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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
INTERWEST HOME MEDICAL, INC.
(Name of Small Business Issuer as specified in its charter)
Utah 87-0402042
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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
(Zip Code)
84107-7349
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(Address of principal executive offices)
Issuer's telephone number, including area code: (801) 261-5100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: No Par
Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x/ No
.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The Issuer's revenues for the fiscal year ended September 30, 1999 were
$33,262,000.
As of December 1, 1999, 4,089,029 shares of the Issuer's common stock were
issued and outstanding of which 1,918,226 were held by non-affiliates. As of
December 1, 1999, the aggregate market value of shares held by non-affiliates
(based upon the closing price reported by the NASD's SmallCap Market System of $
3.13) was approximately $ 6,004,047.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Interest Home Medical, Inc. and subsidiaries ("Interwest" or the
"Company") provide a diversified range of home health care services and
products. The Company currently conducts its business from twenty-nine (29)
locations in the States of Utah, Colorado, Idaho, Arizona, Nevada, California
and Alaska and serves over 22,000 customers. The Company divides its products
and services into three general categories:
1. Home Oxygen and Respiratory Care Services. The Company primarily
provides oxygen and other respiratory therapy services to patients in the
home. Interwest Home Medical has more than 30 respiratory therapists on
staff whose focus is training and monitoring patients in the proper use of
home oxygen equipment, nebulizers and unit dose medications, apnea
monitors, sleep disorder equipment, ventilators, home phototherapy, and
other respiratory services.
2. Home Medical Equipment and Supplies. The Company provides a wide
variety of home medical equipment including items such as hospital beds,
manual and powered wheelchairs, patient lifts, commodes, bathroom aids and
safety equipment, powered scooters, walkers, canes, and other home medical
supplies.
3. Rehabilitation Services. The Company provides custom
rehabilitation equipment and services which include custom fitted and
adaptive wheelchairs, seating systems, home and workplace lifts,
specialized beds, and physical therapy equipment.
Many of Interwest's customers suffer from chronic obstructive pulmonary
disease ("COPD"), such as emphysema, chronic bronchitis or asthma, and require
supplemental oxygen or other respiratory therapy services in order to alleviate
the symptoms and discomfort of respiratory dysfunction. Others suffer from
causes incident to aging or debilitating conditions which require recuperation
in a non-critical care setting. Some of the Company's customers have permanent
disabilities which require adaptive equipment to allow the individual to attain
and acceptance degree of independence.
The Company's business is impacted by extensive political, economic and
regulatory influences, which continue to subject the health care industry in the
United States to fundamental change. During fiscal 1998, significant changes to
the Medicare system of reimbursement were enacted in connection with the
Balanced Budget Act of 1997 ( "BBA"). Reductions in Medicare oxygen services
reimbursement rates which resulted from the BBA have had and are expected to
continue to have an adverse impact on the Company's current and future
operations. Recent regulatory changes proposed by the Health Care Financing
Administration ("HCFA"), if enacted, could result in additional changes in the
system of Medicare reimbursement. The uncertainty of the outcome of additional
legislative and regulatory changes facing the industry have had a significant
impact on the industry.
The Company's revenues are generated from selling and renting home
medical equipment and supplies and from providing a variety of services to
customers. Revenues and income for the last five fiscal years were as follows
(all in 000's):
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1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
Revenues $33,262 $28,636 $24,845 $22,426 $17,829
Pre-tax Income Before $2,660 $1,961 $1,479 $697 $1,486
Accounting Charge
Net Income $1,861 $1,426 $657 $595 $1,346
Currently, revenues are divided between sales and equipment rentals. For
the fiscal years ended September 30, 1999 and 1998 rentals represented 55% and
49% of total revenues while sales were 45% and 51% of total revenues,
respectively.
The Company completed 18 acquisitions and one merger in both existing and
new markets between fiscal 1996 and 1999, including one acquisition in fiscal
1999. As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company may
in the foreseeable future slow its growth through acquisition.
Industry Overview
The importance of home health care is increasing as a result of
significant economic pressures within the health care industry. Total
expenditures within the health care industry, which have increased at twice the
rate of inflation in recent years, were approximately $1.3 trillion in 1997. The
ongoing pressure to contain health care costs, while maintaining high quality
care, is accelerating the growth of alternate site care, such as home health
care, that reduces hospital admissions and lengths of hospital stays. Home
health care, one of the fastest growing segments of the health care industry,
had estimated total expenditures in 1997 of approximately $37 billion, including
$25 billion for nursing and related patient services, $6 billion for infusion
therapy services, $3.5 billion for home respiratory therapy services, and $2
billion for durable medical equipment.
The growth in home health care is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home health care often results in lower costs, which is
increasingly important under managed care. In addition, home health care has
grown rapidly as a result of (i) advances in medical technology, which have
facilitated the delivery of services in alternate sites, (ii) demographic
trends, such as the increasing proportion of the population over the age of 65,
and (iii) a strong preference among patients to receive health care in their
homes.
The home health care industry has been highly fragmented and characterized
by local providers that typically do not offer a comprehensive range of
cost-effective services and products. These local providers often do not have
the capital necessary to expand their operations or the range of services and
products offered, which limits their ability to compete for managed care
contracts and other referrals and to realize efficiencies in their operations.
As managed care has become more prevalent, payors increasingly are seeking home
health care providers that offer cost-effective, comprehensive services in each
market served, which further inhibits the ability of local providers to compete
effectively. As a result of these economic and competitive pressures, the home
health care industry is undergoing rapid consolidation, a trend the Company
expects to continue.
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Strategy
The Company's objective is to increase its market share through internal
growth and acquisitions. Interwest focuses primarily on growth within its
existing geographic markets, which the Company believes is generally more
profitable than adding additional operating centers in new geographic 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.
The Company has encountered collection difficulties from acquired Accounts
Receivable due to: (i) failure to document initial service authorizations or
continued service authorizations in required time frames, (ii) inability to
retain or adequately replace billing representatives with knowledgeable
personnel due to the complex billing requirements encountered in the industry,
and (iii) difficulties in converting data from acquired companies to the
Company's accounting and billing system. Consequently, the Company intends to
restrict acquisition of Accounts Receivable in the future.
The Company believes the market for home respiratory and durable medical
equipment services is highly fragmented on both a national and regional basis,
and most participants are "mom and pop" companies with limited market share. The
Company believes by combining small participants into a single larger company,
product purchasing, accounting, claims processing and marketing could be
centralized and aggregate operations would be more efficient. The Company
estimates there are over 3,000 home respiratory and/or durable medical equipment
companies suitable and available for acquisition. The Company intends to grow in
part by acquiring some of these companies. As a result of the uncertainty of the
outcome of additional legislative and regulatory changes in the system of
Medicare reimbursement, the Company may in the foreseeable future slow its
growth through acquisition and concentrate primarily upon internal growth.
The Company's business strategy is to develop an efficient and effective
organization that specializes in providing selected home medical equipment
services and products. The Company's future growth is projected to be derived
from two principal sources: (i) increased services and product sales and rentals
from its existing operations, and (ii) revenues generated by businesses which
may be acquired in the future. During the last six years, the Company's revenues
increased by approximately $20.8 million to $33.3 million for the year ended
September 30, 1999 from $12.5 million for the year ended September 30, 1994.
During fiscal 1999 Interwest acquired the assets of one (1) other business
which contributed to the 16% net increase of fiscal 1999 revenues over fiscal
1998 revenues. The total purchase price paid by the Company for the acquisition
was approximately $4.1 million paid in cash and notes. The operation acquired in
1999 had aggregate annualized revenues of approximately $7.2 million at the time
of acquisition. This acquisition was integrated with the Company's existing
operation in Denver, Colorado.
During fiscal 1998 Interwest acquired the assets of five (5) other
businesses and sold assets and operations of one business all of which
contributed to the 15% net increase of fiscal 1998 revenues over fiscal 1997
revenues. The total purchase price paid by the Company for such acquisitions was
approximately $4.4 million paid in cash, notes and assumption of debt. The
operations acquired in 1998 had aggregate annualized revenues of approximately
$7.5 million at the time of acquisition. These acquisitions resulted in the
addition of 4 new branches.
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Products and Services Offered to Customers
The Company provides a wide variety of home respiratory and durable
medical equipment products and services on a sale or monthly rental basis.
Customers are usually referred by a physician, hospital discharge planner, other
medical professional, or insurance contract. The Company's customer
representative obtains the necessary medical and insurance coverage information
and coordinates the delivery of the Company's services and products to the
patient. The services provided include delivering and installing medical
equipment, training patients and their care givers in the proper use of products
in the home, monitoring patients' compliance with their individualized treatment
plans, reporting to the physician and/or managed care organization, maintaining
equipment and processing claims to third party payors. The customer remains
under the physician's care and medical supervision. The Company employs
respiratory therapists who are licensed where required by applicable law to
perform training and other support functions.
The following table sets forth the percentage of net revenues represented
by each line of business for the periods presented:
Percent of Revenues
1999 1998 1997 1996 1995
--------------------------------
Home oxygen and respiratory care services 62 55 44 39 39
Home medical equipment and supplies 32 34 29 28 30
Rehabilitation products 6 11 27 33 31
- -- -- -- --
Total 100 100 100 100 100
=== === === === ===
Home Oxygen and Respiratory Care Services. Industry-wide home respiratory
market revenues were an estimated $3.5 billion in 1998, having grown by an
estimated 8% to 10% per year over the last five years. This growth reflects the
significant increase in the number of persons afflicted with chronic obstructive
pulmonary disease ("COPD"), which is attributable, to a large extent, to the
increasing proportion of the population over the age of 65.
The Company's home oxygen and respiratory care services primarily consist
of:
o Oxygen systems to assist patients with breathing. There are three
types of oxygen systems: (i) oxygen concentrators, which are
stationary units that filter ordinary air to provide a continuous
flow of oxygen; (ii) liquid oxygen systems, which are portable,
thermally-insulated containers of liquid oxygen; and (iii) high
pressure oxygen cylinders, which are used for portability with
oxygen concentrators. Oxygen systems are used to treat patients with
chronic obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems.
o Nebulizers and prescribed medications to deliver aerosol medications
to patients. Nebulizers are used to treat patients with asthma,
COPD, cystic fibrosis and neurologically-related respiratory
problems.
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o Home ventilators to sustain a patient's respiratory function
mechanically in cases of severe respiratory failure when a patient
can no longer breathe normally.
o Non-invasive positive pressure ventilation ("NPPV") to provide
nocturnal ventilatory support for neuromuscular and COPD patients.
This therapy improves daytime function and decreases incidents of
acute illness.
o Continuous positive airway pressure ("CPAP") therapy to maintain
open airways in patients suffering from obstructive sleep apnea
("OSA") by providing airflow at prescribed pressures during sleep.
o Apnea monitors to monitor and warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome.
o Home sleep screenings and studies to detect sleep disorders and the
magnitude of such disorders.
o Home phototherapy which provides UV light to help newborn systems
eliminate above normal levels of bilirubin.
The Company provides technicians who deliver and/or install the
respiratory care equipment, instruct the patient in its use, refill the high
pressure and liquid oxygen systems as necessary and provide continuing
maintenance of the equipment.
Home Medical Equipment and Supplies. These products include patient room
equipment (such as hospital beds, patient lifts and commodes), manual and
powered wheelchairs, ambulatory aids (such as walkers and canes), bathroom aids
and safety equipment, and various medical supplies. The Company maintains retail
stores and showrooms where customers may select from alternatives the needed
products and/or supplies. The products offered by the Company range in price
from a few cents to customized wheelchairs priced at $20,000 and above.
Rehabilitation Products. The Company is one of a limited number of
providers of adaptive rehabilitation equipment. Its rehabilitation technology
specialists work in conjunction with physicians, physical and occupational
therapists, special education teachers, case managers and association personnel
to design and adapt wheelchairs and other therapy equipment for use by
physically challenged persons. During 1998, the Company sold or substantially
reduced its provision of rehabilitation products in all branches except for Utah
and Alaska due to payment or profitability difficulties.
The Company's rehabilitation services include custom fitting, adapting and
repairing wheelchairs and related seating systems for persons affected with
cerebral palsy, muscular dystrophy and its related conditions, spinal cord
injuries, head injuries, arthritis, and other disabling diseases. The Company
also sells and installs specialized wheelchair elevators and stairway lifts in
commercial buildings primarily through successful competitive bids which are
installed and maintained by a few trained service technicians who are certified
through a national dealer organization. Some of the Company's facilities include
a national "Certified Repair Center" which provides warranty, maintenance and
repair services for most home medical equipment.
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Organization and Operations
Management. The Company is managed at the executive level as a system of
locally managed businesses. The Company seeks to address the local market needs
of the home health care industry through its branch office network. Each branch
office conducts local marketing efforts, negotiates contracts with local
referral sources, recruits personnel and coordinates patient care. Since the
provision of home health care services is generally a local business, the
Company provides its branch office managers with training, comprehensive
policies and procedures and standardized operating systems, while allowing them
sufficient autonomy to address local needs. Incentive plans are designed to
reward performance based upon revenue increases, earnings contribution and
accounts receivable collection primarily for branch teams. The central corporate
office provides support in marketing, sales and staff training, contracting with
managed care organizations, purchasing and accounting functions.
Information Systems. Each of the Company's branch locations are equipped
with computer systems that are on-line with the central corporate computer. The
software is provided and maintained by an industry leading software vendor. This
system has enabled the Company to standardize operating processes, track
operating performance by branch, control and manage accounts receivable, process
customer orders, improve inventory management, reduce administrative overhead,
facilitate interbranch communications and gather statistical data in order to
provide patient management information to managed care organizations. Medicare
and many third-party payor claims are billed electronically, thereby
facilitating the collection of accounts receivable. The Company also focuses
upon quickly integrating the information systems of acquired businesses as a
part of its overall integration efforts.
The Company currently sells and rents equipment and/or provides services
from the following retail locations:
Year Opened
State City Or Acquired
-----------------------------------------------------------
Colorado Colorado Springs 1995
Denver 1994
Greeley 1996
Fort Collins 1996
Fort Morgan 1996
Idaho Boise 1987
Idaho Falls 1991
Twin Falls 1994
Nevada Las Vegas/Henderson 1992
Reno 1996
Fallon 1996
Utah Murray (Main Office) 1978
Ogden 1989
Pleasant Grove 1983
Price 1988
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Salt Lake Downtown 1995
Vernal 1994
St. George 1996
Cedar City 1997
Logan 1998
Midvale (Service center) 1998
California Quincy 1997
Chester 1997
Alaska Anchorage 1997
Regional Interwest Home Pharmacy(mail-order)1997
Arizona Phoenix (2) 1998
Mesa 1998
Scottsdale 1998
Sales and Marketing
The Company believes the sales and marketing skills of its employees have
been instrumental in its growth to date and are critical to its future success.
The Company emphasizes to its employees the importance of patient base growth
and retention by providing quality service to physicians and their patients.
Approximately 50 of the Company's employees are actively involved in sales and
marketing either in full or in part, of the Company's products to health care
organizations and other customers. Key marketing targets include, but are not
limited to, managed care organizations, hospital-based health care
professionals, physicians and their staffs, home care agencies, private practice
therapists and case managers. Sales representatives receive regular clinical and
technical training to represent the Company's major product lines of products
and services. The Company's sales representatives maintain continual contact
with medical professionals in order to strengthen these relationships.
Given the shift toward managed health care, an integral component of the
Company's overall sales strategy is to seek preferred provider contracts with
various managed care organizations. Managed care organizations have grown
substantially in terms of the percentage of the population covered by such plans
and their influence over an increasing portion of the health care economy. These
contracts typically designate the Company as one of a limited number of
preferred providers of certain services in selected areas but do not establish
an exclusive relationship. The Company currently has approximately 100 preferred
provider agreements that are both local and regional in scope to provide home
medical equipment services and supplies to the beneficiaries of these managed
care entities. Total revenue generated from these agreements amounted to
approximately 21% and 24% of total revenues for the years ended September 30,
1999 and 1998, respectively. Approximately 85% of the revenues acquired in
fiscal 1999 is expected to come from managed care agreements; consequently, the
Company expects total revenues for fiscal 2000 to approach 28%.
During fiscal 1999 and 1998 the Company terminated relationships with
certain managed care organizations and is in the process of reviewing its
managed care contracts The Company's contracts with managed care organizations
will change from time to time as either the Company or a managed care
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organization determines not to continue with such contract. The Company will
continue to enter additional managed care contracts with managed care
organizations seeking new providers. As a result, the Company's relationships
with its managed care referral sources may continue to change. There can be no
assurance the Company will be able to successfully maintain existing referral
sources or develop and maintain new referral sources. The loss of any
significant referral sources or the failure to develop any new referral sources
could have a material adverse effect on the Company's financial condition or
results of operations.
Quality of service is emphasized throughout the Company's organization
both in the hiring and training of its clinical personnel and the manner in
which its home health care services are delivered. Quality assurance and
training are directed and monitored by a Director of Quality Improvement, who is
an experienced health care professional. The Company has received accreditation
from the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a nationally recognized organization that has established voluntary
standards for the provision of home health care services. The Company believes
the JCAHO accreditation of its branch offices is an important factor in its
sales and marketing efforts. Accreditation by JCAHO (the program began in 1988)
is one of the few indicators that referral sources have for judging the standard
of quality of a home health care provider and is increasingly being considered a
prerequisite for entering into contracts with managed care organizations. The
Company was the first company located west of the Mississippi River to complete
its accreditation, which occurred in 1988. As of December 1999, 16 of the
Company's branches are accredited by JCAHO, and 12 satellite or retail branches
are not separately accredited as they are managed by an accredited branch. JCAHO
does not accredit mail-order pharmacy operations and accordingly, the Company's
respiratory mail-order pharmacy operations are not eligible for such
accreditation. Upon acquiring companies in existing or new regions which are
non-accredited, the Company may choose to have a particular company/branch
undergo the JCAHO accreditation process, generally within twelve to eighteen
months after acquisition.
Reimbursement for Services
A substantial percentage of the Company's revenues are derived from
payments made by third party payors including Medicare, Medicaid and private
insurance companies. For the years ended September 30 as indicated, the
Company's revenues from payor sources were allocated as follows:
Payor Percent of Total Revenues
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Medicare 36 33 30 28 33
Medicaid 10 6 6 9 6
Managed care organizations 21 24 20 18 17
Private insurance companies 12 12 20 19 18
Private pay (includes patient
copays) 15 17 17 18 19
Over-the-counter sales 6 8 7 8 7
---- ---- ----- ---- ----
Total 100 100 100 100 100
=== === === === ===
Reimbursement is a complicated process which involves submission of claims
to multiple payors, each having its own claims documentation requirements. The
Company has substantial expertise at processing claims and continues to create
and improve systems to manage third-party reimbursements,
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produce clean claims and obtain timely reimbursements by third-party payors.
Currently, the Company electronically submits over 55% of its billings to third
party payors. The billing and claims processing departments work closely with
reimbursement officers at branch locations and third-party payors and are
responsible for the review of patient coverage, the adequacy and timeliness of
documentation and the follow-up with third-party payors to expedite
reimbursement payments.
The Company has achieved increased operating revenue in home respiratory
and other medical equipment operations despite increased regulation and certain
reimbursement reductions (see further discussion under "Government Regulation").
While the increased regulation tends to reduce the amount of reimbursement from
government sources for individual cases, the Company believes the continued
increased regulation also benefits the Company by reducing the competition from
joint ventures and fee revenue sharing arrangements, which the Company has
historically avoided.
The Company's levels of operating revenue and profitability, like other
health care companies, are affected by the continuing efforts of third-party
payors to contain or reduce health care costs by lowering reimbursement rates
and increasing case management review of services. Home health care, which is
generally less costly to third-party payors than hospital-based care, has
benefitted from those cost containment objectives. However, as expenditures in
the home health care market continue to grow, initiatives are increasingly aimed
at reducing the health care delivery costs at non-hospital sites. Changes in
reimbursement policies by third-party payors, or the reduction in or elimination
of such reimbursement programs, could have a material adverse impact on the
Company's revenues. Various state and federal health care reform initiatives may
lead to additional changes in reimbursement programs.
Purchasing
Each branch office is responsible for determining its inventory needs and
submitting requisitions to a centralized purchasing department. Using this
input, personnel located at the Company's headquarters select and purchase
virtually all equipment and supplies. Purchased inventory is shipped by vendors
to the specific location instructed by the Company. In fiscal 1999, the Company
purchased products from over 600 suppliers. The Company believes it has good
relationships with its suppliers and has alternative sources to purchase nearly
all the products it provides to customers.
The Company is an authorized dealer of The MED Group, Lubbock, Texas, a
national organization of home medical equipment service providers. The MED Group
arranges national pricing agreements with certain manufacturers, assists with
national networks and contracting with managed care organizations, conducts
specialty training programs and provides certain marketing materials and other
services for its dealers. The arrangement is annually renewable and may be
canceled by either party with sixty (60) days written notice. The Company
intends to continue its participation for the foreseeable future.
Interwest Home Medical has no long-term contracts for the purchase of
inventory although it has pricing agreements with several suppliers, many of
which are arranged through its affiliation with The MED Group. The Company
believes its relationships with suppliers are good and that alternative sources
of supply exist, at similar costs and on similar terms for most of the products
purchased.
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Competition
The home respiratory and durable medical equipment market is highly
competitive and fragmented. The barriers to enter into the market are low and,
accordingly, competition is intense. While there are four national providers and
approximately ten regional providers, the vast majority of the Company's
competition comes from small, locally owned firms. Quality of service is the
single most important competitive factor. Other competitive factors in the
market are the ability to develop and maintain contractual relationships with
managed care organizations, price of services, ease of doing business with the
provider, the mix of products and services offered and the reputation with
referring persons. The Company believes it competes effectively in each of its
lines of business with respect to these factors.
Other types of health care providers including hospitals, home health
agencies, physicians and new health "super stores" have entered, and may
continue to enter, the Company's various lines of business. However, the Company
believes its wide variety of home medical equipment products and services
broadens its appeal to managed care organizations and local health care
professionals.
The entire health care and medical product and service market is under
pressure to reduce costs and increase efficiencies. The Company intends to
attempt to reduce costs and increase efficiencies through its growth strategy.
The Company believes it currently competes effectively in the market and will
continue to take all action necessary to remain competitive. Certain of the
Company's competitors and potential competitors have significantly greater
financial, technical and marketing and sales resources than the Company and may,
in certain locations, possess licenses or certificates that permit them to
provide services that the Company cannot currently provide nor has any plans to
provide. There can be no assurance that the Company will not encounter increased
competition in the future that could limit the Company's ability to maintain or
increase its business which could adversely affect the Company's operating
results.
Governmental Regulation
The Company's business is subject to extensive federal, state and local
regulation.
The operations of the Company's branches are subject to federal and state
laws covering the repackaging and dispensing of drugs (including oxygen),
operating of pharmacies and regulating of interstate motor-carrier
transportation. Certain of the Company's employees are subject to state laws and
regulations governing the professional practice of respiratory therapy, pharmacy
and nursing.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid fraud and abuse laws. These
laws, among other things, prohibit any payment, kickback or rebate in return for
the referral of Medicare or Medicaid patients. Violations of these provisions
may result in civil and criminal penalties and exclusion from participation in
the Medicare and Medicaid programs.
Health care is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and
the amount of reimbursement by government and third-party payors. The Omnibus
Budget Reconciliation Act of 1987 ("OBRA 1987") created six categories of
durable medical equipment for purposes of reimbursement under the Medicare Part
B program. There is a separate fee schedule for each category. OBRA 1987 also
controls whether durable medical equipment products will be
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paid for on a rental or sale basis and established fixed payment rates for
oxygen service as well as a 15-month rental ceiling on certain medical
equipment. An interim final rule implementing the payment methodology under the
fee schedules recently was published in the Federal Register. Payment based on
the fee schedules is effective with covered items furnished on or after January
1, 1989. Generally, Medicare pays 80% of the lower of the supplier's actual
charge for the item or the fee schedule amount, after adjustment for the annual
deductible amount. OBRA 1990 made changes to Medicare Part B reimbursement that
were implemented in 1991. The substantive change was the standardization of
Medicare rates for certain equipment categories. Laws and regulations often are
adopted to regulate new products, services and industries.
The Balanced Budget Act of 1997 ("BBA"), enacted in August 1997, reduces
the Medicare national payment limits for oxygen and oxygen equipment used in
home respiratory therapy by 30%, with 25% effective January 1, 1998 and an
additional 5% effective January 1, 1999 from the 1997 fee schedule. Compounding
these reductions is a freeze on reimbursement rates for all other equipment and
supplies through 2002. The BBA also reduces payments for covered drugs and
biologicals to 95 percent of the average wholesale price of such covered items
for each of the years 1998 through 2002. Approximately 22% and 21% of the
Company's total revenues for the years ended September 30, 1999 and 1998 were
derived from the provision of oxygen services to Medicare patients. The Balanced
Budget Refinement Act of 1999 ("BBRA") enacted November of 1999 lifts the freeze
on reimbursement rates imposed in the BBA and provides a modest annual CPI
increase of 0.3% for 2001 and 0.6% for 2002.
The BBA also extends to the Health Care Financing Administration ("HCFA")
authority to alter certain reimbursement rates that are not inherently
reasonable ("IR"). BBRA suspends HCFA's IR authority until such time as the
General Accounting Office ("GAO") issues its report on the subject and the
Secretary of Health and Human Services ("HHS")publishes a final rule for use of
this authority. The GAO report is slated to be issued in the spring of 2000.
HCFA is to consider industry input when developing this rule and it is to be
published in the Federal Register. Congress has stipulated that the final rule
must reflect the use of a "sound costing methodology" and the use of
statistically "valid and reliable data." The Company anticipates that Congress
and state legislatures will continue to review and assess alternative health
care delivery and payment systems and may in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system.
The Company cannot predict the ultimate timing, scope or effect of any
legislation concerning health care reform. Any proposed Federal legislation, if
adopted, could result in significant changes in the availability, delivery,
pricing and payment for health care services and products. Various state
agencies also have undertaken or are considering significant health care reform
initiatives. Although it is not possible to predict whether any health care
reform legislation will be adopted or, if adopted, the exact manner and the
extent to which the Company will be affected, it is likely that the Company will
be affected in some fashion, and there can be no assurance that any health care
reform legislation, if and when adopted, will not have a material adverse effect
on the Company's business, financial condition, cash flows or results of
operations.
The BBA authorizes the HHS to conduct up to five competitive bidding
demonstration projects for the acquisition of durable medical equipment and
requires that one such project be established for oxygen and oxygen equipment.
Each demonstration project is to be operated over a three-year period and is to
be conducted in not more than three competitive acquisition areas. The only
project announced as of December 1, 1999 is being conducted in Polk County,
Florida. Additionally, the Company anticipates it will be required to have
surety bonds of at least $50,000 for each durable medical equipment company that
it operates.
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The BBA also contained a provision requiring that only a Home Health
Agency ("HHA") can bill for durable medical equipment and home oxygen therapy
services provided to beneficiaries enrolled in a Medicare approved plan of care
beginning October 1, 2000. BBRA reverses this provision allowing Medicare
beneficiaries using durable medical equipment and home oxygen therapy services
to continue to use their provider of choice.
Fraud and Abuse Laws. The Company is subject to Federal and state laws
prohibiting direct or indirect payments for patient referrals for items and
services reimbursed under Medicare, Medicaid and state programs as well as in
relation to private payors. The Company also is subject to Federal and state
laws governing certain financial relationships with physicians and other fraud
and abuse laws prohibiting the submission of false claims.
The Federal Medicare and Medicaid "Anti-kickback Statute" prohibits
certain conduct involving improper payments in connection with the delivery of
items or services covered by a number of Federal and state health care programs.
Among other things, these prohibitions apply to anyone who knowingly and
willfully solicits, receives, offers, or pays any remuneration in return for
referring an individual to another person for the furnishing, or arranging for
the furnishing, of any item or service that may be paid, in whole or in part, by
the Medicare, Medicaid or other Federal health care programs. To date, courts
have interpreted the Anti-kickback Statute to apply to a broad range of
financial relationships between providers and referral sources, including
physicians and other direct health care providers, as well as persons who do not
have a direct role in the provision of health care services. Violations of the
statute may result in criminal penalties, including fines of up to $25,000 and
imprisonment for up to five years for each violation, exclusion from
participation in the Medicare and Medicaid programs, and civil penalties of up
to $50,000 and treble the amount of remuneration for each violation. The BBA
increases accountability and strengthens program integrity through additional
fraud and abuse penalties.
HHS's Office of Inspector General ("OIG") has adopted regulations
creating "safe harbors" from Federal criminal and civil penalties under the
Anti-kickback Statute by identifying certain types of ownership interests and
other financial arrangements that do not appear to pose a threat of Medicare and
Medicaid program abuse. Additional safe harbors have also been proposed, and the
OIG has recently solicited proposals for developing new and modifying existing
safe harbors. Transactions covered by the Anti-kickback Statute that do not
conform to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute, but such arrangements would risk scrutiny and may be
subject to civil sanctions or criminal enforcement action.
The Federal self-referral or "Stark Law" provides that where a
physician has a "financial relationship" with a provider of "designated health
services" (including, among other things, parenteral and enteral nutrients,
equipment and supplies, outpatient prescription drugs and home medical
equipment, which are products and services provided by the Company), the
physician is prohibited from referring a Medicare patient to the health care
provider, and that provider is prohibited from billing Medicare, for the
designated health service. The Stark Law has certain statutory exceptions. In
August 1995, regulations were issued pursuant to the Stark Law as it existed
prior to significant amendments enacted in 1993. The preamble to these
regulations states that HCFA intends to rely on the language and interpretations
in the regulations when reviewing compliance under the Stark Law, as amended
(the "Amended Stark Law"). Certain exceptions from the referral prohibitions are
available under the Amended Stark Law, including the referral of patients to
providers owned by certain qualifying publicly-traded companies in which a
referring physician owns an investment security. At this time, the Company
believes that its investments will qualify for the publicly-traded securities
exception because it has shareholder equity of at least $75,000,000. Submission
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of a claim that a provider knows or should know is for services for which
payment is prohibited under the Amended Stark Law, and which does not meet an
exception could result in refunds of any amounts billed, civil money penalties
of not more than $15,000 for each such service billed, and possible exclusion
from the Medicare program. In addition, a state cannot receive Federal financial
participation payments under the Medicaid program for designated health services
furnished to an individual on the basis of a physician referral that would
result in a denial of payment under Medicare if Medicare covered the services to
the same extent as under a state Medicaid plan.
A number of Federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false claim. In addition, a
civil penalty of up to $15,000 may be assessed for engaging in other activities
prohibited by this statute. Actions to enforce the False Claims Act may be
commenced by a private citizen on behalf of the Federal government, and such
private citizens receive between 15 and 30 percent of the recovery. Recent
government efforts have been made (with mixed success) to assert that any claim
resulting from a relationship in violation of the Anti-kickback Statute or the
Amended Stark Law is false or fraudulent under the False Claims Act. The Company
carefully monitors its submissions of Medicare and Medicaid claims and all other
claims for reimbursement to assure that they are not false or fraudulent, and as
noted above, believes that it is in substantial compliance with the
Anti-kickback Statute or the Amended Stark Law.
The OIG instituted "Operation Restore Trust" ("ORT") in May 1995 in the
five states with the highest Medicare expenditures (California, Florida, New
York, Texas and Illinois) and has since been expanded to all fifty states.
Operation Restore Trust is intended to counter health care fraud, waste and
abuse in targeted areas that HHS believes to be particularly vulnerable to fraud
and abuse, including home health care, nursing homes and home medical equipment.
The OIG also has issued "Fraud Alerts" relating to improper business practices
in the provision of medical supplies to nursing homes, and is expected to issue
additional Fraud Alerts in the future as a means of advising the public of
suspect business arrangements and practices in the health care industry. In
addition, providers of home medical equipment, wound care supplies and other
products and services are expected to be subject to increased scrutiny for
practices involving fraud and abuse.
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with health care providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Sanctions for violating these state restrictions may include loss of
licensure and civil and criminal penalties. Certain states also have begun
requiring health care practitioners and/or other providers to disclose to
patients any financial relationship with a provider, including advising patients
of the availability of alternative providers.
The Company continues to review all aspects of its operations and
believes that it is in substantial compliance with all material respects with
applicable provisions of the Anti-kickback Statute, the Amended Stark Law, False
Claims and applicable state laws, although because of the broad and sometimes
vague nature of these laws, there can be no assurance that an enforcement action
will not be brought against the Company or that the Company will not be found to
be in violation of one or more of these provisions. The Company intends to
monitor developments under these Federal and state fraud and abuse laws. At this
time, the Company cannot anticipate what impact, if any, subsequent
administrative or judicial interpretation of
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the applicable Federal and state fraud and abuse laws may have on the Company's
business, financial condition, cash flows or results of operations.
As part of ORT, HHS has contracted with ChoicePoint, an independent
organization, to conduct on-site surveys of home respiratory and durable medical
equipment companies in order to determine compliance with certain minimum
standards of participation as required by HHS. As of December 1, 1999, most of
the Company's locations had been visited by representatives of ChoicePoint and
no notices of deficiency had been received by the Company.
On June 3, 1998, HHS issued a federal Medicare regulation, commonly
referred to as the Incentive Program for Fraud and Abuse Information, which will
make citizens who alert Medicare of possible acts of fraud and abuse eligible
for rewards if their information leads directly to the recovery of Medicare
money. The program was launched in 1999 and will reward the individual reporting
the fraud the lesser of 10% of the recovered payment or $1,000.
Management believes that the Company operations are in material compliance
with applicable laws. In July 1999, the OIG published the "OIG Compliance
Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics and
Supply Industry". The Company has begun a process to complete a corporate
compliance program designed to accomplish the goals of the OIG model guidelines.
However, the Company is unable to predict what additional government
regulations, if any, affecting its business may be enacted in the future, how
existing or future laws and regulations might be interpreted or whether the
Company will be able to comply with such laws and regulations either in the
markets in which it presently conducts, or wishes to commence, business. The
Company also is subject to routine and periodic surveys and audits by various
governmental agencies.
Year 2000 Compliance
The Company installed software upgrades for its accounting and data
processing systems in the fourth fiscal quarter of 1998 that are warranted by
the vendor to be Y2K compatible. The Company also uses ancillary, third party
computer software to electronically submit medical claims to certain payors. In
the event that the use of this software is impacted by the Y2K problem, the
Company's contingency plan includes the submission of paper claims to such
payors. The Company does not believe that this software will have a material
effect on the Company's ability to receive payment for services rendered. 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 $75,000 has been incurred as of September 30, 1999, 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 Y2K compliant products and
services. In addition, the Company has reviewed Y2K product compliance listings
provided by the FDA and exchanged equipment that may be questionable with
equipment that has been determined to be Y2K compliant. In the event that the
Company identifies specific equipment that is not Y2K compliant, or that the
Company is unable to determine the status of such items, the Company will remove
such items from service and replace them with therapeutically comparable, Y2K
compliant equipment from alternate vendors. The Company does not believe that
the scope and cost of exchanging non-compliant equipment will have a material
impact on the Company's financial position.
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The Company is highly dependent upon certain government and private payors
for payment of claims for services and equipment provided by the Company. The
Company is in the process of determining the Year 2000 compliance of computer
systems used by third party payors to process claims for medical services and
equipment submitted by the Company for payment. The Company cannot be assured of
the timely remediation of third party claims processing and payment systems. The
failure by a significant third party payor to correct Year 2000 problems, 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 Year 2000 progress of Medicare Part B carriers,
and other government agencies and private payors with which the Company does
significant business, to determine the potential impact to the Company. The
Company is also in the process of determining the contingency plans of these
payors to release payments to providers such as the Company in the event of
claims processing system failures. Such plans may include cash advances to
providers based on historical payment trends or processing claims on paper
rather than in an electronic format.
The financial institutions with whom the Company has its material
relationships have represented to the Company that their Y2K compliance programs
are substantially completed.
Insurance
In recent years, participants in the health care market have become
subject to an increasing number of malpractice and product liability lawsuits,
many of which involve large claims and significant defense costs. As a result of
the liability risks inherent in the Company's lines of business, including the
risk of liability due to the negligence of health care professionals employed by
or otherwise under contract to the Company, the Company maintains liability
insurance intended to cover such claims. While management believes the
manufacturers of the equipment it sells or rents currently maintain their own
insurance, and in some cases the Company has received evidence of such coverage
and has been added by endorsement as additional insured, there can be no
assurance that such manufacturers will continue to do so, that such insurance
will be adequate or available to protect the Company, or that the Company will
not have liability independent of that of such manufacturers and/or their
insurance coverage. There can be no assurance that the coverage limits of the
Company's insurance policies will be adequate, or that the Company can obtain
liability insurance in the future on acceptable terms or at all.
The Company currently has in force general liability insurance, including
professional and products liability, with coverage limits of $4.0 million per
occurrence and in the aggregate annually (with no deductible either per
occurrence or in the aggregate annually). The Company's insurance policies
provide coverage on an "occurrence" basis, have certain immaterial exclusions
from coverage and are subject to annual renewal.
Environmental Matters
Medical facilities are subject to a wide variety of federal, state and
local environmental and occupational health and safety laws and regulations,
such as air and water quality control requirements, waste management
requirements and requirements for training employees in the proper handling and
management of hazardous materials and wastes. The typical branch office facility
operations include, but are not limited to, the handling, use, storage,
transportation, disposal and/or discharge of hazardous, toxic, infectious,
flammable and other hazardous materials, wastes, pollutants or contaminates.
These activities may result
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in injury to individuals or damage to property or the environment and may result
in legal liability, damages, injunctions, fines, penalties or other governmental
agency actions. The Company is not aware of any pending or threatening claim,
investigation or enforcement action regarding environmental issues which if
determined adversely to the Company, would have an adverse effect upon the
capital expenditures, earnings, or competitive position of the Company. The
annual costs of compliance with environmental laws are not considered by the
Company to be material.
Employees
As of December 1999, the Company had approximately 410 full-time
equivalent employees. The Company's employees are not currently represented by a
labor union or other labor organization. As the Company's business grows, it
will hire additional employees as may be reasonably necessary to conduct its
business. The Company believes the relations between its management and its
employees are good.
ITEM 2. PROPERTIES
Headquarters
The Company's headquarters and retail facilities are located in Salt Lake
City, Utah. The Company leases a 26,000 square foot facility at 235 East 6100
South. The facilities are leased from a third party pursuant to a lease expiring
December 21, 2008. The Company has options to renew the lease for an additional
15 years. Rent is currently $14,871 per month on a triple net basis and
increases to $18,000 per month in July 2007.
Other Retail and Office Facilities
In addition to its headquarters, the Company leases twenty-eight (28)
other facilities which range in size from 1,000 square feet to 24,000 square
feet. Most of these leases are for terms of three-to five years and most have
renewal options. The aggregate annual lease payments for these other facilities
were $665,000 for the year ended September 30, 1999. See further disclosure in
Note 8 - Lease Obligations in the financial statements.
Real Property Owned
The Company owns five acres of undeveloped property in Provo, Utah,
approximately 40 miles south of Salt Lake City.
At September 30, 1998, the Company owned a three-level office building
known as the Securities Savings and Loan Building located at 170 South Main
Street, Pleasant Grove, Utah. The building was sold on October 15, 1998 for 20%
cash and a six-month note for the balance that was paid in April 1999. The
building consisted of approximately 9,500 square feet and was originally used as
a bank. As of September 30, 1998, the building was leased to various tenants.
The leases were net leases whereby the tenants paid monthly rents which totaled
approximately $6,000 per month, and the Company paid taxes and insurance.
The Company intends to sell the remaining parcel and use the proceeds as
working capital. There are no material liens or other limitations on ownership
of any property held by the Company other than a
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general lien from the Company's bank under the general credit line which is
disclosed in the financial statements as Note 7 - Long Term Debt.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, Link Medical, Inc. ("Link") commenced litigation against
the Company and several other parties which was filed in the District Court
County, County of Arapahoe, Colorado. Link contended 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 sought to recover
$600,000, plus interest at 8% per annum, and attorney's fees and costs.
Interwest believed that it owed no additional money to Link because there had
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 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 sought to recover at least $500,000 plus interest, attorney's fees
and costs. In addition, Interwest filed Cross Claims against the other
Defendants and third party claims against the principal shareholders in Link and
another related party. Those claims were varied in nature, but included such
things as breach of contract, breach of various non-compete agreements, breach
of the Uniform Trade Secret Act, and conspiracy, and generally sought to recover
at least $500,000. The parties settled the litigation which was dismissed with
prejudice in July 1999 with the Company paying $120,000 which had been fully
covered by accrued reserves.
In June 1998, American Springs Development ("ASD") commenced litigation
against the Company which was filed in the Fourth District Court in Provo, UT.
ASD claimed that the Company breached a warranty of title in connection with the
sale of real property, and that it had suffered damages it estimated to be at
least $50,000. The Company counterclaimed against the ASD alleging that the deed
should be reformed and denying any liability. ASD remained 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. The parties settled the litigation
as of June 30, 1999 with ASD paying the balance of the note minus $10,000.
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.
From time to time the Company is subject to routine litigation and
regulatory proceedings. The Company cooperates with regulatory authorities in
order to resolve issues and refers routine litigation to insurance companies and
defense counsel as appropriate.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for a vote during
the last quarter of the year ended September 30, 1999.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the National Association of Security Dealer's SmallCap
Market System under the Symbol IWHM. Currently there is only limited trading
activity in the Company's common stock and the quotations set forth below
reflect such activity. There can be no assurance that quotations will not
fluctuate greatly in the future in the event trading activity increases or
decreases. The information contained in the following table was obtained from
the NASD and from various broker-dealers and shows the range of representative
bid prices for the Company's common stock for the periods indicated. The prices
represent quotations between dealers and do not include retail mark, mark-down
or commission and do not necessarily represent actual transactions:
Bid Price
1999(1)
High Low
First Quarter $3.63 $2.44
Second Quarter $5.00 $2.50
Third Quarter $3.50 $2.50
Fourth Quarter $3.75 $2.50
1998(1)
High Low
First Quarter $4.19 $2.75
Second Quarter $4.00 $2.75
Third Quarter $4.13 $3.50
Fourth Quarter $3.81 $2.75
(1) Calendar Quarters.
Shares Issued in Unregistered Transactions
During the last three fiscal years, the Company issued its securities in
non-registered transactions pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. The Company did not pay a commission
or any finders fees in connection with such transactions nor did any general
solicitation occur in any transaction. The securities issued in such
transactions (all with restrictive legends) were as follows:
In March 1995, the Company issued 300,000 shares of Series "A" preferred
stock in connection with the acquisition of Mountain Rehabilitation Equipment,
Inc. ("MRE") to the shareholders of MRE in exchange for all of the outstanding
shares of MRE. In August 1997, these preferred stock shares were
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converted to 112,500 shares of common stock in accordance with the formula
stated in the signed Purchase Agreement and in the Company's Amended Articles of
Incorporation.
In January 1997, the Company issued 105,140 shares of common stock for
$450,000 and warrants to purchase an additional 105,140 shares to Merlin G.
Kirby, M.D., in connection with an Option Agreement executed in November 1996.
The warrants may be exercised at $4.28 per share if paid during the first
warrant year, $4.75 per share if paid during the second warrant year, and $5.25
if paid during the third warrant year. The Option Agreement became effective
November 22, 1996 and was terminated as of October 12, 1998.
In August 1997, the Company issued 465,000 shares of common stock in
connection with the acquisition of Northwest Homecare, Inc. to the shareholders
of NHI in exchange for all of the outstanding shares of NHI.
In September 1997, the Company completed issuance of 57,126 shares of
common stock for $244,500 and warrants to purchase an additional 57,126 shares
to Jerry D. Kennett, M.D., in connection with an Option Agreement executed in
November 1996. The warrants may be exercised at $4.28 per share if paid during
the first warrant year, $4.75 per share if paid during the second warrant year,
and $5.25 if paid during the third warrant year. The Option Agreement became
effective November 22, 1996 and was terminated as of October 12, 1998.
In September 1997, the Company issued 50,992 shares of common stock for
$20,000 to James U. Jensen in connection with a Stock Option Agreement purchased
from Interwest Medical Equipment Distributors, Inc., a predecessor company, in
November 1987.
In January 1998, the Company issued 8,484 shares of common stock for
$36,312 and warrants to purchase an additional 8,484 shares to Jeffrey F. Poore,
D.D.S., in connection with an Option Agreement executed September 30, 1997. The
warrants may be exercised at $4.28 per share if paid during the first warrant
year, $4.75 per share if paid during the second warrant year, and $5.25 if paid
during the third warrant year. The Option Agreement was terminated as of
September 30, 1998.
In January 1998, the Company issued 5,000 shares of common stock for
$21,400 and warrants to purchase an additional 5,000 shares to James U. Jensen,
in connection with an Option Agreement executed September 30, 1997. The warrants
may be exercised at $4.28 per share if paid during the first warrant year, $4.75
per share if paid during the second warrant year, and $5.25 if paid during the
third warrant year. The Option Agreement was terminated as of September 30,
1998.
In January 1998, the Company issued 500 shares of common stock for $2,140
and warrants to purchase an additional 500 shares to Jerald L. Nelson, in
connection with an Option Agreement executed September 30, 1997. The warrants
may be exercised at $4.28 per share if paid during the first warrant year, $4.75
per share if paid during the second warrant year, and $5.25 if paid during the
third warrant year. The Option Agreement was terminated as of September 30,
1998.
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Holders
As of December 1, 1999, there were 4,089,029 shares of common stock
outstanding and approximately 765 stockholders of record of common stock. The
number of stockholders of record does not include an indeterminate number of
stockholders whose shares are held by brokers in "street name." Management
believes there are in excess of 800 beneficial stockholders of the Company's
common stock.
Dividends
The Company has not paid any cash dividends since its inception and does
not anticipate or contemplate paying dividends in the foreseeable future. In
addition, the Company has a bank credit agreement which limits the payment of
dividends. It is the present intention of management to utilize all available
funds for the development of the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The Company's revenue and income are derived from a diversified range of
home health care products and services. The Company divides its products and
services into three general categories: (1) home oxygen and respiratory care
services, (2) home medical equipment and supplies and (3) rehabilitation
services.
The Company's objective is to increase its market share through internal
growth and acquisitions. Interwest focuses primarily on growth within its
existing geographic markets, which the Company believes is generally more
profitable than adding additional operating centers in new markets. In addition,
the Company expands into new geographic markets on a selective basis, either
through acquisitions or by opening new operating centers, when it believes such
expansion will enhance its business. Management seeks to establish a regional
concentration of centers in order to develop the market penetration and critical
mass necessary to position the Company as a cost-effective provider of selective
home medical equipment services to managed care and other third-party payors.
As a result of the uncertainty of the outcome of additional legislative
and regulatory changes in the system of Medicare reimbursement, the Company may
in the foreseeable future slow its growth through acquisition and concentrate
primarily upon internal growth.
Net Revenues
Net revenues increased 16% from $28,636,000 in 1998 to $33,262,000 in
1999. Approximately $3.4 million or 12% of the increase was generated by same
store growth from continuing product lines. The increase was offset by
approximately $1.0 million or 4% of fiscal 1998's revenues which were sold or
terminated due to the Company's focus to provide more respiratory services.
Approximately $2.2 million or 8% of the increase in revenues was contributed by
acquired operations.
Net sales increased 4% from $14,495,000 in 1998 to %15,033,000 in 1999.
Approximately $1.2 million of net sales or 8% of the increase was generated by
same store growth from continuing product lines. The increase was offset by
approximately $1.0 million or 7% of fiscal 1998's net sales, primarily of
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rehabilitation products, which were sold or terminated. Approximately $.3
million or 3% of the increase of net sales was contributed by acquired
operations. The same store increases were due primarily due to increased
marketing efforts in the Company's core respiratory products.
Net rental revenue increased 29% from $14,144,000 in 1998 to $18,229,000
in 1999. Approximately $1.9 million or 13% increase of net rental revenue was
contributed by acquired operations and approximately $2.2 million or 16%
increase of net rental revenue was generated by same store growth. Rental
revenue as a percentage of total revenue increased to 55% at 1999 compared to
49% at 1998. Sales revenue had a corresponding reduction to 45% in 1999 from 51%
in 1998. 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%, 32% and
6%, respectively, in 1999 compared to 55%, 34% and 11% in 1998, respectively.
Increases in home oxygen and respiratory care services and home medical
equipment product lines are due primarily to increased strategic focus on these
segments in both marketing and acquisitions. The decrease in rehabilitation
products revenue is due primarily to the strategic exit by the Company in
markets where reimbursement rates and/or payment terms are inadequate.
The Balanced Budget Act of 1997 ("BBA") was signed into law on August 5,
1997. The legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year thereafter
are reduced to 70 percent of the fee schedule amounts in effect during 1997. The
BBA reduced revenue to the Company approximately $750,000 in fiscal 1998 and an
additional $460,000 in fiscal 1999.
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.
However, the Omnibus Budget Bill ("BBRA") enacted in November 1999 lifts the
freeze imposed in the BBA and provides a modest annual CPI increase of 0.3% for
2001 and 0.6% for 2002.
Gross Margins
Gross margins were 65.0% in 1999 and 63.0% in 1998. Gross margin from
net rental revenue was 82% in 1999 compared to 81% in 1998. Gross margin from
net sales revenue was 47% in 1999 compared to 46% in 1998. The increase in gross
margin is primarily due to increases in rental revenue, with higher margins, as
percentage of total revenue partially offset by lower margins on rental revenue
due to the BBA reduction in payment for home oxygen services provided to
Medicare beneficiaries. Additionally, the increase in gross margin from net
sales is primarily due to the elimination of certain low margin products. The
managed care market fosters competition which has had an adverse effect on
reimbursement rate with resultant decrease in margins on rental revenue.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses have increased 20% to
$18,296,000 for fiscal 1999 from $15,253,000 for fiscal 1998. Selling, general
and administrative expenses increased as a percentage of net revenues to 55.0%
in 1999 from 53.3% in 1998 due to increased staffing and efforts to improve the
collection of both acquired receivables and ongoing increases in receivables due
to internal revenue increases.
Interest Expense
Interest expense decreased 5% to $991,000 in fiscal 1999 compared to
$1,046,000 in fiscal 1998. Interest expense as a percentage of revenue decreased
to 3.0% for 1999 from 3.7% for 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
decrease was primarily attributable to reductions in the prime interest rate
offset by payments on long term debt and approximately $4.1 million of new and
assumed borrowings to fund acquisition activities during fiscal 1999, most of
which was funded at the end of September 1999.
Non-recurring Items
During the first quarter of fiscal 1999, the Company sold, for $545,000,
a building that had been leased to several independent parties, with a basis of
$447,000. After commissions and closing costs, the Company recognized a
non-recurring gain of $67,000. During the third quarter of fiscal 1999, the
Company sold, for $105,000, a home that had been 75% owned by the Company, with
a basis of $49,000 After commissions and closing costs, the Company recognized a
non-recurring gain of $50,000.
Acquisitions
In fiscal 1999, the Company acquired certain operating assets of
HealthCor Holdings, Inc.'s Denver home medical equipment services operations.
The operations acquired in fiscal 1999 had aggregate annualized revenues of
approximately $7.2 million at the time of acquisition. The cost of this
acquisition was approximately $4.1 million and was allocated to acquired assets
as follows: $.1 million to current assets and $4.0 million to property and
equipment; the Company did not acquire accounts receivable. This acquisition was
integrated with the Company's current operation in Denver.
In fiscal 1998, the Company acquired, in unrelated transactions, certain
operating assets of 5 local competitors. The operations acquired in fiscal 1998
had aggregate annualized revenues of approximately $8.0 million at the time of
acquisition. The cost of these acquisitions was approximately $4.4 million and
was allocated to acquired assets as follows: $1.9 million to current assets,
$1.6 million to property and equipment, and $.9 million to goodwill. These
acquisitions resulted in the addition of 4 new operating branches.
Liquidity and Capital Resources
At September 30, 1999 and 1998 the Company's working capital was
$9,504,000 and $2,613,000, respectively, an increase of $6,891,000 or 264%. The
increase is primarily due to a new long term credit
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agreement with a financial institution that converted the majority of the
Company's credits into a single six-year line of credit.
The Company's primary needs for capital are to fund acquisitions,
purchase rental equipment, and cover debt service payments. For the year ended
September 30, 1999, net cash provided by operating activities was $2,701,000 as
compared to $2,854,000 for the year ended September 30, 1998, a decrease of
$153,000 or 5%. Significantly contributing to cash provided from operations in
fiscal 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 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 $4,215,000 and
$1,752,000 for the years ended September 30, 1999 and 1998, respectively.
Activity in the year ended September 30, 1999 included the purchase of
$4,100,000 of assets acquired from HealthCor Holdings, Inc., and the Company's
investment in capital equipment of $1,945,000.
Net cash provided in financing activities amounted to $1,618,000 for the
year ended September 30, 1999 compared to $1,750,000 used in financing
activities for the year ended September 30, 1998. Activity in the year ended
September 30, 1999 included the Company's proceeds of $3,147,000 from long-term
obligations primarily due to the acquisition of assets from HealthCor Holdings,
Inc., and payments of $3,430,000 related to long-term obligations.
As of September 30, 1999, the Company's principal sources of liquidity
consisted of $9.5 million of working capital and approximately $4.2 million
available on its $18 million revolving line of credit. The Company has an $18
million revolving operating line of credit with its principal bank expiring on
July 31, 2005. The maximum principal amount will be reduced by $600,000 on a
quarterly basis, beginning September 30, 2000 and continuing on the last day of
each quarter thereafter. Borrowing under the Company's line of credit is secured
and limited to 80% of the net book value of eligible equipment, 75% of eligible
accounts receivable and 50% of eligible inventory plus $4 million or 3 times the
Company's EBITDA for the most recently preceding 12 months. Interest is payable
monthly at the bank's prime lending rate minus .25%. As of September, 30, 1999
and 1998, $13,024,000 and $4,491,000, respectively, were outstanding under lines
of credit. The increase is primarily due to the new line of credit described
above that replaced previous lines of credit and term loans and acquisitions
which contributed to additional borrowings under the Company's working capital
credit facilities.
The Company anticipates that capital expenditures for fiscal 2000 will
be approximately $2.5 million. The Company believes that it will be able to
generate sufficient funds internally, together with funds that may be borrowed
under its credit facilities, to meet its anticipated short-term and long-term
capital requirements for the foreseeable future.
The Company's future liquidity will continue to be dependent upon its
operating cash flow and management of accounts receivable. The Company is not
aware of any impact on liquidity due to pending litigation arising in the
ordinary course of business.
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Financial Condition
Net accounts receivable increased 17% to $12,225,000 from $10,447,000 at
September 30, 1999 and 1998, respectively. Approximately one-half of the
increase is due to receivables from the acquisition in Denver, revenue growth
from existing stores during the year and collection delays encountered
integrating trade receivables from acquisition activities during fiscal 1998.
Collection delays contributed to the Company's average days sales in receivables
increasing to 122 days from 111 days at September 30, 1999 and 1998,
respectively. However, days sales in receivables at September 30, 1999 and 1998
decreased to 111 from 123, respectively. The recent decrease in days sales in
receivables is due to substantial increases in the Company's billing and
collections staff throughout the fiscal year. The allowance for doubtful
accounts decreased to $1,594,000 from $1,760,000 at September 30, 1999 and 1998,
respectively due to substantial writeoffs of uncollectible accounts from
acquisitions during fiscal 1998.
Inventories decreased 20% to $3,007,000 from $3,771,000 at September 30,
1999 and 1998, respectively. Inventories decreased $764,000 during 1999
primarily as a result of a shift in product mix toward rentals revenue which
requires lower inventory levels.
At September 30, 1999, the Company had notes receivable, including
current portion, of $187,000 compared to $617,000 at September 30, 1998. The
decrease is due to payments. The notes receivable originated from the sales of
undeveloped real estate, an apartment complex and sale of rehab business
operations.
At September 30, 1999, the Company held property and equipment, net of
depreciation, used in its business amounting to $11,097,000 compared to
$6,745,000 at September 30, 1998. The increase in property and equipment is
attributable to the fair market value of assets acquired in acquisition
activities and patient rental equipment purchased to support increased rental
revenue.
Current liabilities decreased 47% to $6,916,000 at September 30, 1999
from $12,959,000 at September 30, 1998. Correspondingly, current assets grew 5%
to $16,420,000 from $15,572,000. The decrease in current liabilities is
primarily due to a new long term credit agreement with a financial institution
that converted majority of the Company's credits into a single six-year line of
credit. The increase in current assets is due primarily to increases in net
accounts receivable due to acquired operations, revenue growth from existing
stores during the year and billing delays encountered integrating trade
receivables from acquisition activities during fiscal 1998. The allowance for
doubtful accounts decreased to $1,594,000 from $1,760,000 at September 30, 1999
and 1998, respectively due to substantial writeoffs of uncollectible accounts
from acquisitions during fiscal 1998 that were previously provided for.
Option Agreements
On December 9, 1996, the Company entered into an option agreement with
eight private investors. The terms of the agreement provide the investors the
right to purchase, pursuant to options and warrants, up to an aggregate of
1,170,714 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If the optionees elected to exercise their rights in full, the total
proceeds to the Company would be approximately $5.9 to 6.5 million. On December
19, 1996, the investors paid $100,000 option fee providing the right to exercise
options to purchase 162,500 shares of common stock at a price $4.28 within 180
days. During the year ended September 30, 1997, the optionees exercised the
option by paying $694,500 in exchange for 162,266 shares of the Company common
stock and issuance of warrants for 162,266 shares of
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common stock exercisable for three years at $4.28 during the first warrant year,
$4.75 during the second year, and $5.25 during the third warrant year. The
Company still holds the second $100,000 option fee and owes 21,263 shares and
warrants for 21,263 shares of common stock exercisable for three years (from
June 30, 1997) at $4.78 during the first warrant year, $5.25 during the second
year, and $5.75 during the third warrant year. All of the terms of this option
agreement have expired without any further exercise.
On September 30, 1997, the Company entered into an option agreement with
each of its outside Directors. The terms of the agreements provide the Directors
the right to purchase, pursuant to options and warrants, up to an aggregate of
198,000 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If each Director elected to exercise his rights in full, the total
proceeds to the Company would be approximately $1.02 to $1.12 million. On
October 10, 1997, each Director paid a $1,000 option fee providing each Director
the right to exercise options to purchase 8,250 shares of common stock at a
price $4.28 within 180 days. During the year ended September 30, 1998, the
Directors exercised options by paying $59,852 in exchange for 13,984 shares of
the Company common stock and issuance of warrants for 13,984 shares of common
stock exercisable for three years at $4.28 during the first warrant year, $4.75
during the second year, and $5.25 during the third warrant year. As of September
30, 1998, all of the terms of this option agreement had expired without any
further exercise.
There have been no other significant changes in capitalization or
financial status during the past two years that are not reflected in the
financial statements.
Inflation
Inflation continues to apply modest upward pressure on the cost of goods
and services provided by Interwest Home Medical. Because of restrictions on
reimbursement by government and private medical insurance programs and the
pressures to contain the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation.
Year 2000
The Company installed software upgrades for its accounting and data
processing systems in the fourth fiscal quarter of 1998 that are warranted by
the vendor to be Y2K compatible. The Company also uses ancillary, third party
computer software to electronically submit medical claims to certain payors. In
the event that the use of this software is impacted by the Y2K problem, the
Company's contingency plan includes the submission of paper claims to such
payors. The Company does not believe that this software will have a material
effect on the Company's ability to receive payment for services rendered. 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 $75,000 has been incurred as of September 30, 1999, 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 Y2K compliant products and
services. In addition, the Company has reviewed Y2K product compliance listings
provided by the FDA and exchanged equipment that may be questionable with
equipment that has been determined to be Y2K compliant. In the event that the
Company identifies specific equipment that is
26
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not Y2K compliant, or that the Company is unable to determine the status of such
items, the Company will remove such items from service and replace them with
therapeutically comparable, Y2K compliant equipment from alternate vendors. The
Company does not believe that the scope and cost of exchanging non-compliant
equipment will have a material impact on the Company's financial position.
The Company is highly dependent upon certain government and private
payors for payment of claims for services and equipment provided by the Company.
The Company is in the process of determining the Year 2000 compliance of
computer systems used by third party payors to process claims for medical
services and equipment submitted by the Company for payment. The Company cannot
be assured of the timely remediation of third party claims processing and
payment systems. The failure by a significant third party payor to correct Year
2000 problems, 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 Year 2000 progress of
Medicare Part B carriers, and other government agencies and private payors with
which the Company does significant business, to determine the potential impact
to the Company. The Company is also in the process of determining the
contingency plans of these payors to release payments to providers such as the
Company in the event of claims processing system failures. Such plans may
include cash advances to providers based on historical payment trends or
processing claims on paper rather than in an electronic format.
The financial institutions with whom the Company has its material
relationships have represented to the Company that their Y2K compliance programs
are substantially completed.
Forward Outlook and Risks
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological development, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in any of the
Company's forward- looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (a) the failure to
obtain additional borrowed and/or equity capital on favorable terms for
acquisitions and expansion; (b) adverse changes in federal and state laws, rules
and regulations relating to home health care industry, to government
reimbursement policies, to private industry reimbursement policies and to other
matters affecting the Company's industry and business; (C) the availability of
appropriate acquisition candidates and the successful completion of
acquisitions; (d) the demand for the Company's products and services; and (e)
other risks detailed in the Company's Securities and Exchange Commission
filings.
This Form 10-KSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of the Company. All statements, other than statements of
historical facts, included in this Form 10-KSB, including those regarding market
trends, the Company's financial position, business strategy, projected costs,
and plans and objectives of management for future operations, are
forward-looking statements. In general, such statements are identified by the
use of forward- looking words or phrases including, but not limited to,
"intended," "will," "should," "may," "expects," "expected," "anticipates," and
"anticipated" or the negative thereof or variations thereon or similar
terminology. These
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<PAGE>
forward-looking statements are based on the Company's current expectations.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Because forward-looking statements
involve risks and uncertainties, the Company's actual results could differ
materially. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed hereunder and elsewhere
in this Form 10-KSB. These forward-looking statements represent the Company's
judgment as of the date of this Form 10-KSB. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements. The Company disclaims, however,
any intent or obligation to update its forward-looking statements.
High Leverage. As of September 30, 1999, the Company had total
stockholder's equity of $11.2 million and total indebtedness of $21.1 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" and the Company's fiscal 1998
consolidated financial statements, included herein.
Changing Regulatory Environment. The Company's business is subject to
extensive federal, state and local regulation. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. See "Government Regulation."
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 and 1999 had an adverse impact on 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. However, the Omnibus Budget Bill ("BBRA") enacted in November 1999
lifts the freeze imposed in the BBA and provides a modest annual CPI increase of
0.3% for 2001 and 0.6% for 2002. See "Reimbursement for Services" and
"Government Regulation."
Slow Reimbursements. At September 30, 1999, approximately 32% of the
Company's net revenues were derived from managed care and other non-governmental
third party payors. The increase in the length of time required to collect
receivables owed by managed care and other non-governmental third party payors
is an industry-wide issue. A continuation of the lengthening of the amount of
time required to collect accounts receivables from managed care organizations or
other payors or the Company's inability to decrease days net sales outstanding
could have a material adverse effect on the Company's financial condition or
results of operations. During fiscal 1998 and 1999 the Company terminated
relationships with certain managed care organizations and is in the process of
reviewing its managed care contracts. There can be no assurance that the
Company's days net sales outstanding will not continue to increase if these
payors continue to delay or deny payments to the Company for its services. See
"Reimbursement for Services" and "Liquidity and Capital Resources."
28
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Pricing Pressures. Medicare, Medicaid and other payors, including
managed care organizations and traditional indemnity insurers, are attempting to
control and limit increases in health care costs and, in some cases, are
decreasing reimbursement rates. While the Company's net revenues from managed
care and other non-governmental payors have increased and are expected to
continue to increase, payments per service from managed care organizations
typically have been lower than Medicare fee schedules and reimbursement from
other payors, resulting in reduced profitability on such services. Other payor
and employer groups, including Medicare, are exerting pricing pressure on home
health care providers, resulting in reduced profitability. Such pricing
pressures could have a material adverse effect on the Company's financial
condition or results of operations. During fiscal 1998 and 1999 the Company
terminated relationships with certain managed care organizations and is in the
process of reviewing its managed care contracts. See "Sales and Marketing" and
"Government Regulation."
Risks Related to Goodwill. At September 30, 1999 unamortized goodwill
resulting from acquisitions was approximately $4.4 million, or approximately
13.7% of total assets. Goodwill is the excess of cost over the fair value of the
net assets of businesses acquired. There can be no assurance that the Company
will ever realize the value of such goodwill. This goodwill is being amortized
on a straight-line basis over 5 to 40 years. The Company will continue to
evaluate on a regular basis whether events or circumstances have occurred that
indicate all or a portion of the carrying amount of goodwill may no longer be
recoverable, in which case an additional charge to earnings would become
necessary. Although at September 30, 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 six
acquisitions between fiscal 1998 and 1999, 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.
The Company has encountered collection difficulties from acquired
Accounts Receivable due to: (i) failure to document initial service
authorizations or continued service authorizations in required time frames, (ii)
inability to retain or adequately replace billing representatives with
knowledgeable personnel due to the complex billing requirements encountered in
the industry, and (iii) difficulties in converting data from acquired company to
the Company's accounting and billing system. Consequently, the Company intends
to restrict acquisition of Accounts Receivable in the future.
When evaluating acquisitions, the Company focuses primarily on growth
within its existing geographic markets, which the Company believes is generally
more profitable than adding additional operating centers in new markets. See
"Strategy." In attempting to make acquisitions, the Company competes with other
providers, some of which have greater financial resources than the Company. In
addition, since the consideration for acquired businesses may involve cash,
notes or the issuance of shares of common stock, options or warrants, existing
stockholders may experience dilution in the value of their shares of common
stock in connection with such acquisitions. There can be no assurance that the
Company in the future will be able to negotiate, finance or integrate
acquisitions without experiencing adverse consequences that could have a
material adverse effect on the Company's financial condition or results of
operations. Acquisitions involve numerous short and long-term risks, including
loss of referral sources, diversion of management's attention, failure to retain
key personnel, loss of net revenues of the acquired
29
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companies, inability to integrate acquisitions (particularly management
information systems) without material disruptions and unexpected expenses, the
possibility of the acquired businesses becoming subject to regulatory sanctions,
potential undisclosed liabilities and the continuing value of acquired
intangible assets. There can be no assurance that any given acquisition will be
consummated, or if consummated, will not materially adversely affect the
Company's financial condition or results of operations. Additionally, because of
matters discussed herein that may be beyond the control of the Company, there
can be no assurance that suitable acquisitions will continue to be identified or
that acquisitions can be consummated on acceptable terms.
Competition. The home medical equipment services industry is highly
competitive and includes national, regional and local providers. The Company
competes with a large number of companies in all areas in which its operations
are located. The Company's competitors include major national and regional
companies, hospital-owned companies, and numerous local providers. Some current
and potential competitors have or may obtain significantly greater financial and
marketing resources than the Company. Accordingly, other companies, including
managed care organizations, hospitals, long-term care providers and health care
providers that currently are not serving the home health care market, may become
competitors. As a result, the Company could encounter increased competition in
the future that may limit its ability to maintain or increase its market share
or otherwise materially adversely affect the Company's financial condition or
results of operations.
Regulatory Compliance. The Company is subject to extensive regulation
which govern financial and other arrangements between healthcare providers at
both the federal and state level. At the federal level, such laws include (i)
the Anti-Kickback Statute, which generally prohibits the offer, payment,
solicitation or receipt of any remuneration in return for the referral of
Medicare and Medicaid patients or the purchasing, leasing, ordering or arranging
for any good, facility services or items for which payment can be made under
Medicare and Medicaid, federal and state health care programs, (ii) the Federal
False Claims Act, which prohibits the submission for payment to the federal
government of fraudulent claims, and (iii) "Stark legislation," which generally
prohibits, with limited exceptions, the referrals of patients by a physician to
providers of "designated health services" under the Medicare and Medicaid
programs, including durable medical equipment, where the physician has a
financial relationship with the provider. Violations of these provisions may
result in civil and criminal penalties, loss of licensure and exclusion from
participation in the Medicare and Medicaid programs. Many states have also
adopted statutes and regulations which prohibit provider referrals to an entity
in which 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.
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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 No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" which
is effective for years beginning after December 15, 1998. It is not expected
that the adoption of this statement will have a material impact on the Company's
financial statements.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Interest Home Medical, Inc. Financial Statements Page
Report of Independent Accountants ....................................33
Consolidated Balance Sheets...........................................34
September 30, 1999 and 1998
Consolidated Statements of Income.....................................36
Years ended September 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity.......................37
Years ended September 30 , 1999 and September 30, 1998
Consolidated Statements of Cash Flows.................................38
Years ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements............................41
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Interwest Home Medical, Inc.
We have audited the accompanying consolidated balance sheet of Interwest Home
Medical, Inc. and subsidiaries, as of September 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Interwest Home Medical, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
TANNER + CO.
Salt Lake City, Utah
November 24, 1999
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- ------------------------------------------------------------------------------
1999 1998
------------------------
Assets
Current assets:
Cash and cash equivalents $ 357,000 $ 253,000
Accounts receivable, net of allowance for
doubtful accounts of $1,594,000 and
$1,760,000 12,225,000 10,447,000
Inventories 3,007,000 3,771,000
Current portion of notes receivable 54,000 243,000
Other current assets 77,000 157,000
Deferred tax asset 700,000 701,000
------------------------
Total current assets 16,420,000 15,572,000
Notes receivable 133,000 374,000
Investment in undeveloped real estate 76,000 125,000
Investment in office buildings - 447,000
Property and equipment - net 11,097,000 6,745,000
Intangible assets, net 4,422,000 4,967,000
Other assets 192,000 151,000
------------------------
$ 32,340,000 $28,381,000
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Consolidated Balance Sheet
September 30,
- ------------------------------------------------------------------------------
1999 1998
------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Checks written in excess of cash in bank $ 1,735,000 $ 771,000
Current portion of long-term debt 1,791,000 3,246,000
Notes payable - 4,491,000
Accounts payable 2,293,000 2,800,000
Accrued expenses 743,000 767,000
Income taxes payable 354,000 884,000
------------------------
Total current liabilities 6,916,000 12,959,000
------------------------
Deferred tax liability 958,000 416,000
Long-term debt 13,273,000 5,674,000
------------------------
Total liabilities 21,147,000 19,049,000
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares - -
authorized and -0- shares issued and
outstanding
Common stock, no par value; 50,000,000 shares
authorized, 4,089,029 shares issued and 3,299,000 3,299,000
outstanding
Retained earnings 7,894,000 6,033,000
------------------------
Total stockholders' equity 11,193,000 9,332,000
------------------------
$ 32,340,000 $28,381,000
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years Ended September 30,
- ------------------------------------------------------------------------------
1999 1998
------------------------
Revenue:
Net sales $ 15,033,000 $14,492,000
Net rental income 18,229,000 14,144,000
------------------------
Total revenue 33,262,000 28,636,000
Cost of sales and rental 11,684,000 10,582,000
------------------------
Gross profit 21,578,000 18,054,000
------------------------
Selling, general and administrative expenses 18,296,000 15,253,000
------------------------
Income from operations 3,282,000 2,801,000
Other income (expense):
Gain on sale of assets 126,000 -
Interest income 243,000 206,000
Interest expense (991,000) (1,046,000)
------------------------
Income before income taxes 2,660,000 1,961,000
Income tax benefit (expense):
Current (256,000) (846,000)
Deferred (543,000) 311,000
------------------------
Total income taxes (799,000) (535,000)
------------------------
Net income $ 1,861,000 $ 1,426,000
========================
Net income per share:
Basic $ .45 $ .35
========================
Fully diluted $ .45 $ .35
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended September 30, 1999 and 1998
- ------------------------------------------------------------------------------
Preferred Stock Common Stock Retained
---------------------------------------
Shares Amount Shares Amount Earnings
----------------------------------------------------
Balance, October 1, 1997 - $ - $4,074,249 $3,239,000 $4,607,000
Issuance of common stock - - 14,780 60,000 -
Net income - - - - 1,426,000
----------------------------------------------------
Balance, September 30, 1998 - - 4,089,029 3,299,000 6,033,000
Net income - - - - 1,861,000
----------------------------------------------------
Balance September 30, 1999 - $ - 4,089,029 $3,299,000 $7,894,000
====================================================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended September 30,
- ------------------------------------------------------------------------------
1999 1998
--------------------------
Cash flows from operating activities:
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 1,861,000 $ 1,426,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,555,000 2,042,000
Gain on settlement of litigation (96,000) -
(Gain) loss on sale of assets (126,000) 28,000
(Increase) decrease in:
Accounts receivable, net (1,778,000) (1,884,000)
Inventories 764,000 164,000
Other current assets 80,000 16,000
Other assets (41,000) 40,000
Deferred tax asset 1,000 (460,000)
Increase (decrease) in:
Accounts payable (507,000) 439,000
Accrued expenses (24,000) 173,000
Income taxes payable (530,000) 721,000
Deferred income taxes 542,000 149,000
------------------------
Net cash provided by
operating activities 2,701,000 2,854,000
------------------------
Cash flows from investment activities:
Collection of notes receivable 430,000 93,000
Proceeds from sale of property and equipment 787,000 437,000
Proceeds from sale of investment in office
building and 613,000 -
undeveloped real estate
Increase in investment in office building - (11,000)
Purchase of property and equipment (6,045,000) (2,071,000)
Purchase of intangible assets - (200,000)
------------------------
Net cash used in
investing activities (4,215,000) (1,752,000)
------------------------
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- ------------------------------------------------------------------------------
1999 1998
------------------------
Cash flows from financing activities:
Checks written in excess of cash 964,000 (171,000)
Proceeds from notes payable 6,836,000 (12,677,000)
Payments on notes payable (5,899,000) 13,805,000
Proceeds from long-term debt 3,147,000 44,000
Payments on long-term debt (3,430,000) (2,811,000)
Issuance of common stock - 60,000
------------------------
Net cash provided by (used in)
financing activities 1,618,000 (1,750,000)
------------------------
Net increase (decrease) in cash 104,000 (648,000)
Cash, beginning of year 253,000 901,000
------------------------
Cash, end of year $ 357,000 $ 253,000
========================
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 971,000 $ 1,021,000
========================
Income taxes $ 786,000 $ 125,000
========================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
- ------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
1999
o The Company financed the purchase of property and equipment in the amount of
$1,079,000 with long term debt.
o The Company re-financed its note payable and certain of its long-term debt
with a new financing arrangement in the amount of $10,499,000.
o The Company settled litigation, and as a result was relieved of debt in the
amount of $480,000 related to a prior acquisition. As a result, the Company
also wrote down goodwill associated with this acquisition in the amount of
$384,000. The Company recognized a gain of $96,000 on the transaction.
o The Company acquired property and equipment in the amount of $4,100,000 with
long-term debt of $400,000 and cash of $3,700,000.
1998
o The Company acquired assets and assumed certain liabilities from companies in
Utah and Arizona for long-term debt. The net assets purchased for long-term
debt consist of the following:
Accounts receivable, net $ 1,348,000
Inventory 491,000
Note receivable 13,000
Property and equipment 1,548,000
Intangible assets 744,000
Other assets 23,000
Accounts payable and accrued liabilities (31,000)
------------
Net assets purchased with long-term debt $ 4,136,000
============
o The Company sold a segment of its business in Nevada to the former owner of
the business in exchange for a note receivable in the amount of $250,000.
o The Company also financed the purchase of property and equipment in the
amount of $515,000 with long-term debt.
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- ------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Description of Business
Interwest Home Medical Equipment, Inc., and subsidiaries ("Interwest" or the
"Company") provides a diversified range of home health care services and
products. The Company currently conducts its business from twenty-nine (29)
locations in the States of Utah, Colorado, Idaho, Nevada, California, Alaska,
and Arizona. The Company divides its products and services into three general
categories: (1) home oxygen and respiratory care services, (2) home medical
equipment and supplies, and (3) rehabilitation services.
Principles of Consolidation
The consolidated financial statements include the financial information of
Interwest Home Medical, Inc., and its wholly owned subsidiaries (Interwest
Medical Equipment Distributors, Inc., Interwest Home Pharmacy, Inc., Interwest
Home Medical - Alaska, Inc., and Interwest Home Medical - Arizona, Inc.). All
material intercompany transactions and balances have been eliminated in
consolidation of the companies.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term securities purchased with an original maturity of three months or
less to be cash equivalents.
Inventories
Inventories consist of medical equipment and supplies held for sale and are
stated at the lower of average cost (FIFO basis) or market.
Investments in Undeveloped Real Estate
Investments in undeveloped real estate are recorded at the lower of cost or
market. When it is determined that future estimated cash flows are lower than
recorded values for long-term investments, these investments are written down to
estimated net fair market value and the amount of the write-down is accounted
for as a current period loss.
Investment in real estate consists of one parcel of undeveloped land located in
the state of Utah in Utah County.
- ------------------------------------------------------------------------------
41
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
1, Organization and Summary of Significantn Accounting Policies Continued
Property and Equipment
Property and equipment, consisting of rental equipment, equipment, furniture and
fixtures, vehicles and leasehold improvements is stated at historical cost.
Depreciation and amortization is computed using the straight-line method over
estimated useful lives of the assets or the term of the lease agreements.
Intangible Assets
Intangible assets, consisting of purchased customer lists, supplier lists,
non-competition agreements and goodwill are stated at cost. The Company
evaluates goodwill and other intangible assets by using an operating income
realization test. In addition, the Company considers the effects of changes in
the business environment, including competitive pressures, market changes, and
technological and regulatory changes. Amortization is computed using the
straight-line method over five to forty years, or the term of the non-compete
agreement.
Income Taxes
The Company accounts for income taxes under the provision of SFAS 109
"Accounting for Income Taxes." This method requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between tax bases and financial reporting bases of other assets and
liabilities.
Revenue Recognition Revenues are recognized as follows:
o Patient revenues are recognized net of contractual adjustments
related to third party payers when services are rendered. The
amount paid by a third party payer is dependent upon the
benefits included in the patient's policy.
o Other revenues are recognized as the services are
rendered or the sales are made.
Net Income Per Share
Net income per share is based on weighted average shares outstanding of
approximately 4,089,000 and 4,085,000 shares for the years ended September 30,
1999 and 1998, respectively. There is no difference on earnings per share on a
fully diluted basis under the Treasury Stock method as the weighted average
shares outstanding are essentially the same for both standard and fully diluted
shares outstanding.
- ------------------------------------------------------------------------------
42
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
1, Organization and Summary of Significant Accounting Policies Continued
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of individuals in the Western
United States. Substantially all revenues are from these customers. Accounts
receivable include those of the individuals and their third party payors,
including insurance companies, Medicare, Medicaid and other governmental
agencies. Revenues covered by Medicare, which is a third party payor, accounted
for approximately 36% and 33% of total revenues received for the years ended
September 30, 1999 and 1998, respectively.
Use of Estimates in the preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassification
Certain amounts in the financial statements for 1998 have been reclassified to
conform with the current year presentation.
2. Acquisitions
During the year ended September 30, 1999 the Company acquired certain assets of
a company which was accounted for as a purchase and, accordingly, is included in
the consolidated financial statements since its date of acquisition. The
purchase price of $4,100,000, was financed through cash and long-term debt, has
been allocated to the assets of the Company based upon their respective fair
market values. There was no excess purchase price over assets acquired.
The following unaudited pro forma consolidated results of operations have been
prepared as if the 1999 acquisition had occurred at the beginning of fiscal
1999:
- ------------------------------------------------------------------------------
43
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
Pro Forma
Results of
Operations
------------
1999
------------
Total revenue $ 40,450,000
Total expenses $ 38,350,000
------------
Net income $ 2,100,000
============
Net income per share $ 0.51
============
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
- ------------------------------------------------------------------------------
44
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
2. Acquisitions Continued
During the year ended September 30, 1998 the Company acquired five companies
which were accounted for as purchases and, accordingly, are included in the
consolidated financial statements since their respective dates of acquisition.
The aggregate purchase price of $4,385,000, which was financed through cash
resources and long-term debt, has been allocated to the assets of the Company
based upon their respective fair market values. The excess of the purchase price
over assets acquired of $944,000 has been included in goodwill and is being
amortized over periods of ten to forty years.
The following unaudited pro forma consolidated results of operations have been
prepared as if the 1998 acquisitions had occurred at the beginning of fiscal
1998:
Pro Forma
Results of
Operations
------------
1998
------------
Total revenue $ 32,209,000
Total expenses $ 30,597,000
------------
Net income $ 1,612,000
============
Net income per share $ 0.39
============
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
- ------------------------------------------------------------------------------
45
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
3. Notes Receivable
Notes receivable consist of the following at September 30, 1999 and 1998:
1999 1998
------------------------
Notes receivable in connection
with the sale of a segment of the
business due in monthly
installments of $5,633, including
interest at 8.5%. The note is due
in October 2002 and is unse$ured 187,000 $ 231,000
Mortgage receivable, due in
monthly installments of $1,765,
including interest at 9.5%,
maturing March 1, 2000, secured
by apartment building - 194,000
Note receivable in connection with
the sale of property. The note was
due in March 1997, including
interest of 9%, and is secured by
real estate - 179,000
Note receivable acquired in
connection with the purchase of
another company, due in 1998 - 13,000
------------------------
187,000 617,000
Less current portion 54,000 243,000
------------------------
$ 133,000 $ 374,000
========================
- ------------------------------------------------------------------------------
46
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
4. Property and
Equipment
Property and equipment at September 30, 1999 and 1998 consist of the following:
Life 1999 1998
--------------------------------------------
Rental equipment 3-10 years $15,990,000 $10,514,000
Equipment and signs 3-10 years 1,417,000 1,095,000
Furniture and fixtures 3-10 years 498,000 412,000
Vehicles 2-5 years 1,021,000 636,000
Leasehold improvements 3-5 years 322,000 501,000
--------------------------------------------
19,248,000 13,158,000
Less accumulated
depreciation and
amortization 8,151,000 6,413,000
-----------------------------
$11,097,000 $6,745,000
=============================
5. Intangible Assets
Intangible assets at September 30, 1999 and 1998 consist of the following:
Life 1998
------------------------------------------------
Goodwill 5-40 years $4,557,000 $4,958,000
Noncompete agreements 5-7 years 399,000 399,000
Other 5 years 30,000 30,000
---------------------------------
4,986,000 5,387,000
Less accumulated
amortization 564,000 420,000
---------------------------------
$4,422,000 $4,967,000
=================================
- ------------------------------------------------------------------------------
47
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
6. Notes Payable
Notes payable at September 30, and 1998, consist of the following:
1999 1998
-------------------------------
Line of credit in the amount of
$4,350,000 payable to a financial
institution due February 12, 1999;
with interest payments at the bank's
prime rate (8.25% at September 30,
1998) minus 0.50% payable quarterly,
secured by accounts receivable and
inventory $ - $ 3,691,000
Line of credit in the amount of
$1,000,000 payable to a financial
institution due August 30, 1999, with
interest at prime (8.25% at September
30, 1998) minus 0.50% payable quarterly;
secured by accounts receivable and
inventory - 800,000
-------------------------------
$ - $ 4,491,000
===============================
- ------------------------------------------------------------------------------
48
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
7. Long-term Debt
Long-term debt at September 30, 1999 and 1998, consists of the following:
1999 1998
----------------------------------
Note payable to a bank requiring
quarterly principal payments of
$600,000, beginning September 30, 2000.
The total borrowing available under
the note is $18 million. Monthly
interest payments are due at a rate of
the bank's prime rate (8.25% at September
30, 1999) minus .25%, secured by accounts
receivable, inventory and equipment. $ 13,024,000 $ -
Notes payable in connection with
the acquisition of companies
requiring aggregate monthly payments of
$25,049 including interest at rates of
8% to 9%, unsecured 501,000 894,000
Note payable in connection with
the acquisition of a company
requiring a single payment in
March, 2000, including interest
8%, unsecured 400,000 -
Installment contracts payable in
aggregate monthly installments totaling
$2,069 including interest ranging from
10% to 10.99%, secured by vehicles 24,000 78,000
- ------------------------------------------------------------------------------
49
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
1999 1998
----------------------------------
7. Long-term Debt Continued
Notes payable to a bank requiring
aggregate monthly payments of
$183,558 including interest at a rate of
8.0% to prime (8.25% at September 30,
1998) plus 1.25%, secured by accounts
receivable, inventory and equipment - 6,388,000
Note payable to a company in
connection with the acquisition
of a company requiring annual payments
of $200,000 plus interest at a rate of
8%, secured by property and equipment.
This amount was settled in 1999. - 600,000
Notes payable requiring aggregate monthly
payments of $21,741 including interest
at prime (8.25% at September 30, 1998)
plus 1.25% to 13%, secured by equipment - 367,000
Capital lease obligations (see note 8) 1,115,000 593,000
----------------------------------
15,064,000 8,920,000
Less current portion 1,791,000 3,246,000
----------------------------------
Long-term debt $13,273,000 $5,674,000
==================================
- ------------------------------------------------------------------------------
50
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
7. Long-term Debt Continued
Future maturities of long-term debt at September 30, 1998 were as follows:
Year ending September 30:
2000 $ 1,791,000
2001 2,791,000
2002 2,609,000
2003 2,576,000
2004 2,473,000
Thereafter 2,824,000
-------------
$ 15,064,000
=============
8. Lease Obligations
The Company leases certain equipment under terms accounted for as capital
leases. The Company also leases small equipment under noncancellable operating
leases. At September 30, 1999 and 1998, the total cost of all assets currently
under capital lease is $1,752,000 and $969,000, respectively. Accumulated
amortization at that date amounted to $623,000 and $351,000, respectively. The
following summarizes future minimum lease payments under leases at September 30,
1999:
Operating Capital
Year Ending September 30: Leases Leases
------------------------
2000 $ 864,000 $ 595,000
2001 673,000 217,000
2002 473,000 191,000
2003 368,000 189,000
2004 and thereafter 664,000 75,000
------------------------
$ 3,042,000 1,267,000
============
Less amounts representing interest 152,000
------------
Present value of future minimum
lease payments $ 1,115,000
=============
- ------------------------------------------------------------------------------
51
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
8. Lease Obligations Continued
Total rent expense for operating leases was approximately $894,000 and $925,000
for the years ended September 30, 1999, and 1998, respectively.
9. Income Taxes
The provisions for income taxes differ from the amount computed at federal
statutory rates as follows:
1999 1998
------------------------
Tax at statutory rates $ (904,000) $(667,000)
State tax (130,000) (117,000)
Change in valuation allowance 328,000 279,000
Other (93,000) (30,000)
-------------------------
$ (799,000) $(535,000)
=========================
The deferred income tax benefit (liability) for the years ended September 30,
1999 and 1998 is as follows:
1999 1998
------------------------
Short-term:
Allowance for bad debts $ 590,000 $ 669,000
Employee benefits 70,000 56,000
Deferred gain - (43,000)
Other 40,000 19,000
------------------------
Deferred tax asset $ 700,000 $ 701,000
========================
1999 1998
--------------------------
Long-term:
Depreciation $ (958,000) $ (416,000)
Net operating loss carryforward 275,000 603,000
Valuation allowance (275,000) (603,000)
--------------------------
Deferred tax liability $ (958,000) $ (416,000)
--------------------------
- ------------------------------------------------------------------------------
52
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
9. Income Taxes Continued
At September 30, 1999, the Company has approximately $742,000 of net operating
losses to use to offset future income. These net operating losses expire in the
years 2000 through 2009. A valuation allowance has been established for the net
operating loss due to certain limitations that may effect its utilization. If
certain substantial changes in the Company's ownership should occur, there would
be an annual limitation of the amount of net operating loss carryforwards which
could be utilized.
It is not possible to estimate the utilization of carrying forward the available
net operating losses to future periods to offset income. The amount of the net
operating losses which can be used are limited by the future operations and the
tax laws in effect at the time of the utilization. Consequently, a valuation
allowance has been established to offset any tax asset.
10. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at September
30, 1999 and 1998, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable
judgement is necessarily required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
11. 401(K)Savings Plan
The Company has a contributory 401(K) savings plan covering all employees who
are at least 21 years of age, work at least 1,000 hours per year, and have a
minimum of one year of service to the Company. All contributions by the Company
are fully discretionary. The Company made contributions of $70,000 and $50,000
in 1999 and 1998, respectively.
- ------------------------------------------------------------------------------
53
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12. Stock Options and Warrants Employee Options
In February 1995, the Company adopted a stock option plan. Under the plan, stock
options aggregating 312,500 shares of common stock may be granted to employees
and other persons to purchase the Company's common stock. No individual may be
granted stock options exceeding $100,000 fair market value in any one year. The
stock options vest at varying rates, are exercisable within the time or upon the
events determined by the option agreement and terminate after five years from
the date of grant for stockholders owing more than 10 percent of all classes of
stock and after 10 years for all others. At September 30, 1999, options to
purchase 218,750 shares remain unexercised under this agreement.
Director Options
In February 1995, the Company adopted a stock option plan. Under the plan, stock
options aggregating 75,000 shares of common stock may be granted to non-employee
directors to purchase the Company's common stock. No individual may be granted
more than one stock option per year, nor more than 11,000 shares on the exercise
of all options granted pursuant to this agreement. The stock options are
exercisable within six months after the grant date and terminate after five
years from the date of grant. At September 30, 1999, options to purchase 19,500
shares remained unexercised under this agreement.
On September 30, 1997, the Company entered into an option agreement with each of
its outside Directors. The terms of the agreements provide the Directors the
right to purchase, pursuant to options and warrants, up to an aggregate of
198,000 newly issued common shares at prices ranging from $4.28 to $7.00 per
share. If each Director elected to exercise his rights in full, the total
proceeds to the Company would be approximately $1.02 to $1.12 million. On
October 10, 1997, each Director paid a $1,000 option fee providing each Director
the right to exercise options to purchase 8,250 shares of common stock at a
price of $4.28 within 180 days. During the year ended September 30, 1998, the
Directors exercised options by paying approximately $60,000 in exchange for
13,984 shares of the Company common stock and issuance of warrants for 13, 984
shares of common stock exercisable for three years at $4.28 during the first
warrant year, $4.75 during the second year, and $5.25 during the third warrant
year. As of September 30, 1998, all of the terms of this options agreement had
expired without any further exercise.
- ------------------------------------------------------------------------------
54
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12. Stock Options and Warrants Continued
In addition, the Company has issued options to purchase an aggregate of 120,000
shares to three board members. The options are exercisable beginning one year
after issuance and terminated five years from the date of grant. As of September
30, 1999, none of the options were exercised.
Other
During November 1996, the Company entered into an agreement with several
investors to sell up to 1,170,714 shares of the Company's common stock for
prices ranging from $4.28 to $7.00 per share. As part of the agreement the
investors when they purchase each share of common stock they receive a warrant
to purchase an additional share of common stock at the same price. During 1997
the Company issued 162,266 shares of common stock plus warrants for an
additional 162,266 shares of common stock exercisable for 3 years at yearly
prices of $4.28 in the first year, to $5.25 in year three. The Company holds an
option fee of $100,000 whereby the Company owes 21,263 shares of the Company's
common stock plus warrants to purchase another 21,263 shares of the Company's
common stock at an additional price of $4.78 to $5.75 per share through 2000. No
warrants had been exercised and the agreement was terminated as of September 30,
1998.
During March 1998, the Company entered into a stock option agreement with a
consultant. The stock option agreement granted options to purchase 17, 500
shares of common stock exercisable for 8 years. Options to purchase 11,666 and
5,834 shares of common stock are exercisable at $3.50 and $4.00, respectively.
At September 30, 1999 no options had been exercised under this agreement.
The Company also has options outstanding to an individual to purchase 5,000
shares at an exercise price of $4.00 per share. The options expire in February
2000.
- ------------------------------------------------------------------------------
55
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
12. Stock Options and Warrants Continued
A schedule of the options and warrants at September 30, 1999 and 1998 is as
follows:
Number of
---------------------- Price Per
Options Warrants Share
------------------------------------
Outstanding at
October 1, 1997 274,984 183,529 $2.50 - 5.52
Granted 209,766 13,984 3.00 - 4.28
Exercised (13,984) - 4.00 - 4.28
Expired (85,016) - 4.00 - 4.28
------------------------------------
Outstanding at
September 30, 1998 385,750 197,513 2.50 - 5.52
Granted - - -
Exercised - - -
Expired (5,000) - -
------------------------------------
Outstanding at
September 30, 1999 380,750 197,513 $ 2.50 - 5.52
====================================
- ------------------------------------------------------------------------------
56
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
13. Stock-Based
Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1999 and 1998
consistent with the provisions of FAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
September 30,
--------------------------
1999 1998
--------------------------
Net Income - as reported $ 1,861,000 $ 1,426,000
Net Income - pro forma $ 1,789,000 $ 1,301,000
Earnings per share - as reported $ 0.45 $ .35
Earnings per share - pro forma$ $ 0.42 $ .32
--------------------------
The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
September 30,
-----------------------
1999 1998
-----------------------
Expected dividend yield $ - $ -
Expected stock price volatility 44% 42%
Risk-free interest rate 4.4% 4.4%
Expected life of options 1-5 years 1-5 years
-----------------------
The weighted average fair value of options outstanding during 1999 and 1998 are
$1.49 and $1.44 per share, respectively.
- ------------------------------------------------------------------------------
57
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
13. Stock-Based Compensation Continued
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 9/30/99 (Years) Price 9/30/99 Price
- --------------------------------------------------------------------------------
$ 2.50 to 4.28 362,734 1.96 $ 3.75 291,065 $ 3.84
4.75 to 5.52 176,766 .58 4.79 176,766 4.79
- --------------------------------------------------------------------------------
$ 2.50 to 5.52 539,500 1.51 $ 4.09 467,831 $ 4.20
===============================================================================
14. Employee Stock Purchase Plan
During the year ended September 30, 1996, the Company adopted a Stock Purchase
Plan (the "Plan"). The Plan is designed to provide employees of the Company with
an opportunity to purchase shares of the Company's common stock through
accumulated payroll deductions. The purchase price may be established at 85% of
the fair market price. The number of shares which may be purchased under the
Plan is 500,000. At September 30, 1999 and 1998, 28,525 and 16,751 shares,
respectively, of common stock had been cumulatively purchased under the plan.
15. Commitments and Contingencies
In October 1991, an officer of the Company retired and a trust was created which
purchased 429,544 shares of the Company's common stock from the officer. In
exchange for the stock, a note was entered into between the trust and the
retired officer in the principal amount of $305,000. The note requires monthly
payments over ten years of $4,000, including principal and interest at an annual
rate of 8 percent. Certain employees of the Company have entered into an
agreement to purchase the shares of stock from the trust under similar terms. At
the employees' option, shares can be issued as they are purchased. The Company
has guaranteed the collectibility of amounts due the trust by the employees. The
outstanding balance of the note was $85,100 at September 30, 1999.
Litigation
The Company is involved in certain litigation related to normal business
operations. Management believes that sufficient reserves have been accrued and
there will not be any material effect upon the Company's financial condition.
- ------------------------------------------------------------------------------
58
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- ------------------------------------------------------------------------------
15. Commitments and Contingencies Continued
Government Regulation
The health care industry, in which the Company operates, is regulated by Federal
and State government authorities, and has been the subject of certain scrutiny
in recent years. A number of laws and regulations have been passed and put into
effect during the past several years which impact the Company and its industry.
Specifically, a significant amount of accounts receivable is collected from
Federal Medicare and State Medicaid programs. The Company is also subject to
Medicare and Medicaid rate adjustments on services provided. Beginning January
1, 1998, Medicare reduced its oxygen reimbursement rate by 25%. An additional 5%
reduction was effective January 1, 1999. Management has taken what it believes
to be appropriate steps to mitigate any financial impact on the Company's
financial condition related to the changes and regulations of the health care
industry.
16. Preferred Stock
Preferred stock has voting rights of one vote for one share. The preferred stock
is convertible at the option of the holder into common stock based upon the
trading value of the common stock. The conversion rate varies from one share for
one share up to receiving three shares of common stock for one share of common
stock. At September 30, 1999 and 1998 there were no shares of preferred stock
issued and outstanding.
17. Sale of Office Building and Undeveloped Real Estate
During the year ended September 30, 1999, the Company sold a building and a
portion of its investment in undeveloped real estate with a book value of
$496,000. The proceeds from the sale of $613,000 was received in cash. The
resulting gain on the sale was $117,000.
18. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" which
is effective for years beginning after December 15, 1998. It is not expected
that the adoption of this statement will have a material impact on the Company's
financial statements.
- ------------------------------------------------------------------------------
59
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The current
directors and officers of the Company, who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
Name Age Position
--------------------------------------------------------------------
James E. Robinson 48 CEO /President/Chairman
James U. Jensen 55 Director
Dr. Jeffrey F. Poore 51 Director
Jerald L. Nelson 57 Director
Que H. Christensen 44 COO/Vice President
Serena Falgoust 52 Secretary
James E. Robinson. Mr. Robinson has been president and a director of the
Company since February 1995. Mr. Robinson has been President (CEO) and Chairman
of the Board of Interwest Medical Equipment Distributors, Inc. since October
1982. He also acted as Treasurer until 1990. Mr. Robinson graduated from Brigham
Young University with a Master of Accountancy degree in 1975. He worked until
July 1977 with Haskins & Sells at which time he joined Robinson's Medical Mart
(a predecessor company to Interwest Medical) as its Vice President and
Treasurer. Mr. Robinson was elected to the Board of Directors of the National
Association of Medical Equipment Suppliers (NAMES) in 1984 where he served as
Treasurer from 1986 until 1990, Chair from 1990 to 1991, Immediate Past-Chairman
from 1991 to 1992, and continues as an "Ex-Officer" Board member. He was also
elected to the Board of Directors of Medical Equipment Distributors, Inc. (The
MED Group) in 1985 and served as its Chair from 1988 until 1992. Mr. Robinson
has been active in many local, regional, and national organizations which
represent individuals with disabilities. He is currently serving as the Chair of
the Utah Assistive Technology Foundation (UATF).
James U. Jensen. Mr. Jensen has been a director of the Company since
February 1995. Mr. Jensen has been Vice President, Corporate Development and
Legal Affairs for NPS Pharmaceuticals, Inc. since July 1991. He was Secretary
and a director of Interwest Medical Equipment Distributors, Inc. from 1987 to
1995. From 1988 to July 1991 Mr. Jensen was a partner in the law firm of
Woodbury, Jensen, Kesler & Swinton, P.C. concentrating on technology transfer
and licensing and corporate finance. From 1983 until July 1985 he served as
outside general counsel for a software company. From July 1985 to October 1986
he served as it's Chief Financial Officer. From 1980 to 1983 Mr. Jensen served
as General Counsel and Secretary of Dictaphone Corporation, a subsidiary of
Pitney Bowes, Inc. He serves as a director of NPS Pharmaceuticals, Inc., a
public company and of Wasatch Advisors Funds, Inc., a publicly registered
investment company. Mr. Jensen received a B.A. in English/Linguistics from the
University of Utah and a J.D. and an M.B.A. degree from Columbia University.
60
<PAGE>
Jeffrey F. Poore D.D.S. Dr. Poore has been a director of the Company since
February 1995. Presently, Dr. Poore is a court appointed receiver and custodian
over several companies. Dr. Poore was previously President, CEO, and Chairman of
the Board of Healthchair Group, Inc. He served as President of CompHealth from
1995 through 1996. He is also a 20-year veteran of the health care industry and
an early champion of the concept of managed care. Prior to joining CompHealth,
he coordinated mergers, acquisitions and development in the office of the CEO at
FHP International, Inc., a health maintenance organization. During his tenure at
FHP he also directed staff in the organization's operational finance, financial
services, marketing, sales, medical, PPO/IPA, and contracting divisions. He also
has experience as a health care lobbyist and provider. He was in private dental
practice for many years. He earned his DDS from Loyola Medical Center in 1976,
and a BA in Economics from Brigham Young University in 1971.
Jerald L. Nelson Ph.D. Dr. Nelson served as a director of the Company from
April 1990 to February 1995, and was reappointed a director in August, 1995. In
1997, he was instrumental in starting a long distance phone company, Family
Telecommunications, Inc., which was recently sold to I-Link, Inc., a Utah based,
publicly traded telecommunications firm. He graduated from the University of
Utah with a B.A. in business and holds a Ph.D. in Economics from North Carolina
State University. Dr. Nelson has over twenty- five years of experience as an
economist, business executive and financial analyst. His career began in 1972 in
NYC with TWA. Later he advised Fortune 500 firms as a consultant with Date
Resources, Inc. and then directed planning efforts at U.S. Industries, Inc. He
has served on numerous Boards of Directors including Arrow Dynamics, Gentner
Communications and One-2-One Communications, where he also served as Chairman
and CEO.
Que H. Christensen, CPA. Mr. Christensen was appointed an officer of the
Company in February 1995. Mr. Christensen joined Interwest Medical Equipment
Distributors, Inc. as the controller in October 1990. He has been an officer and
director of Interwest Medical Equipment Distributors, Inc. since October 1991.
From 1980 to 1988 he worked as a CPA for Main Hurdman and KPMG Peat Marwick.
From 1988 to 1990 he was vice president of a Utah based financial institution.
Mr. Christensen graduated from the University of Utah with a Bachelor of Science
degree in Accounting in 1980.
Serena J. Falgoust. Mrs. Falgoust was appointed Secretary of the Company in
January 1998. Mrs. Falgoust has been involved with the Company since the
organization of Beacon Financial in 1983 and previously served as
Secretary/Treasurer from 1984 to 1990 and from 1993 to 1995.. She is a graduate
of Utah Valley State College with a degree in Business Management and has worked
in the business of credit and collection management since 1973.
B. Significant Employees. None
C. Family Relationships. There are no family relationships among the
Company's officers and directors.
D. Other Involvement in Certain Legal Proceedings. There have been no
events under any bankruptcy act, no criminal proceedings and no judgments or
injunctions material to the evaluation of the ability and integrity of any
director or executive officer during the last five years.
61
<PAGE>
E. Compliance With Section 16(a). Section 16 of the Securities Exchange
Act of 1934 requires the filing of reports for sales of the Company's common
stock made by officers, directors and 10% or greater shareholders. A Form 4 must
be filed within ten days after the end of the calendar month in which a sale or
purchase occurred. Based upon the review of the Form 4's filed with the Company,
no disclosure is required relating late filings.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------
Commissions Restrict
and Other Annual Stock Options/
Bonuses Compensation Awards SAR's
Name and Principal Position Year Salary ($) ($) ($) (#)
- ----------------------------- ------ ---------- ---------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
James E. Robinson 1999 $175,000 $36,735 (2) -0- -0-
President/CEO 1998 $150,000 $36,735 (2) -0- -0-
1997 $150,000 $15,750 (2) -0- 50,000(1)
Que H. Christensen
Vice President/COO(3) 1999 $115,000 $23,265 (2) -0- -0-
1998 $ 95,000 $23,265 (2) -0- -0-
1997 $ 95,000 $ 9,975 (2) -0- 25,000(1)
</TABLE>
(1) These Options were granted under the Company's 1995 Employee Stock
Option Plan. No SAR's have been granted by the Company.
(2) Does not include the value of perquisites provided to certain
executive officers which in the aggregate did not exceed the lesser of
$50,000 or 10% of such officer's salary and bonus.
(3) In December 1997, Mr. Christensen was promoted to Vice President and
Chief Operating Officer (COO) from Chief Financial Officer.
Stock Options
There were no options granted during fiscal 1999 or 1998 to the named
executive officers.
The following table sets forth information concerning the number and value
of options held at September 30, 1999 by each of the named executive officers.
No options held by such executive officers were exercised during 1999.
62
<PAGE>
Option Values at September 30, 1999
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
September 30, 1999 (#) At September 30, 1999($)(1)
-----------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
James E. Robinson 62,500 (2) -0- $62,500 (2) -0-
33,333 16,667 $8,333 $4,167
Que H. Christense 31,250 (2) -0- $31,250 (2) -0-
16,667 8,333 $4,167 $2,083
(1) An "In-the-Money" stock option is an option for which the
market price of the Company's common stock underlying the
option on September 30, 1998 exceed the option price. The
value shown represents stock price appreciation since the date
of grant. The market price was based upon the closing price of
the Company's common stock on the NASD SmallCap Market on
September 30, 1998 ($3.50 per share).
(2) This stock option was granted at an exercise price of $4.00
per share and was repriced by the Board of Directors on
October 22, 1998 to an exercise price of $2.50 per share which
was the closing price of the Company's common stock on the
NASD SmallCap Market on that date. The values shown are
calculated at the fair market value of the underlying shares
as of September 30, 1999 ($3.50 per share) minus the exercise
price.
1995 Employee Stock Purchase Plan
On November 6, 1995, the Company's Board of Directors adopted the
Company's 1995 Stock Purchase Plan (the "Plan"). The Plan is designed to provide
employees of the Company with an opportunity to purchase shares of the Company's
common stock through accumulated payroll deductions. The purchase price may be
established at 85% of the fair market price. The number of shares which may be
purchased under the Plan is 500,000. At December 1, 1999, 28,525 shares of
common stock had been purchased under the plan.
1995 Employee Stock Option Plan
On February 24, 1995, the Company's Board of Directors adopted the
Company's 1995 Stock Option Plan (the "Plan") which provides for the issuance of
a maximum 312,500 shares of common stock pursuant to the exercise of options
granted under the Plan. The Options granted under the Plan may be Incentive
Stock Options pursuant to Section 422 of the Internal Revenue Code of 1986
("ISO's") or Non-Qualified Stock Options ("NSO's"). The Plan is administered by
the Board of Directors' Compensation Committee. The Option price and terms is to
be set for each Option by the Committee administering the Plan. NSO options
granted under the Plan may have a term not exceeding ten years. ISO options
granted under the Plan may have a term not exceeding five years. The Committee
may grant options to employees (including officers and directors, or
consultants. Options to purchase 250,000 shares of stock have been granted and
options to purchase 218,750 shares of stock were outstanding as of September 30,
1999.
Compensation of Directors
The Company's non-employee directors are paid $500 for each Board of
Directors meeting attended and $400 for each Committee Meeting attended. On
February 24, 1995, the Company adopted, and the shareholders approved at the
Annual Meeting on February 16, 1996, the 1995 Non-Employee Director's
63
<PAGE>
Stock Option Plan. The Plan provides that each non-employee director who was a
director as of February 24, 1995, or who became a director thereafter, was and
will be issued an option to purchase 5,000 shares of the Company's common stock
at $4.00 per share. Additionally, each non-employee director is automatically
granted an option to purchase 1,500 shares at market prices on April 1st of each
year commencing April 1, 1997. As of April 1, 1997, the annual grant was
terminated and each non-employee director was granted an option to purchase
40,000 shares at $4.00 per share with one-third of the shares vesting at March
31, 1998 and each additional one-third vesting in the two subsequent years. No
initial options granted by the Company under this plan in 1995 may be exercised
until the Company achieves cumulative before-tax income of $1,500,000,
commencing February 22, 1995.
Employment Agreements
The Company is currently a party to the following Employment Agreements:
James E. Robinson. On May 3, 1995, the Company entered into an
Employment Agreement with its President/CEO, James E. Robinson. The
Agreement replaced and superseded a previously executed agreement. The
Agreement may be terminated by the Company without notice and without
cause. The Agreement may be terminated by Mr. Robinson upon thirty day
written notice. The Agreement provides for a base annual salary of
$150,000 and incentive salary based upon pre-tax profits, revenue growth
and acquisition incentives. The Agreement contains a 12 month
non-competition restriction following termination and provisions relating
to death and disability during the term of employment. The Company is
obligated to compensate Mr. Robinson for 120 days past termination in the
event the Company terminates the agreement. The Compensation Committee of
the Board of Directors amended the annual base salary to $175,000
effective October 1, 1998.
Que H. Christensen. On May 3, 1995, the Company entered into an
Employment Agreement with its Chief Financial Officer, Que H..
Christensen. The Agreement replaced and superseded a previously executed
agreement. The Agreement may be terminated by the Company without notice
and without cause. The Agreement may be terminated by Mr. Christensen upon
thirty day written notice. The Agreement provides for a base annual salary
of $95,000 and incentive salary based upon pre-tax profits, revenue growth
and acquisition incentives. The Agreement contains a 12 month
non-competition restriction following termination and provisions relating
to death and disability during the term of employment. The Company is
obligated to compensate Mr. Christensen for 90 days past termination in
the event the Company terminates the agreement. The Compensation Committee
of the Board of Directors amended the annual base salary to $115,000
effective October 1, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock beneficially owned as of December 1, 1999 by: (i) each
officer and director of the Company; (ii) all officers and directors as a group;
and (iii) each person known by the Company to beneficially own 5 percent or more
of the outstanding shares of the Company's common stock.
64
<PAGE>
Name Amount
and Address and Nature Percent
of Beneficial of Beneficial of Class(1)
Owner Ownership Ownership
- -------------------------------------------------------------------------
James E. Robinson (2) 1,280,250 29.07%
235 East 6100 South
Salt Lake City, UT 84107
James U. Jensen(3) 152,590 3.20%
420 Chipeta Way
Salt Lake City, UT 84108
Dr. Jeffrey F. Poore(4) 51,134 .87%
4536 Abinadi Road
Salt Lake City, UT 84124
Jerald L. Nelson(5) 60,231 1.08%
10242 Ashley Hills Circle
Sandy, UT 84092
Que H. Christensen(6) 161,802 3.53%
235 East 6100 South
Salt Lake City, UT 84107
Val D. Christianson(7) 331,812 7.63%
3065 S. 2850 East
Salt Lake City, UT 84107
Charles Davis(8) 359,396 8.27%
20 Bennington Drive
Colorado Springs, CO 80906
Serena J. Falgoust(9) 30,820 0.71%
1620 N. 1250 W.
Provo, UT 84604
I-Med Shareholders(10) 309,094 7.11%
Share Purchase Trust
235 East 6100 South
Salt Lake City, UT 84107
All Officers and Directors 1,671,825 38.47%
as a Group (6 Persons)
65
<PAGE>
Unless otherwise indicated in the footnotes below, the Company has been
advised that each person above has sole voting power over the shares indicated
above. All of the individuals listed above are officers and directors of the
Company.
(1) As of December 1, 1999, there were 4,089,029 shares of the Company's
common stock issued and outstanding. There are also outstanding
exercisable options and warrants to purchase 257,232 shares of the
Company's common stock which are owned by officers and directors.
Therefore, for purposes of the above set forth chart, 4,346,261 shares are
deemed to be issued and outstanding in accordance with Rule 13d-3 adopted
by the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended. This amount does not include options owned by
officers and directors which are not currently exercisable.
(2) Includes (i) 22,500 shares owned of record by the five children of Mr.
Robinson (4,500 shares each); (ii) 892,798 shares owned by J&J Medical
Investments, Ltd., (iii) 269,118 shares owned of record by Mr. Robinson
and (iv) 95,834 shares which may be acquired by Mr. Robinson pursuant to
stock options which are currently exercisable.
(3) Includes (i) 88,538 shares owned of record by Mr. Jensen of which
55,992 shares were purchased through the exercise of stock options; (ii)
25,886 shares which are beneficially owned through the I-Med Shareholder
Share Purchase Trust; and 38,166 shares which may be issued pursuant to
other stock options and warrants which are currently exercisable.
(4) Includes 9,484 shares owned of record by Dr. Poore of which 8,484
shares were purchased through the exercise of stock options and 41,650
shares which may be acquired pursuant to stock options and warrants which
are currently exercisable.
(5) Includes (i) 500 shares which are owned of record by Mr. Nelson which
were purchased through the exercise of stock options; (ii) 33,666 shares
which may be issued pursuant to stock options and warrants which are
currently exercisable; and (iii) 26,065 shares which are owned of record
by Mr. Nelson's spouse.
(6) Includes (i) 11,000 shares owned of record by Mr. Christensen; (ii)
92,886 shares which are beneficially owned through the I-Med Shareholders
Share Purchase Trust; (iii) 10,000 shares owned of record by the four
children of Mr. Christensen (2,500 shares each) and (iv) 47,916 shares
which may be acquired pursuant to stock options which are currently
exercisable.
(7) Includes (i) 54,328 shares owned of record by Mr. Christianson jointly
with his spouse; (ii) 154,099 shares which are owned of record by Mr.
Christianson jointly with his spouse and held in a brokerage account;
(iii) 100,885 shares which are beneficially owned through the I-Med
Shareholders Share Purchase Trust; and (iv) 22,500 shares owned of record
by the four children of Mr. Christianson (2,500 shares each) .
(8) Includes 197,156 shares owned of record by Mr. Davis and 162,240
shares owned jointly with his spouse.
(9) Includes 29,385 shares owned jointly with her spouse and 1,435 shares
which are owned through the Interwest Home Medical Employee Stock Purchase
Plan.
(10) The I-Med Shareholders Share Purchase Trust was established in
October 1991 to purchase shares of Interwest Medical Equipment
Distributors, Inc. common stock from a retiring officer/employee. The
Trust's shares were exchanged for the Company's shares in connection with
a merger effected February 22, 1995. The purchase price is payable in 120
monthly payments. The purchase price for the shares is funded by Trust
participants who contribute monthly payments to purchase a pro-rata
portion of such shares. There are currently 9 persons purchasing shares
pursuant to the Trust arrangement. These persons have the right to vote
the shares attributable to their pro-rata portion of the total shares
being purchased from the Trust. It is anticipated that the Trust will
distribute shares paid for to the Trust beneficiaries from time-to-time as
requested by purchasers. Interwest Medical has guaranteed payment of the
unpaid balance of the purchase price for the shares purchased by the
Trust.
Security Ownership of Management
See Item 4(a) above.
66
<PAGE>
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Board of Directors Stock Option Purchase Plan
On September 30, 1997, the Company's Board of Directors adopted a
financing Plan which provides a stock purchase right and warrant purchase right
to each of its three non-employee directors (the "Holders"). The maximum number
of shares issuable under the Plan is 66,000 shares per Holder, of which up to
33,000 shares per Holder may be purchased as "Purchase Shares" and up to 33,000
shares per Holder may be purchased as "Warrant Shares". This Plan is modeled on
a similar financing arrangement earlier negotiated between the Company and third
party investors. The Plan for the non-employee directors is intended to
encourage long term investment in the Company by the non-employee directors but
is not considered by the Company as "compensation" to the non-employee
directors. The prices and terms provided are deemed fair market value because
the Plan uses substantially the same prices and terms as were previously
negotiated in good faith between the Company and third party investors.
By October 30, 1997, each of the Holders had purchased the first option
right (the "First Purchase Right") by paying the required $1,000. This purchase
of the First Purchase Right entitles each Holder to purchase up to 8,250 shares
of the Company's common stock (the "First Purchase Shares") at a price of $4.28
per share if purchased on or before April 5, 1998, when the First Purchase Right
expires. To the extent the Holder purchases shares of the First Purchase Shares
on or before December 29, 1997; however, (rather that waiting until the end of
the First Purchase Period, April 5, 1998) the Holder is then entitled to
exercise a warrant (the "First Purchase Warrant") to purchase the same number of
shares (up to 8,250 shares, the "First Warrant Shares") during the ensuing three
year period at prices of $4.28 per share during the first year, $4.75 in the
second year, and $5.25 per First Warrant Share during the third year.
The Plan repeats this arrangement for three additional Purchase Periods,
for a total of four such purchase periods. The following Table show the basic
content of the non-employee director financing Plan.
<TABLE>
<CAPTION>
Last Date to Last Date to Last Date
Exercise/Price Shares Option Fee Obtain Warrant without Warrant Prices
Warrants
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Option $4.28 8,250 10/30/97 12/29/97 4/5/98 $4.28, 4.75,
5.25
Second Option $4.78 8,250 1/28/98 Date Option Fee 6/9/98 $4.78, 5.25,
paid + 90 days 5.75
Third Option $5.50 8,250 4/26/98 Date Option Fee 9/7/98 $5.50, 6.00,
paid + 90 days 6.50
Fourth Option $6.00 8,250 7/25/98 Date Option Fee 12/6/98 $6.00, 6.50,
paid + 90 days 7.00
</TABLE>
* Warrant prices change on the annual anniversary of the date the Option
Fee is paid.
As of September 30, 1999, Dr. Poore had purchased 8,250 shares, Dr. Nelson
had purchased 500 shares, and Mr. Jensen had purchased 5,000 shares. Each
director received warrants equal to the number of shares purchased. No other
option fees were paid and all the remaining options and warrants had terminated
as a result.
67
<PAGE>
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of the Exchange
Act, are the officers and directors of the Company. For information regarding
the share holdings of the Company's officers and directors, see Item 11.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The Exhibits which are filed with this Report or which are incorporated
herein by reference are set forth in the Exhibits Index which appears on
page 68.
B. On October 12, 1999, the Company filed a Form 8-K to report on the
acquisition of assets from HealthCor Holdings, Inc.
68
<PAGE>
Exhibits to Form 10-KSB
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- --------------
2.1 Agreement and Plan of Merger - N/A
-------
Interwest Medical Equipment Distributors, Inc.
effective February, 1995.
(Incorporated by reference to Form 8-K filed
February 1995)
2.2 Agreement and Plan of Merger - N/A
-------
Mt Rehabilitation Services
May 1995 (Incorporated by reference
to Form 8-K dated May 1995)
3.1 Amended and Restated Articles of Incorporation* N/A
3.2 Bylaws* N/A
10.1 Form of 1995 Stock Option Plan* N/A
-------
10.2 Form of 1995 Non-Employee Directors' Stock Option Plan* N/A
-------
10.3. Form of 1995 Stock Purchase Plan* N/A
-------
10.4. Employment Agreement - James E. Robinson* N/A
-------
10.5. Employment Agreement - Val D. Christianson* N/A
-------
10.6. Employment Agreement - Que H. Christensen* N/A
-------
10.7. Loan Documentation* 71
10.8 Non-employee Director Stock Option Purchase Agreement* N/A
11.1 Schedule of Weighted Average Shares 87
--------
21.1 Subsidiaries of Registrant 88
--------
23.1 Consent of Independent Accountant 89
--------
*Attached.
**Incorporated by reference to Form 10-KSB for year ended September 30, 1997.
69
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Interwest Home Medical, Inc.
Date: December 15, 1999 By/s/ James E. Robinson
----------------------------
James E. Robinson
President/CEO
Date: December 15, 1999 By/s/ Bret A. Hardy
----------------------------
Bret A. Hardy
Controller
Principal Financial Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ James E. Robinson CEO/Director December 15, 1999
- ----------------------------
James E. Robinson
/s/ James U. Jensen Director December 15, 1999
- ----------------------------
James U. Jensen
/s/ Dr. Jeffrey F. Poore Director December 15, 1999
- ----------------------------
Dr. Jeffrey F. Poore
/s/ Jerald L. Nelson Director December 15, 1999
- ----------------------------
Jerald L. Nelson
70
LOAN AGREEMENT
Borrower:INTERWEST HOME MEDICAL, INC.; ET. Al. Lender:ZIONS FIRST NATIONAL BANK
235 EAST 6100 SOUTH HEAD OFFICE/COMMERCIAL
SALT LAKE CITY, UT 84102 BANKING
#1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
==============================================================================
THIS LOAN AGREEMENT between INTERWEST HOME MEDICAL, INC., INTERWEST MEDICAL
EQUIPMENT DISTRIBUTORS, INC., INTERWEST HOME PHARMACY, INC., INTERWEST HOME
MEDICAL-ALASKA, INC., formerly known as NORTHWEST HOMECARE, INC. and INTERWEST
HOME MEDICAL-ARIZONA, INC. (referred to in this Agreement individually and
collectively as "Borrower") and ZIONS FIRST NATIONAL BANK (referred to in this
Agreement as "Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; and
(b) all such Loans shall be and shall remain subject to the following terms and
conditions of this Agreement.
TERM. This Agreement shall be effective as of July 29, 1999 and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or other
right to payment for goods sold or services rendered owing to Borrower (or to a
third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity obligated
upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrowing Base. The words "Borrowing Base" mean as determined by Lender from
time to time, the lesser of (a) $18,000,000.00 or such lesser amount as
described in the Note; or (b) the sum of (i) 75.000% of the aggregate amount of
Eligible Accounts, plus (ii) 50.000% of the aggregate amount of Eligible
Inventory, plus (iii) 80.000% of the aggregate amount of the net book value of
Eligible Equipment, plus (iv) $4,000,000.00 of additional allowance which will
reduce $333,000.00 at the end of each calendar quarter commencing with the
quarter ending September 30, 2000, or (c) the amount which when added to all of
Borrower's indebtedness which is not subordinated in favor of Zions does not
exceed 3 times Borrower's consolidated EBITDA for the most recently preceding 12
months. For the purposes of this provision and the LEVERAGE provision, EBITDA
will be computed on a proforma basis to include the historical EBITDA for the
most recently preceding 12 months of any acquired entities adjusted on a basis
satisfactory to Lender to include compensation and other expense adjustments
which are non-reoccurring in nature.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
EBITDA. The phrase "EBITDA" means net earnings excluding extraordinary gains or
losses as defined by GAP calculated before allowances for interest expense,
taxes, depreciation expense and amortization expense.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may borrow
shall exclude all returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an employee
or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of, or
affiliated with or related to Borrower or its shareholders, officers, or
directors.
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<PAGE>
(c) Accounts with respect to which goods are placed on consignment, guaranteed
sale, or other terms by reason of which the payment by the Account Debtor may be
conditional.
(d) Accounts with respect to which the Account Debtor is not a resident of the
United States, except to the extent such Accounts are supported by insurance,
bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is liable to the Account Debtor for
goods sold or services rendered by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or delivered,
or the services have not been rendered, to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems the
creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(i) Accounts which have not been paid in full within 120 DAYS from the invoice
date.
(j) That portion of the Accounts of any single Account Debtor which exceeds
10.000% of all of Borrower's Accounts.
(k) Accounts with respect to which the Account Debtor is a Canadian resident and
is not a resident of the following Canadian Provinces: British Columbia,
Alberta, Saskatchewan, Manitoba and Ontario, except to the extent such Accounts
are supported by insurance, bonds or other assurances satisfactory to Lender.
(l) Accounts which Lender in its sole discretion reasonably deems ineligible.
Eligible Equipment. The words "Eligible Equipment" mean, at any time, all of
Borrower's Equipment as defined below except:
(a) Equipment which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims of third parties. (b) Equipment which
Lender, in its sole discretion, deems to be obsolete, unsalable, damaged,
defective, or unfit for operation.
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all of
Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
(c) Work in progress.
(d) Inventory which is not for direct resale including but not limited to
packaging, labeling and manufacturing supplies.
(e) Inventory which is prohibited from being sold by any federal, state or local
governmental agency.
(f) Inventory which Lender in its sole discretion reasonably deems ineligible.
Equipment. The word "Equipment" means all of Borrower's revenue generating
assets used or bought for use in Borrower's business including equipment which
is presently leased or held for lease and which is not included in inventory.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entities granting a Security Interest in any Collateral for
the Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation all
Loans, together with all other obligations, debts and liabilities of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others; whether Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw materials, work in
process, finished goods, merchandise, parts and supplies, of every kind and
description, and goods held for sale or lease or furnished under contracts of
service in which Borrower now has or hereafter acquires any right, whether held
by Borrower or others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of Borrower's custody or
possession and all returns on Accounts.
Lender. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors and
assigns.
Letter of Credit. The words "Letter of Credit" mean a letter of credit issued
by Lender on behalf of Borrower as described below in the section titled
"Letter of Credit Facility."
Line of Credit. The words "Line of Credit" mean the credit facility described in
the Section titled "LINE OF CREDIT" below.
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Loan. The word "Loan" or "Loans" means and includes without limitation any and
all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note or
notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or
title retention contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of
1986 as now or hereafter amended.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any Advance to
or for the account of Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments, opinions, reports, and
other items required under this Agreement to be in form and substance
satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all Related
Documents have been duly authorized, executed, and delivered by Borrower to
Lender.
(b) Lender shall have received such opinions of counsel, supplemental opinions,
and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly authorized,
created, and perfected with first lien priority and shall be in full force and
effect.
(d) All guaranties required by Lender for the Line of Credit shall have been
executed by each Guarantor, delivered to Lender, and be in full force and
effect.
(e) Lender, at its option and for its sole benefit, shall have conducted an
audit of Borrower's Accounts, Inventory, Equipment books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses specified
in this Agreement and the Related Documents as are then due and payable.
(g) There shall not exist at the time of any Advance a condition which would
constitute an Event of Default under this Agreement, and Borrower shall have
delivered to Lender the compliance certificate called for in the paragraph below
titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested orally
by authorized persons. Lender may, but need not, require that all oral requests
be confirmed in writing. Each Advance shall be conclusively deemed to have been
made at the request of and for the benefit of Borrower (a) when credited to any
deposit account of Borrower maintained with Lender or (b) when advanced in
accordance with the instructions of an authorized person. Lender, at its option,
may set a cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of the
outstanding Advances shall exceed the applicable Borrowing Base, Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all Advances then
outstanding and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in which
Lender shall make entries for each Advance and such other debits and credits as
shall be appropriate in connection with the credit facility. Lender shall
provide Borrower with periodic statements of Borrower's account, which
statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30) days
after Borrower's receipt of any such statement which Borrower deems to be
incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"). Lender's Security
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Interests in the Collateral shall be continuing liens and shall include the
proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower agrees and
represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral. Upon request of
Lender, Borrower will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Borrower will note Lender's interest upon
any and all chattel paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower will execute one
or more UCC financing statements and any similar statements as may be required
by applicable law, and will file such financing statements and all such similar
statements in the appropriate location or locations. Borrower hereby appoints
Lender as its irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest. Lender may
at any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for use
as a financing statement. Borrower will reimburse Lender for all expenses for
the perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of any
change in Borrower's name including any change to the assumed business names of
Borrower. Borrower also promptly will notify Lender of any change in Borrower's
Social Security Number or Employer Identification Number. Borrower further
agrees to notify Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge or consolidate
with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall, keep
correct and accurate records of the Collateral, all of which records shall be
available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees to
keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings. With respect to the Inventory, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation information
concerning Eligible Inventory and records itemizing and describing the kind,
type, quality, and quantity of Inventory, Borrower's Inventory costs and selling
prices, and the daily withdrawals and additions to Inventory. With respect to
the Equipment, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible Equipment
and records itemizing and describing the kind, type, quality, and quantity of
Equipment, Borrower's Equipment costs, and the daily withdrawals and additions
to Equipment.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of Accounts,
Inventory and Equipment and schedules of Eligible Accounts, Eligible Inventory
and Eligible Equipment, in form and substance satisfactory to the Lender.
Thereafter supplemental collateral schedules shall be delivered according to the
following schedule: AT THE REQUEST OF LENDER.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this Agreement
conforms to the requirements of the definition of an Eligible Account; (b) All
Account information listed on schedules delivered to Lender will be true and
correct, subject to immaterial variance; and (c) Lender, its assigns, or agents
shall have the right at any time and at Borrower's expense to inspect, examine,
and audit Borrower's records and to confirm with Account Debtors the accuracy of
such Accounts.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this Agreement
conforms to the requirements of the definition of Eligible Inventory; (b) All
Inventory values listed on schedules delivered to Lender will be true and
correct, subject to immaterial variance; (c) The value of the Inventory will be
determined on a consistent accounting basis; (d) Except as agreed to the
contrary by Lender in writing, all Eligible Inventory is now and at all times
hereafter will be in Borrower's physical possession and shall not be held by
others on consignment, sale on approval, or sale or return; (e) Except as
reflected in the Inventory schedules delivered to Lender, all Eligible Inventory
is now and at all times hereafter will be of good and merchantable quality, free
from defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will concurrently
at the time of bailment cause any such bailee, warehouseman, or similar party to
issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Inventory; and (g) Lender, its assigns,
or agents shall have the right at any time and at Borrower's expense to inspect
and examine the Inventory and to check and test the same as to quality,
quantity, value, and condition.
Representations and Warranties Concerning Equipment. With respect to the
Equipment, Borrower represents and warrants to Lender: (a) All Equipment
represented by Borrower to be Eligible Equipment for purposes of this Agreement
conforms to the requirements of the definition of Eligible Equipment; (b) All
Equipment values listed on schedules delivered to Lender will be true and
correct, subject to immaterial variance; (c) The value of the Equipment will be
determined on a consistent accounting basis; (d) Except as agreed to the
contrary by Lender in writing, all Eligible Equipment is now and at all times
hereafter will be in Borrower's physical possession or in the possession of
Borrowers' customers; (e) Except as reflected in the Equipment schedules
delivered to Lender, all Eligible Equipment is now and at all times hereafter
will be of good and merchantable quality, free from defects; (f) Eligible
Equipment is not now and will not at any time hereafter be stored with a bailee,
warehouseman, or similar party without Lender's prior written consent, and, in
such event, Borrower will concurrently at the time of bailment cause any such
bailee, warehouseman, or similar party to issue and deliver to Lender, in form
acceptable to Lender, warehouse receipts in Lender's name evidencing the storage
of Equipment; and (g) Lender, its assigns, or agents shall have the right at any
time and at Borrower's expense to inspect and examine the Equipment and to check
and test the same as to quality, quantity, value, and condition.
Remittance Account. Borrower agrees that Lender may at any time in Lender's
reasonable determination require Borrower to institute procedures whereby the
payments and other proceeds of the Accounts shall be paid by the Account Debtors
under a remittance account or lock box arrangement with Lender, or Lender's
agent, or with one or more financial institutions designated by Lender. Borrower
further agrees that, if no Event of Default exists under this Agreement, any and
all of such funds received under such a remittance account or lock box
arrangement shall, at Lender's sole election and discretion, either be (a) paid
or turned over to Borrower; (b) deposited into one or more accounts for the
benefit of Borrower (which deposit accounts shall be subject to a security
assignment in favor of Lender); (c) deposited into one or more accounts for the
joint benefit of Borrower and Lender (which deposit accounts shall likewise be
subject to a security assignment in favor of Lender); (d) paid or turned over to
Lender to be applied to the Indebtedness in such order and priority as Lender
may determine within its sole discretion; or (e) any combination of the
foregoing as Lender shall determine from time to time. Borrower further agrees
that, should one or more Events of Default exist, any and all funds received
under such a remittance account or lock box arrangement shall be paid or turned
over to Lender to be applied to the Indebtedness, again in such order and
priority as Lender may determine within its sole discretion.
MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who
are referred to herein individually, collectively and interchangeably as
"Borrower." Unless specifically stated to the contrary, the word "Borrower" as
used in this Agreement, including without limitation all representations,
warranties and covenants, shall include all Borrowers. Borrower understands and
agrees that, with or without notice to Borrower, Lender may with respect to any
other Borrower (a) make one or more additional secured or unsecured loans or
otherwise extend additional credit; (b) alter, compromise, renew, extend,
accelerate, or otherwise change one or more times the time for payment or other
terms any indebtedness, including increases and decreases of the rate of
interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or
decide not to perfect, and release any security, with or without the
substitution of new collateral; (d) release, substitute, agree not to sue, or
deal with any one or more of
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Borrower's sureties, endorsers, or other guarantors on any terms or in any
manner Lender may choose; (e) determine how, when and what application of
payments and credits shall be made on any indebtedness; (f) apply such security
and direct the order or manner of sale thereof, including without limitation,
any nonjudicial sale permitted by the terms of the controlling security
agreement or deed of trust, as Lender in its discretion may determine; (g) sell,
transfer, assign, or grant participations in all or any part of the
indebtedness; (h) exercise or refrain from exercising any rights against
Borrower or others, or otherwise act or refrain from acting; (i) settle or
compromise any indebtedness; and (j) subordinate the payment of all or any part
of any indebtedness of Borrower to Lender to the payment of any liabilities
which may be due Lender or others.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of each Borrower's respective
state of incorporation and is validly existing and in good standing in all
states in which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal name,
and Borrower has not used, or filed a financing statement under, any other name
for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. Except as disclosed to and acknowledged by Lender in writing,
Borrower represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any hazardous
waste or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent
or other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, about or from any of the properties; and any such activity
shall be conducted in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and its
agents to enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at Borrower's
expense and for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any other
person. The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release of a hazardous waste or substance on the
properties. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the Related
Documents are binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance with
their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may have
any liability complies in all material respects with all applicable requirements
of law and regulations, and (i) no Reportable Event nor Prohibited Transaction
(as defined in ERISA) has occurred with respect to any
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such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps
to do so, (iii) no steps have been taken to terminate any such plan, and (iv)
there are no unfunded liabilities other than those previously disclosed to
Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 235 EAST 6100 SOUTH, SALT LAKE CITY, UT 84107-7349.
Unless Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith furnished
by Borrower to Lender for the purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all information hereafter
furnished by or on behalf of Borrower to Lender will be, true and accurate in
every material respect on the date as of which such information is dated or
certified; and none of such information is or will be incomplete by omitting to
state any material fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees that
Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until such time
as Borrower's Indebtedness shall be paid in full, or until this Agreement shall
be terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any other
such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and
obligations, including without limitation all assessments, taxes, governmental
charges, levies and liens, of every kind and nature, imposed upon Borrower or
its properties, income, or profits, prior to the date on which penalties would
attach, and all lawful claims that, if unpaid, might become a lien or charge
upon any of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same shall be
contested in good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
Compliance Certificate. Provide Lender with a certificate executed by Borrower's
chief financial officer, or other officer or person acceptable to Lender,
certifying that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further certifying
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that, as of the date of the certificate, no Event of Default exists under this
Agreement. Compliance Certificates will be provided at the same time Borrower
provides Financial Statements.
Environmental Compliance and Reports. Borrower shall comply in all respects with
all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal course
of business and indebtedness to Lender contemplated by this Agreement, create,
incur or assume indebtedness for borrowed money, including capital leases,
except for an amount not to exceed at any one time of $500,000, (b) except as
allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease,
grant a security interest in, or encumber any of Borrower's assets, except for
an amount not to exceed at any one time of $500,000, or (c) sell with recourse
any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, or consolidate with any other entity,
change ownership, change its name, dissolve or transfer or sell Collateral out
of the ordinary course of business without Lender's prior written consent which
will not be unreasonably withheld, (c) pay any dividends on Borrower's stock
(other than dividends payable in its stock), or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, or (b) incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
CUSTOMER LIST. BORROWER SHALL FURNISH TO LENDER ON A SEMI-ANNUAL BASIS A LIST OF
BORROWER'S ACCOUNTS RECEIVABLE CUSTOMERS AND THEIR ADDRESSES IN A FORM
ACCEPTABLE TO LENDER AT LENDER'S REQUEST.
BORROWING BASE CERTIFICATE. BORROWER SHALL FURNISH TO LENDER A MONTHLY BORROWING
BASE CERTIFICATE CERTIFIED BY AN AUTHORIZED OFFICER/EMPLOYEE OF BORROWER, WITHIN
TWENTY (20) DAYS OF THE END OF EACH MONTH IN A FORM ACCEPTABLE TO LENDER. THE
BORROWING BASE CERTIFICATES SHALL BE ACCOMPANIED BY AN ACCOUNTS RECEIVABLE AGING
REPORT, AN ACCOUNTS PAYABLE AGING REPORT AND AN INVENTORY REPORT ALL IN A FORM
ACCEPTABLE TO LENDER.
WAIVER OF CLAIMS. Borrower (i) represents that they have no defenses to or
setoffs against any indebtedness or other obligations owing to Lender or its
affiliates (the "Obligations"), nor claims against Lender or its affiliates for
any matter whatsoever, related or unrelated to the Obligations, and (ii) release
Lender and its affiliates from all claims, causes of action, and costs, in law
or equity, existing as of the date of this Agreement, which Borrower has or may
have by reason of any matter of any conceivable kind or character whatsoever,
related or unrelated to the Obligations, including the subject matter of this
Agreement. This provision shall not apply to claims for performance of express
contractual obligations owing to Borrower by Lender or its affiliates.
NET WORTH. BORROWER SHALL NOT PERMIT ITS NET WORTH TO BE LESS THAN $10,000,000,
PLUS 75% OF FUTURE QUARTERLY NET INCOME (NOT REDUCED BY FUTURE QUARTERLY LOSSES
), PLUS 100% OF FUTURE NET EQUITY ISSUED.
MAXIMUM DAYS' SALES IN RECEIVABLES. BORROWER SHALL NOT PERMIT ITS DAYS'
SALES IN RECEIVABLES TO EXCEED THE MAXIMUMS SET FORTH BELOW.
PERIODS DAYS
From Closing to 3/31/2000 140
From 4/1/2000 to 9/30/2000 125
From 10/1/2000 to 3/31/2001 110
From 4/1/2001 to 9/30/2001 100
From 10/1/2001 and thereafter 90
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THIS INFORMATION SHALL BE INCLUDED IN BORROWER'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION OR IF NOT INCLUDED THEREIN, SHALL BE CALCULATED AS FOLLOWS:
DAYS' SALES IN RECEIVABLES FOR ANY QUARTER END SHALL BE CALCULATED BY DIVIDING
(A) ANNUALIZED NET SALES FOR SUCH QUARTER INTO (B) NET RECEIVABLES OUTSTANDING
AT THE END OF SUCH QUARTER AND MULTIPLYING THE PRODUCT SO DERIVED BY 365. OR AS
REPORTED.
LEVERAGE. BORROWER SHALL MAINTAIN A RATIO OF TOTAL INDEBTEDNESS FOR BORROWED
MONEY TO EBITDA AS DEFINED IN THE PARAGRAPH TITLED BORROWING BASE OF NOT MORE
THAN 4.50, AND SHALL MAINTAIN A RATIO OF SENIOR INDEBTEDNESS FOR BORROWED MONEY
TO EBITDA OF NOT MORE THAN 3.00. THESE RATIOS WILL BE REDUCED AS FOLLOWS BY THE
PERIODS INDICATED, SEPTEMBER 30, 2001 THROUGH SEPTEMBER 29, 2000, 4.25 AND 2.75;
SEPTEMBER 30, 2002 THROUGH SEPTEMBER 29, 2003, 4.00 AND 2.50; SEPTEMBER 30, 2003
THROUGH SEPTEMBER 29, 2004, 3.75 AND 2.25; SEPTEMBER 30, 2004 AND FOR ALL
PERIODS THEREAFTER, 3.50 AND 2.00.
FIXED CHARGE COVERAGE. BORROWER SHALL MAINTAIN A MINIMUM FIXED CHARGE
COVERAGE RATIO (EBITDA MINUS TAX EXPENSE MINUS CAPITAL EXPENDITURES RELATED TO
THE PURCHASE OF FIXED ASSETS NOT ACQUIRED FOR THE PURPOSE OF LEASING OR RENTING
SAME TO CUSTOMERS TO PRINCIPAL PAYMENTS MADE ON LONG TERM DEBT PLUS INTEREST
PLUS PREFERRED DIVIDENDS PAID) OF NOT LESS THAN 2.40 AS OF SEPTEMBER 30, 1999;
2.00 AS OF DECEMBER 31, 1999; 1.60 AS OF MARCH 31, 2000; 1.20 AS OF JUNE 30,
2000 THROUGH JUNE 29, 2001; 1.30 AS OF JUNE 30, 2002 THROUGH JUNE 29, 2003; 1.40
AS OF JUNE 30, 2004 THROUGH JUNE 29, 2005; AND 1.50 AS OF JUNE 30, 2005 AND
THEREAFTER. THIS CALCULATION SHALL BE MADE QUARTERLY BASED ON THE CURRENT
QUARTER AND THE IMMEDIATELY THREE QUARTERS
WORKING CAPITAL. BORROWER SHALL MAINTAIN WORKING CAPITAL OF NOT LESS THAN
$9,000,000. WORKING CAPITAL SHALL BE DEFINED AS CURRENT ASSETS MINUS CURRENT
LIABILITIES.
ACQUISITIONS. BORROWER SHALL BE PERMITTED TO MAKE ACQUISITIONS SO LONG AS:
A) TOTAL PURCHASE PRICE FOR SUCH ACQUISITIONS IS LESS THAN 7.00 TIMES THE
ACQUIRED ENTITIES' ADJUSTED PROFORMA EBITDA FOR THE TWELVE (12) MONTHS
IMMEDIATELY PRECEDING THE ACQUISITION DATE OF EACH SUCH ENTITY. B) TOTAL
PURCHASE PRICE PAID FOR ANY ONE ACQUISITION SHALL NOT EXCEED ONE MILLION
($1,000,000.00) AND THE AGGREGATE TOTAL PURCHASE PRICE PAID FOR ALL ACQUISITIONS
WITHIN ANY ONE (1) FISCAL YEAR SHALL NOT EXCEED FIVE MILLION ($5,000,000.00). C)
BORROWER PROVIDES CERTIFICATION SATISFACTORY TO LENDER THAT BORROWER HAS
COMPLIED WITH ALL REGULATORY REQUIREMENTS RELATED TO THE ACQUISITION. D) THE
ACQUISITION WILL NOT RESULT IN A DEFAULT OF ANY PROVISION HEREUNDER.
FINANCIAL STATEMENTS. BORROWER SHALL FURNISH LENDER WITH, AS SOON AS AVAILABLE,
BUT IN NO EVENT LATER THAN ONE HUNDRED TWENTY (120) DAYS AFTER THE END OF EACH
FISCAL YEAR, BORROWER'S CONSOLIDATED BALANCE SHEET, INCOME STATEMENT AND
STATEMENT OF CASH FLOWS FOR THE YEAR THEN ENDED, AUDITED BY A CERTIFIED PUBLIC
ACCOUNTANT SATISFACTORY TO LENDER. IN ADDITION BORROWER SHALL FURNISH LENDER
WITH, AS SOON AS AVAILABLE, BUT IN NO EVENT LATER THAN FORTY FIVE (45) DAYS
AFTER THE END OF EACH QUARTER, BORROWER'S BALANCE SHEET, INCOME STATEMENT AND
STATEMENT OF CASH FLOWS FOR THE PERIOD THEN ENDED, PREPARED BY BORROWER, AND
CERTIFIED AS CORRECT TO THE BEST KNOWLEDGE AND BELIEF OF BORROWER'S CHIEF
FINANCIAL OFFICER OR OTHER OFFICER OR PERSON ACCEPTABLE TO LENDER. ALL FINANCIAL
REPORTS REQUIRED TO BE PROVIDED UNDER THIS AGREEMENT SHALL BE PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, APPLIED ON A
CONSISTENT BASIS, AND CERTIFIED BY BORROWER AS BEING TRUE AND CORRECT. ALL
FINANCIAL STATEMENTS SUBMITTED HEREUNDER SHALL BE ACCOMPANIED BY A COMPLIANCE
CERTIFICATE.
ADDITIONAL FINANCIAL INFORMATION. BORROWER SHALL FURNISH LENDER WITH 8K, 10K,
10Q AND ANY OTHER REPORTS AND FILINGS WHICH BORROWER IS REQUIRED TO FILE OR
OTHERWISE PROVIDE TO THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REQUIRED SEC REPORTS WITHIN TEN (10) DAYS OF WHEN SUCH REPORTS ARE FILED.
UNUSED LINE OF CREDIT FEE. BORROWER SHALL PAY A FEE EQUAL TO .40% PER ANNUM
OF THE AVERAGE UNUSED BALANCE OF THE LINE OF CREDIT FOR THE PREVIOUS QUARTER.
THE FIRST QUARTERLY FEE WILL BE CALCULATED FOR THE PERIOD ENDING SEPTEMBER 30,
1999.
DELINQUENT REPORTING FEE. Borrower shall pay a late reporting fee of $300.00 for
each day for each financial statement report that Borrower fails to provide and
a late reporting fee of $100.00 for each day for each report, certificate or
item other than financial statement reports which Borrower is required to
provide herein.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to perform
when due any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Borrower's property or Borrower's or any Grantor's
ability to repay the Loans or perform their respective obligations under this
Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material respect at the time
made or furnished, or becomes false or misleading at any time thereafter.
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Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and for
any reason.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor against
any collateral securing the Indebtedness, or by any governmental agency. This
includes a garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if there is
a good faith dispute by Borrower or Grantor, as the case may be, as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of
the creditor or forfeiture proceeding and furnishes reserves or a surety bond
for the creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Events Affecting Co-Borrowers. Any of the preceding events occurs with respect
to any co-borrower of any of the Indebtedness or any co-borrower dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any of
the Indebtedness. Lender, at its option, may, but shall not be required to,
permit the co-borrower's estate to assume unconditionally the obligations on the
Indebtedness in a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is curable
and if Borrower or Grantor, as the case may be, has not been given a notice of a
similar default within the preceding twelve (12) months, it may be cured (and no
Event of Default will have occurred) if Borrower or Grantor, as the case may be,
after receiving written notice from Lender demanding cure of such default: (a)
cures the default within fifteen (15) days; or (b) if the cure requires more
than fifteen (15) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment. Applicable Law. This
Agreement has been delivered to Lender and accepted by Lender in the State of
Utah. If there is a lawsuit, Borrower agrees upon Lender's request to submit to
the jurisdiction of the courts of SALT LAKE County, the State of Utah. Subject
to the provisions on arbitration, this Agreement shall be governed by and
construed in accordance with the laws of the State of Utah.
ARBITRATION DISCLOSURES:
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY
LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING
IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF ARBITRATORS'
RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED
WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and their
assigns, including but not limited to Disputes arising out of or relating to
this agreement, this arbitration provision ("arbitration clause"), or any
related agreements or instruments relating hereto or delivered in connection
herewith ("Related Documents"), and including but not limited to a Dispute based
on or arising from an alleged tort, shall at the request of any party be
resolved by binding arbitration in accordance with the applicable arbitration
rules of the American Arbitration Association (the "Administrator"). The
provisions of this arbitration clause shall survive any termination, amendment,
or expiration of this agreement or Related Documents. The provisions of this
arbitration clause shall supersede any prior arbitration agreement between or
among the parties. If any provision of this arbitration clause should be
determined to be unenforceable, all other provisions of this arbitration clause
shall remain in full force and effect.
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(b) The arbitration proceedings shall be conducted in Salt Lake City, Utah, at a
place to be determined by the Administrator. The Administrator and the
arbitrator(s) shall have the authority to the extent practicable to take any
action to require the arbitration proceeding to be completed and the
arbitrator(s)' award issued within one hundred fifty (150) days of the filing of
the Dispute with the Administrator. The arbitrator(s) shall have the authority
to impose sanctions on any party that fails to comply with time periods imposed
by the Administrator or the arbitrator(s), including the sanction of summarily
dismissing any Dispute or defense with prejudice. The arbitrator(s) shall have
the authority to resolve any Dispute regarding the terms of this agreement, this
arbitration clause or Related Documents, including any claim or controversy
regarding the arbitrability of any Dispute. All limitations periods applicable
to any Dispute or defense, whether by statute or agreement, shall apply to any
arbitration proceeding hereunder and the arbitrator(s) shall have the authority
to decide whether any Dispute or defense is barred by a limitations period and,
if so, to summarily enter an award dismissing any Dispute or defense on that
basis. The doctrines of compulsory counterclaim, res judicata, and collateral
estoppel shall apply to any arbitration proceeding hereunder so that a party
must state as a counterclaim in the arbitration proceeding any claim or
controversy which arises out of the transaction or occurrence that is the
subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)'
discretion and at the request of any party: (1) consolidate in a single
arbitration proceeding any other claim or controversy involving another party
that is substantially related to the Dispute where that other party is bound by
an arbitration clause with the Lender, such as borrowers, guarantors, sureties,
and owners of collateral; (2) consolidate in a single arbitration proceeding any
other claim or controversy that is substantially similar to the Dispute; and (3)
administer multiple arbitration claims or controversies as class actions in
accordance with the provisions of Rule 23 of the Federal Rules of Civil
Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of the
Administrator from panels maintained by the Administrator. A single arbitrator
shall have expertise in the subject matter of the Dispute. Where three
arbitrators conduct an arbitration proceeding, the Dispute shall be decided by a
majority vote of the three arbitrators, at least one of whom must have expertise
in the subject matter of the Dispute and at least one of whom must be a
practicing attorney. The arbitrator(s) shall award to the prevailing party
recovery of all costs and fees (including attorneys' fees and costs, arbitration
administration fees and costs, and arbitrator(s)' fees). The arbitrator(s),
either during the pendency of the arbitration proceeding or as part of the
arbitration award, also may grant provisional or ancillary remedies, including
but not limited to an award of injunctive relief, foreclosure, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver.
(d) Judgment upon an arbitration award may be entered in any court having
jurisdiction, subject to the following limitation: the arbitration award is
binding upon the parties only if the amount does not exceed Four Million Dollars
($4,000,000.00); if the award exceeds that limit, either party may demand the
right to a court trial. Such a demand must be filed with the Administrator
within thirty (30) days following the date of the arbitration award; if such a
demand is not made within that time period, the amount of the arbitration award
shall be binding. The computation of the total amount of an arbitration award
shall include amounts awarded for attorneys' fees and costs, arbitration
administration fees and costs, and arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any rights
hereunder, shall limit the right of any party to: (1) judicially or
non-judicially foreclose against any real or personal property collateral or
other security; (2) exercise self-help remedies, including but not limited to
repossession and setoff rights; or (3) obtain from a court having jurisdiction
thereover any provisional or ancillary remedies, including but not limited to
injunctive relief, foreclosure, sequestration, attachment, replevin,
garnishment, or the appointment of a receiver. Such rights can be exercised at
any time, before or during initiation of an arbitration proceeding, except to
the extent such action is contrary to the arbitration award. The exercise of
such rights shall not constitute a waiver of the right to submit any Dispute to
arbitration, and any claim or controversy related to the exercise of such rights
shall be a Dispute to be resolved under the provisions of this arbitration
clause. Any party may initiate arbitration with the Administrator; however, if
any party initiates litigation and another party disputes any allegation in that
litigation, the disputing party--upon the request of the initiating party--must
file a demand for arbitration with the Administrator and pay the Administrator's
filing fee. The parties may serve by mail a notice of an initial motion for an
order of arbitration.
(f) Notwithstanding the applicability of any other law to this agreement, the
arbitration clause, or Related Documents between or among the parties, the
Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the
construction and interpretation of this arbitration clause.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will have
all the rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or against
any purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest in
the Loans. Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal claims or
defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation reasonable attorneys' fees, incurred in connection
with the preparation, execution, enforcement, modification and collection of
this Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's reasonable attorneys' fees and Lender's
legal expenses, whether or not there is a lawsuit, including reasonable
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimile (unless otherwise required by law), and
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties, specifying
that the purpose of the notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice purposes, Borrower
will keep Lender informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
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Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any of Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
FINAL AGREEMENT. Borrower understands that this Agreement and the related loan
documents are the final expression of the agreement between Lender and Borrower
and may not be contradicted by evidence of any alleged oral agreement.
EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
JULY 29, 1999.
BORROWER:
INTERWEST HOME MEDICAL, INC.
By:________________________________________________________
JAMES E. ROBINSON, PRESIDENT
INTERWEST MEDICAL EQUIPMENT DISTRIBUTORS, INC., Co-Borrower
By:________________________________________________________
JAMES E. ROBINSON, PRESIDENT
INTERWEST HOME PHARMACY, INC., Co-Borrower
By:________________________________________________________
JAMES E. ROBINSON, PRESIDENT
INTERWEST HOME MEDICAL-ALASKA, INC., formerly known as NORTHWEST HOMECARE,INC.,
Co-Borrower
By:________________________________________________________
PRESIDENT
INTERWEST HOME MEDICAL-ARIZONA, INC., Co-Borrower
By:________________________________________________________
PRESIDENT
LENDER:
ZIONS FIRST NATIONAL BANK
By:__________________________________________________________
Authorized Officer
===============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26c (c) 1999 CFI ProServices,
Inc. All rights reserved. [UT-C40 F3.26b INTWEST.LN C3.OVL]
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PROMISSORY NOTE
Salt Lake City, Utah July 30,1999
$18,000,000.00
For value received, Interwest Home Medical, Inc., lnterwest Medical
Equipment Distributors, Inc., lnterwest Home Pharmacy, Inc., lnterwest Home
Medical-Alaska, Inc., formerly known as Northwest Homecare, Inc., and lnterwest
Home Medical-Arizona, Inc., (hereinafter collectively referred to as "Borrower,
promises to pay to the order of ZIONS FIRST NATIONAL BANK, a national banking
association (hereinafter referred to as "Zions" or "Lender") at its office in
Salt Lake City, Utah, the sum of Eighteen Million and 00/100 Dollars
($18,000,000.00) or such other principal balance as may be outstanding or
authorized pursuant to the Loan Agreement of even date herewith between Borrower
and Lender (the "Loan Agreement") in lawful money of the United States with
interest thereon at an interest rate hereinafter described. This Promissory Note
evidences a revolving line of credit under which Borrower may repeatedly borrow
and repay pursuant to the terms hereunder provided an event of default has not
occurred. The initial principal amount available for advances hereunder will be
$18,000,000.00 or such lesser amount as described in the Loan Agreement. The
maximum principal amount will be reduced by $600,000.00 on a quarterly basis,
beginning September 30, 2000 and continuing on the last day of each quarter
thereafter.
Payments. Commencing September 1, 1999, and continuing on the same day of
each month thereafter, accrued interest on those amounts advanced hereunder
shall be due and payable. In addition, if at any time the aggregate principal
amount of outstanding advances made hereunder exceed the applicable Borrowing
Base (as defined in the Loan Agreement), Borrower, immediately upon written or
oral notice from Lender, shall pay to Lender an amount equal to the difference
between the outstanding principal balance of the advances and the Borrowing
Base. In any event, the unpaid balance of principal and any accrued but unpaid
interest shall be due and payable no later than July 31, 2005.
Interest Rate. Prime Rate means an index which is determined daily by the
published commercial loan variable rate index held by any two of the following
banks: Chase Manhattan Bank, Wells Fargo Bank N.A., and Bank of America N.T. &
S.A. In the event no two of the above banks have the same published rate, the
bank having the median rate will establish the Prime Rate. If, for any reason
beyond the control of Zions, any of the aforementioned banks becomes
unacceptable as a reference for the purpose of determining the Prime Rate used
herein, Zions may, five days after posting notice, substitute another comparable
bank for the one determined unacceptable. As used in this paragraph, "comparable
bank" shall mean one of the ten largest commercial banks headquartered in the
United States of America. This definition of Prime Rate is to be strictly
interpreted and is not intended to serve any purpose other than providing an
index to determine the variable interest rate used herein. It is not the lowest
rate at which Zions may make loans to any of its customers, either now or in the
future.
All advances made hereunder will bear interest through August 31, 2000 at a
variable rate equal to the Prime Rate minus one-quarter percent (.25%) per annum
or a fixed rate equal to thirty (30), sixty (60), or ninety (90) day LIBOR Rate
plus two and 35/100 percent (2.35%) per annum. All advances outstanding under
this Promissory Note shall accrue interest at the Prime Rate plus the applicable
margin, except for such amount as Borrower may choose (as provided below) which
amount shall accrue at a fixed rate equal to the thirty (30), sixty (60), or
ninety (90) day LIBOR Rate plus the applicable margin, for corresponding thirty
(30), sixty (60), or ninety (90) day periods. The rate over or above the Prime
Rate or LIBOR Rate is the applicable margin. The variable interest rate will
change immediately and automatically with each change in the Prime Rate. The
applicable margin shall be determined quarterly in accordance with the
calculations described on Exhibit A. The first quarterly calculation shall be
made with the quarter ending June 30, 2000.
At such times as Borrower may elect, as hereafter provided a portion of the
outstanding balance may be converted to a fixed rate of interest equal to the
thirty (30), sixty (60), or ninety (90) day London Interbank Offered Rate
(LIBOR) for a period corresponding to the LIBOR term chosen plus the applicable
margin. Borrower may not choose a period which extends past the maturity date of
this Promissory Note. Upon expiration of the applicable fixed rate period,
Borrower may elect to have the Promissory Note accrue interest at an elected
LIBOR Rate or the variable rate. if no election is made, this Promissory Note
will bear interest at the variable rate equal to the Prime Rate plus the
applicable margin. Borrower shall make all interest rate selections hereunder by
delivering to Lender in writing Borrower's selection of the interest rate not
less than five (5) business days prior to the expiration of any LIBOR period.
Borrower shall not prepay any amounts which accrue interest at a LIBOR rate, nor
may a LIBOR rate be converted to a variable rate until the expiration of the
LIBOR rate period. In the event that a LIBOR rate is not available on such
dates, the interest rate shall be the applicable variable rate. Zions will
maintain records, which may be computerized, which will specify the interest
rates payable hereon. Borrower will promptly notify Zions of any possible error
contained in any records which are provided to Borrower.
As used herein, Lender's thirty (30), sixty (60), or ninety (90) day LIBOR
Rate shall mean the rates per annum quoted by Lender as Lender's thirty (30),
sixty (60), and ninety (90) day LIBOR Rate based upon quotes for the London
Interbank Offered Rate from the British Bankers Association Interest Settlement
Rates, Lasser Marshall Inc., or other comparable services. This
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definition of Lender's thirty (30), sixty (60), or ninety (90) day LIBOR Rate is
to be strictly interpreted and is not intended to serve any purpose other than
providing an index to determine the interest rate used herein. Lender's thirty
(30), sixty (60), or ninety (90) day LIBOR Rate may not necessarily be the same
as the quoted offer side in the eurodollar time deposit market by any particular
institution or service applicable to any interest period.
Not withstanding any other provision in this Promissory Note, if the
adoption of any applicable law, rule, or regulation, or any change therein, or
any change in the interpretation or administration thereof by any governmental
authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender with any request or directive
(whether or not having the force of law) of any such authority, central bank, or
comparable agency shall make it unlawful or impossible for Lender to maintain or
fund advances based on Lender's thirty (30), sixty (60), or ninety (90) day
LIBOR Rate, then upon notice to Borrower by Lender, interest accruing on the
outstanding principal balance under this Promissory Note, together with interest
already accrued thereon, shall, at the election of Lender, be immediately
converted to the applicable variable rate.
Notwithstanding anything to the contrary herein, if Lender determines
(which determination shall be conclusive) that quotations of interest rates
referred to in the definition of Lender's thirty (30), sixty (60), or ninety
(90) day LIBOR Rate are not being provided in the relevant amounts or for the
relevant maturities for purposes of Lender's determining Lender's thirty (30),
sixty (60), or ninety (90) day, or if Lender determines (which determination
shall be conclusive) that Lender's thirty (30), sixty (60), or ninety (90) day
LIBOR Rate does not accurately cover the cost to Lender of making or maintaining
advances based on Lender's thirty (30), sixty (60), or ninety (90) day LIBOR
Rate, then Lender shall give notice thereof to Borrower, whereupon, until Lender
notifies Borrower that the circumstances giving rise to such suspension no
longer exist, the interest rate hereunder shall be converted to the applicable
variable rate.
Interest on this Promissory Note is computed on a 365/360 simple interest
basis; that is, interest is computed by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at lender's address located at #1 South
Main Street, Salt Lake City, UT 84101, or at such other place as Lender
maintains Banking Centers.
Application of Payments. Any and all payments by Borrower under this
Promissory Note shall be applied as follows: first, to the repayment of any
Lender Expenditures advanced by Lender hereunder or pursuant to the loan
documents relating to the Promissory Note; second, to the payment of any late
charges; third, to the payment of accrued interest on the principal
indebtedness; and fourth, to the payment of the principal indebtedness
hereunder.
Lender's Expenditures. Borrower agrees to pay on demand any expenditures
made by Lender in accordance with the loan documents relating to this Promissory
Note, including, but not limited to, the payment of taxes, insurance premiums,
costs of maintenance and preservation of the collateral, common expense and
other assessments relating to the collateral, and attorney fees and costs
incurred in connection with any matter pertaining hereto or to the security
pledged to secure the principal indebtedness under this Promissory Note or any
portion thereof (collectively the "Lender Expenditures"). At the election of
Lender, all Lender Expenditures may be added to the unpaid balance of this
Promissory Note and become a part of and on a parity with the indebtedness
secured by the collateral and shall accrue interest at such rate as may be
computed from time to time in the manner prescribed in this Promissory Note.
Zions shall maintain appropriate records of advances, repayments and the
interest rates applicable to the advances. Such records may consist of computer
records and shall be deemed correct.
Default. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due hereunder or under any Term Note;
(b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails
to comply with or to perform when due any other term, obligation, covenant, or
condition contained in this Promissory Note or any agreement related to this
Promissory Note, or in any other agreement or loan Borrower has with Lender; (c)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished; (d) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws; (e) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest (including a garnishment of any of Borrower's accounts with Lender); (o
Any guarantor dies or any of the other events described in this default section
occurs with respect to any guarantor of this Promissory Note; (g) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired; (h) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Promissory
Note within the preceding twelve (1 2) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen (1
5) days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole
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discretion to be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce compliance as
soon as reasonably practical.
Lender's Rights. Upon default, Lender may declare the entire unpaid
principal balance on this Promissory Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount. Upon
default, including failure to pay upon final maturity, Lender, at it option, may
also, if permitted under applicable law, increase the variable interest rate on
this Promissory Note 3.000 percentage points. The interest rate will not exceed
the maximum rate permitted by applicable law. Lender may hire or pay someone
else to help collect this Promissory Note if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's reasonable attorney's fees and Lender's legal expenses
whether or not there is a lawsuit, including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law.
Right of Setoff. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts held jointly with someone
else and all accounts Borrower may open in the future, excluding however all IRA
and Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this
Promissory Note against any and all such accounts.
If any payment of this Promissory Note becomes due and payable on a
Saturday, Sunday or legal holiday for commercial banks under applicable banking
laws, the maturity thereof shall be extended to the next succeeding business day
and interest thereon shall be payable at the then applicable rate during such
extension.
Borrower and all endorsers, sureties, and guarantors hereof hereby jointly
and severally waive presentment for payment, demand, protest, notice of protest
and of non-payment and of dishonor, and consent to extensions of time, renewal,
waivers, or modifications without notice and further consent to the release of
any collateral or any part thereof, with or without substitution.
This Promissory Note has been delivered to Lender and accepted by Lender in
the State of Utah. If there is a lawsuit, Borrower agrees upon Lender's request
to submit to the jurisdiction and venue of the courts of SALT LAKE County, the
State of Utah. This Promissory Note shall be governed by and construed in
accordance with the laws of the State of Utah except as modified by the
arbitration provisions.
Arbitration Disclosures:
1. Arbitration is usually final and binding on the parties and subject to
only very limited review by a court.
2. The parties are waiving their right to litigate in court, including
their right to a jury trial.
3. Pre-arbitration discovery is generally more limited and different from
court proceedings.
4. Arbitrators' awards are not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by arbitrators is strictly limited.
5. A panel of arbitrators might include an arbitrator who is or was
affiliated with the banking industry.
6. If you have questions about arbitration, consult your attorney or the
American Arbitration Association.
Arbitration Provisions:
(a) Any controversy or claim between or among the parties, including but
not limited to those arising out of or relating to this Promissory Note or any
agreements or instruments relating hereto or delivered in connection herewith,
and including but not limited to a claim based on or arising from an alleged
tort, shall at the request of any party be determined by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration proceedings shall be conducted in Salt Lake City,
Utah. The arbitrator(s) shall have the qualifications set forth in subparagraph
(c) hereto. All statutes of limitations which would otherwise be applicable in a
judicial action brought by a party shall apply to an arbitration or reference
proceeding hereunder.
(b) In any judicial action or proceeding arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith, including but not limited to a claim based on or arising
from an alleged tort, if the controversy or claim is not submitted to
arbitration as provided and limited in subparagraph (a) hereto, all decisions of
fact and law shall be determined by a reference in accordance with Rule 53 of
the Federal Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedures or other comparable, applicable reference procedure. The parties
shall designate to the court the referee(s) selected under the auspices of the
American Arbitration Association in the same manner as arbitrators are selected
in Association-sponsored arbitration proceedings. The referee(s) shall have the
qualifications set forth in subparagraph (c) hereto.
-84-
<PAGE>
(c)The arbitrator(s) or referee(s) shall be selected in accordance with the
rules of the American Arbitration Association from panels maintained by the
Association. A single arbitrator or referee shall be knowledgeable in the
subject matter of the dispute. Where three arbitrators or referees conduct an
arbitration or reference proceeding, the claim shall be decided by a majority
vote of the three arbitrators or referees, at least one of whom must be
knowledgeable in the subject matter of the dispute and at least one of whom must
be a practicing attorney. The arbitrator(s) or referee(s) shall award recovery
of all costs and fees (including reasonable attorneys' fees, administrative
fees, arbitrators' fees, and court costs). The arbitrator(s) or referee(s) also
may grant provisional or ancillary remedies such as, for example, injunctive
relief, attachment, or the appointment of a receiver, either during the pendency
of the arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the arbitration
or reference award is binding upon the parties only if the amount does not
exceed Four Million Dollars ($4,000,000); if the award exceeds that limit,
either party may commence legal action for a court trial de novo. Such legal
action must be filed within thirty (30) days following the date of the
arbitration or reference award; if such legal action is not filed within that
time period, the amount of the arbitration or reference award shall be binding.
The computation of the total amount of an arbitration or reference award shall
include amounts awarded for arbitration fees, attorneys' fees, interest, and all
other related costs.
(e) At Zions option, foreclosure under a deed of trust or mortgage may be
accomplished either by exercise of a power of sale under the deed of trust or by
judicial foreclosure. The institution and maintenance of an action for judicial
relief or pursuit of a provisional or ancillary remedy shall not constitute a
waiver of the right of any party, including the plaintiff, to submit the
controversy or claim to arbitration if any other party contests such action for
judicial relief.
(f) Notwithstanding the applicability of other law to any other provision
of this Promissory Note, the Federal Arbitration Act, 9 U.S.C. s 1 et seq.,
shall apply to the construction and interpretation of this arbitration section.
This Promissory Note is secured by Commercial Security Agreements of even date.
This Promissory Note is made in accordance with a Loan Agreement of even date.
INTERWEST HOME MEDICAL, INC.
By: JAMES E. ROBINSON
Title:PRESIDENT
INTERWEST MEDICAL EQUIPMENT DISTRIBUTORS, INC.
By: JAMES E. ROBINSON
Title:PRESIDENT
INTERWEST HOME PHARMACY, INC.
By: JAMES E. ROBINSON
Title:PRESIDENT
INTERWEST HOME MEDICAL-ALASKA, INC., formerly known as NORTHWEST HOMECARE, INC.
By: JAMES E. ROBINSON
Title:PRESIDENT
INTERWEST HOME MEDICAL-ARIZONA, INC.
By: JAMES E. ROBINSON
Title:PRESIDENT
-85-
Schedule I
APPLICABLE MARGINS
If Senior Debt-to-EBITDA Ratio is: Level of Applicable Margins
- -------------------------------------------------------------------------------
Greater than 2.5, but less than 3.0 Level I
Greater than 2.0, but less than 2.5 Level II
less than 2.0 Level III
- -------------------------------------------------------------------------------
Applicable Margins
--------------------
Level I Level II Level III
-----------------------------------
Applicable Revolver 0% (.25%) (.50%)
Prime Margin
Applicable Revolver 2.60% 2.35% 2.10%
LIBOR Margin
-----------------------------------
-86-
Exhibit 11.1.
INTERWEST HOME MEDICAL, INC.
Schedule of Weighted Average Shares
1999 1998 1997
----------------------------------------
Weighted average shares:
Issued common shares 4,089,000 4,085,000 3,898,000
Common stock equivalents -0- -0- 63,000
-----------------------------------------
Total weighted average per share 4,089,000 4,085,000 3,961,000
=========================================
-87-
Exhibit 21.1
Subsidiaries of Registrant
Interwest Medical Equipment Distributors, Inc.
Interwest Home Pharmacy, Inc.
Interwest Home Medical - Alaska, Inc.
Interwest Home Medical - Arizona, Inc.
-88-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration
Statement (Form S-8 No. 333-6049) pertaining to the Interwest Home Medical, Inc.
1995 Stock Option Plan; 1995 Non-Employee Director Stock Option Plan; and 1995
Stock Purchase Plan of our report dated November 24, 1999 with respect to the
consolidated financial statements of Interwest Home Medical, Inc., included in
the Annual Report (Form 10-KSB) for the year ended September 30, 1999.
TANNER + CO.
Salt Lake City, Utah
December 15, 1999
-89-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTS FROM
INTERWEST HOME MEDICAL, INC.'S FINANCIAL STATEMENTS AND IS QUALIRIFED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 357,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 357,000
<SECURITIES> 0
<RECEIVABLES> 13,849,000
<ALLOWANCES> 1,594,000
<INVENTORY> 3,007,000
<CURRENT-ASSETS> 16,420,000
<PP&E> 11,097,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,340,000
<CURRENT-LIABILITIES> 6,916,000
<BONDS> 0
0
0
<COMMON> 3,299,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,340,000
<SALES> 15,033,000
<TOTAL-REVENUES> 33,262,000
<CGS> 11,684,000
<TOTAL-COSTS> 18,296,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 991,000
<INCOME-PRETAX> 2,660,000
<INCOME-TAX> 799,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,861,000
<EPS-BASIC> .46
<EPS-DILUTED> .46
</TABLE>
