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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
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INTERWEST HOME MEDICAL, INC.
(Name of Registrant as specified in its charter)
Utah 87-0402042
--------------- --------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification No.)
235 East 6100 South, Salt Lake City, UT 84107
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(Address of principal executive offices)
Registrant's telephone no., including area code: (801) 261-5100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: No Par
Value Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Common Stock outstanding at June 30, 2000 - 4,104,990 shares of no par value
Common Stock.
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<PAGE>
FORM 10-Q
FINANCIAL STATEMENTS AND SCHEDULES
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2000
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
Page of
Form 10-Q
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets--June 20, 2000 and
September 30, 1999...................................... 3
Condensed Consolidated Statements of Income--for three
months and nine months ended June 30, 2000 and 1999..... 5
Condensed Consolidated Statements of Cash Flows--for the
nine months ended June 30, 2000 and 1999................ 6
Notes to Condensed Consolidated Financial Statements..... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 16
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6(a)Exhibits 16
Item 6(b)Reports on Form 8-K 16
<PAGE>
ITEM 1
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 2000 and September 30, 1999
(unaudited)
Assets June 30, 2000 September 30, 1999
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 542,000 $ 357,000
Notes receivable 75,000 -
Accounts receivable - net 15,127,000 12,225,000
Current portion of long-term receivable 49,000 54,000
Inventory 2,467,000 3,007,000
Current deferred tax asset 700,000 700,000
Other current assets 98,000 77,000
---------------- ----------------
Total current assets 19,058,000 16,420,000
Notes receivable 89,000 133,000
Investment in undeveloped real estate 76,000 76,000
Property and equipment - net 11,465,000 11,097,000
Intangible assets - net 4,903,000 4,422,000
Other assets 200,000 192,000
--------------- ---------------
$ 35,791,000 $ 32,340,000
============ ============
3
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
June 30, 2000 and September 30, 1999
(unaudited)
Liabilities and Stockholders' Equity June 30, 2000 September 30, 1999
-----------------------------------------------------------------------------
Current liabilities:
Checks written in excess of cash in bank $ 814,000 $ 1,735,000
Current portion of long-term debt 1,986,000 1,791,000
Accounts payable 2,230,000 2,293,000
Accrued expenses 720,000 743,000
Income taxes payable 750,000 354,000
--------------- ---------------
Total current liabilities 6,500,000 6,916,000
-------------- --------------
Deferred income taxes 958,000 958,000
Long-term debt 14,745,000 13,273,000
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Total liabilities 22,203,000 21,147,000
Stockholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 4,104,990 shares and 4,089,029
issued and outstanding, respectively 3,418,000 3,299,000
Treasury stock (21,000)
Retained earnings 10,191,000 7,894,000
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Total stockholders' equity 13,588,000 11,193,000
---------- ----------
$ 35,791,000 $ 32,340,000
============ ============
See accompanying notes to consolidated financial statements.
4
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income
For the Periods Ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Nine months ended June 30, Three months ended June 30,
2000 1999 2000 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Net rental $18,134,000 $12,893,000 $6,211,000 $4,267,000
Net sales income 14,214,000 10,511,000 4,769,000 3,652,000
---------------------------------------------------------
Total revenue 32,348,000 23,404,000 10,980,000 7,919,000
Cost of sales and rental 10,409,000 8,218,000 3,393,000 2,740,000
---------------------------------------------------------
Gross profit 21,939,000 15,186,000 7,587,000 5,179,000
---------------------------------------------------------
Selling, general, &
administrative expenses 17,518,000 12,782,000 6,047,000 4,345,000
---------------------------------------------------------
Income from operations 4,421,000 2,404,000 1,540,000 834,000
Other income (expense)
Interest expense (1,053,000) (843,000) (363,000) (268,000)
Interest income 123,000 203,000 43,000 28,000
Other (111,000) (45,000) (46,000) (39,000)
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Income before taxes 3,380,000 1,719,000 1,174,000 555,000
Income taxes 1,082,000 507,000 375,000 161,000
---------------------------------------------------------
Net income $ 2,298,000 $ 1,212,000 $ 799,000 $ 394,000
=========================================================
Net income per share:
Basic $ 0.56 $ 0.30 $ 0.19 $ 0.10
======== ======== ======== =========
Fully diluted $ 0.56 $ 0.29 $ 0.19 $ 0.10
======== ======== ======== =========
Average number of shares
outstanding:
Basic 4,078,000 4,089,000 4,081,000 4,089,000
========= ========= ========= =========
Fully diluted 4,136,000 4,114,000 4,253,000 4,114,000
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2000 and 1999
(unaudited)
Cash flows from operating activities: 2000 1999
---- ----
Reconciliation of net income to net cash
provided by operating activities:
Net income $2,298,000 $1,212,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,533,000 1,722,000
Gain from sale of office building - (67,000)
(Increase) decrease in:
Accounts receivable (2,902,000) (675,000)
Inventories 540,000 675,000
Other current assets (21,000) 59,000
Other assets (78,000) (167,000)
Increase (decrease) in:
Accounts payable (63,000) (678,000)
Accrued expenses (23,000) 171,000
Income tax payable 396,000 (268,000)
-------------- -------------
Net cash provided by
operating activities 2,680,000 1,984,000
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Cash flows from investment activities:
Collection of notes receivable 44,000 574,000
Purchase of property and equipment (3,383,000) (1,223,000)
Proceeds from sale of building - 110,000
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Net cash (used in)
investing activities (3,339,000) (539,000)
-------------- -------------
6
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - Continued
For the Nine Months Ended June 30, 2000 and 1999
(unaudited)
2000 1999
---- ----
Cash flows from financing activities:
Checks written in excess of cash in bank (921,000) (268,000)
Proceeds from notes payable - 6,795,000
Payments on notes payable - (5,755,000)
Principal payments on long-term debt (8,149,000) (2,957,000)
Proceeds from long-term debt 9,816,000 1,070,000
Issuance of Common Stock 119,000 -
Purchase of Treasury Stock (21,000) -
----------------------------------
Net cash provided by
(used in) financing activities 844,000 (1,115,000)
Net increase
in cash 185,000 330,000
Cash, beginning of period 357,000 253,000
------------ ---------------
Cash, end of period $ 542,000 $ 583,000
============= ==============
Supplemental schedule of non-cash investing and financing activities
During the nine months ended June 30, 1999, the Company sold its investment
in the office building and undeveloped real estate. Of the total proceeds,
$448,000 was received as a note receivable.
During the nine months ended June 30, 2000, the Company acquired certain
assets from unrelated companies. The purchased assets were funded by cash and
owner financing. The assets purchased consisted of the following:
Capital equipment 352,000
Inventories 16,000
Goodwill 584,000
--------------
Net assets purchased 952,000
Less owner financed portion 82,000
--------------
Net cash invested $ 870,000
==============
Supplemental disclosure of cash flow information
2000 1999
---- ----
Cash paid for:
Interest $ 1,023,000 $ 818,000
============= =============
Income taxes $ 375,000 $ 470,000
============= =============
See accompanying notes to consolidated financial statements.
7
<PAGE>
INTERWEST HOME MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Presentation
The condensed consolidated unaudited financial statements include the
accounts of Interwest Home Medical and subsidiaries (Interwest) and
include all adjustments (consisting of normal recurring items) which are
in the opinion of management necessary to present fairly the financial
position as of June 30, 2000 and the results of operations for the nine
months and three months ended June 30, 2000 and 1999 and cash flows for
the nine months ended June 30, 2000 and 1999. The results of operations
for the nine months and three months ended June 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the entire year.
(2) Lines of Credit
The Company has a line of credit of $18 million available as of July 30,
1999. At June 30, 2000 $15.6 million was outstanding which is included in
long-term debt and current portion of long term debt.
(3) Legal
From time to time the Company is subject to routine litigation and regulatory
proceedings. The Company cooperates with regulatory authorities in order to
resolve issues and refers routine litigation to insurance companies and defense
counsel as appropriate.
(4) Weighted Average
Income per share is based on the weighted average number of shares
outstanding during the period. Weighted average shares are as
follows:
Nine months ended June 30, Three Months ended June 30
2000 1999 2000 1999
---- ---- ---- ----
Weighted average number of common shares outstanding:
Basic 4,078,000 4,089,000 4,081,000 4,089,000
========= ========= ========= =========
Fully Diluted 4,136,000 4,114,000 4,253,000 4,114,000
========= ========= ========= =========
8
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's level
of operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements appearing in Item 1.
The Company's revenue and income are derived from home medical equipment and
services. The Company's products and services include home oxygen and
respiratory care services and home medical equipment and supplies.
The Company's objective is to increase its market share through internal
growth and acquisitions. The Company focuses primarily on growth within its
existing geographic markets, which it believes is generally more profitable than
adding additional operating centers in new markets. In addition, the Company
expands into new geographic markets on a selective basis, either through
acquisitions or by opening new operating centers, when it believes such
expansion will enhance its business. Management seeks to establish a regional
concentration of centers in order to develop the market penetration and critical
mass necessary to position the Company as a cost-effective provider of selective
home medical equipment services to managed care and other third-party payers.
As a result of the uncertainty of the outcome of legislative and regulatory
changes in the system of Medicare reimbursement, the Company may in the
foreseeable future slow its growth through acquisition and concentrate primarily
upon internal growth.
Net Revenues
Net revenues for the three months ended June 30, 2000 and 1999 increased
39% to $10,980,000 from $7,919,000. The net increase of $3,061,000 consists of:
(1) revenues generated from existing stores in continuing product lines of
approximately $1.4 million and (2) revenues contributed by acquired operations
of approximately $1.6 million. Net revenues for the nine months ended June 30,
2000 and 1999 increased 38% to $32,348,000 from $23,404,000. The net increase of
$8,944,000 consists of: (1) revenues generated from existing stores in
continuing product lines of approximately $4.3 million and (2) revenues
contributed by acquired operations of approximately $4.6 million. A major payor
has notified the Company that effective October 1, 2000, it would no longer be
the primary provider of services for a portion of its membership in Denver,
Colorado. The Company estimates an annual impact of $2 million in revenues
related to this contract. From time to time, contracts begin, terminate or
adjust under which the Company receives recurring revenues which may be
material. Therefore, the Company may experience some fluctuation in quarterly
revenues. It is the Company's policy not to comment on such fluctuations unless
a material adjustment occurs in isolation.
Net rental revenue for the three months ended June 30, 2000 and 1999 increased
46% to $6,211,000 from $4,267,000. The net increase of $1,944,000 consists of:
(1) net rentals contributed by acquired operations of approximately $1.3 million
and (2) net rentals generated from existing stores in continuing product lines
of approximately $644,000. Net rental revenue for the nine months ended June 30,
2000 and 1999 increased 41% to $18,134,000 from $12,893,000. The net increase of
$5,241,000 consists of: (1) net rentals contributed by acquired operations of
approximately $3.9 million and (2) net rentals generated from existing stores in
continuing product lines of approximately $1.3 million. The Company's strategy
has been to increase its rental revenue because of higher gross margins.
Management has targeted acquisitions whose product mix is primarily respiratory
rental revenue. Additionally, the Company has expanded its marketing staff,
emphasizing development of the respiratory rental market.
Net sales revenue for the three months ended June 30, 2000 and 1999 increased
31% to $4,769,000 from $3,652,000. The net increase of $1,117,000 consists of:
(1) net sales contributed by acquired operations of approximately $525,000 and
(2) net sales from existing stores in continuing product lines of approximately
$592,000. Net sales revenue for the nine months ended June 30, 2000 and 1999
increased 35% to $14,214,000 from $10,511,000. The net increase of $3,703,000
consists of: (1) net sales contributed by acquired operations of approximately
$1.6 million and (2) net sales from existing stores in continuing product lines
of approximately $2.1 million.
For the three and nine months ended June 30, 2000 the Company's revenues (both
sales and rentals) consisted of 70% home oxygen and respiratory care services
and 30% home medical equipment compared to 61% and 39%, respectively for the
same periods ended June 30, 1999. Increases in home oxygen and respiratory care
services are due primarily to increased strategic focus in both marketing and
acquisitions.
9
<PAGE>
Home oxygen and respiratory care services and home medical equipment revenues
(both sales and rentals) represent 71% and 29%, respectively, for the quarter
ended June 30, 2000 compared to 62% and 38%, respectively for the quarter ended
June 30, 1999. Home oxygen and respiratory care services and home medical
equipment revenues (both sales and rentals) represent 70% and 30%, respectively,
for the nine months ended June 30, 2000 compared to 61% and 39%, respectively
for the nine months ended June 30, 1999. Increases in home oxygen and
respiratory care services and home medical equipment product lines are due
primarily to increased strategic focus in both marketing and acquisitions.
The Balanced Budget Act of 1998 ("BBA") was signed into law on August 5, 1998.
The legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year thereafter
are reduced to 70 percent of the fee schedule amounts in effect during 1997.
The BBA freezes the Consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1999 through
2002 while limiting fees for parenteral and enteral nutrients, supplies and
equipment to 1995 reasonable charge levels over the same period. The BBA reduces
payment amounts for covered drugs and biologicals to 95 percent of the average
wholesale price of such covered items for each of the years 1999 through 2002.
Gross Margins
Gross margins were 69% and 65% in the quarters ended June 30, 2000 and 1999,
respectively. For the nine months ended June 30, 2000 and 1999 gross margins
were 68% and 65% . Gross margin from net rental revenue in the three months
ended June 30, 2000 and 1999 was 84% compared to 85%, while gross margin from
rental revenue for the nine months ended March 3, 2000 and 1999 was 84% for both
periods. Gross margin from net sales revenue in the three months ended June 30,
2000 and 1999 was 50% compared to 43%. For the nine months ended June 30, 2000
and 1999 gross margins from sales revenue was 47% compared to 41%, respectively.
While rental margins have remained stable, increased sales margins resulted from
the elimination of lower margin products.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were 55% of revenue for
the three months ended June 30, 2000 and 1999. SG&A expenses for the nine months
ended June 30, 2000 and 1999 decreased from 55% to 54%of revenue. On a dollar
basis, SG&A expenses for the three and nine months ended June 30, 2000 and 1999
increased by 39% and 37% respectively. Revenue for the same periods increased by
39% and 38%. Increased fuel prices have increased the company's SG&A expense by
approximately $100,000 for the nine months ended June 31, 2000.
Interest Expense
Interest expense increased to $363,000 from $268,000 in the three months ended
June 30, 2000 and 1999, and to $1,053,000 from $843,000 for the nine months
ended June 30, 2000 and 1999. Interest expense as a percentage of revenue was 3%
for the three months ended June 30, 2000 and 1999. For the nine months ended
June 30 2000 and 1999, interest expense declined as a percent of revenues to 3%
from 4% . Interest expense consists of interest on borrowing under its bank
credit agreement and seller financing agreements to fund acquisitions. The
increase was primarily attributable to approximately $1 million of new borrowing
to fund acquisition activities in fiscal 2000 and $4.1 million in fiscal 1999.
Interest rate increases of 1.50% will have an annual impact of approximately
$225,000 for current levels of debt as compared to prior years.
10
<PAGE>
Acquisitions
During the nine months ended June 30, 2000, the Company acquired certain
assets from unrelated companies. The Company expects that the acquired assets
and operations will generate approximately $1 million in net revenues. The
purchased assets were funded by cash and owner financing.
Liquidity and Capital Resources
At June 30, 2000, the Company's working capital was $12,558,000 compared to
$9,504,000 at September 30, 1999, an increase of $3,054,000 or 32%. The increase
is primarily due to increased revenues and profits with increased accounts
receivable and current obligations which were satisfied through the increase in
long-term borrowing.
The Company's primary needs for capital are to fund acquisitions, purchase
rental equipment, and cover debt service payments. For the nine months ended
June 30, 2000, net cash provided by operating activities was $2,680,000 as
compared to $1,984,000 for the nine months ended June 30, 1999, an increase of
$696,000. Significantly contributing to cash provided from operations in the
nine months ended June 30, 2000 were increased net income and non cash expenses
of depreciation and amortization. A significant portion of the Company's assets
consists of accounts receivable from third party payers that provide
reimbursement for the services provided by the Company. The Company includes
accounts receivable as security for its lines of credit.
Net cash used in investing activities amounted to ($3,339,000) and ($539,000)
for the nine months ended June 30, 2000 and 1999, respectively. Activity in the
nine months ended June 30, 2000 included the Company's investment in additional
capital equipment of $3,383,000 including $952,000 of assets acquired from
unrelated companies.
Net cash provided by (used in) financing activities amounted to $844,000 and
($1,115,000) for the nine months ended June 30, 2000 and 1999, respectively.
Activity in the nine months ended June 30, 2000 included the Company's proceeds
of $9,816,000 from long-term obligations, and payments of $8,149,000 related to
long-term obligations.
As of June 30, 2000 the Company has available an operating line of credit with
its principal bank which aggregates to $18 million. The amount borrowed on the
line as of June 30, 2000 was $15.6 million. The Company's ability to borrow on
the line of credit is limited by either (a) the aggregate amount of the line of
credit, or (b) the Company's borrowing base as detailed in the loan agreement.
The line of credit is due on July 31, 2005 and requires quarterly principal
payments of $600,000 beginning September 30, 2000. Interest is payable monthly
at the bank's prime lending rate minus .25%. Based upon the borrowing base, the
amount available at June 30, 2000 was $1.9 million.
The Company anticipates that capital expenditures for fiscal 2000 will be
approximately $3.5 million. The Company believes that it will be able to
generate sufficient funds internally, together with funds that may be borrowed
under its credit facilities, to meet its anticipated short-term and long-term
capital requirements for the foreseeable future.
The Company's future liquidity will continue to be dependent upon its
operating cash flow and management of accounts receivable. The Company is not
aware of any impact on liquidity due to pending litigation arising in the
ordinary course of business.
Financial Condition
Net accounts receivable increased 24% to $15,127,000 at June 30, 2000 from
$12,225,000 at September 30, 1999 while revenues increased 38% during the same
period. The increase was due to revenue generated from an acquisition in the
fourth quarter of fiscal 1999 and internal revenue growth from existing stores
during the year. The Company's average days sales in receivables was up to 124
days at June 30, 2000 from 122 days at September 30, 1999. The allowance for
doubtful accounts was $1.9 million at June 30, 2000 compared to $1.8 million at
September 30, 1999. The increase in the allowance for doubtful accounts is due
to increased revenue growth and slower collections from certain managed care
organizations. The Company continues to monitor the collectibility of its
receivables and will make prudent increases in the allowance for doubtful
accounts as it believes necessary.
Inventories were $2,467,000 at June 30, 2000 compared to $3,007,000 at
September 30, 1999, a decrease of 18%. Inventories decreased $540,000 during the
nine month period is primarily the result of the Company's focus on
11
<PAGE>
reducing emphasis on lower margin products. Year-to-year percentage increases in
inventory levels have declined as a result of a shift in product mix toward
rental revenue which requires lower inventory levels.
At June 30, 2000, the Company held property and equipment, net of
depreciation, used in its business amounting to $11,465,000 compared to
$11,097,000 at September 30, 1999. The increase in property and equipment for
the three month period is attributable to purchases of capital equipment to
support revenue growth and from acquisitions.
At June 30, 2000, intangible assets primarily resulting from acquisitions were
approximately $4,903,000 compared to $4,422,000 at September 30, 1999. The
increase in net intangible assets for the nine month period is attributable to
acquisition activities offset by amortization expense which is based upon the
lives of the intangible assets which range from 5 - 40 years.
Current assets grew to $19,058,000 at June 30, 2000 from $16,420,000 at
September 30, 1999. The increase in current assets is due primarily to accounts
receivable from revenue acquired in the fourth quarter of fiscal 1999 and
internal revenue growth from existing stores during the year. Current
liabilities decreased to $6,500,000 at June 30, 2000 compared to $6,916,000 at
September 30, 1999. The decrease is due primarily to the reduction of current
obligations which were satisfied through the increase in long-term borrowing.
Inflation
Inflation continues to apply modest upward pressure on the cost of goods and
services provided by Interwest Home Medical. Because of restrictions on
reimbursement by government and private medical insurance programs and the
pressures to contain the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation.
Forward Outlook and Risks
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological development, new products, research and development activities and
similar matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward- looking statements. In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in any of the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following: (a) the failure to obtain
additional borrowed and/or equity capital on favorable terms for acquisitions
and expansion; (b) adverse changes in federal and state laws, rules and
regulations relating to home health care industry, to government reimbursement
policies, to private industry reimbursement policies and to other matters
affecting the Company's industry and business; (C) the availability of
appropriate acquisition candidates and the successful completion of
acquisitions; (d) the demand for the Company's products and services; and (e)
other risks detailed in the Company's Securities and Exchange Commission
filings.
This Form 10-Q contains and incorporates by reference certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act with respect to results of operations and businesses of
the Company. All statements, other than statements of historical facts, included
in this Form 10-Q, including those regarding market trends, the Company's
financial position, business strategy, projected costs, and plans and objectives
of management for future operations, are forward-looking statements. In general,
such statements are identified by the use of forward-looking words or phrases
including, but not limited to, "intended," "will," "should," "may," "expects,"
"expected," "anticipates," and "anticipated" or the negative thereof or
variations thereon or similar terminology. These forward-looking statements are
based on the Company's current expectations. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct.
Because forward-looking statements involve risks and uncertainties, the
Company's actual results could differ materially. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed hereunder and elsewhere in this Form 10-Q. These forward-looking
statements represent the Company's judgment as of the date of this Form 10-Q.
All subsequent written and oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by the
12
<PAGE>
Cautionary Statements. The Company disclaims, however, any intent or
obligation to update its forward-looking statements.
High Leverage. As of June 30, 2000, the Company had total stockholder's equity
of approximately $13.5 million and total indebtedness of approximately $22
million. Accordingly, the Company's balance sheet is highly leveraged. This, in
turn, has important consequences to the Company. The Company's ability to obtain
additional financing may be limited. Additionally, a substantial portion of the
Company's cash flows from operations may be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
for operations. The Company's leverage will substantially increase the Company's
vulnerability to changes in the industry or adverse changes in the Company's
business. See "Liquidity and Capital Resources" in the Company's fiscal 1999
Form 10- KSB.
Changing Regulatory Environment. The Company's business is subject to
extensive federal, state and local regulation. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. The Company is in the process of developing and
implementing a Compliance Program that will satisfy the elements of the draft
OIG Model Compliance Plan released in July 1999. See "Government Regulation" in
the Company's fiscal 1999 Form 10-KSB.
Changes in System of Medicare Reimbursement. The BBA provided for a 25%
reduction in home oxygen reimbursement from Medicare effective January 1, 1998
and a further reduction of 5% effective January 1, 1999. Compounding these
reductions was a freeze on consumer price index updates for the next five years.
Approximately 15% of the Company's net revenues were derived from reimbursement
of oxygen services prior to this reduction in reimbursement. The reduction in
oxygen reimbursement during fiscal 1998 and 1999 had an adverse impact on the
Company's net revenues and results of operations. Additionally, payments will be
frozen for durable medical equipment, excluding orthotic and prosthetic
equipment, and payments for certain reimbursable drugs and biologicals will be
reduced. However, the Balanced Budget Recovery 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" in the Company's fiscal 1999 Form 10-KSB.
Slow Reimbursements. At June 30, 2000, approximately 37% of the Company's net
revenues were derived from managed care and other non-governmental third party
payers. The increase in the length of time required to collect receivables owed
by managed care and other non-governmental third party payers 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 payers or the Company's inability to decrease days net sales outstanding
could have a material adverse effect on the Company's financial condition or
results of operations. There can be no assurance that the Company's days net
sales outstanding will not continue to increase if these payers continue to
delay or deny payments to the Company for its services. The Company continues to
monitor the collectibility of its receivables and will make prudent increases in
the allowance for doubtful accounts as it believes necessary. See "Reimbursement
for Services" and "Liquidity and Capital Resources" in the Company's fiscal 1999
Form 10-KSB.
Pricing Pressures. Medicare, Medicaid and other payers, including managed care
organizations and traditional indemnity insurers, are attempting to control and
limit increases in health care costs and, in some cases, are decreasing
reimbursement rates. While the Company's net revenues from managed care and
other non-governmental payers 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 payers,
resulting in reduced profitability on such services. Other payor and employer
groups, including Medicare, are exerting pricing pressure on home health care
providers, resulting in reduced profitability. Such pricing pressures could have
a material adverse effect on the Company's financial condition or results of
operations. See "Sales and Marketing" and "Government Regulation" in the
Company's fiscal 1999 Form 10-KSB.
Risks Related to Goodwill. At June 30, 2000, net goodwill resulting from
acquisitions was approximately $4.9 million, approximately 14% of total assets.
Goodwill is the excess of cost over the fair value of the net assets of
businesses acquired. There can be no assurance that the Company will ever
realize the value of such goodwill. This goodwill is being amortized on a
straight-line basis over 5 to 40 years. The Company will continue to evaluate on
a regular basis whether events or circumstances have occurred that indicate all
or a portion of the carrying amount of goodwill may no longer be recoverable, in
which case an additional charge to earnings would become necessary. Although at
June 30, 2000 the net unamortized balance of goodwill is not considered to be
impaired under generally accepted
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accounting principles, any such future determination requiring the write-off of
a significant portion of unamortized goodwill could have a material adverse
effect on the Company's financial condition or results of operations.
Risks Associated with Acquisitions. While the Company completed six
acquisitions during fiscal 1998 and 1999, as a result of the uncertainty of the
outcome of additional legislative and regulatory changes in the system of
Medicare reimbursement, the Company may slow its growth through acquisitions in
the future. See "Strategy." Management believes that as a result of Medicare
legislative and regulatory changes and managed care and other competitive
pressures, the home health care industry will continue to consolidate.
When evaluating acquisitions, the Company focuses primarily on growth within
its existing geographic markets, which the Company believes is generally more
profitable than adding additional operating centers in new markets. See
"Strategy" in the Company's fiscal 1999 Form 10-KSB. In attempting to make
acquisitions, the Company competes with other providers, some of which have
greater financial resources than the Company. In addition, since the
consideration for acquired businesses may involve cash, notes or the issuance of
shares of common stock, options or warrants, existing stockholders may
experience dilution in the value of their shares of common stock in connection
with such acquisitions. There can be no assurance that the Company in the future
will be able to negotiate, finance or integrate acquisitions without
experiencing adverse consequences that could have a material adverse effect on
the Company's financial condition or results of operations. Acquisitions involve
numerous short and long-term risks, including loss of referral sources,
diversion of management's attention, failure to retain key personnel, loss of
net revenues of the acquired companies, inability to integrate acquisitions
(particularly management information systems) without material disruptions and
unexpected expenses, the possibility of the acquired businesses becoming subject
to regulatory sanctions, potential undisclosed liabilities and the continuing
value of acquired intangible assets. There can be no assurance that any given
acquisition will be consummated, or if consummated, will not materially
adversely affect the Company's financial condition or results of operations.
Additionally, because of matters discussed herein that may be beyond the control
of the Company, there can be no assurance that suitable acquisitions will
continue to be identified or that acquisitions can be consummated on acceptable
terms.
Competition. The home medical equipment services industry is highly
competitive and includes national, regional and local providers. The Company
competes with a large number of companies in all areas in which its operations
are located. The Company's competitors include major national and regional
companies, hospital-owned companies, and numerous local providers. Some current
and potential competitors have or may obtain significantly greater financial and
marketing resources than the Company. Accordingly, other companies, including
managed care organizations, hospitals, long-term care providers and health care
providers that currently are not serving the home health care market, may become
competitors. As a result, the Company could encounter increased competition in
the future that may limit its ability to maintain or increase its market share
or otherwise materially adversely affect the Company's financial condition or
results of operations.
Regulatory Compliance. The Company is subject to extensive regulation which
govern financial and other arrangements between health care 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
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in California, Florida, Illinois, New York and Texas, the states with the
largest Medicare populations, has been expanded to all fifty states. See
"Government Regulation." While the Company believes that it is in material
compliance with such laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such laws or
interpretations of such laws.
While the Company believes that it is in material compliance with the fraud
and abuse and self-referral laws, there can be no assurance that the practices
of the Company, if reviewed, would be found to be in full compliance with such
requirements, as such requirements ultimately may be interpreted. Although the
Company does not believe it has violated any fraud and abuse laws, there can be
no assurance that future related legislation, either health care or budgetary,
related regulatory changes or interpretations of such regulations, will not have
a material adverse effect on the future operations of the Company.
Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS No.137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No.133." SFAS 133 establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 is now effective for fiscal years beginning
after June 15th 2000. The company believes that the adoption of SFAS 133 will
not have any material effect on the financial statements of the company.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently utilizes no material derivative financial instruments
that expose the Company to significant market risk. However, the Company is
subject to interest rate changes on its variable rate line of credit under the
Company's bank credit agreement that may affect the fair value of that debt and
cash flow and earnings. Based on the amount outstanding on the line of credit at
June 30, 2000 and the current market perception, a 50 basis point increase in
the applicable interest rates would decrease the Company's annual cash flow and
earnings by approximately $75,000. Conversely, a 50 basis point decrease in the
applicable interest rates would increase annual cash flow and earnings by
approximately $75,000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. The Annual
Meeting of Shareholders was held April 20, 2000. The following
matters were voted upon:
1. Election of director For Against Abstain Broker non-votes
James U. Jensen 3,131,703 390,612 154,958 -0-
Jerald L. Nelson 3,131,703 390,612 154,958 -0-
Jeffrey F. Poore 3,131,703 390,612 154,958 -0-
James E. Robinso 3,134,692 387,623 154,958 -0-
2. 2000 Stock Incentive 2,055,142 441,227 170,590 1,010,314
Item 5. Other Information. None
Item 6(a)Exhibits. Exhibit 27 (Financial Data Schedule).
Item 6(b)Reports on Form 8-K. None
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: August 11, 2000 INTERWEST HOME MEDICAL, INC.
By /s/ James E. Robinson
----------------------------------
James E. Robinson
President
Principal Executive Officer
By /s/ Bret A. Hardy
----------------------------------
Bret A. Hardy
Principal Financial Officer
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