UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 1995
or
[ ] Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Transition Period From____To____
Commission File Number 0-17787
MEDICAL INNOVATIONS, INC.
(Exact Name of Registrant As Specified In Its Charter)
DELAWARE 76-0280551
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
ONE RIVERWAY, SUITE 2300 HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
(713) 688-6600
(Registrant's Telephone Number, Including Area Code)
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 [ ]
The number of shares outstanding of the Registrant's common stock as of May 12,
1995 was 12,572,400 shares.
<PAGE>
MEDICAL INNOVATIONS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Part I. Condensed Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets ......................................... 1
Consolidated Statements of Income ................................... 2
Consolidated Statements of Cash Flows ............................... 3
Notes to Unaudited Condensed Consolidated Financial Statements ...... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12
Part II. Other Information ............................................ 17
Signatures ............................................................ 18
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
ASSETS (UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 341,863 $ 1,322,407
Short-term investments ............................... 201,000 201,000
Accounts receivable, net ............................. 10,279,841 9,596,884
Inventories .......................................... 301,292 257,360
Deferred income taxes ................................ 489,049 347,047
Other ................................................ 735,044 586,311
----------- -----------
Total current assets ............................ 12,348,089 12,311,009
Property and equipment, net .............................. 1,976,713 1,904,443
Excess cost over net assets of acquired companies, net of
amortization of $520,851 and $438,896 ................ 12,180,131 12,258,000
Other, net ............................................... 1,340,188 767,353
----------- -----------
Total assets .................................... $27,845,121 $27,240,805
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and other debt ......................... $ 4,691,673 $ 1,764,331
Accounts payable and accrued liabilities ............. 2,965,234 2,441,347
Accrued compensation and benefits .................... 2,497,379 2,450,995
Reserve for government program settlements ........... 1,701,514 1,784,256
Income taxes payable ................................. 249,939 62,773
----------- -----------
Total current liabilities ....................... 12,105,739 8,503,702
Notes payable and other debt ............................. 6,763,643 10,022,975
Other accrued liabilities ................................ 660,581 678,236
Deferred income taxes .................................... 45,100 32,804
----------- -----------
Total liabilities ............................... 19,575,063 19,237,717
----------- -----------
Stockholders' equity:
Preferred stock - par value $.01 per share; 3,000,000
shares authorized, none issued or outstanding ..... -- --
Common stock - par value $.0075 per share; 75,000,000
shares authorized, 12,572,400 and 12,566,400 shares
issued and outstanding ............................ 94,293 94,248
Additional paid-in capital ........................... 6,707,581 6,702,047
Retained earnings .................................... 1,468,184 1,206,793
----------- -----------
Total stockholders' equity ...................... 8,270,058 8,003,088
Commitments and contingencies
----------- -----------
Total liabilities and stockholders' equity ...... $27,845,121 $27,240,805
=========== ===========
</TABLE>
(See notes to unaudited condensed consolidated financial statements)
1
<PAGE>
MEDICAL INNOVATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Notes 1 and 2)
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1994
------------ -----------
Revenues ....................................... $15,927,991 $11,585,694
Costs and expenses:
Direct patient care ....................... 9,868,757 7,072,051
Selling, general and administrative ....... 5,343,929 3,847,413
Provision for doubtful accounts ........... 150,634 83,661
----------- -----------
15,363,320 11,003,125
----------- -----------
Income from operations ......................... 564,671 582,569
Interest expense ............................... 242,472 142,058
----------- -----------
Income before income taxes ..................... 322,199 440,511
Provision for income taxes ..................... 60,808 189,342
----------- -----------
Net income ..................................... $ 261,391 $ 251,169
=========== ===========
Net income per common and common
equivalent share ............................ $ .02 $ .02
=========== ===========
Weighted average common and common
equivalent shares outstanding ............... 14,324,131 14,606,669
=========== ===========
(See notes to unaudited condensed consolidated financial statements)
2
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Notes 1 and 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1994
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 261,391 $ 251,169
Noncash adjustments:
Depreciation and amortization ................................. 266,470 160,341
Provision for doubtful accounts ............................... 150,634 83,661
Deferred income taxes ......................................... (129,706) (11,260)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ......................................... (833,591) (1,410,159)
Inventories ................................................. 24,545 40,339
Income taxes ................................................ 188,545 3,949
Other assets ................................................ (239,827) 51,399
Accounts payable and accrued liabilities ................... 532,801 (227,673)
--------- -----------
Net cash provided (used) by operating activities ............ 221,262 (1,058,234)
--------- -----------
Cash flows from investing activities:
Acquisition of STAT ............................................. -- (6,606)
Acquisition of PharmaThera Branch ............................... (56,468)
Acquisition expenses ................................................. (41,116) (511)
Purchases of property and equipment, net ........................ (135,463) (193,461)
--------- -----------
Net cash (used) by investing activities ..................... (233,047) (200,578)
--------- -----------
</TABLE>
(See notes to unaudited condensed consolidated financial statements)
3
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Notes 1 and 2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable ........................... $ -- $ 1,650,000
Net borrowings (payments) revolving credit facilities (320,000) 900,000
Payments on notes payable and capital lease obligations (585,946) (2,678,424)
Payments on obligation to former owners of PVNS ....... (66,413) --
Proceeds from exercise of stock options ............... 3,600 --
----------- -----------
Net cash (used) by financing activities ........... (968,759) (128,424)
----------- -----------
Net decrease in cash and cash equivalents .................. (980,544) (1,387,236)
Cash and cash equivalents at beginning of period ........... 1,322,407 1,929,237
----------- -----------
Cash and cash equivalents at end of period ................. $ 341,863 $ 542,001
=========== ===========
Cash paid during the period for:
Interest .............................................. $ 277,969 $ 153,297
Income taxes .......................................... $ 4,491 $ 198,376
Non-cash transactions (not otherwise disclosed):
None
</TABLE>
(See notes to unaudited condensed consolidated financial statements)
4
<PAGE>
MEDICAL INNOVATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION:
The condensed consolidated financial statements of Medical Innovations, Inc. and
its subsidiaries (the "Company") have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
As applicable under such regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the presentation and disclosures herein are adequate
to make the information not misleading, and that the financial statements
reflect all elimination entries and adjustments (consisting of only normal
recurring adjustments) which are necessary for a fair statement of the results
for the three months ended March 31, 1995 and 1994. Operating results for these
interim periods are not necessarily indicative of the results for full years. It
is suggested that these condensed consolidated interim financial statements be
read in conjunction with the consolidated financial statements and notes thereto
for each of the three years in the period ended December 31, 1994 presented in
the Company's 1994 Annual Report on Form 10-K.
Certain reclassifications have been made to previously reported information to
conform to the current period presentation.
Net income per share is based on the weighted average number of common shares
and equivalents outstanding during the period. Common stock equivalents
consisting of stock options and warrants are included in the computation of
weighted average shares when their effect is dilutive.
NOTE 2 - ESTIMATES INVOLVED IN PREPARING THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS:
The Company's interim financial statements are prepared in accordance with the
same accounting policies as those followed at year-end. Certain items in the
financial statements can be determined on an interim basis only by making
accounting estimates. The accuracy of such amounts is dependent upon facts that
will exist and procedures that will be accomplished by the Company later in the
year.
NOTE 3 - ACQUISITION AND PRO FORMA INFORMATION:
PHYSICIAN'S VISITING NURSE SERVICE
Effective May 1, 1993, the Company purchased all of the outstanding common stock
of Physician's Visiting Nurse Service, Inc. ("PVNS") for total consideration of
approximately $9,209,000. The Company also entered into agreements with the
former owners resulting in a total obligation of approximately $1,211,000, net
of amounts attributable to compensation and imputed interest at 7-1/2%. This
obligation, which is included in accrued liabilities in the accompanying
condensed consolidated balance sheet at March 31, 1995 and December 31, 1994, is
secured by accounts receivable of the Company and is payable in approximately
equal monthly installments through June 1998. Effective November 18, 1994, the
Company entered into an agreement with the former owners of PVNS to settle
claims for certain acquisition contingencies. In connection with the settlement,
the Company received (i) 850,000 shares of its common stock issued to the former
owners and escrowed since the acquisition date, which were valued at $1.50 per
share, the fair market value at the settlement date, and (ii) a reduction of
$275,000 in the principal amount of the above referenced note payable, in
exchange for the release of all further obligations under an
5
indemnification received by the Company from the former owners for acquisition
contingencies. As a result, the Company recorded various reserves for estimated
liabilities pertaining to any adjustments from open pre-acquisition Medicare
cost reimbursement reports ("Cost Reports") (see also Note 8) and other matters
for which the Company received the settlement consideration as set forth above.
STAT SPECIALTY HOME HEALTH
Effective February 11, 1994, the Company acquired certain assets of STAT
Specialty Home Health Care, Inc. ("STAT") for cash in the amount of
approximately $285,000, of which approximately $119,000 was allocated to
purchased contracts and the remainder to property and equipment. The results of
operations of STAT are included with those of the Company for periods subsequent
to the effective date of the acquisition.
PRN NEVADA
Effective April 1, 1994, the Company purchased all of the outstanding common
stock of PRN Home Health Care, Inc. of Nevada and its affiliated companies
(collectively "PRN Nevada"), a provider of skilled homecare services. Total
consideration to the seller consisted of $1,825,000 in cash, 380,952 restricted
shares of the Company's common stock, a note payable to the former owner in the
principal amount of $850,000, and an additional contingent payment estimated to
be approximately $95,000, which is payable in July 1995. The acquisition was
accounted for by the purchase method. Accordingly, the results of operations of
PRN Nevada are included with those of the Company for periods subsequent to the
effective date of the acquisition. Of the total purchase price of approximately
$3,726,000, the amount allocated to excess cost over net assets of acquired
companies is approximately $3,169,000.
PHARMATHERA BRANCH
On January 31, 1995, the Company acquired certain assets, consisting primarily
of inventory, equipment, provider contracts and a customer base, of PharmaThera,
Inc.'s branch operation in Pensacola, Florida ("PharmaThera Branch"), a provider
of infusion therapy services, for cash of approximately $56,000 and two notes
with obligations totalling approximately $574,000, which are subject to
reductions of up to $117,500 based primarily on certain performance criteria of
the post acquisition PharmaThera Branch operations. The acquisition was
accounted for by the purchase method. Accordingly, the results of operations of
the PharmaThera Branch are included with those of the Company for periods
subsequent to the acquisition date. The price paid for the provider contracts
and customer base, together with related acquisition costs, were allocated to
purchased contracts and amortized over ten years.
PRO FORMA INFORMATION
The pro forma combined results of operations of the Company and its 1994 and
first quarter of 1995 acquisitions (STAT, PRN Nevada and PharmaThera Branch),
after giving effect to certain pro forma adjustments and assuming these
acquisitions had been completed effective January 1, 1994, are as follows for
the three month periods ended March 31:
1995 1994
----------- -----------
(Unaudited) (Unaudited)
Revenue .................................. $15,993,000 $14,871,000
Net income ............................... $ 251,000 $ 213,000
Net income per common and
common equivalent share ............... $ .02 $ .01
The pro forma information is not necessarily indicative of results which may
occur in the future.
6
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable at March 31, 1995 consist of the following:
Accounts receivable ................................ $11,034,814
Less allowance for doubtful accounts ............... 754,973
-----------
$10,279,841
===========
NOTE 5 - INCOME TAXES:
The provisions (benefits) for income taxes for the three month periods ended
March 31 consist of the following:
1995 1994
--------- ---------
Federal:
Current ........................ $ 185,515 $ 190,602
Deferred ....................... (129,707) (11,260)
State ................................ 5,000 10,000
--------- ---------
$ 60,808 $ 189,342
========= =========
The tax effects of temporary differences related to deferred tax (liabilities)
assets at March 31, 1995 are comprised of the following:
Prepaid expenses .......................................... $ (65,740)
Depreciation and amortization ............................. (49,444)
---------
Deferred tax liabilities ......................... (115,184)
Provision for doubtful accounts ........................... 252,863
Accruals not currently deductible ......................... 171,087
Compensation .............................................. 130,841
Other ..................................................... 4,342
---------
Deferred tax assets .............................. 559,133
Net deferred tax asset ........................... $ 443,949
=========
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the three month periods ended March 31:
1995 1994
------ ------
Federal income tax at statutory rate .................. 34.0% 34.0%
Nondeductible amortization ............................ 8.6% 3.7%
Recovery of nontaxable payroll related costs .......... (25.8)% --
Other permanent differences ........................... 1.6% 4.5%
State taxes ........................................... .5% .8%
---- ----
Effective tax rate .................................... 18.9% 43.0%
==== ====
7
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1995 consist of the following:
Furniture and fixtures ................................... $1,329,742
Equipment, including computers ........................... 1,617,175
Transportation equipment ................................. 290,197
Leasehold improvements ................................... 181,509
----------
3,418,623
Less accumulated depreciation ............................ 1,441,910
----------
$1,976,713
==========
NOTE 7 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at March 31, 1995 consist of the following:
Bank revolving credit facilities ............................... $ 3,105,000
Notes payable to Bank .......................................... 5,450,000
Term note payable to Bank ...................................... 300,000
Notes payable to former owners of PVNS ......................... 639,179
Note payable to former owner of PRN Nevada ..................... 637,500
Notes payable to former owner of PharmaThera Branch ............ 549,304
Notes payable to Bank and others in monthly installments
totalling approximately $5,375, including interest ranging
from prime (9.0% at March 31,1995) to 14%, with various
maturities through 1998, secured by property and equipment ..... 91,589
Capital lease obligations ...................................... 682,744
-----------
11,455,316
Less current portion ........................................... 4,691,673
-----------
Noncurrent portion ............................................. $ 6,763,643
===========
BANK REVOLVING CREDIT FACILITIES
In December 1994, the Company entered into new revolving credit facilities
totalling $3,725,000 with a bank (the "Bank") that mature March 31, 1996. In
connection with this refinancing, the then outstanding balances of the credit
facilities entered into in March 1994 (total borrowing availability of
$2,125,000) and certain other debt were repaid and the Company's borrowing
availability was increased. The new credit facilities, which bear interest at
prime plus 1/4% (9.25% at March 31, 1995), a decrease from the prior rate of
prime plus 1/2%, are secured by all accounts receivable of the Company and are
guaranteed by the president and another director of the Company. The new loan
agreements covering $2,550,000 of the credit facilities include covenants to
maintain certain net worth and a debt to net worth ratio and prohibit
8
certain additional indebtedness and the payment of dividends. At March 31, 1995,
the Company was in compliance with such loan covenants. The Company also
maintains a $200,000 revolving credit facility with the Bank, which matures June
4, 1995, and is secured by a $200,000, 7.25% certificate of deposit. This credit
facility bears interest at 8.25%.
On May 3, 1995, the Company entered into an additional revolving credit facility
with the Bank in the amount of $1,000,000. This new credit facility, which was
obtained for working capital purposes, is secured by all accounts receivable of
the Company and is guaranteed by the president and another director of the
Company. Interest only at the prime rate is due monthly through the maturity
date of November 1, 1995.
NOTES PAYABLE TO BANK
In June 1994, the Company borrowed $5,450,000 from the Bank ("New Term Note")
for the purpose of repaying a demand note of $1,650,000 and substantially all of
the remaining balance on the subordinated note payable as described in Note 6.
The $1,650,000 demand note was executed in March 1994 when the Company entered
into a demand loan agreement with the president, another director and a
shareholder of the Company (the "Payees"). The New Term Note matures June 6,
1996 and bears interest at prime minus 1% (8.0% at March 31, 1995) payable
monthly through maturity. The New Term Note is secured by collateral (marketable
securities) pledged to the Bank by the Payees. Prior to the refinancing, this
collateral was held by the Bank as security for a loan to the Payees which was
used by the Payees to make the above referenced loans to the Company.
TERM NOTES PAYABLE TO BANK
In June 1994, the Company also borrowed $2,000,000 from the Bank to fund the
$1,825,000 cash portion of the PRN Nevada acquisition and to provide $175,000
for working capital purposes. After scheduled and other payments reduced the
principal balance to $400,000, this term note was refinanced in December 1994,
resulting in the maturity date being extended to December 31, 1995 (previously
May 31, 1995). Monthly principal payments of $33,333, plus interest at prime
(9.0% at March 31, 1995), commenced January 31, 1995. The note is secured by the
accounts receivable of the Company and the guarantees of the president and
another director of the Company. Fees totaling $20,000 were paid to these
individuals for providing their guarantees on the note.
NOTES PAYABLE TO FORMER OWNERS OF PVNS
In connection with the acquisition of PVNS in 1993, the Company issued a
$1,000,000 note payable to the former owners of PVNS ("PVNS Note") which is
secured by accounts receivable of the Company and is guaranteed by the president
of the Company. In January 1994, the Company repaid principal of $306,000 on
this note, pursuant to its contractual obligation to apply as debt reduction, a
portion of the net proceeds from the Company's offering of common stock in
connection with the exercise of various outstanding warrants ("Warrant
Offering") completed in December 1993. Also, the principal balance of the PVNS
Note was further reduced by $275,000 in November 1994 as a result of the
settlement with the former owners of PVNS as more fully described in Note 3.
This note reduction was also required to be applied to principal in inverse
order of maturity. Scheduled monthly principal payments of $20,833 commenced on
August 1, 1994, together with interest at prime (9.0% at March 31, 1995). On
June 28, 1995, the interest rate increases to prime plus 1%. At March 31, 1995,
the principal balance of the PVNS Note was $231,503.
9
In November 1994, the Company borrowed $458,636 of previously escrowed cash from
the former owners of PVNS for working capital purposes. Interest only was due on
this note through February 1, 1995, at which date monthly principal and interest
payments commenced in eighteen equal installments with a final payment due on
July 1, 1996. The note bears interest at prime (9.0% at March 31, 1995) through
June 30, 1995 and then prime plus 1% through maturity.
NOTE PAYABLE TO FORMER OWNER OF PRN NEVADA
In connection with the acquisition of PRN Nevada effective April 1, 1994, the
Company issued an $850,000 note payable to the former owner of PRN Nevada. The
note bears interest at prime (9.0% at March 31, 1995), payable monthly, and is
secured by the common stock of PRN Nevada. Monthly principal payments of $23,611
commenced August 1, 1994 and are payable in such amount for thirty-six months.
NOTES PAYABLE TO FORMER OWNER OF PHARMATHERA BRANCH
In connection with acquisition of the PharmaThera Branch on January 31, 1995,
the Company issued two notes payable to the former owner of the PharmaThera
Branch. The larger note in the amount of $500,000, attributable primarily to the
purchase of provider contracts and a customer base, is non-interest bearing and
is payable at various dates through May 15, 1996, based on collected revenues of
the PharmaThera Branch. This note is subject to reductions of up to $117,500
based primarily on certain performance criteria of the post acquisition
PharmaThera Branch operations. The other note in the amount of $73,956 was
issued for the purchase of inventories and equipment and is payable in six equal
monthly principal installments of $12,326 through August 1, 1995, plus interest
at prime (9% at March 31, 1995). Both notes are secured by all equipment of the
Pensacola Branch.
SUBORDINATED NOTE PAYABLE
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the Payees. On March 28, 1994, the Company repaid principal of
$1,675,000 on the note, pursuant to its contractual obligation to apply as debt
reduction a portion of the net proceeds from the Company's Warrant Offering
completed in December 1993. On the date of such repayment, the Payees agreed to
waive any defaults on the note and a replacement note was issued to the Payees
in the amount of $3,802,370. This replacement note was repaid in June 1994.
Substantially all of the repayment was funded from the New Term Note.
In connection with making this subordinated loan, the Payees were granted
warrants to purchase 100 shares of the Company's Class A preferred stock at $100
per share. As previously described, the collateral (marketable securities) that
the Payees pledged to the Bank as security for the New Term Note was, prior to
the refinancing, held by the Bank as security for a loan to the Payees which was
used by the Payees to make loans to the Company. Thus, the Payees' risk position
has not significantly changed and accordingly, the agreement governing the
preferred stock warrants has been amended so that the warrants remain
outstanding under substantially the same terms, except that the exercisability
of the warrants now relates to the New Term Note rather than the subordinated
loan. Such warrants are now exercisable only in the event of certain defaults of
the Company or the Payees under the New Term Note or the related collateral
maintenance agreements with the Bank, or in the event the Bank liquidates the
Payees' collateral. The warrants expire when the aggregate outstanding balance
of the New Term Note and the PVNS Note is $1,175,000 or less and the Company is
not in default under the New Term Note. If the warrants are exercised and the
aggregate outstanding balance of the New Term Note and the PVNS Note is
$3,625,000 or more, the holders of the preferred stock have the right to elect
seven of thirteen Company directors. At March 31, 1995, the aggregate principal
outstanding on the New Term Note and the PVNS Note was $5,681,503. At all other
times after warrant exercise, the holders of the preferred stock have the right
to
10
elect three of nine Company directors. If the warrants are exercised, the
Company may redeem the preferred stock, at the price of $100 per share, at any
time after the outstanding principal balance on the New Term Note and the PVNS
Note is less than $1,175,000.
OTHER
On March 8, 1993, the Company borrowed $200,000 from its president and another
director for working capital purposes under a demand note agreement at the prime
rate, which was repaid May 7, 1993. On June 7, 1994, the Company borrowed
$500,000 from its president for working capital purposes at prime plus 2%, which
was repaid on June 28, 1994. The Company also borrowed $400,000 and $50,000 from
its president on September 12, 1994 and September 15, 1994, respectively, for
working capital purposes at prime plus 2%, which were repaid on September 26,
1994.
On April 10, 1995, the Company borrowed $300,000 from its president for working
capital purposes. This loan, which is payable upon demand, bears interest at
prime plus 2%.
NOTE 8 - RESERVE FOR GOVERNMENT PROGRAM SETTLEMENTS:
The Company's Medicare operations are subject to regulations administered by the
Health Care Financing Administration. Amounts reimbursed by the Medicare program
(including those of PVNS and PRN Nevada prior to acquisition) are subject to
audit and retroactive adjustment.
As more fully described in Note 3, the Company entered into a settlement in
November 1994 with the former owners of PVNS pertaining to various acquisition
contingencies including open preacquisition Cost Reports. In connection with
this settlement, the Company assumed liability for final adjustments on the June
30, 1990 and 1991 PVNS Cost Reports for which determination letters have been
received (now reopened for further audit by the Medicare intermediary) and the
June 30, 1993 PVNS Cost Report that remains open for examination. In recognition
of this settlement, the Company established a reserve for estimated final
adjustments to these open Cost Reports. The post acquisition PVNS Cost Reports
also remain open for examination and a reserve has been established for any
estimated adjustments thereto.
The Company received an indemnification from the former owner of PRN Nevada for
adjustments to PRN Nevada's preacquisition Cost Reports open for examination
through June 29, 1994. Most of PRN Nevada's preacquisition Cost Reports have
been settled or are in process of final settlement. Final settlements thereto
and also any adjustments to other preacquisition Cost Reports open for
examination are expected to be recovered from the above referenced
indemnification or applied against the reserve established at the acquisition
date. The Cost Reports for the post acquisition period are also open for
examination and a reserve has been established for any estimated adjustments
thereto.
Management believes the above referenced PRN Nevada indemnification and the
Company's remaining reserve for government program settlements are adequate to
cover any adjustments to open Cost Reports and that any final determinations in
connection therewith will not have a material adverse effect on the Company's
financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents selected financial information as a percentage of
revenues for the periods indicated:
PERCENTAGE OF REVENUES
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
------ ------
Revenues ............................................. 100.0% 100.0%
Direct patient care expenses ......................... 62.0% 61.1%
Selling, general and administrative expenses ......... 33.6% 33.2%
Provision for doubtful accounts ...................... 0.9% 0.7%
----- -----
Income from operations ............................... 3.5% 5.0%
Interest expense ..................................... 1.5% 1.2%
----- -----
Income before income taxes ........................... 2.0% 3.8%
Provision for income taxes ........................... 0.4% 1.6%
----- -----
Net income ........................................... 1.6% 2.2%
===== =====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
REVENUES. Revenues for the first quarter of 1995 were $15,927,991, an increase
of $4,342,297, or 37.5%, over the first quarter of 1994. Of this increase,
approximately $2,658,000 was due to the acquisition of PRN Nevada effective
April 1, 1994 and approximately $150,000 as a result of the PharmaThera Branch
acquisition effective January 31, 1995. Also, the management services division,
which had no revenues in the first quarter of 1994, contributed revenues of
approximately $232,000 in the first quarter of 1995; such amount excludes PRN
Nevada's management service revenues of approximately $99,000 during such period
since such revenues are included in the PRN Nevada revenues referred to above.
The remaining net increase of approximately $1,302,000 was due primarily to (i)
the growth in the number of patients serviced by the Company's nursing
operations in Texas which, combined with infusion operations, had increased
revenues of approximately 15.7% ($1,497,000), (ii) an increase in revenues from
Virginia infusion and nursing operations of 2.8% ($43,000), and (iii) a decrease
in revenues in the New Jersey operation of 49.4% ($257,000). On a company-wide
basis, nursing and related revenues increased 45.9% ($3,352,000) in the first
quarter of 1995 compared to the first quarter of 1994. Also, homemaker service
revenues increased 19.8% ($533,000) and pharmacy revenues increased 6.6%
($104,000) in the same comparable periods. The Company's revenues have been
affected by changes in reimbursement policies and rates of various third party
payors; however, it is not reasonably possible to determine the magnitude
thereof.
DIRECT PATIENT CARE. Costs of direct patient care in the first quarter of 1995
were $9,868,757, an increase of $2,796,706, or 39.5%, over the first quarter of
1994, resulting primarily from the corresponding increase in revenues described
above. As a percentage of revenues, such costs were 62.0% of revenues in the
first quarter of 1995 compared to 61.1% in the first quarter of 1994. The
increase in the percentage
12
of direct patient care costs is due primarily to the acquisition of PRN Nevada,
which is a provider of nursing services. Such services are more labor intensive
than infusion therapy services which yield higher profit margins and accounted
for a larger percentage of the Company's revenues prior to this acquisition. In
addition, this acquisition increased the Company's percentage of revenues from
government programs which produce only a marginal profit. The Company continues
to experience close involvement by payors in referring and managing patients.
Consequently, there is consistent pressure to evaluate direct patient care
expenses to ensure continued efficiency in the delivery of care. The Company
makes extensive use of personnel who are paid on a "per visit" basis. This
enables adjustments of personnel costs to be made in response to changes in
reimbursement while not being burdened with a large full-time staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the first quarter of 1995,
selling, general and administrative expenses were $5,343,929, an increase of
$1,496,516, or 38.9%, over the first quarter of 1994. A large portion of the
increase relates to the acquisition of PRN Nevada effective April 1, 1994 which
had selling, general and administrative expenses of approximately $725,000
(48.5% of the increase) in the first quarter of 1995. The remaining increase of
approximately $771,000 is primarily due to additional selling, general and
administrative expenses incurred by the Company's other operations which
coincide with their growth in revenues and an increase in corporate overhead
costs, which is attributable to the Company's overall growth. During the first
quarter of 1995, selling, general and administrative expenses were reduced by
approximately $245,000 resulting from the recovery of certain nonrecurring
payroll related costs attributable to prior periods. As a percentage of
revenues, taking into account the above reduction in 1995, such expenses
increased to 35.1% in the first quarter of 1995 compared to 33.2% in the first
quarter of 1994 for the reasons set forth above.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
$150,634 in the first quarter of 1995, an increase of $66,973, or 80.0%,
compared to the first quarter of 1994. The increase is primarily attributable to
the corresponding increase in revenues between the two periods. As a percentage
of revenues, the provision for doubtful accounts increased to 0.9% in the first
quarter of 1995, compared to 0.7% in the same period in 1994, primarily as a
result of the change in the Company's payor mix. The Company's revenues from
government programs, including Medicare and Medicaid, increased between the two
periods due to the acquisition of PRN Nevada, whose revenues are derived
primarily from government programs. For the most part, a contractual allowance
is recognized directly against revenues from government programs as compared to
a provision for doubtful accounts applied to other payors. Also in the first
quarter of 1994, the Company experienced larger than normal recoveries on
accounts previously written off.
INCOME FROM OPERATIONS. Income from operations was $564,671 in the first quarter
of 1995, a 3.1% decrease from the first quarter of 1994 of $582,569. As a
percentage of revenues, income from operations decreased to 3.5% in the first
quarter of 1995 as compared to 5.0% in the first quarter of 1994. The decrease
in percentage is primarily attributable to lower margins resulting from the
change in the Company's service and payor mix as described above, reduced
profitability of the Virginia and New Jersey operations, losses in the Company's
new Florida operation, and increased selling, general and administrative
expenses including corporate overhead costs, to support the Company's growth.
The Company continues to focus its attention on the Virginia and New Jersey
operations which are not achieving desired profitability. In addition, emphasis
is being placed on improving the operating results of the Florida operation
which commenced as a start-up in 1994 and was expanded through the acquisition
of the PharmaThera Branch in early 1995. This focus and the related operating
changes have produced positive results, particularly in the Houston, Texas
Pharmacy operation. The Company's management services division, which commenced
operations in late 1993 and became profitable in the third quarter of 1994,
contributed income of approximately $230,000 in the first quarter of 1995.
13
INTEREST EXPENSE. Interest expense increased $100,414, or 70.7%, to $242,472 in
the first quarter of 1995, compared to $142,058 in the first quarter of 1994,
primarily as a result of interest on debt incurred in connection with the
Company's acquisitions and for working capital purposes to fund the Company's
operations and growth. A portion of this increase was also attributable to
increases in the prime interest rate charged in 1995 over 1994. The weighted
average of the prime interest rate in the first quarter of 1995 was 8.7%,
compared to 6.1% during the same period of 1994, which equates to a $60,000
increase in the first quarter of 1995 interest expense when applying the
percentage increase in average interest rates to the interest expense incurred
in the first quarter of 1994..
PROVISION FOR INCOME TAXES. The Company's effective tax rate for the first
quarter of 1995 was 18.9% compared to 43.0% for the same period of 1994. Such
effective tax rate was substantially lower in 1995 primarily due to the
permanent book and tax difference created by a nontaxable recovery of certain
nonrecurring payroll related costs in this quarter. See also Note 5 to the
accompanying condensed financial statements for more detailed information
concerning the items causing the difference between the effective tax rate and
the statutory rate of 34% for these quarters and the differences between the two
periods.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, the level of the
Company's cash and cash equivalents, working capital and its current and
debt-to-equity ratios:
LIQUIDITY AND CAPITAL RESOURCES
(DOLLAR AMOUNTS, NOT RATIOS, IN THOUSANDS)
MARCH 31, DECEMBER 31,
1995 1994
------ -------
Cash and cash equivalents ........................ $ 543 $1,523
Working capital .................................. $ 242 $3,807
Current ratio .................................... 1.02 1.45
Debt-to-equity ratio ............................. 2.37 2.40
GENERAL
Cash and cash equivalents at March 31, 1995 decreased by approximately $980,000
from December 31, 1994. Working capital also decreased by approximately
$3,565,000 during this period, primarily because the Company's revolving credit
facilities with outstanding balances totalling $2,905,000 at March 31, 1995 are
classified as current due to their maturity date of March 31, 1996. At December
31, 1994, such credit facility outstanding balances of $3,225,000 were
classified as noncurrent. This is also primarily the reason that the current
ratio decreased from 1.45 at December 31, 1994 to 1.02 at March 31, 1995. As
further explanation, accounts receivable, net of reserves, at March 31, 1995
increased by approximately $683,000, or 7.1%, from December 31, 1994, due to the
Company's growth in revenues, which resulted partially from the Company's
various acquisitions, the growth of the Company's existing operations, and other
matters as set forth below. Additionally, accounts payable and accrued
liabilities increased by approximately $524,000 and accrued compensation and
benefits increased by approximately $46,000 from December 31, 1994 to March 31,
1995. For the three months ended March 31, 1995, net cash of approximately
$969,000 was used for financing activities, while cash of approximately $221,000
was provided by operating activities during this period. Also during this
period, the Company used cash of approximately $135,500 to acquire property and
equipment and approximately $97,500 for other investing activities.
14
The Company has entered into various debt obligations with its primarily lender
(the "Bank") and others, including the former owners of acquired companies,
resulting in total outstanding borrowings of $10,772,572 at March 31, 1995. Such
total debt amount is exclusive of capital leases and an obligation to the former
owners of PVNS, both of which are included in the discussion below concerning
the Company's other commitments. At March 31, 1995, the Company had borrowing
availability of $820,000 under its revolving credit facilities with the Bank.
The terms and other information regarding such borrowings are described more
fully in Note 7 to the accompanying condensed consolidated financial statements.
Subsequent to March 31, 1995, primarily for the reasons set forth below in the
third paragraph under ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES, the
Company borrowed the remaining amount available of $820,000 under its revolving
credit facilities and entered into additional borrowings for working capital
purposes. On April 10, 1995, the Company borrowed $300,000 from its president
and on May 3, 1995, borrowed $1,000,000 from the Bank under a new revolving
credit facility.
The Company's stockholders' equity at March 31, 1995 was $8,270,058, which
increased approximately $267,000 from December 31, 1994. The debt-to-equity
ratio remained approximately the same at these dates.
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The Company's total debt outstanding at March 31, 1995 will require
approximately $5,600,000 for principal and interest payments during the twelve
months ending March 31, 1996, based on the assumptions that interest rates and
the Company's borrowing levels remain constant. This amount is exclusive of the
repayment of additional borrowings totalling $2,120,000 by the Company
subsequent to March 31, 1995 as described above. The Company also has
commitments under employment agreements to various officers and other employees,
as well as an obligation to the former owners of PVNS that requires total
payments over the twelve months ending March 31, 1996 of approximately $337,000,
including an amount attributable to compensation and imputed interest, as more
fully described in Note 3 to the accompanying condensed consolidated financial
statements. In addition, the Company is committed under various capital and
operating leases (primarily office facilities and property and equipment), for
payments totalling approximately $2,100,000 over the twelve months ending March
31, 1996. Also in connection with PharmaThera Branch acquisition as more fully
described in Note 3 to the accompanying condensed consolidated financial
statements, the Company has remaining obligations to the seller at this date of
up to approximately $520,000, payable at various dates through May 15, 1996. As
of March 31, 1995 and through this date, the Company had no other significant
commitments and no material planned purchases of property and equipment.
Primary sources of liquidity include cash generated from operations, amounts
available under the Company's credit facilities with the Bank and loans from the
Company's president and another director (see above and Note 7 in the
accompanying condensed consolidated financial statements). At March 31, 1995 and
through this date, (i) approximately $1,630,000 is being withheld by a Medicare
intermediary in connection with the determination letters issued for the PVNS
June 30, 1990 and 1991 Cost Reports which have been reopened for further audit
at the Company's request, (ii) approximately $850,000 of receivable claims are
due from the PRN Nevada Medicaid intermediary that exceed the normal amount of
receivables outstanding for this operation (approximately $500,000 of which are
subject to an appeal with the Nevada Medicaid program), (iii) approximately
$1,000,000 is due from a Medicare intermediary for the PVNS 1994 tentative Cost
Report settlement and a 1995 lump sum payment, and (iv) approximately $1,250,000
of receivable claims are due from a Texas welfare program that exceed the normal
amount of receivables outstanding for this operation. Also during 1995 through
this date, PRN Nevada has repaid accelerated payments from a Medicare
intermediary totalling approximately $1,450,000, which was partially offset by
15
the receipt of approximately $500,000 from a Medicare intermediary for a lump
sum payment attributable to the PVNS 1994 Cost Report. The above amounts
withheld, delayed receivable collections and the repayment of the referenced
accelerated payments, were the primary reasons for the need to obtain the
additional working capital loans entered into after March 31, 1995 as described
above. The Company expects that it will collect a large portion of the amounts
withheld and outstanding receivables described above during 1995. However,
collection is based on a number of variables and determinations by government
programs or their intermediaries which are not completely within the Company's
control. Thus, the amounts referred to above could be withheld longer than
expected, could continue to be delayed in collection and could be adversely
impacted by third-party determinations and accordingly, the additional working
capital loans entered into subsequent to March 31, 1995 may not be repaid in the
time frame expected (by November 1, 1995) and additional borrowings may be
required.
Taking into account the Company's commitments and the matters described above,
management believes that the Company's existing capital resources and sources of
liquidity are sufficient to finance its existing operations during the next
twelve months. If cash generated from operations is less than anticipated, or if
other currently unforeseen events occur including the outcome of the matters
described above, the Company may be required to seek additional financing.
Potential sources of additional financing include private or public equity or
debt financing or additional bank financing. The Company's credit facilities
with the Bank generally prohibit additional borrowings by the Company without
the Bank's consent. There can be no assurance that the Company would be able to
obtain additional financing, if required, on acceptable terms.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on Page 19 for location of exhibits required by Item
601 of Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1995.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Innovations, Inc.
Date: May 14, 1995 By /S/ MARK H. FISHER
Mark H. Fisher
President and Chief
Executive Officer
By /S/ DAVID C. HORN
David C. Horn
Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT DESCRIPTION
- - -------- -------------------
10.37 Revolving Promissory Note by and between Physician's
Visiting Nurse Service, Inc. and Texas Commerce Bank
National Association, dated May 3, 1995, and attachments.
(Filed on paper under Form-SE.)
11 Computation of Per Share Earnings.
EXHIBIT 11
MEDICAL INNOVATIONS, INC.
COMPUTATION OF PER SHARE EARNINGS
QUARTERS ENDED MARCH 31,
-------------------------
PRIMARY: 1995 1994
----------- -----------
Net income applicable to common stock ............. $ 261,391 $ 251,169
Adjustment to net income to reduce interest expense
and increase interest income, net of tax effect . 35,795 3,338
----------- -----------
Net income applicable to common and common
equivalent shares ............................... $ 297,186 $ 254,507
=========== ===========
Weighted average common shares outstanding ........ 12,569,111 12,989,448
Effect of stock options and warrants .............. 1,755,020 1,617,221
----------- -----------
Weighted average common and common
equivalent shares ............................... 14,324,131 14,606,669
=========== ===========
Net income per common and common
equivalent share - primary ...................... $ 0.02 $ 0.02
=========== ===========
FULLY DILUTED:
Net income applicable to common stock ............. $ 261,391 $ 251,169
Adjustment to net income to reduce interest expense
and increase interest income, net of tax effect . 32,808 3,405
----------- -----------
Net income applicable to common and common
equivalent shares ............................... $ 294,199 $ 254,574
=========== ===========
Weighted average common and common
equivalent shares ............................... 14,324,131 14,606,669
Additional effect of stock options and warrants ... -- --
----------- -----------
Weighted average common and common
equivalent shares ............................... 14,324,131 14,606,669
=========== ===========
Net income per common and common
equivalent shares - fully diluted ............... $ 0.02 $ 0.02
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 341,863
<SECURITIES> 201,000
<RECEIVABLES> 10,279,841
<ALLOWANCES> 0<F1>
<INVENTORY> 301,292
<CURRENT-ASSETS> 12,348,089
<PP&E> 1,976,713
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 27,845,121
<CURRENT-LIABILITIES> 12,105,739
<BONDS> 0
<COMMON> 94,293
0
0
<OTHER-SE> 0<F3>
<TOTAL-LIABILITY-AND-EQUITY> 27,845,121
<SALES> 15,927,991
<TOTAL-REVENUES> 15,927,991
<CGS> 9,868,757<F4>
<TOTAL-COSTS> 9,868,757
<OTHER-EXPENSES> 5,494,563
<LOSS-PROVISION> 150,634
<INTEREST-EXPENSE> 242,472
<INCOME-PRETAX> 322,199
<INCOME-TAX> 60,808
<INCOME-CONTINUING> 261,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,391
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<FN>
<F1>ALLOWANCES ARE NETTED AGAINST RECEIVABLES ON THE BALANCE SHEET, BUT ARE
DISCLOSED IN THE NOTES.
<F2>DEPRECIATION IS INCLUDED IN PP&E AND IS DISCLOSED IN NOTES SEPARATELY.
<F3>OTHER-SE INCLUDES ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS.
<F4>CGS INCLUDES DIRECT PATIENT CARE COSTS.
</FN>
</TABLE>
