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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
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.
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(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
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(Address of principal executive offices)
(Zip Code)
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84107-7349
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-K or any
amendment to this Form 10-K.
The Issuer's revenues for the fiscal year ended September 30, 2000 were
$43,303,000.
As of December 20, 2000, 4,104,990 shares of the Issuer's common stock
were issued and outstanding of which 2,109,857 were held by non-affiliates. As
of December 20, 2000, the aggregate market value of shares held by
non-affiliates (based upon the closing price reported by the NASD's SmallCap
Market System of $ 3.56) was approximately $7,511,901.
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 now conducts its business from twenty-five (25) locations
in the States of Utah, Colorado, Idaho, Arizona, Nevada, California and Alaska
and serves over 23,000 customers. The Company divides its products and services
into two 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, custom fitted and adaptive wheelchairs,
patient lifts, commodes, bathroom aids and safety equipment, powered
scooters, walkers, canes, and other home medical supplies.
The company does not provide home nursing, home I.V. therapy or other
personnel services and has no plans to do so.
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 noncritical care setting. Some of our customers have permanent disabilities
which require adaptive equipment to allow the individual to attain and
acceptance degree of independence.
Interwest'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 occured 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 our 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.
Interwest'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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2000 1999 1998 1997 1996
-------- ------- ------- ------- -----
Revenues $43,300 $33,262 $28,636 $24,845 $22,426
Pre-tax Income Before $4,783 $2,660 $1,961 $1,479 $697
Accounting Charge
Net Income $1,433 $1,861 $1,426 $657 $595
Currently, revenues are divided between equipment rentals and sales. For
the fiscal years ended September 30, 2000 and 1999 rentals represented 56% and
55% of total revenues while sales were 44% and 45% of total revenues,
respectively.
We completed 21 acquisitions and one merger in both existing and new
markets between fiscal 1996 and 2000, including three acquisitions in fiscal
2000. We sold four branch locations during fiscal 2000 that were primarily
selling non-core products to retail customers. In November, 2000, we acquired a
company in Arizona that resulted in the addition of two additional locations.
The rate of acquisitions we pursue in the future will depend on a variety of
factors, including, legislative and regulatory developments, regulations and
policies concerning reimbursement, including reimbursement for Medicare,
attractiveness of pricing and availability of acquisition capital at acceptable
prices.
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 $1.5 trillion in 1999. 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 1999 of approximately $40 billion, including $27 billion for
nursing and related patient services, $6 billion for infusion therapy services,
$4 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
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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
Interwest expects to continue.
Strategy
Our objective is to increase our market share through internal growth and
acquisitions. We focus primarily on growth within our existing geographic
markets, which we believe is generally more profitable than adding additional
operating centers in new geographic markets. In addition, we expand into new
geographic markets on a selective basis, either through acquisitions or by
opening new operating centers, when we believe such expansion will enhance our
business. Management seeks to establish a regional concentration of centers in
order to develop the market penetration and critical mass necessary to position
Interwest as a cost-effective provider of selective home medical equipment
services to managed care and other third-party payors.
Interwest 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 our
accounting and billing system. Consequently, we intend to restrict acquisition
of Accounts Receivable in the future.
Interwest 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. We
believe 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. We estimate there are over 3,000
home respiratory and/or durable medical equipment companies suitable and
available for acquisition. We intends to grow in part by acquiring some of these
companies. The rate of acquisitions we pursue in the future will depend on a
variety of factors, including, legislative and regulatory developments,
regulations and policies concerning reimbursement, including reimbursement for
medicare, attractiveness of pricing and availability of acquisition capital at
acceptable prices. We intend to concentrate primarily upon internal growth.
Just as Interwest continually considers the acquisition of smaller
companies, we believe larger companies, from time to time, may consider
acquisition of companies of the size and composition of Interwest. We also
consider, from time to time, the possible benefits to our customers, employees
and shareholders of consolidation of the company with a larger organization. We
also periodically seek expert advice on the value of our shares and of means to
increase shareholder value. We believe the company experiences an arbitrarily
low trading volume and market price due to the thin trading nature of small
capital companies and the relative inefficiencies in that market. We believe the
market undervalues our company in current and historic trading ranges.
Interwest's business strategy is to develop an efficient and effective
organization that specializes in providing selected home medical equipment
services and products. Our future growth is projected to be derived from two
principal sources: (i) increased services and product rentals and sales from our
existing operations, and (ii) revenues generated by businesses which may be
acquired in the future.
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During the last six years, our revenues increased by approximately $25.5 million
to $43.3 million for the year ended September 30, 2000 from $17.8 million for
the year ended September 30, 1995.
During fiscal 2000 Interwest acquired the assets of three (3) other
businesses and sold assets and operations of four (4) branch locations all of
which contributed to the 30% net increase of fiscal 2000 revenues over fiscal
1999 revenues. We also closed two (2) branch locations. The total purchase price
paid by Interwest for the acquisitions was approximately $1.0 million paid in
cash and notes. The operations acquired in 2000 had aggregate annualized
revenues of approximately $1.0 million at the time of acquisition. These
acquisitions were integrated with our existing operations in Las Vegas, Nevada
and Colorado Springs, Colorado.
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 Interwest for such acquisitions
was approximately $4.1 million paid in cash, notes. The operations acquired in
1999 had aggregate annualized revenues of approximately $7.2 million at the time
of acquisition. This acquisition was integrated with our existing operations in
Denver, Colorado.
Products and Services Offered to Customers
Interwest 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. Our customer representative obtains the
necessary medical and insurance coverage information and coordinates the
delivery of our 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. We employ 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
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2000 1999 1998 1997 1996
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Home oxygen and respiratory care services 65 62 55 44 39
Home medical equipment and supplies 35 38 55 56 61
---- ---- ---- ---- ----
Total 100 100 100 100 100
=== === === === ===
Home Oxygen and Respiratory Care Services. Industry-wide home respiratory
market revenues are an estimated $5 billion, having grown by an estimated 7% 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. This increase in total market revenues
occurred during a period when the unit price of home oxygen services as
reimbursed under federal programs, decreased by 30 percent.
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Interwest'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.
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.
We provide technicians who deliver and/or install the respiratory care
equipment, instruct the patient in our 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. We maintain retail stores
and showrooms where customers may select from alternatives the needed products
and/or supplies. We also provide adaptive rehabilitation equipmen, primarily in
Utah. Our rehabilitation services include custom fitting, adapting and repairing
wheelchairs and related seating systems for persons affected with cerebral
palsy, muscular dystrophy and our related conditions, spinal cord injuries, head
injuries, arthritis, and other disabling diseases. Some of our facilities
include a national "Certified Repair Center" which provides warranty,
maintenance and repair services for most home medical
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equipment. The products offered by Interwest range in price from a few cents to
customized wheelchairs priced at $20,000 and above.
Organization and Operations
Management. Interwest is managed at the executive level as a system of
locally managed businesses. We seek to address the local market needs of the
home health care industry through our 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, we provide out 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. The central corporate office has primary responsibility for billing
and collection of accounts receivable and provides support in marketing, sales
and staff training, contracting with managed care organizations, purchasing and
accounting functions.
Information Systems. Each of our branch locations is 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 us 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. We also focus upon quickly integrating the
information systems of acquired businesses as a part of our overall integration
efforts.
Locations. Interwest currently rents and sells equipment and/or provides
services from the following retail locations:
Year Opened
State City Or Acquired
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Colorado Colorado Springs 1995
Denver 1994
Fort Collins 1996
Fort Morgan 1996
Idaho Boise 1987
Idaho Falls 1991
Twin Falls 1994
Nevada Las Vegas/Henderson 1992
Reno 1996
Utah Murray (Main Office) 1978
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Cedar City 1997
Logan 1998
Midvale (Service center) 1998
Ogden 1989
Pleasant Grove 1983
Price 1988
Vernal 1994
St. George 1996
California Quincy 1997
Chester 1997
Alaska Anchorage 1997
Regional Interwest Home Pharmacy 1997
(mail-order)
Arizona Phoenix 1998
Cottonwood 2000
Flagstaff 2000
Sales and Marketing
We believes the sales and marketing skills of our employees have been
instrumental in our growth to date and are critical to our future success. We
emphasizes to our employees the importance of patient base growth and retention
by providing quality service to physicians and their patients. Approximately 50
of our employees are primarily involved in sales and marketing of our 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 our major product lines of products and
services. Interwest'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 our
overall sales strategy is to seek preferred provider contracts with certain
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 Interwest as one of a limited number of preferred providers
of certain services in selected areas but do not establish an exclusive
relationship. We currently have 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 27% and 21% of
total revenues for the years ended September 30, 2000 and 1999, respectively.
Approximately 85% of the revenues acquired in fiscal 1999 resulted from managed
care agreements. We expect total revenues from managed care agreements for
fiscal 2001 to decrease slightly due to our focus upon internal growth from
sources other than managed care companies.
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During fiscal 2000, 1999 and 1998 we lost or terminated relationships with
certain managed care organizations. Our contracts with managed care
organizations will change from time to time as either Interwest or a managed
care organization determines not to continue with such contract. We will
continue to enter strategically appropriate additional managed care contracts
with managed care organizations seeking new providers. As a result, our
relationships with our managed care referral sources may continue to change.
There can be no assurance we 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 our financial condition or results of
operations.
Quality of service is emphasized throughout our organization both in the
hiring and training of our clinical personnel and the manner in which our home
health care services are delivered. Quality assurance and training are directed
and monitored by a Compliance Officer, who is an experienced health care
professional. We have 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. We believe that accreditation of our branch offices is an
important factor in certain markets in our sales and marketing efforts.
Accreditation 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. Interwest was the first company located west of the
Mississippi River to complete its accreditation, which occurred in 1988. As of
December 2000, 15 of the Company's branches are accredited by JCAHO, and 10
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, our respiratory mail-order pharmacy operations are not eligible
for such accreditation. JCAHO does not transfer its accredition to an acquiring
company. Therefore, we evaluate each acquired location to determine the benefit
to have that location undergo the JCAHO accreditation process, generally within
twelve to eighteen months after acquisition. Other companies have established
accreditiation programs in recent years, and we continue to monitor the
available programs and their acceptance by our customers to determine the most
appropriate accreditiation program for us.
Reimbursement for Services
A substantial percentage of Interwest'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, our revenues from
payor sources were allocated as follows:
Payor Percent of Total Revenues
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Medicare 35 36 33 30 28
Medicaid 9 10 6 6 9
Managed care organizations 27 21 24 20 18
Private insurance companies 11 12 12 20 19
Private pay (includes
patient copays) 13 15 17 17 18
Over-the-counter sales 5 6 8 7 8
---- ---- ---- ---- ----
Total 100 100 100 100 100
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Reimbursement is a complicated process which involves submission of claims
to multiple payors, each having its own claims documentation requirements.
Interwest has substantial expertise at processing claims and continues to create
and improve systems to manage third-party reimbursements, produce clean claims
and obtain timely reimbursements by third-party payors. Currently, we
electronically submit approximately 50% of our 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.
Management conducted an extensive analysis of our outstanding receivable
balances beginning in the late thir quarter and continuing through the fourth
quarter of fiscal 2000, and we eventually determined that a $2.8 million
one-time adjustment was necessary. We have implemented enhancements to our
billing and collection processes and systems technology to improve receivables
management. Further, our analysis led us to adopt, beginning October 1, 2000, a
modified policy for the recording of bad debt expenses. Meanwhile, our
fundamental and current business is strong.
Interwest 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, we believe the continued increased
regulation also benefits Interwest by reducing the competition from joint
ventures and fee revenue sharing arrangements, which we have historically
avoided.
Interwest'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 our
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 Interwest's headquarters select and purchase
virtually all equipment and supplies. Purchased inventory is shipped by vendors
to the specific location instructed by our purchasing department. In fiscal
2000, we purchased products from over 200 suppliers. We believes we have good
relationships with our suppliers and have alternative sources to purchase nearly
all the products we provide to our customers.
Interwest 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,
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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. We intend
to continue our participation for the foreseeable future.
Interwest has no long-term contracts for the purchase of inventory
although we have pricing agreements with several suppliers, many of which are
arranged through our affiliation with The MED Group. We believe that our
relationships with our suppliers are good and that alternative sources of supply
exist, at similar costs and on similar terms for most of the products purchased.
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 our 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. We believes that
we compete effectively in each of our 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, our various lines of business. However, the continuing
pricing pressures from government and managed care payors have recently caused
some of these providers to exit the HME industry. Furthermore, we believe our
market coverage and our experience with managed care contracts enhances our
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. Interwest intends to attempt
to reduce costs and increase efficiencies through its growth strategy. We
believe that we currently compete effectively in our markets and will continue
to take all action necessary to remain competitive. Certain of our competitors
and potential competitors have significantly greater financial, technical and
marketing and sales resources than Interwest and may, in certain locations,
possess licenses or certificates that permit them to provide services that we
cannot currently provide nor have any plans to provide. There can be no
assurance that we will not encounter increased competition in the future that
could limit our ability to maintain or increase our business which could
adversely affect our operating results.
Governmental Regulation
Interwest's business is subject to extensive federal, state and local
regulation.
The operations of our 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 our employees are subject to state laws and regulations governing the
professional practice of respiratory therapy, pharmacy and nursing.
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As a provider of services under the Medicare and Medicaid programs,
Interwest 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.
Medicare Reimbursement. The Omnibus Budget Reconciliation Act of 1987
("OBRA 1987") created six categories of durable medical equipment for purposes
of reimbursement under the Medicare Part B program. There is a separate fee
schedule for each category. OBRA 1987 also controls whether durable medical
equipment products will be paid for on a rental or sale basis and established
fixed payment rates for oxygen service as well as a 15-month rental ceiling on
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 20%, 22% and 21% of the
Company's total revenues for the years ended September 30, 2000, 1999 and 1998
were derived from the provision of oxygen services to Medicare patients.
On November 29, 1999, the Balanced Budget Refinement Act of 1999 ("BBRA")
was signed into law. This legislation was designed to mitigate the effects of
the BBA on health care providers. The BBRA restores approximately $1.2 billion
in funding in 2000 and $16 billion over five years, and affects a wide range of
health care providers. With respect to the services provided by Interwest, the
BBRA provides for temporary increases in Medicare payment rates for durable
medical equipment (including oxygen equipment) of 0.3% in 2001 and 0.6% in 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. 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 GAO report, issued in April of
2000, generally agrees with Congress. The Secretary of HHS has not published a
final rule as of December 2000. The Company anticipates that Congress and state
legislatures will continue to review
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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. Interwest 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 Interwest will be affected, it
is likely that we 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 our 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 first
project commenced October 1, 1999 in Polk County, Florida and the second project
is scheduled to begin in the San Antonio, Texas area on February 1, 2001. The
competitive bidding demonstrations could provide HCFA and Congress with a model
for implementing competitive pricing in all Medicare Programs. If such a
competitive bidding system were implemented, it could result in lower
reimbursement rates, exclude certain items and services from coverage or impose
limits on increases in reimbursement rates.
The BBA also contained a provision requiring that only a Home Health
Agency ("HHA") can bill for durable medical equipment, home oxygen therapy
services, and certain medical supplies 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. HHS
has issued a list of specific medical supply codes that continue to be covered
by this provision. We do not anticipate any material impact on our revenues from
this provision. Additionally, we anticipate that we will be required to have
surety bonds of at least $50,000 for each durable medical equipment company we
operate.
On December 15, 2000, the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 ("MMSBIPA") was passed by Congress. The
legislation was designed to further mitigate the effects of the BBA on health
care providers. The MMSBIPA restores approximately $3 billion in funding over
five years to DME and "other" health care providers. With respect to the
services provided by Interwest, the MMSBIPA provides for the restoration of a
full CPI update to be phased in during 2001 and a full CPI update in 2002 and a
moritorium on proposed reductions for unit-dose respiratory medications until
GAO submits to Congress and the Secretary of HHS a report that includes specific
recommendations for revised payment methodologies. The MMSBIPA has not yet been
signed into law by the President as of December 20, 2000.
Claims Audits. Durable Medical Equipment Regional Carriers ("DMERC") are
private organizations that contract to serve as the government's agents for the
processing of claims for items and services provided under Part B of the
Medicare program. The DMERC's and Medicaid agencies also periodically conduct
prepayment and post-payment reviews and other audits of claims submitted.
Medicare and Medicaid agents are under increasing pressure to scrutinize
healthcare claims more closely. Such reviews and/or claims audits of our claims
and related documentation could result in denials of claims for payment
submitted by Interwest or in government demands for significant refunds or
recoupments of amounts paid by the government for claims which, upon subsequent
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investigation, are determined by the DMERC's to be inadequately supported
by the required documentation.
From time to time Interwest is subject to routine pre-payment and
post-payment reviews and other audits of claims submitted. We cooperate with
regulatory authorities in order to resolve issues and refer requests to our
Compliance Director and defense counsel as appropriate. We believe that we are
in material compliance with claims regulations and cannot estimate any amount
for potential claims recoupment; therefore, no accrual has been reflected in the
financial statements.
Fraud and Abuse Laws. Interwest 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. We are also 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 Interwest), 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
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"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. Submission of a claim that a
provider knows or should know is for services for which payment is prohibited
under the Amended Stark Law, and which does not meet an exception could result
in refunds of any amounts billed, civil money penalties of not more than $15,000
for each such service billed, and possible exclusion from the Medicare program.
In addition, a state cannot receive Federal financial participation payments
under the Medicaid program for designated health services furnished to an
individual on the basis of a physician referral that would result in a denial of
payment under Medicare if Medicare covered the services to the same extent as
under a state Medicaid plan.
A number of Federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false claim. In addition, a
civil penalty of up to $15,000 may be assessed for engaging in other activities
prohibited by this statute. Actions to enforce the False Claims Act may be
commenced by a private citizen on behalf of the Federal government, and such
private citizens receive between 15 and 30 percent of the recovery. Recent
government efforts have been made (with mixed success) to assert that any claim
resulting from a relationship in violation of the Anti-kickback Statute or the
Amended Stark Law is false or fraudulent under the False Claims Act. We
carefully monitor our submissions of Medicare and Medicaid claims and all other
claims for reimbursement through routine internal and independent audits as part
of our Compliance Program to assure that they are not false or fraudulent, and
as noted above, believe that we are 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 durable medical equipment, 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.
In 1996, the Health Insurance Portability and Accountability Act
("HIPAA") introduced a new category of federal criminal health care fraud
offenses. If a violation of a federal criminal law relates to a health care
benefit, then an individual is guilty of committing a Federal Health Care
Offense. The specific offenses are: health care fraud; theft or embezzlement;
false statements, obstruction of an investigation; and money laundering. These
crimes can apply to claims submitted not only to government reimbursement
programs such as Medicare, Medicaid and CHAMPUS, but to any third-party payor,
and carry penalties including fines and imprisonment. Additionally, HIPAA
contains requirements for payors and providers to implement national standard
claims filing and payment procedures by October 1, 2002.
Many states, including the states in which Interwest operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with health care
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<PAGE>
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.
Interwest 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 Interwest or that we will not be found to be in
violation of one or more of these provisions. We intend to monitor developments
under these Federal and state fraud and abuse laws. At this time, Interwest
cannot anticipate what impact, if any, subsequent administrative or judicial
interpretation of the applicable Federal and state fraud and abuse laws may have
on our 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 2000, most our
locations have been visited by representatives of ChoicePoint and no notices of
deficiency have been received.
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 our 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". During fiscal 2000, we adopted and implemented a Compliance Program,
which we believes meets the elements of the OIG's Model Program for the industry
through employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, internal and independent compliance audits and
other programs.
Interwest 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 we will be able to comply
with such laws and regulations either in the markets in which we presently
conduct, or wish to commence, business.
Year 2000 Compliance
We had developed plans to address the possible exposures related to the
impact on our computer systems for the Year 2000. Since entering the Year 2000,
we have not experienced any major disruptions to our business, nor are we aware
of any significant Year 2000 related disruptions impacting our customers and
suppliers. Furthermore, we did not experience any material impact on business at
calendar year end. We will continue to monitor our critical systems over the
next several months but do not
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anticipate any significant impacts due to Year 2000 exposures from our internal
systems as well as from the activities of our suppliers and customers.
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 Interwest's lines of business, including the
risk of liability due to the negligence of health care professionals employed by
or otherwise under contract to Interwest, we maintain 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 we have received evidence of such coverage and have 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 Interwest, or that we 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 our insurance policies will be adequate,
or that we can obtain liability insurance in the future on acceptable terms or
at all.
Interwest 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). Our 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 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. We are not aware of any pending
or threatening claim, investigation or enforcement action regarding
environmental issues which if determined adversely to Interwest, would have an
adverse effect upon our capital expenditures, earnings, or competitive position.
The annual costs of compliance with environmental laws are not considered by
Interwest to be material.
Employees
As of December 2000, we had approximately 410 full-time equivalent
employees. Our employees are not currently represented by a labor union or other
labor organization. As our business grows, we will hire additional employees as
may be reasonably necessary to conduct our business. We believe the relations
between our management and our employees are good.
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ITEM 2. PROPERTIES
Headquarters
Interwest's headquarters and retail facilities are located in Salt Lake
City, Utah. We lease 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. We have 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 our headquarters, Interwest leases twenty-three (23) 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
$459,444 for the year ended September 30, 2000 See further disclosure in Note 7
- Lease Obligations in the financial statements.
Real Property Owned
We sold five acres of undeveloped property in Provo, Utah, approximately
40 miles south of Salt Lake City in June, 2000.
At September 30, 1998, Interwest 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 Interwest paid taxes and insurance.
There are no material liens or other limitations on ownership of any
property held by Interwest other than a general lien from our bank under the
general credit line which is disclosed in the financial statements as Note 6 -
Long Term Debt.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, Interwest was sued by a supplier who sought damages
related to a contract for oxygen cylinders with a company acquired by Interwest.
The parties settled the litigation as of June 2000 with Interwest paying
approximately $32,000 in cash and replacement equipment. We are satisfied with
the settlement.
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From time to time Interwest is subject to routine litigation and
regulatory proceedings. We cooperate with regulatory authorities in order to
resolve issues and refer routine litigation to insurance companies and defense
counsel as appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to Interwest's shareholders for a vote during
the last quarter of the year ended September 30, 2000.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Interwest'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 our 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 our
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
-----------
2000(1)
-------
High Low
---------------------
First Quarter $3.75 $2.44
Second Quarter $4.38 $2.88
Third Quarter $7.00 $3.00
Fourth Quarter $6.97 $3.50
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
(1) Calendar Quarters.
Shares Issued in Unregistered Transactions
During the last three fiscal years, Interwest issued its securities in
non-registered transactions pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. We 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:
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In January 1998, Interwest 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, Interwest 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, Interwest 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.
In April 2000, Interwest issued 5,000 shares of common stock for $20,000
to Jerald L. Nelson, in connection with a Non-qualified Stock Option Agreement
executed August 7, 1995.
In May 2000, Interwest issued 1,615 shares of common stock to Colleen
Harryman, in connection with an Incentive Stock Option Agreement executed
January 5, 1998.
In June 2000, Interwest issued 1,560 shares of common stock to Alan
Blackhurst, in connection with an Incentive Stock Option Agreement executed
January 5, 1998.
In June 2000, Interwest completed issuance of 21,130 shares of common
stock for approximately $100,000 that had been deposited with us in June 1997 to
Trine Starnes, in connection with an Option Agreement executed in November 1996.
The Option Agreement became effective November 22, 1996 and was terminated as of
October 12, 1998.
Holders
As of December 20, 2000, there were 4,104,990 shares of common stock
outstanding and approximately 774 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 our common stock.
Dividends
Interwest has not paid any cash dividends since its inception and does not
anticipate or contemplate paying dividends in the foreseeable future. In
addition, Interwest 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
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development of our business.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction
with our consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. We derived the consolidated
statements of operations data for the fiscal years ended September 30, 1996,
1997, 1998, 1999 and 2000 and the consolidated balance sheet data at September
30, 1996, 1997, 1998, 1999 and 2000 from our consolidated financial statements
which have been audited by Tanner + Co, independent accountants, and, except for
the consolidated statements of operations for the fiscal years ended September
30, 1996 and 1997 and the consolidated balance sheet data at September 30, 1996,
1997 and 1998, are included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year ended September 30, 2000
Statements of operations data: 2000 1999 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $43,303,000 $33,262,000 $28,636,000 $24,845,000 $22,426,000
Cost of sales and rental 13,897,000 11,684,000 10,582,000 9,965,000 9,259,000
Gross profit 29,406,000 21,578,000 18,054,000 14,880,000 13,167,000
Selling, general and administrative 26,296,000 18,296,000 15,253,000 13,138,000 11,941,000
expenses
Income from operations 3,110,000 3,282,000 2,801,000 1,743,000 1,226,000
Net income 1,433,000 1,861,000 1,426,000 657,000 595,000
Net income per share - basic .35 .45 .35 .17 .16
Net income per share - diluted .34 .45 .35 .17 .16
Weighted average shares - basic 4,084,000 4,089,000 4,085,000 3,961,000 3,783,000
Weighted average shares - diluted 4,252,000 4,089,000 4,085,000 3,961,000 3,783,000
Balance sheet data:
Working capital 12,774,000 9,504,000 2,613,000 2,645,000 2,337,000
Total assets 33,711,000 32,340,000 28,381,000 22,541,000 18,200,000
Long-term obligations, including 16,515,000 15,064,000 13,411,000 10,399,000 8,221,000
current portion
Stockholders' equity 12,746,000 11,193,000 9,332,000 7,846,000 6,475,000
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Interwest Home Medical's revenue and income are derived from home
medical equipment and services. Our products and services include home oxygen
and respiratory care services and home medical equipment and supplies.
Our objective is to increase our market share through internal growth
and acquisitions. Interwest focuses primarily on growth within its existing
geographic markets, which we believe is generally more profitable than adding
additional operating centers in new markets. In addition, we expand into new
geographic markets on a selective basis, either through acquisitions or by
opening new operating centers, when we believe such expansion will enhance our
business. Management seeks to establish a regional concentration of centers in
order to develop the market penetration and critical mass necessary to position
Interwest as a cost-effective provider of selective home medical equipment
services to managed care and other third-party payors.
The rate of acquisitions we pursue in the future will depend on a
variety of factors, including, legislative and regulatory developments,
regulations and policies concerning reimbursement, including reimbursement for
Medicare, attractiveness of pricing and availability of acquisition capital at
acceptable prices. We intend to concentrate primarily upon internal growth.
Net Revenues
Net revenues increased 16% in 1999 and 30% in 2000 from $28,636,000 in
1998 to $33,262,000 in 1999 and to $43,303,000 in 2000. Approximately $3.4
million or 12% of the 1999 increase and $4.3 million or 13% of the 2000 increase
was generated by same store growth from continuing product lines. The increases
were offset by approximately $1.0 million or 4% of fiscal 1998's revenues and
approximately $.3 million or 1% of fiscal 1999's revenues that were sold or
terminated in the ensuing years due to our focus to provide more respiratory
services. Approximately $2.2 million or 8% in 1999 and $6.0 million or 18% in
2000 of the increase in revenues was contributed by acquired operations. A major
payor has notified Interwest that effective October 1, 2000, it would no longer
be the primary provider of services for a portion of its membership in Denver,
Colorado. We estimate an annual decrease of $1.3 million in continuing revenues
related to this contract. Another payor has added additional membership to those
for whom we are the primary provider of services effective January 1, 2001. We
estimate an annual increase of $1.0 million in revenues related to this increase
in membership. From time to time, contracts begin, terminate or adjust recurring
revenues in ways that may be material. Therefore, we may experience some
fluctuation in quarterly revenues. It is our policy not to comment on such
fluctuations unless they demonstrate that a one-time or permanent material
adjustment has occured.
Net sales increased 4% in 1999 and 27% in 2000 from $14,495,000 in 1998
to $15,033,000 in 1999 and to $19,114,000 in 2000. Approximately $1.2 million or
8% of the 1999 increase and $2.3 million or 17% of the 2000 increase in net
sales 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 rehabilitation products, and approximately $.3 million or 2%
of fiscal 1999's net sales that were sold or terminated.
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Approximately $.3 million or 3% in 1999 and $1.8 million or 12% in 2000 of the
increase in net sales was contributed by acquired operations. The same store
increases were due primarily due to increased marketing efforts in our core
respiratory products.
Net rental revenue increased 29% in 1999 and 33% in 2000 from
$14,144,000 in 1998 to $18,229,000 in 1999 and to $24,189,000 in 2000.
Approximately $1.9 million or 13% of the 1999 increase and $3.9 million or 21%
of the 2000 increase in net rental revenue was contributed by acquired
operations. Approximately $2.2 million or 16% of the 1999 increase and $2.1
million or 12% of the 2000 increase in net rental revenue was generated by same
store growth. Rental revenue as a percentage of total revenue increased from 49%
to 55% to 56% at 1998, 1999, and 2000, respectively. Sales revenue had a
corresponding reduction from 51% to 45% to 44% at 1998, 1999 and 2000,
respectively. Our strategy has been to increase rental revenue because of higher
gross margins. Management has targeted acquisitions whose product mix is
primarily respiratory rental revenue. Additionally, we have expanded our
marketing staff, emphasizing development of the respiratory rental market.
Home oxygen and respiratory care services and home medical equipment
revenues (both sales and rentals) represent 55% and 45% in 1998, respectively,
compared to, 62% and 38% in 1999, and 70% and 30% in 2000, respectively.
Increases in home oxygen and respiratory care services are due primarily to
increased strategic focus on these segments in both marketing and acquisitions.
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 Interwest 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 Balanced Budget Refinement Act ("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 63% in 1998, 65% in 1999, and 68% in 2000. Gross
margin from net rental revenue was 81% in 1998 compared to 82% in 1999 and 84%
in 2000. Gross margin from net sales revenue was 46% in 1998 compared to 47% in
1999 and 46% in 2000. 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
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elimination of certain low margin products partially offset by pricing pressure
from payors. The managed care market fosters competition which has had an
adverse effect on reimbursement rate with resultant decrease in margins on
rental revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses have increased 20% from
$15,253,000 in fiscal 1998 to $18,296,000 in fiscal 1998 and to $26,296,000 in
fiscal 2000. Selling, general and administrative expenses increased as a
percentage of net revenues from 53.3% in 1998 to 55% in 1999 and to 61% in 2000
primarily due to increased accounts receivable write-offs and adjustments to the
allowance for bad debts. Management conducted an extensive analysis of our
outstanding receivable balances beginning in the late third and continuing
through the fourth quarter of fiscal 2000, and we eventually determined that a
$2.8 million one-time adjustment was necessary. We have implemented enhancements
to our billing and collection processes and systems technology to improve
receivables management. Further, our analysis led us to adopt, beginning October
1, 2000, a modified policy for the recording of bad debt expenses. Selling,
general and administrative expenses were 54% of net revenues before recognition
of the one-time adjustment in fiscal 2000.
Interest Expense
Interest expense was $1,046,000 in fiscal 1998 compared to $991,000 in
fiscal 1999 and $1,367,000 in fiscal 2000. Interest expense as a percentage of
revenue was 3.7% in 1998, 3.0% in 1999, and 3.2% in 2000. Our interest expense
consists of interest on borrowings under our bank credit agreement, our capital
equipment line of credit and bank/seller financing agreements to fund
acquisitions. The decrease from 1998 to 1999 was primarily attributable to
reductions in the prime interest rate and by payments on long term debt offset
by 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. The increase from 1999 to 2000 was primarily due to increases in the prime
interest rate and by approximately $1 million of new borrowings to fund
acquisition activities offset by payments on long term debt.
Non-recurring Items
During the third quarter of fiscal 2000, we sold for $90,000 after
commissions and closing costs, a five-acre parcel of land with a basis of
$75,000, and we recognized a non-recurring gain of $15,000. During the first
quarter of fiscal 1999, we 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, we recognized a non-recurring gain of $67,000. During the third
quarter of fiscal 1999, we sold for $105,000, a home that had been 75% owned by
Interwest, with a basis of $49,000 After commissions and closing costs, we
recognized a non-recurring gain of $50,000.
Management conducted an extensive analysis of our outstanding receivable
balances beginning in the late third quarter and continuing through the fourth
quarter of fiscal 2000, and we eventually determined that a $2.8 million
one-time adjustment was necessary. We have implemented enhancements
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to our billing and collection processes and systems technology to improve
receivables management. Further, our analysis led us to adopt, beginning October
1, 2000, a modified policy for the recording of bad debt expenses.
Acquisitions
In fiscal 2000, Interwest acquired, in unrelated transactions, certain
operating assets of 3 local competitors. The operations acquired in fiscal 2000
had aggregate annualized revenues of approximately $1 million at the time of
acquisition. The cost of these acquisitions was approximately $1 million and was
allocated to acquired assets as follows: $.1 million to current assets, $.5
million to property and equipment, and $.4 million to goodwill; we did not
acquire accounts receivable. These acquisitions were all integrated with our
existing operations in Colorado Springs, Colorado and Las Vegas, Nevada.
In fiscal 1999, Interwest 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; we did not acquire accounts receivable. This acquisition was
integrated with our current operations in Denver. We recognized that certain
portions of the annual revenues were at risk for non-renewal and the transaction
was priced accordingly. Over time, some of this revenue was lost but rates of
realization have now stabilized. We are pleased with this acquisition.
In fiscal 1998, Interwest 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, 1998, 1999 and 2000 our working capital was $2,613,000,
$9,504,000 and $12,774,000, respectively, increases of $6,891,000 or 264% and
$3,270,000 or 34%, respectively. The increase in fiscal 1999 is primarily due to
a new long term credit agreement with a financial institution that converted the
majority of our credits into a single six-year line of credit. The increase in
fiscal 2000 is due to increases in accounts receivable and conversion of most of
our credits into the six-year line of credit.
Interwest's primary needs for capital are to fund acquisitions and
purchase rental equipment. For the years ended September 30, 1998,1999 and 2000,
net cash provided by operating activities was $3,278,000, $3,465,000 and
$5,615,000, respectively. Fiscal 1999 increased $187,000 or 6% from fiscal 1998
and fiscal 2000 increased $2,150,000 or 62% from fiscal 1999. Significantly
contributing to cash
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provided from operations in fiscal 2000 and 1999 were increased income and non
cash expenses of depreciation and amortization. A significant portion of our
assets consists of accounts receivable from third party payors that provide
reimbursement for the services provided by us. We have encountered billing
delays in our efforts to integrate trade receivables from acquisition activities
during fiscal 1998 and to receive payments from certain managed care
organizations. Accounts receivable is included as security for our lines of
credit.
Net cash used in investing activities amounted to $2,176,000, $4,979,000
and $5,361,000 for the years ended September 30, 1998, 1999 and 2000,
respectively. Activity in fiscal 1999 included the purchase of $4,100,000 of
assets acquired from HealthCor Holdings, Inc., and our investment in capital
equipment of $1,945,000. Activity in fiscal 2000 included the purchase of
approximately $400,000 of assets from acquisitions and our investment in capital
equipment of approximately $4.4 million.
Net cash provided by financing activities amounted to $1,618,000 for the
year ended September 30, 1999 compared to $1,750,000 and $428,000 used in
financing activities for the years ended September 30, 1998 and 2000,
respectively. Activity in fiscal 1999 included proceeds of $3,147,000 from
long-term debt primarily due to the acquisition of assets from HealthCor
Holdings, Inc., and payments of $3,430,000 related to long-term debt. Activity
in fiscal 2000 included a reduction of checks written in excess of cash of
$1,634,000 and line of credit activity of $14,168,000 in proceeds from long-term
debt and $12,982,000 in payments on long-term debt.
As of September 30, 1999 and 2000, our principal sources of liquidity
consisted of $9.5 million and $12.8 million of working capital and approximately
$4.2 million and $2.5 million, respectively, available on our $18 million
revolving line of credit. Interwest has an $18 million revolving operating line
of credit with its principal bank expiring on July 31, 2006. The maximum
principal amount will be reduced by $600,000 on a quarterly basis, beginning
September 30, 2001 and continuing on the last day of each quarter thereafter.
Borrowing under our 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 our EBITDA for the most recently
preceding 12 months. Interest is currently payable monthly at the bank's prime
lending rate minus .5%. As of September, 30, 1998, 1999 and 2000, $4,491,000,
$13,024,000 and $15,540,000, respectively, were outstanding under lines of
credit. The increase in fiscal 1999 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 our working
capital credit facilities. The increase in fiscal 2000 is primarily due to
additional replacement of previous term loans and acquisitions which contributed
to additional borrowings under our working capital credit facilities.
We anticipate that capital expenditures for fiscal 2001 will be
approximately $4 million. We believe that we will be able to generate sufficient
funds internally, together with funds that may be borrowed under our credit
facilities, to meet our anticipated short-term and long-term capital
requirements for the foreseeable future.
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Interwest's future liquidity will continue to be dependent upon its
operating cash flow and management of accounts receivable. We are not aware of
any impact on liquidity due to pending litigation arising in the ordinary course
of business.
Financial Condition
Net accounts receivable increased 17% and 8% from $10,447,000 to
$12,225,000 and to $13,205,000 at September 30, 1998, 1999 and 2000
respectively. Approximately one-half of the increase during fiscal 1999 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. The increase in
fiscal 2000 is primarily due to increased revenues. Our average days sales in
net receivables were 111, 122 and 106 days at September 30, 1998,1999 and 2000,
respectively. Management conducted an extensive analysis of our outstanding
receivable balances beginning in the late third quarter and continuing through
the fourth quarter of fiscal 2000, and we eventually determined that a $2.8
million one-time adjustment was necessary. We have implemented enhancements to
our billing and collection processes and systems technology to improve
receivables management. Further, our analysis led us to adopt, beginning October
1, 2000, a modified policy for the recording of bad debt expenses. Meanwhile,
our fundamental and current business is strong. The allowance for doubtful
accounts was $1,760,000, $1,594,000 and $1,616,000 at September 30, 1998, 1999
and 2000, respectively.
Inventories decreased 20% and 13% from $3,771,000 to $3,007,000 and to
$2,611,000 at September 30, 1998, 1999 and 2000, respectively. Inventories
decreased $764,000 during 1999 and $396,000 during 2000 primarily as a result of
the continuing shift in product mix toward rentals and respiratory revenue which
requires lower inventory levels.
Notes receivable, including current portion, were $617,000, $187,000 and
$723,000 at September 30, 1998, 1999, and 2000, respectively. The decrease is
due to payments. The notes receivable before fiscal 2000 originated from the
sales of undeveloped real estate, an apartment complex and sale of rehab
business operations. In fiscal 2000 we sold four retail locations in Utah and
Arizona in exchange for notes receivable of $525,000 as we continue to focus on
our respiratory and rental business.
Property and equipment used in our business, net of accumulated
depreciation, amounted to $6,745,000, $11,097,000 and $11,284,000 at September
30, 1998, 1999 and 2000, respectively. The increases in property and equipment
are attributable to the fair market value of assets acquired in acquisition
activities and patient rental equipment purchased to support increased rental
revenue, net of annual depreciation.
Current liabilities at September 30, 1998, 1999 and 2000 were
$12,959,000, $6,916,000 and $4,235,000, respectively, decreases of 47% and 39%,
respectively. Correspondingly, current assets grew 5% during fiscal 1999 from
$15,572,000 to $16,420,000 and 4% during fiscal 2000 to $17,009,000. The
decreases in current liabilities are primarily due to a new long term credit
agreement with a financial institution that converted majority of our credits
into a single six-year line of credit. The increase in
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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.
Option Agreements
On December 9, 1996, Interwest 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 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 our common stock and issuance of
warrants for 162,266 shares of common stock exercisable for three years at $4.28
during the first warrant year, $4.75 during the second year, and $5.25 during
the third warrant year. On June 26, 2000, the second $100,000 option fee was
converted to 21,130 shares and warrants for 21,130 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, Interwest 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 Interwest 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 our 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 three 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. Because of restrictions on reimbursement by
government and private medical insurance programs and the pressures to contain
the costs of such programs, we bear the risk that reimbursement rates set by
such programs will not keep pace with inflation.
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Year 2000 Compliance
We had developed plans to address the possible exposures related to the
impact on our computer systems for the Year 2000. Since entering the Year 2000,
we have not experienced any major disruptions to our business, nor are we aware
of any significant Year 2000 related disruptions impacting our customers and
suppliers. Furthermore, we did not experience any material impact on business at
calendar year end. We will continue to monitor our critical systems over the
next several months but do not anticipate any significant impacts due to Year
2000 exposures from our internal systems as well as from the activities of our
suppliers and customers.
Forward Outlook and Risks
From time to time, Interwest 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, Interwest notes that a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in any of our forward-
looking statements. The risks and uncertainties that may affect the operations,
performance, development and results of Interwest'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 Interwest's
industry and business; (c) the availability of appropriate acquisition
candidates and the successful completion of acquisitions; (d) the demand for our
products and services; and (e) other risks detailed in our Securities and
Exchange Commission filings.
This Form 10-K 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 Interwest. All statements, other than statements of historical
facts, included in this Form 10-K, including those regarding market trends,
Interwest's financial position, business strategy, projected costs, and plans
and objectives of management for future operations, are forward-looking
statements. In general, such statements are identified by the use of forward-
looking words or phrases including, but not limited to, "intended," "will,"
"should," "may," "expects," "expected," "anticipates," and "anticipated" or the
negative thereof or variations thereon or similar terminology. These
forward-looking statements are based on Interwest's current expectations.
Although we believe 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, Interwest's actual results could differ materially. Important
factors that could cause actual results to differ materially from our
expectations are disclosed hereunder and elsewhere in this Form 10-K. These
forward-looking statements represent our judgment as of the date of this Form
10-K. All subsequent written and oral forward-looking statements attributable to
Interwest are expressly qualified in their entirety by the Cautionary
Statements. Interwest disclaims, however, any intent or obligation to update its
forward-looking statements.
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High Leverage. As of September 30, 1999 and 2000, Interwest had total
stockholder's equity of $11.2 and $12.7 million and total indebtedness of $21.1
and $20 million. Accordingly, our balance sheet is highly leveraged. This, in
turn, has important consequences to Interwest. Our ability to obtain additional
financing may be impaired. Additionally, a substantial portion of our cash flows
from operations may be dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available for operations. Interwest's
leverage will substantially increase our vulnerability to changes in the
industry or adverse changes in our business. See "Liquidity and Capital
Resources" and our fiscal 2000 consolidated financial statements, included
herein.
Changing Regulatory Environment. Interwest'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 our 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 our 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 Balanced Budget Refinement Act ("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, 1998, 1999 and 2000, approximately
36%, 32% and 38% of our 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 our inability to decrease days net sales
outstanding could have a material adverse effect on our financial condition or
results of operations. During fiscal 1998, 1999 and 2000 we terminated
relationships with certain managed care organizations and continues to review
our managed care contracts.
Management conducted an extensive analysis of our outstanding receivable
balances beginning in the late third and continuing through the fourth quarter
of fiscal 2000, and we eventually determined that a $2.8 million one-time
adjustment was necessary. We have implemented enhancements to our billing and
collection processes and systems technology to improve receivables management.
Further, our analysis led us to adopt, beginning October 1, 2000, a modified
policy for the recording of bad debt expenses. There can be no assurance that
our days net sales outstanding will not continue to increase if these payors
continue to delay or deny payments to Interwest for its services. See
"Reimbursement for Services" and "Liquidity and Capital Resources."
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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 Interwest'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 our financial condition or results of operations.
During fiscal 1998, 1999 and 2000 we terminated relationships with certain
managed care organizations as we continue to review our managed care contracts.
See "Sales and Marketing" and "Government Regulation."
Risks Related to Goodwill. At September 30, 1999 and 2000, unamortized
goodwill resulting from acquisitions was approximately $4.4 and $4.6 million, or
approximately 13.7% and 13.8% of total assets, respectively. Goodwill is the
excess of cost over the fair value of the net assets of businesses acquired.
There can be no assurance that Interwest will ever realize the value of such
goodwill. This goodwill is being amortized on a straight-line basis over 5 to 40
years. We 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 and
2000, 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 our financial condition or results of
operations.
Risks Associated with Acquisitions. While Interwest completed four
acquisitions between fiscal 1999 and 2000, the rate of acquisitions we pursue in
the future will depend on a variety of factors, including, legislative and
regulatory developments, regulations and policies concerning reimbursement,
including reimbursement for Medicare, attractiveness of pricing and availability
of acquisition capital at acceptable prices. We intend to concentrate primarily
upon internal growth. 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.
Interwest 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 our
accounting and billing system. Consequently, we intend to restrict acquisition
of Accounts Receivable in the future.
When evaluating acquisitions, we focus primarily on growth within our
existing geographic markets, which we believe is generally more profitable than
adding additional operating centers in new markets. See "Strategy." In
attempting to make acquisitions, we compete with other providers, some of which
have greater financial resources than Interwest. 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
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with such acquisitions. There can be no assurance that we in the future will be
able to negotiate, finance or integrate acquisitions without experiencing
adverse consequences that could have a material adverse effect on Interwest's
financial condition or results of operations. Acquisitions involve numerous
short and long-term risks, including loss of referral sources, diversion of
management's attention, failure to retain key personnel, loss of net revenues of
the acquired companies, inability to integrate acquisitions (particularly
management information systems) without material disruptions and unexpected
expenses, the possibility of the acquired businesses becoming subject to
regulatory sanctions, potential undisclosed liabilities and the continuing value
of acquired intangible assets. There can be no assurance that any given
acquisition will be consummated, or if consummated, will not materially
adversely affect Interwest's financial condition or results of operations.
Additionally, because of matters discussed herein that may be beyond our
control, 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. Interwest
competes with a large number of companies in all areas in which its operations
are located. Our 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 Interwest. 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, we could encounter increased competition in the future
that may limit our ability to maintain or increase our market share or otherwise
materially adversely affect our financial condition or results of operations.
Regulatory Compliance. Interwest 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,
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Illinois, New York and Texas, the states with the largest Medicare populations,
has been expanded to all fifty states. See "Government Regulation." While
Interwest believes that it is in material compliance with such laws, there can
be no assurance that the practices of Interwest, if reviewed, would be found to
be in full compliance with such laws or interpretations of such laws.
While Interwest believes that it is in material compliance with the
fraud and abuse and self-referral laws, there can be no assurance that our
practices, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. Although we do
not believe we have 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 Interwest.
Claims Audits. Durable Medical Equipment Regional Carriers ("DMERC") are
private organizations that contract to serve as the government's agents for the
processing of claims for items and services provided under Part B of the
Medicare program. The DMERC's and Medicaid agencies also periodically conduct
prepayment and post-payment reviews and other audits of claims submitted.
Medicare and Medicaid agents are under increasing pressure to scrutinize
healthcare claims more closely. Such reviews and/or claims audits of our claims
and related documentation could result in denials of claims for payment
submitted by Interwest or in government demands for significant refunds or
recoupments of amounts paid by the government for claims which, upon subsequent
investigation, are determined by the DMERC's to be inadequately supported by the
required documentation.
From time to time Interwest is subject to routine pre-payment and
post-payment reviews and other audits of claims submitted. We cooperate with
regulatory authorities in order to resolve issues and refer requests to our
Compliance Director and defense counsel as appropriate. While we believe that we
are in material compliance with claims regulations and cannot estimate any
amount for potential claims recoupment there can be no assurance that claims
audits leading to refunds or recoupments will not have a material adverse effect
on the future operations of Interwest.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, including the impact of commodity price
changes and changes in the market value of its investments and, to a lesser
extent, interest rate changes and foreign currency fluctuations. In the normal
course of business as described below, the Company employs policies and
procedures with the objective of limiting the impact of market risks on earnings
and cash flows and to lower its overall borrowing costs.
33
<PAGE>
The impact of interest rate changes and foreign currency fluctuations
is not material to the Company's financial condition. The Company does not enter
into interest rate and foreign currency transactions for speculative purposes.
It is also the Company's policy to price products from vendors and to customers
in U.S. dollars and to receive payment in U.S. dollars. The Company has no
international operations.
The Company's risks involving commodity price changes relate to prices
it ultimately pays for its inventory of final goods offered for sale or rent.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Interest Home Medical, Inc. Financial Statements Page
Report of Independent Accountants ....................................35
Consolidated Balance Sheets...........................................36
September 30, 1999 and 1998
Consolidated Statements of Income.....................................38
Years ended September 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity.......................39
Years ended September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows.................................40
Years ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements............................42
34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Interwest Home Medical, Inc.
We have audited the accompanying consolidated balance sheet of Interwest Home
Medical, Inc. and subsidiaries, as of September 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for the three years ended September 30,2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for the 3 years ended September 30,2000 in
conformity with generally accepted accounting principles.
TANNER + CO.
Salt Lake City, Utah
November 22, 2000
35
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
------------------------------------------------------------------------------
2000 1999
------------------------
Assets
Current assets:
Cash and cash equivalents $ 183,000 $ 357,000
Accounts receivable, net of allowance for
doubtful accounts of $1,616,000 and $1,594,000 13,205,000 12,225,000
Income tax refund receivable 135,000 -
Inventories 2,611,000 3,007,000
Current portion of notes receivable 147,000 54,000
Other current assets 95,000 77,000
Deferred tax asset 633,000 700,000
------------------------
Total current assets 17,009,000 16,420,000
Notes receivable 577,000 133,000
Investment in undeveloped real estate - 76,000
Property and equipment - net 11,284,000 11,097,000
Intangible assets, net 4,632,000 4,422,000
Other assets 209,000 192,000
------------------------
$ 33,711,000 $32,340,000
========================
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet - Continued
September 30, 2000
------------------------------------------------------------------------------
2000 1999
------------------------
Liabilities and Stockholders' Equity
--------------------------------------
Current liabilities:
Checks written in excess of cash in bank $ 101,000 $ 1,735,000
Current portion of long-term debt 1,016,000 1,791,000
Accounts payable 2,365,000 2,293,000
Accrued expenses 753,000 743,000
Income taxes payable - 354,000
------------------------
Total current liabilities 4,235,000 6,916,000
------------------------
Deferred tax liability 1,231,000 958,000
Long-term debt 15,499,000 13,273,000
------------------------
Total liabilities 20,965,000 21,147,000
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, 4,104,990 and 4,075,685 shares
issued and outstanding for the years ended
September 30, 2000, and 1999, respectively 3,419,000 3,299,000
Retained earnings 9,327,000 7,894,000
------------------------
Total stockholders' equity 12,746,000 11,193,000
------------------------
$ 33,711,000 $32,340,000
========================
See accompanying notes to consolidated financial statements
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Years Ended September 30, 2000
------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------
Revenue:
Net rental income $ 24,189,000 $ 18,229,000 $14,144,000
Net sales 19,114,000 15,033,000 14,492,000
---------------------------------------
Total revenue 43,303,000 33,262,000 28,636,000
Cost of sales and rental 13,897,000 11,684,000 10,582,000
---------------------------------------
Gross profit 29,406,000 21,578,000 18,054,000
Selling, general and administrative
expenses 17,818,000 14,571,000 12,253,000
Bad debt expense 5,014,000 1,170,000 958,000
Depreciation and amortization 3,464,000 2,555,000 2,042,000
---------------------------------------
Income from operations 3,110,000 3,282,000 2,801,000
Other income (expense):
Other income 79,000 126,000 -
Interest income 161,000 243,000 206,000
Interest expense (1,367,000) (991,000) (1,046,000)
---------------------------------------
Income before income 1,983,000 2,660,000 1,961,000
taxes
Income tax benefit (expense):
Current (210,000) (256,000) (846,000)
Deferred (340,000) (543,000) 311,000
---------------------------------------
Total income taxes (550,000) (799,000) (535,000)
---------------------------------------
Net income $ 1,433,000 $1,861,000 $1,426,000
=======================================
Net income per share:
Basic $ .35 $ .45 $ .35
=======================================
Fully diluted $ .34 $ .45 $ .35
=======================================
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended September 30, 2000, 1999 and 1998
------------------------------------------------------------------------------
Preferred Stock Common Stock
---------------------------------------Retained
Shares Amount Shares Amount Earnings
--------------------------------------------------
Balance, October 1, 1997 $ - - 4,060,905 $3,239,000 $4,607,000
Issuance of common stock - - 14,780 60,000 -
Net income - - - - 1,426,000
---------------------------------------------------
Balance, September 30, 1998 - - 4,075,685 3,299,000 6,033,000
Net income - - - - 1,861,000
--------------------------------------------------
Balance September 30, 1999 - - 4,075,685 3,299,000 7,894,000
Issuance of common stock - - 29,305 120,000 -
Net income - - - - 1,433,000
--------------------------------------------------
Balance September 30, 2000 - $ - 4,104,990 $3,419,000 $9,327,000
==================================================
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended September 30,
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Reconciliation of net income to net cash
provided by operating activities:
Net income $1,433,000 $1,861,000 $1,426,000
Adjustments to reconcile net
income to net cash provided by operating activities:
Depreciation and amortization 3,464,000 2,555,000 2,042,000
Gain on settlement of litigation - (96,000) -
(Gain) loss on sale of assets 96,000 (126,000) 28,000
(Increase) decrease in:
Accounts receivable, net (980,000) (1,778,000) (1,884,000)
Inventories 1,605,000 1,528,000 588,000
Other current assets (19,000) 80,000 16,000
Other assets (17,000) (41,000) 40,000
Deferred tax asset 67,000 1,000 (460,000)
Increase (decrease) in:
Accounts payable 72,000 (507,000) 439,000
Accrued expenses 110,000 (24,000) 173,000
Income taxes (489,000) (530,000) 721,000
(receivable)/payable
Deferred income taxes 273,000 542,000 149,000
------------------------------------
Net cash provided by
operating activities 5,615,000 3,465,000 3,278,000
------------------------------------
Cash flows from investment activities:
Collection of notes receivable 64,000 430,000 93,000
Issuance of notes receivable (75,000) - -
Proceeds from sale of property and 38,000 23,000 13,000
equipment
Proceeds from sale of investment in
office building and undeveloped real 90,000 613,000 -
estate
Increase in investment in office building - (11,000)
Purchase of property and equipment (4,864,000) (6,045,000) (2,071,000)
Purchase of intangible assets (614,000) - (200,000)
------------------------------------
Net cash used in
investing activities (5,361,000) (4,979,000) (2,176,000)
------------------------------------
</TABLE>
-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------
Cash flows from financing activities:
Checks written in excess of cash (1,634,000) 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 14,168,000 3,147,000 44,000
Payments on long-term debt (12,982,000) (3,430,000) (2,811,000)
Issuance of common stock 20,000 - 60,000
--------------------------------------
Net cash provided by (used
in) financing activities (428,000) 1,618,000 (1,750,000)
--------------------------------------
Net increase (decrease) in (174,000) 104,000 (648,000)
cash
Cash, beginning of year 357,000 253,000 901,000
--------------------------------------
Cash, end of year $ 183,000 $ 357,000 $ 253,000
======================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $1,258,000 $ 971,000 $1,021,000
======================================
Income taxes $ 386,000 $ 786,000 $ 125,000
======================================
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
2000
o The Company financed the purchase of property and equipment in the amount of
$183,000 with long term debt.
o The Company sold segments of its business in Utah and Arizona in exchange for
notes receivable in the amount of $525,000.
o The Company acquired assets from two companies with long term debt of $82,000.
o The Company issued 21,130 shares of common stock to retire accrued expenses
of $100,000.
o The Company converted rental equipment of $1,208,647 to inventory.
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.
o The Company converted rental equipment of $764,000 to inventory.
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Continued
------------------------------------------------------------------------------
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.
o The Company converted $424,000 of rental equipment to inventory.
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
------------------------------------------------------------------------------
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 in twenty-three (23)
locations in the States of Utah, Colorado, Idaho, Nevada, California, Alaska,
and Arizona. The Company divides its products and services into two general
categories: (1) home oxygen and respiratory care services, and (2) home medical
equipment and supplies.
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 consisted of one parcel of undeveloped land located in
the state of Utah in Utah County. During 2000 the undeveloped land was sold.
------------------------------------------------------------------------------
44
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
1. Organization and Summary of Significant 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.
------------------------------------------------------------------------------
45
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies Continued
Net Income Per Share
Basic net income per share is based on approximately 4,084,000 shares, 4,075,000
shares and 4,071,000 shares for the years ended September 30, 2000, 1999 and
1998, respectively. Diluted net income per share is based on weighted average
shares outstanding of approximately 4,252,000, 4,075,000 and 4,071,000 shares
for the years ended September 30, 2000, 1999 and 1998, respectively. Diluted
earnings per share have been calculated on the Treasury Stock method.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of individuals in the Western
United States. Substantially all revenues are from these customers. Accounts
receivable include those of the individuals and their third party payors,
including insurance companies, Medicare, Medicaid and other governmental
agencies. Revenues covered by Medicare, which is a third party payor, accounted
for approximately 35%, 36% and 33% of total revenues received for the years
ended September 30, 2000, 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.
------------------------------------------------------------------------------
46
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
Reclassification
Certain amounts in the financial statements for previous years have been
reclassified to conform with the current year presentation.
2.Acquisitions
During the year ended September 30, 2000, the Company acquired certain assets of
three companies which was accounted for as a purchase and, accordingly, are
included in the consolidated financial statements since their respective dates
of acquisition. The aggregate purchase price of $1,000,000, which was financed
through cash resources and short-term debt, has been allocated to the assets of
the Company based on their respective fair market values. The excess of the
purchase price over assets acquired of $612,000 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 2000 acquisitions had occurred at the beginning of fiscal
2000:
Pro Forma
Results of
Operations
------------
2000
------------
Total revenue $ 43,633,000
Total expenses $(42,071,000)
------------
Net income $ 1,562,000
============
Net income per share $ 0.38
============
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.
------------------------------------------------------------------------------
47
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
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.
3.Notes
Receivable
Notes receivable consist of the following at September 30, 2000 and 1999:
2000 1999
---------------------------------
Notes receivable in connection with the sale of a segment of the business due in
monthly installments of $6,734, including interest of 9%. The note is due in
August 2005 and is secured by a personal guarantee from the
purchaser
$ 321,000 -
Notes receivable in connection with the sale of a segment of the business due in
monthly installments of $4,164, including interest of 9%. The note is due in
August 2005 and is secured by the personal guarantee of the
purchaser
199,000 -
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 unsecure 129,000 187,000
------------------------------------------------------------------------------
48
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
Note receivable due on demand,
including interest of 8%. The note
was due October 1999 and is secured
by the personal guarantee of a third
party 75,000 -
-----------------------------
724,000 187,000
Less current portion 147,000 54,000
-----------------------------
$ 577,000 $ 133,000
=============================
4.Property and Equipment
Property and equipment at September 30, 2000 and 1999 consist of the following:
Life 2000 1999
-----------------------------------
Rental equipment 3-10 year $18,410,000 $15,990,000
Equipment and signs 3-10 years 1,649,000 1,417,000
Furniture and fixtures 3-10 years 541,000 498,000
Vehicles 2-5 years 1,035,000 1,021,000
Leasehold improvements 3-5 years 344,000 322,000
-------------------------------------
21,979,000 19,248,000
Less accumulated
depreciation and amortization 10,695,000 8,151,000
-------------------------
$11,284,000 $11,097,000
=========================
------------------------------------------------------------------------------
49
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
5.Intangible
Assets
Intangible assets at September 30, 2000 and 1999 consist of the following:
Life 2000 1999
-----------------------------------
Goodwill 5-40 years $4,920,000 $4,557,000
Noncompete agreements 5-7 years 399,000 399,000
Other 5 years 30,000 30,000
-----------------------------------
5,349,000 4,986,000
Less accumulated
amortization 717,000 564,000
-----------------------
$4,632,000 $4,422,000
======================
------------------------------------------------------------------------------
50
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
6.Long-term
Debt
Long-term debt at September 30, 2000 and 1999, consists of the following:
2000 1999
---------------------------
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 (9.50% at September 30, 2000) minus .5%, secured by accounts receivable,
inventory and equipment, due July 2006
$15,540,000 $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
286,000 501,000
Installment contracts payable in aggregate monthly installments totaling $2,069
including interest ranging from 10% to 10.99%, secured
by vehicles
9,000 24,000
Note payable in connection with the
acquisition of a company requiring a
single payment in March, 2000,
including interest at 8%, unsecured - 400,000
------------------------------------------------------------------------------
51
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
Capital lease obligations (see note 7) 680,000 1,115,000
---------------------------
16,515,000 15,064,000
Less current portion 1,016,000 1,791,000
---------------------------
Long-term debt $15,499,000 $13,273,000
===========================
6.Long-term Debt Continued
Future maturities of long-term debt at September 30, 2000 were as follows:
Year ending September 30:
2001 $ 1,016,000
2002 2,672,000
2003 2,614,000
2004 2,473,000
2005 2,400,000
Thereafter 5,340,000
------------
$ 16,515,000
============
------------------------------------------------------------------------------
52
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
7.Lease Obligations
The Company leases certain equipment under terms accounted for as capital
leases. The Company also leases its facilities and small equipment under
noncancellable operating leases. At September 30, 2000 and 1999, the total cost
of all assets currently under capital lease is $1,573,000 and $1,752,000,
respectively. Accumulated amortization at that date amounted to $561,000 and
$623,000, respectively. The following summarizes future minimum lease payments
under leases at September 30, 2000:
Operating Capital
Year Ending September 30: Leases Leases
-----------------------
2001 $ 734,000$ 257,000
2002 643,000 225,000
2003 499,000 218,000
2004 309,000 75,000
Thereafter 564,000 -
-----------------------
$ 2,749,000 775,000
=======================
Less amounts representing interest 95,000
------------
Present value of future minimum
lease payments $ 680,000
------------
7.Lease Obligations Continued
Total rent expense for operating leases was approximately $957,000, $894,000 and
$925,000 for the years ended September 30, 2000, 1999, and 1998, respectively.
------------------------------------------------------------------------------
53
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
8. Income Taxes
The provisions for income taxes differ from the amount computed at federal
statutory rates as follows:
2000 1999 1998
--------------------------------
Tax at statutory rate$ (675,000) $(904,000) $(667,000)
State tax (100,000) (130,000) (117,000)
Change in valuation
allowance 275,000 328,000 279,000
Other (50,000) (93,000) (30,000)
--------------------------------
$ (550,000) $(799,000) $(535,000)
================================
The deferred income tax benefit (liability) for the years ended September 30,
2000 and 1999 is as follows:
2000 1999
------------------------
Short-term:
Allowance for bad debts $ 549,000 $ 590,000
Employee benefits 84,000 70,000
Other - 40,000
------------------------
Deferred tax asset $ 633,000 $ 700,000
========================
2000 1999
-----------------------
Long-term:
Depreciation $(1,231,000) $ (958,000)
Net operating loss carryforward - 275,000
Valuation allowance - (275,000)
-----------------------
Deferred tax liability $(1,231,000) $ (958,000)
=======================
A valuation allowance has been established in 1999 for the possible utilization
of certain timing differences relating to the net operating loss carryforward.
------------------------------------------------------------------------------
54
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
9.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, 2000 and 1999, 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.
10.401(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 $101,000, $70,000 and
$50,000 in 2000, 1999 and 1998, respectively.
11.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 ten 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, 2000, options to
purchase 295,000 shares remain unexercised under this agreement.
------------------------------------------------------------------------------
55
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
11.Stock Options and Warrants Continued
In February 2000, the Company adopted a stock incentive plan. Under the plan,
stock options aggregating 600,000 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 ten years from the date of grant. At September 30, 2000, options to
purchase 220,000 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 ten years
from the date of grant. At September 30, 2000, this plan had been terminated and
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. 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.
------------------------------------------------------------------------------
56
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
11.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 terminate ten years from the date of grant. During September
30, 2000, the Company issued options to purchase an aggregate of 120,000 shares
to three board members. The options vest one-third per year beginning March 31,
2001. The options terminate ten years from the date of grant. As of September
30, 2000, none of the options were exercised.
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, 2000 no options had been exercised under this agreement.
------------------------------------------------------------------------------
57
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
11.Stock Options and Warrants Continued
A schedule of the options and warrants at September 30, 2000, 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
Granted 525,000 - 3.00 - 3.30
Exercised (11,000) - 3.00 - 4.00
Expired (5,000) (183,529) 4.00 - 5.75
--------------------------------------
Outstanding at
September 30, 2000 889,750 13,984 $ 2.50 - 5.52
---------------------------------------
------------------------------------------------------------------------------
58
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
12. 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 2000, 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,
------------------------------------
2000 1999 1998
------------------------------------
Net Income - as reported $1,433,000 $1,861,000 $1,426,000
Net Income - pro forma $1,047,000 $1,789,000 $1,301,000
Earnings per share - as reported 0.35 $ 0.45 $ .35
Earnings per share - pro form 0.25 $ 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,
----------------------------------
2000 1999 1998
----------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price volatility 42% 44% 42%
Risk-free interest rate 6.0% - 6.5% 4.4% 4.4%
Expected life of options 5-10 years 1-5 years 1-5 years
===================================
The weighted average fair value of options outstanding during 2000, 1999 and
1998 are $1.74, $1.49 and $1.44 per share, respectively.
------------------------------------------------------------------------------
59
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
12.Stock-Based Compensation Continued
The following table summarizes information about fixed stock options outstanding
at September 30, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisabe lAverage
Exercise at Life Exercise at Exercise
Prices 9/30/00 (Years) Price 9/30/00 Price
---------------------------------------------------------------------------
$ 2.50-$4.28 889,234 6.92 $3.20 572,898 $ 3.26
4.75 - 5.52 14,500 5.06 5.27 14,500 5.27
---------------------------------------------------------------------------
$ 2.50 - 5.52 903,734 6.89 $ 3.23 587,398 $ 3.31
===========================================================================
13.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, 2000, 1999 and 1998, 34,050, 28,525 and 16,751
shares, respectively, of common stock had been cumulatively purchased under the
plan.
14.Commitments and Contingencies
In October 1991, an officer of the Company retired and a trust was created which
purchased 429,552 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 $43,000 at September 30, 2000.
------------------------------------------------------------------------------
60
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
14.Commitments and Contingencies Continued
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.
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. 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.
15.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, 2000 and 1999 there were no shares of preferred stock
issued and outstanding.
16.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.
During the year ended September 30, 2000, the Company sold the remaining portion
of its investment in undeveloped real estate with a book value of $76,000, The
net proceeds from the sale of $90,000 was received in cash. The resulting gain
on sale was $14,000.
------------------------------------------------------------------------------
61
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
------------------------------------------------------------------------------
17.Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flows.
------------------------------------------------------------------------------
62
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. 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 Interwest, 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 49 CEO /President/Chairman
James U. Jensen 56 Director
Dr. Jeffrey F. Poore 52 Director
Jerald L. Nelson 58 Director
Que H. Christensen 45 COO/Vice President
Serena Falgoust 53 Secretary
James E. Robinson. Mr. Robinson has been president and a director of
Interwest 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 Interwest 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
63
<PAGE>
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.
Jeffrey F. Poore D.D.S. Dr. Poore has been a director of Interwest 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 Interwest 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
Interwest 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 Interwest in
January 1998. Mrs. Falgoust has been involved with Interwest since the
organization of Beacon Financial in 1983 and previously served as
Secretary/Treasurer from 1984 to 1990 and from 1993 to 1995.. She
64
<PAGE>
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
Interwest'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.
E. Compliance With Section 16(a). Section 16 of the Securities Exchange Act
of 1934 requires the filing of reports for sales of Interwest's common stock
made by officers, directors and 10% or greater shareholders. A Form 3 must be
filed within ten days after the event in which an individual becomes a reporting
person. A Form 4 must be filed within ten days after the end of the calendar
month in which a sale or purchase occurred. A Form 5 must be filed within
forty-five days after the end of the calendar year in which sales and purchases
less than $10,000 during the year occurred. Based upon the review of the Form
3's, 4's and 5's filed with Interwest, only the following disclosure is required
in the Form 10-K:
Serena Falgoust. During the fiscal year ended September 30, 2000, Ms.
Falgoust sold 1,640 shares of common stock and determined that Form 3 had not
been filed. Form 3 was subsequently filed but not within the required period.
Jerald L. Nelson. During the fiscal year ended September 30, 2000, Mr.
Nelson exercised options to purchase 5,000 shares of Interwest's common stock
that was reported but not within the required period.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by
Interwest for services rendered during the last three years to our Chief
Executive Officer and to our most highly compensated executive officers other
than the CEO, whose annual salary and bonus exceeded $100,000:
65
<PAGE>
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Restrict
Commissions Other Annual Stock Options/
Name and Principal and Compensation Awards SAR's
Position Year Salary Bonuses($) ($) ($) (#)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James E. Robinson 2000 $175,000 $52,760 (2) -0- 240,000(1)
President/CEO 1999 $175,000 $36,735 (2) -0- -0-
1998 $150,000 $36,735 (2) -0- -0-
Que H. Christensen
Vice President/COO(3) 2000 $115,000 $34,671 (2) -0- 160,000(1)
1999 $115,000 $23,265 (2) -0- -0-
1998 $ 95,000 $23,265 (2) -0- -0-
</TABLE>
(1) Options for 54,000 shares were granted under Interwest's 1995 Employee
Stock Option Plan. Options for 220,000 shares were granted under
Interwest's 2000 Stock Incentive Plan. Options for 126,000 shares were
granted directly by the Board of Directors. No SAR's have been granted by
Interwest.
(2) Does not include the value of perquisites provided to certain
executive officers which in the aggregate did not exceed the lesser of
$50,000 or 10% of such officer's salary and bonus.
(3) In December 1997, Mr. Christensen was promoted to Vice President and
Chief Operating Officer (COO) from Chief Financial Officer.
Stock Options
There were no options granted during fiscal 1999 or 1998 to the named
executive officers.
Options Grants in the Year Ended September 30, 2000
Percentage
Number of of Total Exercise or
Securities Options Granted Base Price
Underlying Employees in Per Share Expiration
Name Options Granted(#) Fiscal Year ($) Date
-------------------------------------------------------------------------------
James E. Robinson 240,000 59% (1) (1)
Que H. Christensen 160,000 40% (2) (2)
66
<PAGE>
(1) Consists of four stages of grants as follows:
(a) 30,000 shares at $3.30 per share, expiring 12/12/04;
(b) 120,000 shares at $3.30 per share, expiring 1/5/05;
(c) 12,000 shares at $3.00 per share, expiring 1/5/10;
(d) 78,000 shares at $3.00 per share, expiring 1/12/09.
(2) Consists of three stages of grants as follows:
(a) 24,000 shares at $3.00 per share, expiring 12/12/04;
(b) 88,000 shares at $3.00 per share, expiring 1/5/10;
(c) 48,000 shares at $3.00 per share, expiring 12/12/09.
The following table sets forth information concerning the number and value
of options held at September 30, 2000 by each of the named executive officers.
No options held by such executive officers were exercised during 1999.
Option Values at September 30, 2000
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
September 30, 2000 At September 30, 2000($)(1)
(#)
---------------------------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
---------------------------------------------------------------------------
James E. Robinson 62,500(2) -0- $66,250(2) -0-
50,000 -0- $15,500 -0-
150,000 90,000 $66,000 $23,400
Que H. Christense 31,250(2) -0- $31,250(2) -0-
25,000 -0- $7,750 -0-
72,000 88,000 $40,320 $49,280
(1) An "In-the-Money" stock option is an option for which the
market price of Interwest's common stock underlying the option
on September 30, 2000 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
Interwest's common stock on the NASD SmallCap Market on
September 30, 2000 ($3.56 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 Interwest'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, 2000 ($3.56 per share) minus the exercise price.
1995 Employee Stock Purchase Plan
On November 6, 1995, Interwest's Board of Directors adopted the Company's
1995 Stock Purchase Plan (the "1995 Plan"). The 1995 Plan is designed to provide
our employees with an opportunity to purchase shares of Interwest's common stock
through accumulated payroll deductions. The purchase price may be established at
85% of the fair market price. The total number of shares which may be purchased
under the 1995 Plan is 500,000. At December 20, 2000, 38,250 shares of common
stock had been purchased under the 1995 Plan.
67
<PAGE>
2000 Employee Stock Incentive Plan
On February 7, 2000, Interwest's Board of Directors adopted the Company's
2000 Stock Incentive Plan (the "2000 Plan") which provides for the issuance of a
maximum 600,000 shares of common stock pursuant to the exercise of options
granted under the 2000 Plan. The Options granted under the 2000 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 220,000 shares of stock have been granted and
options to purchase 220,000 shares of stock were outstanding as of September 30,
2000.
1995 Employee Stock Option Plan
On February 24, 1995, Interwest'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. The Committee
extended the exercise period to ten years on February 7, 2000. Options to
purchase 310,250 shares of stock have been granted and options to purchase
295,250 shares of stock were outstanding as of September 30, 2000.
Compensation of Directors
Interwest'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, Interwest adopted, and the shareholders approved at the
Annual Meeting on February 16, 1996, the 1995 Non-Employee Director's Stock
Option Plan. The Plan provides that each non-employee director who was a
director as of February 24, 1995, or who became a director thereafter, was and
will be issued an option to purchase 5,000 shares of Interwest'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 on March
31, 1998 and each additional one-third vesting in the two subsequent years. No
initial options granted by Interwest under this plan in 1995 may be exercised
until we achieve cumulative before-tax income of $1,500,000, commencing February
22, 1995. On December 13, 1999, the each non-employee
68
<PAGE>
director was granted an option to purchase 40,000 shares at $3.00 per share with
one-third of the shares vesting on April 1, 2001 and each additional one-third
vesting in the two subsequent years.
Employment Agreements
Interwest is currently a party to the following Employment Agreements:
James E. Robinson. On May 3, 1995, Interwest 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 Interwest 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. Interwest is obligated to
compensate Mr. Robinson for 120 days past termination in the event
Interwest terminates the agreement. The Compensation Committee of the
Board of Directors amended the annual base salary to $175,000 effective
October 1, 1998 and to $195,000 effective December 1, 2000.
Que H. Christensen. On May 3, 1995, Interwest 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 Interwest 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. Interwest is
obligated to compensate Mr. Christensen for 90 days past termination in
the event Interwest terminates the agreement. The Compensation Committee
of the Board of Directors amended the annual base salary to $115,000
effective October 1, 1998 and to $130,000 effective December 1, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of Interwest's
common stock beneficially owned as of December 1, 2000 by: (i) each officer and
director of Interwest; (ii) all officers and directors as a group; and (iii)
each person known by Interwest to beneficially own 5 percent or more of the
outstanding shares of Interwest's common stock.
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Name Amount
and Address and Nature Percent
of Beneficial of Beneficial of Class(1)
Owner Ownership Ownership
-----------------------------------------------------------------------------
James E. Robinson (2) 1,406,916 30.77%
235 East 6100 South
Salt Lake City, UT 84107
James U. Jensen(3) 165,924 3.63%
420 Chipeta Way
Salt Lake City, UT 84108
Dr. Jeffrey F. Poore(4) 64,468 1.41%
4536 Abinadi Road
Salt Lake City, UT 84124
Jerald L. Nelson(5) 73,565 1.61%
10242 Ashley Hills Circle
Sandy, UT 84092
Que H. Christensen(6) 174,077 3.81%
235 East 6100 South
Salt Lake City, UT 84107
Val D. Christianson(7) 326,623 7.14%
3065 S. 2850 East
Salt Lake City, UT 84107
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Serena J. Falgoust(8) 25,144 0.55%
1620 N. 1250 W.
Provo, UT 84604
Eric Nickerson(9) 225,650 4.94%
Third Century Two
1711 Chateau Court
Fallston, MD 21047
I-Med Shareholders(10) 309,094 6.76%
Share Purchase Trust
235 East 6100 South
Salt Lake City, UT 84107
All Officers and Directors 1,925,453 41.78%
as a Group (6 Persons)
Unless otherwise indicated in the footnotes below, Interwest 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
Interwest.
(1) As of December 1, 2000, there were 4,104,990 shares of Interwest's
common stock issued and outstanding. There are also outstanding
exercisable options and warrants to purchase 467,234 shares of Interwest's
common stock which are owned by officers and directors. Therefore, for
purposes of the above set forth chart, 4,572,224 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) 4,500 shares owned of record by a son of Mr. Robinson;
(ii) 892,798 shares owned by J&J Medical Investments, Ltd., (iii) 247,118
shares owned of record by Mr. Robinson and (iv) 262,500 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 51,500 shares which may be issued pursuant to
other stock options and warrants which are currently exercisable.
(4) Includes 9,484 shares owned of record by Dr. Poore of which 8,484
shares were purchased through the exercise of stock options and 54,984
shares which may be acquired pursuant to stock options and warrants which
are currently exercisable.
(5) Includes (i) 5,500 shares which are owned of record by Mr. Nelson
which were purchased through the exercise of stock options; (ii) 42,000
shares which may be issued pursuant to stock options and warrants which
are currently exercisable; and (iii) 26,065 shares which are owned of
record by Mr. Nelson's spouse.
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(6) Includes (i) 4,300 shares owned of record by Mr. Christensen; (ii)
103,527 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) 56,250 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) 148,099 shares which are owned of record by Mr.
Christianson jointly with his spouse and held in a brokerage account;
(iii) 101,696 shares which are beneficially owned through the I-Med
Shareholders Share Purchase Trust; and (iv) 22,500 shares owned of record
by the five children of Mr. Christianson (4,500 shares each).
(8) Includes 25,000 shares owned jointly with her spouse and 144 shares
which are owned through the Interwest Home Medical Employee Stock Purchase
Plan.
(9) Includes 11,900 shares owned jointly with his spouse and 213,750
shares which are owned through Third Century Two, an investment
partnership that Mr. Nickerson controls and owns approximately 5%.
(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 Interwest'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 has guaranteed payment of the unpaid
balance of the purchase price for the shares purchased by the Trust.
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of Interwest are currently contemplated.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Board of Directors Stock Option Purchase Plan
On September 30, 1997, Interwest'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 Interwest and third
party investors. The Plan for the non-employee directors is intended to
encourage long term investment in Interwest by the non-employee directors but is
not considered by Interwest as "compensation"
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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 Interwest 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 Interwest'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 for Last Date to Last Date
Exercise Price Shares Option Fee Obtain without Warrant Prices
Warrants 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 6/9/98 $4.78, 5.25,
Fee paid + 90 5.75
days
Third Option $5.50 8,250 4/26/98 Date Option 9/7/98 $5.50, 6.00,
Fee paid + 90 6.50
days
Fourth Option $6.00 8,250 7/25/98 Date Option 12/6/98 $6.00, 6.50,
Fee paid + 90 7.00
days
</TABLE>
* Warrant prices change on the annual anniversary of the date the Option
Fee is paid.
As of September 30, 2000, Dr. Poore had purchased 8,484 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. The warrants
are due to expire on January 5, 2001. No other option fees were paid and all the
remaining options and warrants had terminated as a result.
ITEM 14. 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 74.
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Exhibits to Form 10-K
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- --------------
2.1 Agreement and Plan of Merger - N/A
Interwest Medical Equipment Distributors, Inc.
effective February, 1995.
(Incorporated by reference to Form 8-K filed
February 1995)
2.2 Agreement and Plan of Merger - N/A
Mt Rehabilitation Services
May 1995 (Incorporated by reference
to Form 8-K dated May 1995)
3.1 Amended and Restated Articles of Incorporation** N/A
3.2 Bylaws** N/A
10.1 Form of 1995 Stock Option Plan** N/A
10.2 Form of 1995 Non-Employee Directors' Stock Option Plan** N/A
10.3. Form of 1995 Stock Purchase Plan** N/A
10.4. Employment Agreement - James E. Robinson** N/A
10.5. Employment Agreement - Val D. Christianson** N/A
10.6. Employment Agreement - Que H. Christensen** N/A
10.7. Loan Documentation*** N/A
10.8 Non-employee Director Stock Option Purchase Agreement* N/A
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11.1 Schedule of Weighted Average Shares 77
21.1 Subsidiaries of Registrant 78
23.1 Consent of Independent Accountant 79
*Attached.
**Incorporated by reference to Form 10-KSB for year ended September 30, 1997.
***Incorporated by reference to Form 10-KSB for year ended September 30, 1999.
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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 20, 2000 By/s/ James E. Robinson
------------------------------------
James E. Robinson
President/CEO
Date: December 20, 2000 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 Interwest and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ James E. Robinson CEO/Director December 20, 2000
James E. Robinson
/s/ James U. Jensen Director December 20, 2000
James U. Jensen
/s/ Dr. Jeffrey F. Poore Director December 20, 2000
Dr. Jeffrey F. Poore
/s/ Jerald L. Nelson Director December 20, 2000
Jerald L. Nelson
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