENUES> 23,404,000
<CGS> 8,218,000
<TOTAL-COSTS> 12,782,000
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 843,000
<INCOME-PRETAX> 1,719,000
<INCOME-TAX> 507,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,212,000
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
