SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 incorporation IRS Employer Identification Number
ONE RIVERWAY, SUITE 2300, HOUSTON, TEXAS 77056
Address of principal executive offices Zip code
(713) 688-6600
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0075 par value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $10,607,700 as of March 24, 1995. Solely for purposes of this
computation, market value was determined by the published closing price of
$1.40625 of the Registrant's Common Stock on March 24, 1995. The number of
shares of Common Stock $.0075 par value, outstanding as of March 24, 1995 was
12,572,400.
Documents Incorporated By Reference -- Part III of this Form 10-K is
incorporated by reference from the Registrant's definitive proxy statement for
its 1995 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Registrant's
fiscal year.
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TABLE OF CONTENTS
MEDICAL INNOVATIONS, INC.
1994 FORM 10-K ANNUAL REPORT
PART I PAGE
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters....................................................... 10
Item 6. Selected Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 8. Financial Statements and Supplementary Data..................... 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 18
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 19
Item 11. Executive Compensation.......................................... 19
Item 12. Security Ownership of Certain Beneficial Owners
of Management................................................. 19
Item 13. Certain Relationships and Related Transactions.................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 20
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PART I
ITEM 1. BUSINESS
A. GENERAL DEVELOPMENT OF THE BUSINESS
Medical Innovations, Inc. (the "Company") is in the business of providing
specialized and high-tech home healthcare services, home medical equipment,
homemaker services, and intravenous therapies. This full complement of home
healthcare services is designed to address the specific needs of patients in a
variety of diagnostic groups, including patients receiving treatment for cancer,
diabetes, wounds, AIDS and high risk pregnancies. The Company has a staff of
full time nursing, homemaker, pharmacy, and therapy personnel and access to
carefully screened registries of qualified clinicians, all of whom interact with
physicians to implement a customized plan of home healthcare for each patient.
Substantially all products used by the Company in its home infusion therapies
are prepared in pharmacies owned by the Company.
The Company also is in the business of providing comprehensive home healthcare
management services under contractual arrangements with hospitals and other
providers. This division was formed in late 1993 and currently has entered into
management contracts with eight hospitals and one independent home healthcare
provider.
The Company believes that its home healthcare business is part of a growing
industry. Pressure to reduce healthcare costs through shorter institutional
stays, combined with the escalating price of healthcare, the aging of the
American population and an increasing awareness by consumers that quality
healthcare can be administered at home, has resulted in rapid growth of the
market for home healthcare. Moreover, physicians are increasingly being asked by
patients and payors to oversee healthcare services at home, or in other
environments which are less costly than hospitalization. The Company offers
healthcare services with an environment familiar to the patient, with systems
that assist the physician in maintaining control of medical treatment, at a
price that the Company believes compares favorably with alternative means of
treatment.
The Company was formed in April 1988, under the name Bryce Financial,
Inc. ("Bryce"). In May 1989, Bryce acquired two operating companies,
Medical Innovations, Inc. ("Medical Texas") and OMNA Corporation ("OMNA") and
their respective subsidiary companies. Bryce was reincorporated in the State
of Delaware and changed its name to Medical Innovations, Inc. OMNA was merged
into Medical Innovations, Inc. in December 1991.
The Company has grown rapidly in 1993 and 1994, due primarily to acquisitions.
These acquisitions are described below.
Effective January 1, 1993, the Company acquired substantially all of the
operating assets, except cash and accounts receivable, of Preferred Homecare,
Inc. and Preferred Pharmacy, Inc. (collectively, "Preferred"). The
Preferred operations consisted of providing home infusion therapy and skilled
homecare services in the Houston, Texas area.
Effective May 1, 1993, the Company acquired all of the issued and outstanding
shares of common stock of Physician's Visiting Nurse Service, Inc. ("PVNS").
PVNS is a provider of skilled homecare and homemaker services exclusively in the
state of Texas.
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Effective September 1, 1993, the Company acquired Advance Healthcare, Inc.
("Advance") in a merger pursuant to which Advance was merged into a wholly-owned
subsidiary of the Company. Advance, a corporation based in Richmond, Virginia,
was a provider of intravenous therapies in the home.
Effective February 11, 1994, the Company acquired certain assets of STAT
Specialty Home Health Care, Inc. ("STAT"). STAT's operations, which consisted of
skilled homecare services in the Texas Rio Grande Valley, were merged into PVNS.
Effective April 1, 1994, the Company acquired all of the outstanding common
stock of PRN Home Health Care, Inc. of Nevada and its affiliated companies
(collectively "PRN Nevada"). PRN Nevada, a group of companies based in Las
Vegas, Nevada, is a provider of skilled homecare services exclusively in the
state of Nevada.
For additional information concerning each of the Company's 1993 and 1994
acquisitions, including the consideration paid therefor, see Note 2 to the
accompanying consolidated financial statements.
As of December 31, 1994, the Company provided its services in Texas, Nevada,
Virginia, New Jersey and Florida through various operating subsidiaries.
The Company's current strategy is to expand through acquisitions, development of
additional complementary healthcare services, increasing the number of patients
served in its existing markets, introducing new therapies, and providing
management services to other providers of home healthcare. As described above,
the Company completed five acquisitions in 1993 and 1994, and formed a
management services division in late 1993 that has signed nine contracts to
date. Also, in January 1995, the Company expanded its Florida operations through
the acquisition of certain assets of PharmaThera, Inc.'s branch operation in
Pensacola, Florida ("PharmaThera Branch"), which provided similar home
healthcare services as the Company. This operation was merged into the Company's
existing Pensacola operations at the acquisition date. The Company is currently
in various stages of discussion and negotiation with several companies regarding
potential acquisitions or other business combinations. It is not possible at
this time to predict whether any of such transactions will actually occur.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment. Information regarding that segment
and the products and services within that segment is discussed in Part I, Item
(1)(C) below.
C. NARRATIVE DESCRIPTION OF BUSINESS
SERVICES PROVIDED
The Company provides services through teams of clinicians, including homemakers,
home health aides, licensed practical nurses, licensed registered nurses,
registered pharmacists, physical therapists, occupational therapists, speech
therapists, and medical social workers. In most of the Company's operations, its
clinicians form tightly knit interdisciplinary teams, each of which provides
home healthcare to patients in a narrowly defined geographic area. In connection
with the administration of home infusion therapies, the Company's pharmacies
prepare the necessary pharmaceuticals, such as nutritional solutions,
antineoplastic chemotherapy agents, antibiotics and other medications. The
Company believes that the multiplicity of its services is unique in the industry
because many other home healthcare providers administer services which are more
narrowly defined.
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The Company has established written policies and procedures prescribing
standards for patient care and has established an internal quality assurance
program including chart audits, pharmacy surveys, patient interviews and
customer questionnaires. The Company conducts clinical and operational audits of
each facility on a periodic basis to assure compliance with these standards. All
facility staff actively participate with the corporate staff in the quality
assurance program.
To assist in maintaining high standards for quality care, the Company has
established medical advisory boards comprised of prominent physicians that
provide advice on specific medical issues. The Company also consults from time
to time with medical specialists on clinical procedures and new therapies. In
addition, the Company has sought and obtained accreditation from the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO) in a number of
its operations. The Company's healthcare specialists and home nursing staff must
meet rigid experience and training criteria. In accordance with state and
federal regulations, each member of such staff is tested and certified at time
of employment, prior to providing patient care.
NURSING SERVICES. The Company offers a full line of intermittent and
extended services for both infusion and general nursing needs of patients. The
Company maintains an extensive registry of carefully screened staff, including
registered nurses, licensed vocational nurses, and certified home health aides.
Skilled nursing services include the following: (i) administering injections;
(ii) changing dressings and other care for wounds, incisions and stomas; (iii)
monitoring vital signs; (iv) catheter care; (v) drawing lab samples; (vi)
administering enteral nutrition therapy; and (vii) patient education. Infusion
nursing services include attended infusion drug administrations, catheter
placements and blood transfusions.
PERSONAL ASSISTANCE. Homemakers provide hourly or round-the-clock
assistance with bathing, hygiene tasks, bed linen changes and general tidying of
the patient's living area and other personal care needs.
PHYSICAL THERAPY. Physical therapists provide structured therapies for
the patient's improved ambulation, use of equipment, prostheses training,
therapies for the patient's increased bed mobility and prescribed exercise
programs.
OCCUPATIONAL THERAPY. Occupational therapists provide structured
therapies for patient's improved upper body mobility, training in home and bath
activities and equipment, and increased independence in patient's activities for
daily living.
SPEECH THERAPY. Speech therapists provide structured therapies for the
patient's increased communication skills and improved swallowing techniques
following a trauma.
MEDICAL SOCIAL SERVICES. Company employees counsel patients to
alleviate stresses encountered during illnesses by providing needed
information and support.
EQUIPMENT AND ENTERAL THERAPY. Durable medical equipment and medical
supplies that are needed to complete therapy in the home are coordinated by
nurse managers and patient service representatives. Infusion pumps and supplies
are stocked, maintained and dispensed according to industry standards in the
Company's in-house pharmacies. Patients receive comprehensive training and
counseling on all medical supplies provided as part of their therapies.
SPECIALIZED HOME HEALTHCARE PROGRAMS. The Company develops special
programs to address specific needs of patient diagnostic groups, managed care
companies and physicians as an effective way to reduce healthcare costs and
ensure quality patient care.
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FACILITY STAFFING. The Company currently engages in nurse staffing
services in New Jersey, Virginia and Nevada.
MANAGEMENT SERVICES. The Company provides comprehensive management
services for start-up and in-place hospital-based home healthcare agencies and
other independent home healthcare providers.
REIMBURSEMENT FOR SERVICES
Patients, or their insurers or other third-party payors, if applicable, are
billed directly by the Company for products and services provided. Nursing
services are generally billed at a specified rate per visit or per hour and
pharmaceuticals are priced based on "per diem" rates or on an item-by-item
basis.
Virtually all of the Company's revenue is attributable to amounts from
third-party payors. Like other medical service providers, the Company is subject
to lengthy collection periods as a result of third-party payment procedures.
Consequently, management of accounts receivable through effective billing and
reimbursement procedures is critical to the Company's financial success.
Before a patient begins home healthcare, reimbursement specialists contact the
patient's third-party payor to determine eligibility for and the extent of
insurance coverage. The billing and reimbursement process involves the
collection, review and approval of a significant number of required documents.
Certain payors such as Medicare, Medicaid, and some managed care plans require
very specific procedures and documentation prior to providing reimbursement. The
Company's reimbursement specialists work closely with third-party payors and are
directly responsible for assessing patient coverage, ensuring the adequacy of
documentation, submitting the documentation and claims to the third-party
payors, and expediting payment. The Company accepts assignments of insurance
benefits from the patient and, in most instances, the third-party payors
reimburse the Company directly.
Reimbursement coverage is provided through private sources, such as insurance
companies, self-insured employers and patients, as well as through Medicare,
Medicaid, and other government programs. Including the acquisitions completed in
1994, the Company's payor mix is currently approximately 55% Medicare, 6%
Medicaid, 20% other government programs, and 19% private insurance and private
pay. Private healthcare insurance typically reimburses a higher amount for a
given therapy and provides a broader range of benefits than Medicare and most
other government programs. In addition, reimbursement from government payors is
subject to examination and retroactive adjustment after reimbursement. From time
to time the Company enters into negotiated pricing arrangements with third
parties, including Health Maintenance Organizations (HMOs) and Preferred
Provider Organizations (PPOs). The Company anticipates that it will continue to
enter into such pricing arrangements to the extent such arrangements do not
affect the Company's ability to obtain adequate reimbursement for services
provided. The Company has not had a material amount of claims questioned or
refused by insurance companies or a material amount of reimbursement by
government payors adjusted downward upon final settlement. See also Note 7 to
accompanying consolidated financial statements.
Even though the Clinton administration's proposed healthcare reform was not
enacted, the federal government continues to focus on the reduction of
healthcare costs. The scope of any healthcare reform, whether at the federal or
state level, is uncertain. The profitability of the Company could be adversely
affected by any new government regulation limiting the levels of reimbursement
and by the continuing efforts of governmental and private payors to
independently reduce costs by lowering reimbursement rates, increasing medical
review of bills for services, and negotiating for reduced contract rates.
4
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Currently, Medicare reimbursement for home healthcare nursing services and
supplies are under a cost-based model that does not encourage efficiency or cost
effectiveness. Within the next five years, however, the Company believes it is
likely that some form of a prospective reimbursement system will be in place
that will provide an incentive for home healthcare companies to reduce costs
while maintaining quality in their services. The Company has been and will
continue to focus on reducing its costs and developing superior patient outcomes
in anticipation of such change.
The Company is compensated on a fee basis, usually per patient visit, under its
management service contracts with hospitals and other home healthcare providers.
PROGRAM EDUCATION AND PATIENT BASE EXPANSION
Expanding the base of healthcare services to patients is highly dependent upon
the professional reputation of the service provider and its ability to respond
to client demands at competitive prices. Since patients are obtained primarily
through referrals from physicians and case managers, the Company emphasizes
establishing and maintaining professional relationships with referral sources in
the areas that the Company does business.
The Company maintains a program education staff which contacts physicians, third
party payors and other referral sources in person and by telephone, explaining
the Company's comprehensive home healthcare program. Typically, a source will
make initial referrals to the Company on a trial basis after it becomes familiar
with the scope and quality of the Company's patient care services. To obtain
referrals, the Company emphasizes high quality, reliability of service to the
patient, and its geographic coverage area, plus detailed reporting and
consultation with referral sources. The Company does not compensate referring
physicians in exchange for their referrals.
The Company provides information about its services to a wide range of patient
referral sources, such as physicians, medical groups, hospital discharge
planners, prepaid health plans, nursing agencies, and case managers. An
important element of the Company's expansion is to provide information to
referral sources concerning the availability of home infusion care and the
cost-saving advantages of home therapy. The Company may also assist referral
sources in establishing procedures for the identification of candidates for whom
home healthcare may be appropriate. Primarily due to escalating pressures to
contain healthcare costs, third-party payors are participating to a greater
extent in decisions regarding healthcare alternatives and, consequently, are
becoming more important in the referral process. The Company endeavors to ensure
that its services and products are provided in a manner and at a price which
enables patients to utilize third-party reimbursement through insurance and
non-governmental subsidies.
The Company from time to time may enter into contractual and other arrangements
with medical professionals, institutions and third-party payors, which may
include arrangements with prepaid health plans, under which the Company agrees
to provide services to members of the organization at negotiated prices.
SUPPLIERS
The Company purchases all pharmaceuticals and other materials and buys or rents
equipment required in connection with the Company's business from a large number
of suppliers. The Company has not experienced, and does not anticipate that it
will experience, difficulty in purchasing such materials or renting such
equipment. In the event that its current suppliers cease to sell materials or
rent equipment to the Company, the Company believes that alternate sources can
readily be located to adequately meet its needs at comparable prices.
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FUTURE EXPANSION
Company management plans to continue its growth and expansion in a number of
ways. Such plans include (i) additional acquisitions of other home healthcare
businesses; (ii) expansion of its existing operations through new product lines
and services, venture arrangements with other providers and management service
contracts; and (iii) further emphasis on expanding the number of contractual
agreements to provide management services to hospitals and other providers. It
is anticipated that the consummation of any acquisition would result in the
issuance of the Company's capital stock, the incurrence or assumption of
additional indebtedness, the payment of available cash, or a combination
thereof. As previously stated, the Company is currently in various stages of
discussion and negotiation with several companies concerning possible
acquisitions; however, the likelihood of consummating such transactions is not
determinable at this time.
SEASONALITY
Company revenues have not historically been seasonal in nature.
DEPENDENCE ON CUSTOMERS
As a result of the Company's existing bases of clients and referral sources, the
Company is not dependent on any single customer or group of customers.
Notwithstanding the foregoing, a large portion of the Company's revenues are
derived from government programs as further discussed above in Note 3 to the
accompanying consolidated financial statements.
BACKLOG
Since the Company primarily is in the healthcare service business, backlog is
not meaningful.
ENVIRONMENT LIABILITY
Due to the nature of the Company's business, and because it does not own or
lease any real property (other than office facilities), Company management
believes that the Company has no potential material environmental liabilities.
RESEARCH AND DEVELOPMENT
Although the Company has not spent material amounts on research and development
activities, it has formed a research and development group whose emphasis is to
develop diagnosis specific programs to enhance the Company's position in the
home healthcare services arena. Such programs consist of the employment of
clinical and support personnel resources, as well as the necessary materials and
testing at selected Company locations, and also the presentation of such
programs through seminars and other educational forums. The programs also
include a patient outcomes tracking system, which is designed to provide
tangible evidence of the Company's superior quality of care.
COMPETITION
The home healthcare business is highly fragmented, with a large number of small
providers serving local markets and a smaller number of larger regional and
national providers. The Company competes with a large number of companies and
programs in most areas in which it provides services and products. These
competitors include major national and regional companies, hospital-based
programs, physician groups and nursing agencies. Company management believes
that the principal competitive factors in obtaining contracts with hospitals are
a reputation for quality service, a range of services, experience and price.
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The competitive factors most important to attracting referral sources and
patients for the Company's home nursing and its other services and products are
name recognition in the marketplace, reputation for quality of service,
geographic area covered, and price.
The Company's competitors in the home infusion business include a large number
of home healthcare providers of various sizes that offer intravenous therapy as
their only home healthcare product and service. The development of alternative
means of treating infections or administering nutrition which do not involve
infusion therapy also could adversely affect the Company's home infusion
business. The Company competes in this market based upon a number of factors,
including quality of care and service, the ability to service the geographic
area, the ability to develop and maintain relationships with referral sources,
and price.
Competition for the Company's management services division is currently
relatively limited as compared to its other services and products, but could
increase as other companies with home healthcare expertise enter this market. In
addition, the hospitals and other providers that are customers, or potential
customers, of the Company's management services may decide to perform such
management internally.
GOVERNMENT REGULATION
STATE REGULATION. Healthcare services are subject to substantial regulation by
the various states in which the Company conducts its business. In particular,
the Company's facilities are subject to state laws governing pharmacies, home
health agencies, nursing services, health planning and professional ethics. The
United States Food and Drug Administration and Drug Enforcement Agency also
require each facility containing a pharmacy to be registered to dispense
controlled substances. These regulations impose substantive standards on the
level of home healthcare provided, as well as licensing and record keeping
requirements. Such licenses generally require annual renewal. The state
governmental bodies that presently regulate the Company are the state
departments of health, the state boards of pharmacy and the state departments of
public safety. Additionally, the Company's nurses and pharmacists are licensed
by respective state agencies. The failure of a facility to obtain, renew or
maintain any required regulatory approvals or licenses could adversely affect
continued expansion of the Company and could prevent such facility from offering
its existing services to patients.
Some of the states in which the Company operates have laws that prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers and referral sources that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. In addition, some states restrict certain
business relationships between physicians and pharmacies. Possible sanctions for
violation of these restrictions include loss of licensure and civil and criminal
penalties. These statutes vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. The Company
believes that it currently has no relationship which would be considered to be
in violation of these statutes in any material respects and intends to structure
referral arrangements, if any, with healthcare providers in compliance with the
relevant state statutes.
FEDERAL REGULATION. The Company has Medicare-certified home healthcare agencies
in Texas, Virginia and Nevada. The Health Care Financing Administration of the
Department of Health and Human Services regulates, through its selected
intermediaries and administrators, certain controls and standards applicable to
the provision of services and reimbursement of those services to Medicare
patients. The business of the Company may be impacted by changes in these
regulations. In addition, the Company is subject to laws and regulations which
relate to business corporations in general, including antitrust laws,
occupational health and safety laws and environmental laws which, among other
things, include the disposal, transportation, and handling of hazardous and
infectious wastes. None of these laws and regulations have had a material
adverse effect on the Company's business or competitive position or required
material capital expenditures on the part of the Company.
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The Company is also subject to Section 112B(b) of the Social Security Act
(commonly known as the Federal Illegal Remuneration Law), which prohibits
certain actions and practices deemed by Congress to be fraudulent or abusive in
nature. In particular, the Federal Illegal Remuneration Law prohibits financial
arrangements between providers of healthcare services to government healthcare
program (including Medicare and Medicaid) beneficiaries, such as the Company,
and potential referral sources, such as physicians, that are designed to induce
patient referrals to the providers. The Federal Illegal Remuneration Law
contains both civil and criminal sanctions. The prohibitions contained in this
statute have been broadly construed by federal cases and administrative agencies
charged with enforcement of the statute and apply to any type of financial
transaction between providers of healthcare services to Medicare and Medicaid
beneficiaries and referral sources. The Company believes that it currently has
no financial relationship which would be considered to be in violation of the
Federal Illegal Remuneration Law in any material respects.
In addition to the Federal Illegal Remuneration Law, Section 1877 of the Social
Security Act (commonly known as the Stark Law) imposes certain restrictions upon
referring physicians and providers of certain designated health services under
the Medicare and Medicaid programs. Subject to certain exceptions, the Stark Law
provides that if a physician (or a family member of a physician) has a financial
relationship with an entity, (i) the physician may not make a referral to the
entity for the furnishing of designated health services reimbursable under the
Medicare and Medicaid programs, and (ii) the entity may not bill for designated
health services furnished pursuant to a prohibited referral. Entities and
physicians committing an act in violation of the Stark Law are subject to civil
money penalties and exclusion from the Medicare and Medicaid programs. The
designated health services include home health services, outpatient prescription
drugs, durable medical equipment, and other services furnished through the
Company's facilities. Financial relationships subject to the Stark Law are
defined to include compensation arrangements, as well as investment interests
such as that held by investors in the Company. Thus, physicians who invest in
the Company, or have family members who invest in the Company, will be
prohibited from referring Medicare and Medicaid patients to facilities owned by
the Company. The Company intends to monitor interests held by physicians or
family members of physicians and comply with the referral prohibitions, as well
as structure all compensation arrangements with physicians, if any, in
compliance with the requirements of the Stark Law.
The Company believes that it is in material compliance with all applicable laws
and regulations. The Company is unable to accurately predict what additional
legislation, if any, may be enacted in the future relating to the Company's
business or the healthcare industry, including third-party reimbursement, or
what effect any such legislation may have on the Company.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has had no foreign or export sales during the three year period
ended December 31, 1994.
EMPLOYEES
The Company employs approximately 670 full-time executive, administrative,
program education, technical and healthcare employees. The Company utilizes, on
a part-time, hourly or per visit basis, nurses, nurse aides and attendants. The
Company maintains registries of over 3,500 nurses, nurse aides and attendants in
Texas, Virginia, New Jersey, Nevada and Florida. To date, the Company has not
experienced any shortages in the availability of qualified nursing or other
professionals.
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ITEM 2. PROPERTIES
The Company currently leases approximately 8,600 square feet of space in
Houston, Texas for its corporate offices. The Company also leases office space
for all of its other operations, including two locations in New Jersey, three
locations in Virginia, one location in Florida, four locations in Nevada, and
approximately forty locations in Texas. These other facilities range in size
from approximately 500 square feet to approximately 15,000 square feet, with the
average size being approximately 2,400 square feet. Company management believes
that such facilities are generally adequate and suitable for its current
operating activities; however, certain existing offices may need to be expanded
and additional facilities may be required to accommodate the Company's
anticipated growth. The Company does not, nor does it plan to, own any real
property.
Aggregate monthly rent for the Company's facilities was approximately $122,500
as of December 31, 1994.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1994 Annual Meeting of Stockholders of the Company was held on December 5,
1994. At such meeting, the stockholders elected five members of the Company's
Board of Directors, which constituted the entire Board of Directors, including
each of Mark H. Fisher, Thomas J. Kaled, Luis T. Campos, M.D., Harvey R. Houck,
Jr. and Philip A. Tuttle. In addition, the stockholders approved the adoption of
the Company's 1993 Employee Stock Option Plan and authorized an amendment to the
Certificate of Incorporation of the Company increasing the number of authorized
shares of the Company's common stock from 26,666,667 to 75,000,000. The results
of the vote for the election of directors was as follows: Mark H. Fisher,
9,380,286 for and 8,600 authority withheld; Thomas J. Kaled, 9,380,286 for and
8,600 authority withheld; Luis T. Campos, M.D., 9,380,286 for and 8,600
authority withheld; Harvey R. Houck, Jr., 9,380,286 for and 8,600 authority
withheld; and Philip A. Tuttle, 9,380,286 for and 8,600 authority withheld. In
the vote on the Company's 1993 Employee Stock Option Plan, 6,602,562 votes were
cast for approval, 357,713 votes were cast against or were withheld, there were
60,865 abstentions and 2,367,746 broker nonvotes. In the vote on authorization
of the amendment to the Company's Certificate of Incorporation, 8,851,531 votes
were cast for authorization, 437,519 votes were cast against or were withheld,
and there were 99,836 abstentions.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ Small-Cap Market under the
symbol MIXX.
As of March 24, 1995, the Company had 266 holders of record for its common
stock. The Company estimates that there were approximately 1,800 beneficial
owners of the common stock as of March 24, 1995.
On November 2, 1993, the Company called for redemption its publicly-traded Class
A and Class B Warrants. As a result, as of December 3, 1993, the Class A and
Class B Warrants ceased to exist and were no longer traded.
The following table sets forth the quarterly high and low sales prices for the
Company's common stock, Class A Warrants and Class B Warrants.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK WARRANTS WARRANTS
MIXX MIXXW MIXXZ
---------------- --------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
FISCAL YEAR ENDED DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C> <C>
First Quarter 1-3/4 1/2 3/8 3/32 1/32 1/32
Second Quarter 1-13/16 1-5/16 3/8 3/16 5/32 1/16
Third Quarter 2-9/16 1-1/2 13/16 9/32 7/16 5/32
Fourth Quarter 2-3/4 1-13/16 1-1/16* 5/16* 9/16* 1/32*
FISCAL YEAR ENDED DECEMBER 31, 1994
First Quarter 2-1/2 1-11/16 N/A N/A N/A N/A
Second Quarter 2-3/16 1-3/4 N/A N/A N/A N/A
Third Quarter 2-11/32 1-9/16 N/A N/A N/A N/A
Fourth Quarter 1-11/16 1-3/8 N/A N/A N/A N/A
</TABLE>
*Through December 3, 1993
The listed quotations reflect interdealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
The Company has never paid cash dividends on its common stock. The Company
presently intends to retain earnings to finance the expansion of its business
and, therefore, does not expect to pay any cash dividends in the foreseeable
future. Any determination as to the payment of cash dividends will depend upon
the Company's earnings, general financial condition, capital needs and other
factors deemed pertinent by the Board of Directors, as well as any limitations
imposed by the Company's lenders under its financing arrangements. The Company's
current credit facilities prohibit the payment of dividends by the Company.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations and balance sheet data have been
derived from the Company's consolidated financial statements. The financial data
set forth below should be read in conjunction with the Consolidated Financial
Statements, related Notes and other financial information included elsewhere
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SELECTED FINANCIAL DATA
IN THOUSANDS (EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
OPERATIONS DATA
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31: 1994(1) 1993(2) 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES $59,110 (3) $33,483 $9,043 $8,573 $8,378
INCOME (LOSS) FROM OPERATIONS 1,981 (4) 1,735 (4,5) (381) 222 389
NET INCOME (LOSS) 804 (6) 846 (313) 72 197
NET INCOME (LOSS) PER
COMMON SHARE 0.06 0.07 (0.04) 0.01 0.03
BALANCE SHEET DATA
------------------------------------------------------------------------
AS OF DECEMBER 31: 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
TOTAL ASSETS $27,241 $20,457 $3,977 $3,157 $3,097
WORKING CAPITAL 3,807 1,908 2,026 353 840
LONG-TERM DEBT 10,023 4,250 669 -- 500
STOCKHOLDERS' EQUITY 8,003 7,623 1,845 878 747
</TABLE>
(1) Includes approximately eleven months of results from STAT which was
acquired effective February 11, 1994, and nine months of results from PRN
Nevada which was acquired effective April 1, 1994.
(2) Includes a full year of results of Preferred which was acquired effective
January 1, 1993, eight months of results from PVNS which was acquired
effective May 1, 1993, and four months of results of Advance which was
acquired effective September 1, 1993.
(3) Includes an increase of approximately $533,000 relating to PVNS prior
year Medicare Cost Reports. See Note 7 to Consolidated Financial
Statements.
(4) Includes payroll tax penalties and employee injury costs of $151,000 in
1993 and $134,000 in 1994 which were recovered in 1994 pursuant to the PVNS
settlement. See Note 2 to Consolidated Financial Statements.
(5) Includes a pre-tax charge of $26,000 related principally to the exchange of
amounts due from a related party in return for that party's release from a
future compensation arrangement. See Note 12 to Consolidated Financial
Statements.
(6) Includes a pre-tax gain of $128,500 from sale of a minority interest
in the Company's Pensacola, Florida operation. See Note 14 to
Consolidated Financial Statements.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents selected financial information for the periods
indicated as a percentage of revenues and sets forth the percentage dollar
increase (decrease) of such items from period to period.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
FROM PRIOR YEAR
YEAR ENDED DECEMBER 31,
PERCENTAGE OF REVENUES --------------------------
YEAR ENDED DECEMBER 31, 1994 VS. 1993 VS.
-----------------------------
1994 1993 1992 1993 1992
---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 100.0% 76.5% 270.3%
DIRECT PATIENT CARE 63.9% 63.9% 60.9% 76.3% 288.9%
SELLING, GENERAL & ADMINISTRATIVE 31.3% 29.0% 38.2% 90.3% 181.1%
PROVISION FOR DOUBTFUL ACCOUNTS 1.4% 1.9% 5.1% 43.4% 34.4%
------- -------- ------
INCOME (LOSS) FROM OPERATIONS 3.4% 5.2% (4.2)% 14.2% N/A
GAIN ON SALE OF MINORITY INTEREST .2% -- -- 100.0% N/A
INTEREST EXPENSE 1.5% 1.3% 1.1% 107.1% 346.0%
------- ------ ------
INCOME (LOSS) BEFORE TAXES 2.1% 3.9% (5.3)% (5.7)% N/A
INCOME TAX PROVISION (BENEFIT) .7% 1.4% (1.8)% (7.0)% N/A
-------- ------ ------
NET INCOME (LOSS) 1.4% 2.5% (3.5)% (4.9)% N/A
======= ====== ======
</TABLE>
1994 COMPARED TO 1993
REVENUES. Revenues for 1994 were $59,110,330, an increase of $25,627,826, or
76.5%, compared to 1993 revenues of $33,482,504. Of this increase, approximately
$8,350,000 was due to the effect of the PVNS acquisition effective May 1, 1993.
A full year of PVNS revenues was included in 1994, while 1993 included only
eight months. Another $8,411,000 of the 1994 revenue increase was due to the
acquisition of PRN Nevada effective April 1, 1994. Additionally, the
acquisitions of Advance and STAT (effective September 1, 1993 and February 11,
1994, respectively) had an increasing effect on revenues of approximately
$1,700,000. The remaining 1994 increase in revenues of approximately $7,167,000
was due primarily to the growth in the number of patients served by the
Company's nursing operations in Texas which, combined with infusion operations,
grew approximately 26% ($6,610,000), and the growth of infusion and nursing
business in Virginia, which increased approximately 17% ($858,000) compared to
1993. The growth in Texas and Virginia was somewhat offset by a decrease of 22%
($545,000) in revenues of the New Jersey operations. On a company-wide basis,
nursing revenues increased 100% ($20,466,000) in 1994 compared to 1993.
Homemaker services revenue increased 83% ($5,385,000) in 1994 over 1993. These
increases were somewhat offset by a decrease in pharmacy revenues of 7%
($438,000), due partially to a decrease in volume and lower reimbursement rates.
The Company's revenues have been affected by changes in reimbursement policies
and rates of various third party payors; however, it is impossible to determine
the exact magnitude thereof.
12
<PAGE>
DIRECT PATIENT CARE. Costs of direct patient care in 1994 were $37,749,829, an
increase of $16,337,995, or 76.3%, over 1993 direct patient care costs of
$21,411,834, resulting primarily from the corresponding increase in revenues
from patient volume described above. As a percentage of revenues, such costs
were 63.9% of revenues in 1994 and 1993. The Company continues to experience
close involvement by payors in referring and managing patients. There is
continuing pressure to evaluate direct patient care expenses to enhance
efficiency in the delivery of care. The Company makes extensive use of personnel
who are paid on a "per patient visit" basis. This enables adjustments of
personnel costs to be made in response to changes in reimbursement and volume
without being burdened with a large full-time staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1994, selling, general and
administrative expenses were $18,487,214, an increase of $8,773,610, or 90.3%,
over such expenses of $9,713,604 in 1993. The increase was due primarily to the
acquisitions of PVNS and PRN Nevada, expansion of operations in Virginia and
Texas, and increased corporate overhead costs to support the Company's growth.
As a percentage of revenues, such costs increased to 31.3% in 1994 compared to
29.0% in 1993. The percentage increase was attributable to the need for the
Company to expand its management resources for anticipated continuing growth
which has not yet been offset by a corresponding growth in revenues. Corporate
overhead increased by approximately $1,081,000, or 52%, in 1994 over such costs
totalling approximately $2,086,000 in 1993. Also, amortization of excess costs
over net assets of acquired companies increased to approximately $306,000 in
1994 as compared to approximately $133,000 in 1993, an increase of $173,000, or
129%, due to the increase in excess cost over net assets of acquired companies
from various acquisitions in 1993 and 1994. Selling, general and administrative
expenses were reduced by $285,000 in 1994, pursuant to the PVNS settlement, for
the recovery of costs of which $134,000 and $151,000 were previously charged
against 1994 and 1993 income, respectively. See also Note 2 to the accompanying
consolidated financial statements.
PROVISION FOR DOUBTFUL ACCOUNTS. Although the provision for doubtful accounts of
$892,611 in 1994 increased $270,075 over the 1993 provision of $622,536, as a
percentage of revenues such provision decreased to 1.4% in 1994, compared to
1.9% in 1993, primarily as the result of a change in the Company's payor mix.
The Company's revenues from government programs, including Medicare and
Medicaid, increased from 71% in 1993 to 81% in 1994, primarily because of the
acquisitions of PVNS and PRN Nevada, whose revenues from government programs
represent a proportionately higher percentage of total revenues. For the most
part, a contractual allowance is recognized directly against revenues from
government programs as compared to a provision for doubtful accounts for other
payors.
INCOME FROM OPERATIONS. Income from operations was $1,980,676 in 1994, a 14.2%
increase over income from operations of $1,734,530 for 1993. However, as a
percentage of revenues, income from operations decreased to 3.4% in 1994 as
compared to 5.2% for 1993. This percentage decrease 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 Houston, Texas and New Jersey
operations, losses in the Florida start-up operation, and increased corporate
overhead costs to support the Company's growth. Various operational changes
continue to be implemented in the Houston, Texas and New Jersey, as well as the
Virginia operations to achieve increased profitability, which should be
reflected in the Company's operating results in 1995. Also, the Company expects
that the acquisition of the PharmaThera Branch which was completed in early 1995
should result in the Florida operation being profitable in 1995. The Company's
management division, which was formed in late 1993, contributed income of
approximately $190,000, all in the last six months of the year. Further, in
1994, income of $479,000 was recognized in connection with changes in estimates
of the reserve for government program settlements. This amount consisted of (i)
income of $200,000 as a result of final settlement of the PVNS June 30, 1992
Cost Report, (ii) income of $333,000 related to favorable revisions in proposed
audit adjustments and reopenings of the PVNS Cost Reports for the years ended
June 30, 1990 and 1991, and (iii) expense of $54,000 related to post-acquisition
Cost Reports.
See also Note 7 to the accompanying consolidated financial statements.
13
<PAGE>
GAIN ON SALE OF MINORITY INTEREST. In the second quarter of 1994, the Company
sold a 20% ownership interest and a 5% net profits interest in its then existing
Pensacola, Florida home healthcare business for cash, and realized a pre-tax
gain of $128,500, as more fully described in Note 14 to the accompanying
financial statements.
INTEREST EXPENSE. Interest expense increased $449,305, or 107.1%, to $868,680 in
1994, compared to $419,375 in 1993, primarily as a result of interest on debt
incurred in connection with the PVNS and PRN Nevada acquisitions and for working
capital purposes to fund the Company's operations and growth, including the post
acquisition operations of PVNS and PRN Nevada. A portion of the increase was
also attributable to increases in the prime interest rate charged by banks in
1994 over 1993. The weighted average of the prime interest rate in 1994 was
7.1%, compared to 6.0% in 1993. Virtually all of the Company's borrowings bear
interest at floating interest rates based on prime.
PROVISION FOR INCOME TAXES. The Company's effective tax rate in 1994 was
approximately 35.2% compared to 35.7% in 1993. See Note 8 to the accompanying
consolidated financial statements for detailed information regarding the
difference in the effective tax rates between 1993 and 1994 and the items
causing the differences between the effective tax rates and the statutory rate
of 34% in both years.
1993 COMPARED TO 1992
REVENUES. Revenues for 1993 were $33,482,504, an increase of $24,439,645, or
approximately 270.3% over 1992 revenues of $9,042,859. Of this increase,
approximately $20,500,000 was due to the effect of the acquisitions of
Preferred, PVNS, and Advance, the largest impact being PVNS which was
approximately $18,900,000. The remaining increase in revenues of approximately
$4,000,000, or about 44%, over 1992, was the result of continued growth in the
number of patients treated at the Company's Virginia operation, the continual
expansion of nursing services provided at the Company's Houston facility and an
increase in the number of infusion therapy patients treated. All of the
Company's primary locations realized revenues that were greater than 1992.
Although the Company's revenues have been affected by changes in reimbursement
policies and reimbursement rates of various third party payors, as discussed
below, it is impossible for the Company to determine the exact magnitude of this
effect.
DIRECT PATIENT CARE COSTS. Costs of direct patient care of $21,411,834 in 1993,
as compared to $5,505,562 in 1992, increased as a percentage of revenues from
60.9% in 1992 to 63.9% in 1993. This percentage increase results from the
acquisition of PVNS which is primarily a provider of nursing services. Such
services are more labor intensive than were the Company's operations prior to
this acquisition, which consisted of a larger percentage of infusion therapy
services. Without PVNS, the percentage would have decreased as a result of
adjustments made by the Company's management in the latter part of 1992 to
increase operating efficiency. The Company continues to experience increased
involvement by payors in referring and managing patients; consequently, there is
increasing pressure to constantly evaluate direct patient care expenses to
ensure continued efficiency in delivery of care. The Company makes extensive use
of personnel who are paid on a "per patient visit" basis ("contract" personnel).
This enables the Company to adjust its personnel costs to respond to changes in
reimbursement while not being burdened with a large full-time staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $9,713,604 in 1993, compared to $3,455,313 in 1992,
decreased as a percentage of revenues from 38.2% in 1992 to 29.0% in 1993. This
percentage decrease was attributable to efficiencies resulting from the
integration of the 1993 acquisitions into the Company's operations, as well as
management costs and overhead being spread over a substantially larger base of
operations and related revenues. The increase in such expenses of $6,258,291 in
1993 over 1992 was due primarily to the effect of the Preferred and PVNS
acquisitions, and the expansion of the Virginia operation including the Advance
acquisition, as well as increased expenses at the Company's Houston, Texas
location related to expanded nursing services and approximately $250,000 in
corporate overhead.
14
<PAGE>
PROVISION FOR DOUBTFUL ACCOUNTS. Although the provision for doubtful accounts
increased from $463,216 in 1992 to $622,536 in 1993, the provision decreased as
a percentage of revenues from 5.1% in 1992 to 1.9% in 1993, primarily as the
result of the change in the Company's payor mix. The Company's revenues from
government programs including Medicare and Medicaid increased from approximately
35% in 1992 to 71% in 1993, due primarily to the PVNS acquisition. For the most
part, a contractual allowance is recognized directly against revenues from
government programs as compared to a provision for doubtful accounts on other
payors.
INCOME (LOSS) FROM OPERATIONS. The Company reported income from operations of
$1,734,530 in 1993, a reversal from a loss of $381,232 in the prior year. With
the 1993 acquisitions, the Company is approaching a size at which certain fixed
expenses may be more easily absorbed by the larger amount of revenues and more
operating efficiencies may be realized.
INTEREST EXPENSE. Interest expense increased $325,345 in 1993 over such expense
of $94,030 in 1992, primarily as a result of interest on debt incurred in
connection with the PVNS acquisition effective May 1, 1993 and the increase in
the Company's credit facilities and borrowings thereunder, resulting from the
need for additional working capital to fund the Company's operations and growth,
including the post acquisition operations of PVNS.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate in 1993
was 35.7% compared to an effective tax rate benefit of 34.1% in 1992, resulting
from the loss incurred in that year. See Note 8 to the accompanying consolidated
financial statements for more detailed information concerning the items causing
the difference between the 1993 effective tax rate and the statutory rate of
34%.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, the level of the
Company's cash and working capital and its current and debt-to-equity ratios.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLAR AMOUNTS, NOT RATIOS, IN THOUSANDS)
AS OF DECEMBER 31: 1994 1993 1992
----- ---- ----
CASH, CASH EQUIVALENTS &
SHORT-TERM INVESTMENTS $1,523 $2,129 $ 453
WORKING CAPITAL 3,807 1,908 2,026
CURRENT RATIO 1.45 1.22 2.42
DEBT TO EQUITY RATIO 2.40 1.68 1.16
GENERAL
The Company has entered into various debt obligations with its primary lender
(the "Bank") and others, including the former owners of acquired companies,
resulting in total outstanding borrowings of $11,088,000 at December 31, 1994.
At such date, the Company had borrowing availability of $500,000 under its
revolving credit facilities with the Bank. The terms and other information
regarding such borrowings are described more fully in Notes 5 and 6 to the
accompanying consolidated financial statements. 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.
15
<PAGE>
The Company's stockholders' equity at December 31, 1994 was $8,003,088,
which increased approximately $380,000 from December 31, 1993.
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The Company's current total debt will require approximately $2,250,000 for
principal and interest payments during the twelve months ending December 31,
1995, based on the assumptions that interest rates and the Company's borrowing
levels remain constant. 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 in 1995 of approximately
$337,000, including an amount attributable to compensation and imputed interest,
as more fully described in Note 2 to the accompanying 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 $1,960,000 over the twelve months ending
December 31, 1995. As of December 31, 1994, the Company had no other significant
commitments and no material planned purchases of property and equipment.
Subsequent to December 31, 1994, the Company acquired the PharmaThera Branch, as
more fully described in Note 15 to the accompanying consolidated financial
statements. In connection therewith, the Company obligated itself to pay cash to
the seller in the total amount of up to $622,000 over a period extending through
May 15, 1996. Payments to date of $68,000 have been funded from the Company's
operations, which is also the anticipated funding source for the remaining
obligation. However, if such funds are not available, additional financing will
be required.
Primary sources of liquidity include cash generated from operations, which has
been used to support accounts receivable growth, and amounts available under the
Company's credit facilities with the Bank (see above). During the three years
ended December 31, 1994, the Company's operating activities consumed $1,445,512
of cash, which included $4,130,540 to finance growth in net accounts receivable.
At December 31, 1994, approximately $1,800,000 was being withheld by Medicare
intermediaries in connection with (i) the determination letters issued for the
PVNS June 30, 1990 and 1991 Cost Reports which have been reopened (approximately
$1,630,000) and (ii) certain PRN Nevada Cost Reports that have been settled
after reopening for which such withheld funds are to be returned to the Company
(approximately $170,000). A lump sum payment of approximately $500,000 was also
due from the Medicare intermediary at December 31, 1994 for the 1994 PVNS cost
reporting period. Such amounts were somewhat offset by accelerated Medicare
payments to the Company totalling approximately $1,450,000 for the 1994 PRN
Nevada cost reporting period. All such amounts, with a net balance of
approximately $850,000, were included in accounts receivable in the accompanying
consolidated balance sheet at December 31, 1994. In February 1995, the lump sum
payment of $500,000 was received by the Company, and in January and February
1995, approximately $1,210,000 of the accelerated payments received by PRN
Nevada were repaid, resulting in approximately $240,000 that is unpaid as of
March 27, 1995. Thus, the Medicare intermediaries are currently withholding
funds in the net amount of approximately $1,560,000, of which a large portion is
expected to be returned to the Company during 1995. Also, certain collection
delays have been encountered on the PRN Nevada Medicaid accounts receivable
which had an outstanding balance of approximately $711,000 at December 31, 1994,
an increase of approximately $337,000 since the April 1, 1994 acquisition date.
A substantial portion of such receivables is expected to be collected by the
Company during 1995. While the Company believes that it is taking appropriate
actions to collect the amounts described above and to manage its investment in
accounts receivable, its anticipated growth may continue to require cash for
working capital in excess of cash generated from operations.
16
<PAGE>
Taking into account the Company's commitments, 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, 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. In addition, at
December 31, 1994, the Company had approximately $9,500,000 of indebtedness due
in 1996, consisting primarily of its revolving credit facilities which mature in
March 1996 and the New Term Note which matures in June 1996. The Company expects
that such indebtedness will be refinanced prior to maturity, although there is
no assurance that such debt will be successfully refinanced.
YEAR END 1994 COMPARED TO YEAR END 1993
Working capital increased by approximately $1,899,000 from December 31, 1993 to
December 31, 1994 and the current ratio increased from 1.22 at December 31, 1993
to 1.45 at December 31, 1994, primarily due to the extension of certain of the
Company's debt maturities into 1996, a portion of which was classified as
current at December 31, 1993. Accounts receivable, net of reserves, at December
31, 1994 increased by approximately $2,000,000, or 26%, from December 31, 1993,
due to the Company's growth in revenues, which resulted primarily from the
Company's various acquisitions, the growth of the Company's existing operations,
and other matters as set forth above. Additionally, accounts payable and accrued
liabilities increased by approximately $225,000 and accrued compensation and
benefits increased by approximately $677,000 from December 31, 1993 to December
31, 1994. For the year ending December 31, 1994, net cash of approximately
$2,733,000 was provided from financing activities, while the Company used cash
of approximately $1,262,000 for operating activities during this period. In
1994, the Company used cash of approximately $285,000 in the acquisition of
STAT, approximately $908,000 in the acquisition of PRN Nevada, and approximately
$670,000 to acquire property and equipment.
The Company received proceeds, net of offering costs, of $2,627,315 from its
Warrant Offering completed in December 1993. In 1994, $1,981,000 of such
proceeds were used to repay principal on the debt incurred to acquire PVNS. The
remaining proceeds were utilized for working capital purposes. No similar
offering of the Company's common stock or other equity securities occurred in
1994.
YEAR END 1993 COMPARED TO YEAR END 1992
Working capital decreased by approximately $118,000 from December 31, 1992 to
December 31, 1993 and the current ratio decreased from 2.42 at December 31, 1992
to 1.22 at December 31, 1993, primarily due to working capital needs caused by
the Company's recent growth. Accounts receivable, net of reserves, increased by
approximately $5,005,000, or 193%, from December 31, 1992 due to the Company's
growth in revenues, which resulted primarily from the PVNS acquisition. This
increase was partially offset by an increase in accounts payable and accrued
liabilities of approximately $1,376,000 and accrued compensation and benefits of
approximately $1,547,000 from December 31, 1992 to December 31, 1993. For the
year ended December 31, 1993, the Company had cash flow from operating
activities of approximately $42,000 with additional net cash of approximately
$7,455,000 being provided from financing activities. The Company used cash of
approximately $5,300,000 in the acquisition of PVNS, approximately $375,000 in
the acquisition of Advance and approximately $169,000 to acquire property and
equipment.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, a new standard (Statement of Financial Accounting Standards No.
121) was issued which covers the accounting for the impairment of long-lived
assets such as "excess cost over net assets of acquired companies." The Company
believes that its existing impairment policy is substantially similar to the new
requirements. Accordingly, the new standard, which is required to be adopted no
later than January 1, 1996, was adopted effective January 1, 1995, as encouraged
by the standard. The adoption of this new standard did not have a material
effect on the Company's financial position or results of operation.
The Index to Financial Statements and Notes to Financial Statements of Medical
Innovations, Inc., referred to in Item 14 (a)(1) of this Report is included at
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Stockholders.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. and 2. The Company's consolidated financial statements and required
schedules thereto are indexed on page F-1 and appear on pages F-2 through F-22
of this report.
3. Exhibits are listed on the following pages. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this Form
10-K is indicated by an asterisk (*) below.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
3.1 Certificate of Incorporation of the Registrant. (2) (Exhibit 2.1)
3.1(a) Certificate of Amendment of the Certificate of Incorporation of the Registrant. (filed herewith)
3.2 By-Laws of the Registrant. (3) (Exhibit 28.2)
3.2(a) Resolution of the Board of Directors dated October 28, 1994, pursuant to Section 2.01 of the
By-Laws of the Registrant, fixing the number of directors at five (5). (10)
4.1 Specimen Unit Certificate (including Specimen Certificate for Shares of Common Stock. (1)
(Exhibit 4.1(a))
9.2 Voting Trust Agreement dated November 19, 1992. (5) (Exhibit 1.2)
9.4 Voting Trust Agreement dated June 28, 1993. (5) (Exhibit 8 of Amendment No. 3)
10.6 Employment Agreement between the Registrant and Thomas J. Kaled, dated May 31, 1989. (3)
(Exhibit 28.9)*
10.6(a) Amendment No. 1 to Employment Agreement with Thomas J. Kaled, dated November 13, 1992. (4)*
10.6(b) Amendment to Employment Agreement with Thomas J. Kaled, dated December 21, 1993. (8)*
10.8 1988 Stock Option Plan of the Registrant, as amended. (3) (Exhibit 28.11)*
10.8(a) Amendment No. 2 to 1988 Stock Option Plan. (8)*
10.8(b) 1993 Employee Stock Option Plan of the Registrant. (8)*
10.8(c) 1993 Executive Security Stock Option Plan of the Registrant. (8)*
10.9 Employment Agreement between the Registrant and Larry Campbell, dated as of August 8, 1993. (7)
(Exhibit 10.10(a))*
10.9(a) Amendment to Employment Agreement with Larry Campbell, dated as of December 6, 1993. (8)*
10.11 Employment Agreement between the Registrant and David C. Horn, dated as of December 6, 1993. (8)*
10.11(a) Amendment to Employment Agreement between the Registrant and David C. Horn, dated July 5, 1994.
(9)*
10.12 Warrant Agreement between the Registrant and Luis Campos, dated as of March 29, 1992. (7)
(Exhibit 10.12)*
10.13 Credit Agreement by and between the Registrant and Texas Commerce Bank National Association, dated
March 23, 1994, and attachments. (8)
10.13(a) Credit Agreement by and between Physician's Visiting Nurse Service, Inc. and Texas Commerce Bank
National Association, dated March 23, 1994, and attachments. (8)
10.13(d) Third Amendment to Credit Agreement by and between Registrant and Texas Commerce Bank National
Association, dated December 22, 1994, and attachments. (filed herewith)
10.13(e) Third Amendment to Credit Agreement by and between Physician's Visiting Nurse Service, Inc. and
Texas Commerce Bank National Association, dated December 22, 1994, and attachments. (filed
herewith)
10.16 Warrant Agreements and Certificates by and between the Registrant and Harvey R. Houck, Jr., dated
as of July 21, 1993. (8)
10.17 Warrant Agreements and Certificates by and between the Registrant and Mark H. Fisher, dated as of
July 21, 1993. (8)
10.20(b) Amended Credit and Financing Support Agreement by and among the Registrant and Mark H. Fisher,
Harvey R. Houck, Jr. and John Schurwon, dated August 12, 1994, and attachments. (9)
10.21 Purchase Agreement by and among the Registrant and Physician's Visiting Nurse Service, Inc., Jerry
W. Simpkins, Julia Ann Lee, and Edward A. McCarthy, Jr., dated June 29, 1993, and attachments. (6)
(Exhibit 2.1)
10.21(a) Settlement Agreement and Mutual Release by and among Registrant, Physician's Visiting Nurse
Service, Inc., Jerry W. Simpkins, Julia Ann Lee, and Edward A. McCarthy, Jr., dated November 18,
1994, and attachments. (12) (Exhibit 99.1)
10.27 Amended and Restated Warrant Agreement and Certificate by and between Registrant and Mark H.
Fisher, dated March 23, 1994. (8)
10.28 Employment Agreement between the Registrant and Douglas S. Johnston, dated May 1, 1994. (9)*
10.31 Promissory Note by and between Registrant and Texas Commerce Bank National Association, dated
June 6, 1994, and attachments. (9)
10.31(a) Renewal Promissory Note by and between Registrant and Texas Commerce Bank National Association,
dated December 22, 1994, and attachments. (filed herewith)
10.32 Promissory Note by and between Physician's Visiting Nurse Service, Inc. and Texas Commerce Bank
National Association, dated June 6, 1994, and attachments. (9)
10.32(a) Renewal Promissory Note by and between Physician's Visiting Nurse Service, Inc. and Texas
Commerce Bank National Association, dated December 22, 1994, and attachments. (filed herewith)
10.33 Promissory Note by and between PRN Home Health Care, Inc. and Texas Commerce Bank National
Association, dated December 8, 1994, and attachments. (filed herewith)
10.34 Revolving Promissory Note by and between Registrant and Texas Commerce Bank National Association,
dated December 22, 1994, and attachments. (filed herewith)
10.35 Revolving Promissory Note by and between Physician's Visiting Nurse Service, Inc. and Texas
Commerce Bank National Association, dated December 22, 1994, and attachments. (filed herewith)
10.36 Promissory Note by and between Registrant and Texas Commerce Bank National Association, dated
December 22, 1994, and attachments. (filed herewith)
10.37 Stock Purchase Agreement by and among Registrant, Robert Gentile, and PRN Home Health Care, Inc.
of Nevada and its affiliated companies, dated June 29, 1994, and attachments. (11) (Exhibit 2.1)
11 Computation of Per Share Earnings (filed herewith)
22 List of Subsidiaries of the Company (filed herewith)
</TABLE>
(1) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Registration Statement No.
33-22898-D on Form S-18 dated July 19, 1991.
(2) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Registration Statement on Form
8-A dated May 26, 1989.
(3) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Form 8-K dated May 31, 1989.
(4) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992.
(5) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number, of
the Schedule 13D dated November 19, 1992 filed on behalf
of Mark H. Fisher, or amendments thereto.
(6) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Registrant's Report on Form 8-K, dated June
29, 1993.
(7) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number, as
filed with the Company's Registration Statement No.
33-68618 on Form S-1 dated September 13, 1993, or
Amendments thereto.
(8) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Annual Report on Form 10-K for the year
ended December 31, 1993.
(9) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.
(10) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
(11) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Registrant's Report on Form 8-K, dated June
29, 1994.
(12) Incorporated by reference from the like-numbered exhibits,
or parenthetically noted exhibit if a different number,
filed with the Registrant's Report on Form 8-K, dated
December 15, 1994.
(b) Reports on Form 8-K since the filing of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
The Company filed a report on Form 8-K dated December 15, 1994,
reporting under Item 5, pertaining to the Registrant's settlement
of acquisition matters with the former owners of Physician's
Visiting Nurse Service, Inc.
(c) Required exhibits are attached hereto and are listed in Item
14(a)3. of this report.
(d) Required financial statement schedules are attached hereto and
are listed in Item 14(a)2. of this report.
23
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: January 2, 1996 MEDICAL INNOVATIONS, INC.
(Registrant)
By: /S/ MARK H. FISHER
Mark H. Fisher,
President and Chief Executive Officer
24
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
1994 FORM 10-K ANNUAL REPORT
ITEMS 8 AND 14(A)(1) AND (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Accountants F-2
Consolidated Financial Statements as of December 31, 1994
and 1993 and for the Years Ended December 31, 1994,
1993 and 1992:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules as of December 31, 1994
and 1993 and for the Years Ended December 31, 1994,
1993 and 1992:
Schedule VIII - Valuation and Qualifying Accounts F-22
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the Notes
thereto.
F-1
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1994 1993
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................ $ 1,322,407 $ 1,929,237
Short-term investments ............................... 201,000 200,000
Accounts receivable, net ............................. 9,596,884 7,596,621
Inventories .......................................... 257,360 261,230
Deferred income taxes ................................ 347,047 186,274
Other ................................................ 586,311 318,321
----------- -----------
Total current assets ............................ 12,311,009 10,491,683
Property and equipment, net .............................. 1,904,443 674,462
Excess cost over net assets of acquired companies,
net of amortization of $438,896 and $133,304 ......... 12,258,000 8,667,653
Other, net ............................................... 767,353 622,878
----------- -----------
Total assets .................................... $27,240,805 $20,456,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and other debt ......................... $ 1,764,331 $ 1,376,592
Subordinated note payable to related parties ......... -- 1,945,000
Accounts payable and accrued liabilities ............. 2,441,347 2,216,302
Accrued compensation and benefits .................... 2,450,995 1,774,423
Reserve for government program settlements ........... 1,784,256 893,126
Income taxes payable ................................. 62,773 378,034
----------- -----------
Total current liabilities ....................... 8,503,702 8,583,477
Notes payable and other debt ............................. 10,022,975 717,637
Subordinated note payable to related parties ............. -- 3,532,370
Other accrued liabilities ................................ 678,236 --
Deferred income taxes .................................... 32,804 --
----------- -----------
Total liabilities ............................... 19,237,717 12,833,484
----------- -----------
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, 12,566,400 and 12,989,448 shares
issued and outstanding ............................ 94,248 97,421
Additional paid-in capital ........................... 6,702,047 7,123,004
Retained earnings .................................... 1,206,793 402,767
----------- -----------
Total stockholders' equity ...................... 8,003,088 7,623,192
Commitments and contingencies ----------- -----------
Total liabilities and stockholders' equity ...... $27,240,805 $20,456,676
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
---- ---- ----
Revenues .............................. $59,110,330 $33,482,504 $ 9,042,859
----------- ----------- -----------
Costs and expenses:
Direct patient care ................ 37,749,829 21,411,834 5,505,562
Selling, general and administrative 18,487,214 9,713,604 3,455,313
Provision for doubtful accounts .... 892,611 622,536 463,216
----------- ----------- -----------
Total costs and expenses ..... 57,129,654 31,747,974 9,424,091
----------- ----------- -----------
Income (loss) from operations ......... 1,980,676 1,734,530 (381,232)
Gain on sale of minority interest ..... 128,500 -- --
Interest expense ...................... 868,680 419,375 94,030
----------- ----------- -----------
Income (loss) before income taxes ..... 1,240,496 1,315,155 (475,262)
Provision (benefit) for income taxes .. 436,470 469,465 (161,963)
----------- ----------- -----------
Net income (loss) ..................... $ 804,026 $ 845,690 $ (313,299)
=========== =========== ===========
Net income (loss) per common and common
equivalent share ................. $ .06 $ .07 $ (.04)
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding .... 14,423,499 13,263,197 7,187,652
=========== =========== ===========
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK Additional Retained
-------------------------- paid-in earnings
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 ................................. 6,431,376 $ 48,235 $ 959,807 $ (129,624) $ 878,418
Exercise of underwriter warrants ......................... 66,650 500 59,500 60,000
Conversion of subordinated notes
and related accrued interest .......................... 736,743 5,526 620,701 626,227
Private placement ........................................ 2,300,000 17,250 682,750 700,000
Offering costs ........................................... (128,654) (128,654)
Purchase of stock by officer ............................. 6,572 49 1,951 2,000
Warrants issued for services ............................. 20,480 20,480
Net loss ................................................. (313,299) (313,299)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1992 ............................... 9,541,341 71,560 2,216,535 (442,923) 1,845,172
Stock issued for acquisitions of:
Preferred ........................................... 300,000 2,250 89,055 91,305
PVNS ................................................ 1,100,000 8,250 1,575,248 1,583,498
Advance ............................................. 203,934 1,530 380,845 382,375
Warrants issued for debt guarantees ...................... 200,000 200,000
Exercise of warrants from public offering ................ 1,796,336 13,472 2,879,921 2,893,393
Offering costs ........................................... (266,078) (266,078)
Stock issued for services ................................ 47,837 359 47,478 47,837
Net income ............................................... 845,690 845,690
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1993 ............................... 12,989,448 97,421 7,123,004 402,767 7,623,192
Stock issued for acquisition of PRN Nevada ............... 380,952 2,857 747,143 750,000
Tax benefit of warrants exercised ........................ 38,282 38,282
Stock returned in connection with PVNS settlement
and subsequently cancelled ............................ (850,000) (6,375) (1,268,625) (1,275,000)
Exercise of stock options, including tax benefit ......... 46,000 345 62,243 62,588
Net income ............................................... 804,026 804,026
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 ............................... 12,566,400 $ 94,248 $ 6,702,047 $ 1,206,793 $ 8,003,088
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ............................................... $ 804,026 $ 845,690 $ (313,299)
Noncash adjustments:
Depreciation and amortization ................................. 933,574 431,194 153,810
Deferred income taxes ......................................... 388 99,380 (48,446)
Provision for doubtful accounts ............................... 892,611 622,536 463,216
Income recognized in connection with
PVNS settlement ............................................. (285,016) -- --
Imputed interest expense ...................................... 32,010 50,000 --
Loss on sale of property and equipment ........................ 8,530 3,616 3,282
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ......................................... (2,246,355) (3,045,990) (816,658)
Income taxes ................................................ 111,073 520,284 1,945
Other assets ................................................ (222,833) (214,414) (6,863)
Accounts payable and accrued liabilities .................... (355,429) 729,211 338,309
Reserve for government program settlements .................. (934,894) -- --
----------- ----------- -----------
Net cash used by operating activities ....................... (1,262,315) 41,507 (224,704)
----------- ----------- -----------
Cash flows from investing activities:
Sale (purchase) of short term investments, net .................. -- 447,027 (447,027)
Acquisition of PVNS ............................................. -- (5,300,654) --
Acquisition of Advance .......................................... -- (374,873) --
Acquisition of STAT ............................................. (276,992) -- --
Acquisition of PRN Nevada ....................................... (907,533) -- --
Acquisition expenses ............................................ (97,021) (133,579) --
Purchases of property and equipment ............................. (680,341) (168,518) (120,850)
Disposals of property and equipment ............................. 10,543 7,447 22,491
Other assets .................................................... (125,837) (50,012) (124,447)
----------- ----------- -----------
Net cash used by investing activities ..................... (2,077,181) (5,573,162) (669,833)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from notes payable ................... $ 9,949,088 $ 797,976 $ 63,933
Proceeds from subordinated note and demand
loans payable to related parties ............ 2,600,000 5,500,000 --
Revolving credit facilities:
Borrowings .................................. 15,261,764 4,307,507 310,415
Repayments .................................. (12,036,764) (5,407,507) (143,415)
Payments on notes payable and capital lease
obligations, including related party debt ... (12,836,306) (370,127) (104,000)
Payments on obligation to former owners of PVNS (256,996) -- --
Proceeds from exercise of warrants, net ....... -- 2,627,315 --
Proceeds from issuance of common stock, net ... -- 753,346
Proceeds from exercise of stock options ....... 51,880 -- --
------------ ------------ ------------
Net cash provided by financing activities 2,732,666 7,455,164 880,279
------------ ------------ ------------
Net increase (decrease) in cash and equivalents .. (606,830) 1,923,509 (14,258)
Cash and equivalents at beginning of year ........ 1,929,237 5,728 19,986
------------ ------------ ------------
Cash and equivalents at end of year .............. $ 1,322,407 $ 1,929,237 $ 5,728
============ ============ ============
Cash paid during the period for:
Interest ...................................... $ 860,814 $ 336,843 $ 80,636
Income taxes .................................. 319,376 37,079 --
Noncash transactions (not otherwise disclosed):
Assets acquired under capital lease obligations 640,323 104,872 --
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Medical Innovations, Inc. and its subsidiaries (collectively referred to as the
"Company") specialize in providing intermittent and extended healthcare
services, intravenous therapies and personal care services to patients in their
home and homecare management services to hospitals and other providers under
contractual arrangements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medical
Innovations, Inc. and its majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when services are rendered at the net realizable amounts
expected to be received from payors, patients, and others. Amounts reimbursed by
certain payors of healthcare services are subject to examination and retroactive
adjustment. Anticipated adjustments are accrued on an estimated basis and
adjusted in future periods as the final settlements are determined. Earnings are
also charged with a provision for doubtful accounts based on an ongoing review
of collectibility. Some credit risk exists regarding the financial viability of
insurance company payors; however, historically this has not been significant.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the accompanying statements of cash flows, cash equivalents
include highly liquid investments with original maturities of three months or
less. Similar investments with original maturities beyond three months are
considered short-term investments. Effective January 1, 1994, the Company
adopted a new standard prescribing accounting and disclosure requirements for
certain investments in debt and equity securities. Adoption of this standard had
an immaterial effect since the Company does not have significant investments in
debt and equity securities. Short-term investments consist of a bank certificate
of deposit carried at cost which approximates market value.
INVENTORIES
Inventories consist of medical supplies and pharmaceuticals and are stated at
the lower of cost (first-in, first-out basis) or market.
EXCESS COST OVER NET ASSETS OF ACQUIRED COMPANIES
The purchase price of an acquired company is allocated to the fair value of the
tangible and identifiable intangible (such as contracts) assets and liabilities
of such company as of the effective date of the acquisition, with any excess
cost allocated to "excess cost over net assets of acquired companies" and
amortized on a straight-line basis over forty years. In the acquisition of PVNS,
Advance and PRN Nevada, their respective reputations, locations, growth
potential and significant market shares, combined with (i) the
F-8
<PAGE>
Company's managed care, administrative and related synergies and (ii) each
acquired entity's contribution to the Company's strategy of achieving
geographical strength and economies of scale, were the principal aspects of
value received by the Company. These factors are indicative of going concern
value rather than separate intangible assets and, accordingly, the Company
allocated substantially all of the excess purchase prices for these companies to
this asset.
The Company reviews the carrying value of this asset for potential impairment
based on the facts and circumstances at each balance sheet date. If the review
indicates that impairment may exist, the asset carrying value would be reduced
based on management's assessment of future undiscounted cash flows of the
respective acquired company or companies.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Major additions or improvements to
property and equipment are capitalized and depreciated over the estimated useful
lives of the related assets. Routine maintenance and repair costs are expensed
as incurred. Depreciation is computed on a straight-line basis over estimated
useful lives of three to five years.
OTHER ASSETS
Other assets consist primarily of debt issuance costs, which are deferred and
amortized over the terms of the related debt agreements, and the allocated cost
of purchased customer lists and contracts, which are amortized on a
straight-line basis over their estimated useful lives of five to ten years.
Additionally, costs incurred by the Company to develop its home infusion
software programs for sale to third parties were capitalized and are being
amortized on a straight-line basis over an estimated useful life of five years.
Such costs were capitalized only after technological feasibility was reached as
demonstrated by the successful use in the Company's operations. The rights to
these programs were subsequently sold as described in Note 12 and no further
costs were capitalized; however, the Company retained the right for their use in
its internal operations. Other assets is shown net of accumulated amortization
of $329,722 in 1994 and $149,945 in 1993.
INCOME TAXES
Effective January 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 ("FAS 109"), ACCOUNTING FOR INCOME TAXES.
The adoption of FAS 109 changed the Company's method of accounting for income
taxes from the deferred method (APB 11) to an asset and liability approach.
Previously the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of other assets and liabilities. The adoption of FAS 109
resulted in an insignificant cumulative effect on the Company's financial
position at January 1, 1993.
PER SHARE DATA
Net income (loss) per common and common equivalent 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.
SEGMENT INFORMATION
The Company operates solely within the United States in the home healthcare
industry segment.
F-9
<PAGE>
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform with their
1994 presentation.
NOTE 2 - ACQUISITIONS AND PRO FORMA INFORMATION:
PREFERRED PHARMACY AND PREFERRED HOMECARE
Effective January 1, 1993, the Company acquired substantially all of the
operating assets, except cash and accounts receivable, of Preferred Homecare,
Inc.("Homecare") and Preferred Pharmacy, Inc. ("Pharmacy" and, collectively with
Homecare, referred to as "Preferred"), for 200,000 and 100,000 restricted shares
of the Company's common stock, respectively. The acquisition was made pursuant
to an option agreement dated November 19, 1992 granted to the Company by the
shareholders of Homecare and Pharmacy as part of the transaction which included
the November 19, 1992 sale of 2,300,000 restricted shares of the Company's
common stock to certain stockholders of Homecare and Pharmacy for an aggregate
of $700,000 in cash. The current president and another director of the Company,
who were not affiliated with the Company prior to the date of the option
agreement, were shareholders of Homecare and Pharmacy. The acquisition was
accounted for by the purchase method. Accordingly, the results of operations of
the acquired companies are included with those of the Company for periods
subsequent to the date of the acquisition.
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"), a provider of skilled
homecare and homemaker services. Consideration for the purchase consisted of
$5,312,000 in cash, 1,100,000 restricted shares of the Company's common stock,
and a note payable to the former owners in the principal amount of $1,000,000.
The Company also entered into agreements to make future payments to 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%. Of the
total obligation of $954,236 at December 31, 1994, $678,236 is included in
noncurrent accrued liabilities in the accompanying consolidated balance sheet at
December 31, 1994. This obligation is secured by accounts receivable of the
Company, is payable in approximately equal monthly installments through June
1998 and is not contingent upon any future event or action by the Company or the
former owners. The acquisition was accounted for by the purchase method.
Accordingly, the results of operations of PVNS are included with those of the
Company for periods subsequent to the effective date of the acquisition.
Substantially all of the purchase price of approximately $9,209,000 has been
allocated to excess cost over net assets of acquired companies.
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 indemnification received by the Company from the former
owners for acquisition contingencies. As a result, the Company assumed and
recorded total estimated liabilities, aggregating approximately $1,265,000,
pertaining to any adjustments from open pre-acquisition Medicare cost
reimbursement reports ("Cost Reports") (see also Note 7) and other matters for
which the Company received the settlement consideration as set forth above. The
Company also recorded pre-tax income of $285,000 in connection with the
settlement, which is a recovery of costs associated with the acquisition
contingencies previously charged against income by the Company after the
acquisition date.
F-10
<PAGE>
ADVANCE HEALTHCARE
Effective September 1, 1993, the Company acquired all of the outstanding common
stock of Advance Healthcare, Inc. ("Advance") for 203,934 restricted shares of
the Company's common stock and $382,375 in cash. The acquisition was accounted
for by the purchase method. Accordingly, the results of operations of Advance
are included with those of the Company for periods subsequent to the date of the
acquisition. Substantially all of the purchase price of approximately $765,000
has been allocated to excess cost over net assets of acquired companies.
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.
PURCHASE PRICE ALLOCATIONS
In addition to industry practice, set forth below are the principal reasons that
a significant portion of the purchase prices of the PVNS, Advance and PRN Nevada
acquisitions was not allocated to the following intangible assets: (1) there
were no formal or informal contracts acquired except for certain PVNS contracts
which were valued at $250,000; (2) physician relationships were considered to be
inseparable from going concern value and the relationships were not contractual
and not exclusive; (3) patients have a generally high turnover rate and cannot
be used to expand the business; and (4) the assembled workforce is readily
replaceable at low cost, market rates are paid, clinical expertise is the
responsibility of the employee and no significant proprietary training is
provided.
PRO FORMA INFORMATION
The pro forma combined results of operations of the Company, Preferred, PVNS,
Advance, STAT, and PRN Nevada, for the years ended December 31, 1994 and 1993,
after giving effect to certain pro forma adjustments and assuming the
acquisitions had been completed effective January 1, 1993, are as follows:
F-11
<PAGE>
1994 1993
---- ----
(Unaudited) (Unaudited)
Revenue .................................. $62,043,000 $53,247,000
Net income ............................... $ 819,000 $ 1,109,000
Net income per common and
common equivalent share ............... $ .06 $ .08
The pro forma information is not necessarily indicative of results which may
occur in the future.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable at December 31, consisted of the following:
1994 1993
---- ----
Accounts receivable .......................... $10,325,040 $ 8,168,951
Less allowance for doubtful accounts ......... 728,156 572,330
----------- -----------
$ 9,596,884 $ 7,596,621
=========== ===========
A large portion of the Company's revenues is derived from services to
beneficiaries of government health programs. The percentages of the Company's
net revenues derived from Medicare and state government programs were
approximately 56% and 25% in 1994, 44% and 27% in 1993, and 22% and 13% in 1992,
respectively.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consisted of the following:
1994 1993
---- ----
Furniture and fixtures ........................... $ 1,307,793 $ 518,117
Equipment, including computers ................... 1,455,858 734,341
Transportation equipment ......................... 290,197 240,112
Leasehold improvements ........................... 167,365 84,953
----------- -----------
3,221,213 1,577,523
Less accumulated depreciation and amortization ... (1,316,770) (903,061)
----------- -----------
$ 1,904,443 $ 674,462
=========== ===========
Property and equipment under capital leases and the accumulated amortization
thereon totalled $816,088 and $134,253, respectively, at December 31, 1994,
and $144,094 and $27,281, respectively, at December 31, 1993.
Depreciation expense totalled $418,326 in 1994, $179,535 in 1993 and $127,418 in
1992.
F-12
<PAGE>
NOTE 5 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Bank revolving credit facilities ........................ $ 3,425,000 $ 200,000
Notes payable to Bank ................................... 5,450,000 --
Term note payable to Bank ............................... 400,000 670,650
Notes payable to former owners of PVNS .................. 752,638 1,000,000
Note payable to former owner of PRN Nevada .............. 708,333 --
Notes payable to Bank and others in monthly installments
totalling $9,863, including interest ranging from prime
(8.5% at December 31,1994) to 14% with various maturities
through 1998, secured by property and equipment ......... 351,931 139,474
Capital lease obligations ............................... 699,404 84,105
------------ ------------
11,787,306 2,094,229
Less current portion .................................... (1,764,331) (1,376,592)
------------ ------------
Noncurrent portion ...................................... $ 10,022,975 $ 717,637
============ ============
</TABLE>
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. A substantial portion of the proceeds of the March
1994 refinancing was used to repay the then outstanding credit facility balances
and a term note with the Bank that had a balance of $670,650 at December 31,
1993. The new credit facilities, which bear interest at prime plus 1/4% (8.75%
at December 31, 1994), a decrease from the prior rate of prime plus 1/2%, are
secured by a first priority lien on 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 certain
additional indebtedness and the payment of dividends. At December 31, 1994, 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 which matures June 4,
1995. This credit facility bears interest at 8.25%.
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% (7.5% at December 31, 1994) 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.
F-13
<PAGE>
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 (8.
5% at December 31, 1994), commenced January 31, 1995. The note is secured by a
first priority lien on 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 a subordinated lien on 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. Such repayment was
required to be applied to principal in inverse order of maturity and is
classified as a current liability in the accompanying consolidated balance sheet
at December 31, 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 2. 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 (8.5% at December 31, 1994). On June 28, 1995, the interest
rate increases to prime plus 1%. At December 31, 1994, the principal balance of
the PVNS Note was $294,002.
In November 1994, the Company borrowed $458,636 of previously escrowed cash from
the former owners of PVNS for working capital purposes which was necessitated
due to funds being withheld from the Company by a Medicare intermediary for
settlements due on preacquisition PVNS Cost Reports. 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 (8.5% at December 31, 1994)
through June 30, 1995 and then prime plus 1% through maturity.
NOTE PAYABLE TO FORMER OWNER OF PRN NEVADA
In connection with the Company's acquisition of PRN Nevada, the Company issued
an $850,000 note payable to the former owner of PRN Nevada. The note bears
interest at prime (8.5% at December 31, 1994), 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.
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.
F-14
<PAGE>
FUTURE MINIMUM MATURITIES
Future minimum maturities of the above described notes payable and other debt
outstanding at December 31, 1994, were as follows:
1995 $ 1,764,331
1996 9,476,762
1997 417,938
1998 93,804
1999 and thereafter 34,471
----------
$11,787,306
NOTE 6 - SUBORDINATED NOTE PAYABLE:
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the Payees. During 1993, principal of $22,630 was repaid, resulting
in a principal balance outstanding of $5,477,370 at December 31, 1993. 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 (see
Note 11). Such repayment was required to be applied to principal in inverse
order of maturity and is classified as a current liability in the accompanying
consolidated balance sheet at December 31, 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 as described in Note 5.
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 described in Note 5, 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 December 31, 1994, the aggregate
principal outstanding on the New Term Note and the PVNS Note was $5,744,002. At
all other times after warrant exercise, the holders of the preferred stock have
the right to 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.
NOTE 7 - 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. Such adjustments which affect income are
included in revenue.
F-15
<PAGE>
As more fully described in Note 2, 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 the total 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 increased the reserve for estimated
final adjustments to these open Cost Reports to approximately $975,000 from
$20,000 for amounts that were previously the responsibility of the former owners
of PVNS. The post acquisition PVNS Cost Reports also remain open for examination
and a reserve of approximately $180,000 has been established for 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, which amounted to approximately $530,000 at December 31, 1994. The Cost
Reports for the post acquisition period are also open for examination and a
reserve of $50,000 has been established for estimated adjustments thereto.
In reviewing its reserve for government program settlements for adequacy, the
Company considers, among other factors, recent Medicare intermediary audit
results, the effect of final adjustments on open Cost Reports, recent
interpretations of regulations and cost reporting principles, and other
available current information. In accordance with the Company's policy of
periodic evaluation of the reserve, the reserve of $893,000 attributable to the
PVNS preacquisition Cost Reports was reduced by $533,000 and taken to income.
Such acquisition date reserve was considered necessary due to the magnitude of
the audit adjustments proposed by the intermediary as of that date. The reserve
reduction resulted from settlements and audit notifications for preacquisition
PVNS Cost Reports received from the intermediary more than one year after the
PVNS acquisition date. Of the reserve reduction, $200,000 was recorded effective
June 21, 1994 in the second quarter of 1994 when the Company received final
audit results for the June 30, 1992 PVNS Cost Report and $333,000 was recorded
in the third quarter of 1994 when the Company was notified of the revised audit
adjustments for the June 30, 1990 and 1991 PVNS Cost Reports. Subsequently, the
Company assumed liability for all prior Cost Reports pursuant to the PVNS
settlement described above. In early 1994, the Company also recorded $138,000 as
a reduction in "excess cost over net assets of acquired companies" due to a
favorable result in connection with the 1988 Cost Report which was determined
prior to the end of the PVNS acquisition allocation period. Expense of $54,000
was also recorded in 1994 related to changes in estimates for post-acquisition
cost reporting periods.
As a result of the foregoing, management believes the Company's reserve for
government program settlements is adequate to cover estimated 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.
NOTE 8 - INCOME TAXES:
The provision (benefit) for income taxes for the years ended December 31,
consisted of the following:
1994 1993 1992
---- ---- ----
Federal:
Current .......................... $ 447,742 $ 528,460 $(115,919)
Deferred ......................... (42,272) 1,600 (48,446)
Change in deferred tax
asset valuation allowance ..... -- (100,980) --
State ................................ 31,000 40,385 2,402
--------- --------- ---------
$ 436,470 $ 469,465 $(161,963)
========= ========= =========
F-16
<PAGE>
The tax effects of temporary differences related to deferred tax assets
(liabilities) at December 31, consisted of the following:
1994 1993
---- ----
Prepaid expenses ............................. $ (99,467) $ (72,420)
Depreciation and amortization ................ (44,431) (65,946)
Other ........................................ -- (4,008)
--------- ---------
Deferred tax liabilities ............ (143,898) (142,374)
--------- ---------
Provision for doubtful accounts .............. 220,619 146,992
Accruals not currently deductible ............ 132,909 74,043
Compensation ................................. 92,886 22,273
Covenants not to compete ..................... 11,627 85,340
--------- ---------
Deferred tax assets ................. 458,141 328,648
--------- ---------
Net deferred tax asset .............. $ 314,243 $ 186,274
========= =========
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the years ended December 31:
1994 1993 1992
---- ---- ----
Federal income taxes at statutory rates .......... 34.0% 34.0% (34.0)%
Nondeductible amortization ....................... 8.1 3.5 --
Other permanent differences ...................... 1.6 5.3 1.1
Utilization of operating loss carryforwards ...... -- (4.0) --
Income tax effect of PVNS settlement ............. (7.8) -- --
Subsidiary losses not benefitted ................. -- -- 9.0
State income taxes ............................... 2.5 3.1 .5
Permanent tax deductions related to
subsidiary liquidations ........................ -- -- (11.1)
Change in deferred tax asset valuation
allowance ...................................... -- (7.7) --
Changes in prior year estimates and other ........ (3.2) 1.5 .4
----- ----- -----
Effective income tax rate ........................ 35.2% 35.7% (34.1)%
===== ===== =====
The Company adopted FAS 109 effective January 1, 1993, resulting in a change in
accounting for income taxes from the deferred method to an asset and liability
approach. The change in accounting method includes the recognition of a deferred
tax asset related to a covenant not to compete that was previously expensed for
financial reporting purposes. A deferred tax asset for the covenant was not
previously recognized. Recognition of this asset under FAS 109 did not have a
material impact on the Company's January 1, 1993 balance sheet as management's
assessment at the time indicated that the amount should have been fully offset
by a deferred tax asset valuation allowance. During the fourth quarter of 1993,
the Company determined, based principally on consistent 1993 earnings, that the
future tax benefits associated with this deferred tax asset would most likely be
realized and release of the valuation allowance in the amount of $100,980 was
therefore appropriate.
F-17
<PAGE>
NOTE 9 - EMPLOYEE BENEFIT PLANS:
The Company provides 401(k) savings plans for its employees who may contribute
up to a certain percentage of their annual gross wages into the plans, with the
Company matching the employees' contributions up to certain levels, as defined
in the plans. Company contributions were $124,011 in 1994, $23,888 in 1993, and
$21,874 in 1992.
NOTE 10 - STOCK OPTIONS:
In May 1988, the Company adopted the 1988 Stock Option Plan, as amended in May
1989 and December 1993 ("1988 Plan"), which reserves 600,000 common shares for
issuance to officers, directors and employees of the Company. In December 1993,
the Company adopted the 1993 Employee Stock Option Plan ("1993 Plan") which
reserves 1,000,000 common shares for issuance to officers and employees of the
Company.
Options under the 1988 and 1993 Plans are granted at an exercise price equal to
at least 100% of the fair market value of the common stock on the date of grant
in the case of incentive stock options. Nonqualified option grants are at 85% of
the fair market value under the 1988 Plan and as determined by the Stock Option
Committee under the 1993 Plan. All options generally vest over a five year
period from the date of grant and expire within ten years. The Plans restrict
the rights to exercise based on employment status and percentage of stock
ownership in accordance with Section 422 of the Internal Revenue Code.
The following schedule summarizes the changes in options outstanding under the
1988 and 1993 Plans:
SHARES PRICE RANGE
------ -----------
Outstanding, December 31, 1991 ............ 405,000 $ .85 - 1.67
Granted .............................. 182,500 .60 - 1.30
Cancelled ............................ (35,000) .85 - 1.14
------------
Outstanding, December 31, 1992 ............ 552,500 .60 - 1.67
Granted .............................. 350,000 1.38 - 1.94
Cancelled ............................ (52,500) .60 - 1.67
------------
Outstanding, December 31, 1993 ............ 850,000 .60 - 1.94
Granted .............................. 405,000 1.38 - 2.13
Exercised ............................ (46,000) .60 - 1.67
Cancelled ............................ (97,500) .60 - 1.67
------------
Outstanding, December 31, 1994 ............ 1,111,500
=============
At December 31, 1994, options to purchase 302,000 shares were exercisable and
options to purchase 442,500 shares were available for future grant.
In December 1993, the Company also adopted the 1993 Executive Security Stock
Option Plan ("1993 Executive Plan") which reserves 500,000 common shares for
issuance to officers of the Company. The option price for all grants under the
1993 Executive Plan is $.50 per share. The options are exercisable only if the
officer's employment is terminated without cause or a majority of the issued and
outstanding common shares is acquired by a person or group not including the
current president of the Company. The Company will
F-18
<PAGE>
recognize compensation expense related to these options if and when such events
occur. Two officers have been granted a total of 325,000 nonqualified options
under the 1993 Executive Plan. None of the options are currently exercisable.
The options expire in ten years.
Effective April 1992, the Company granted stock options (not included in the
1988 Plan or 1993 Plans described above) to the then president of the Company
and a current officer and director of the Company in connection with the
extension of their employment agreements. Each stock option entitles the holder
to purchase a total of 250,000 restricted shares of the Company's common stock
at $1.50 per share. The options fully vest and are exercisable on January 1,
1996. The options expire on April 29, 1996. In June 1992, the Company granted a
similar stock option for 250,000 restricted shares to a director of the Company.
Compensation associated with options granted at less than quoted market value
is expensed over the vesting period and totalled $10,385 in 1994, $18,160 in
1993 and $7,230 in 1992.
NOTE 11 - STOCK WARRANTS:
In connection with the initial public offering in November 1988, the Company had
two classes of outstanding public warrants to purchase a total of 2,666,667
shares of the Company's common stock at prices of $1.50 per share for the Class
A warrants and $2.00 per share for the Class B warrants. Both the Class A and
Class B warrants were scheduled to expire on December 31, 1993; however, on
November 2, 1993, the Company called the public warrants for redemption on or
before December 3, 1993. In connection with the Company's 1993 Warrant Offering,
1,228,557 Class A warrants and 397,779 Class B warrants were exercised and the
Company received gross proceeds of approximately $2,638,000, less offering costs
of approximately $276,000. Any unexercised public warrants expired and were
redeemed by the Company for $.0075 per warrant.
In connection with the initial public offering in November 1988, the underwriter
received options to purchase 10,000 units consisting of a total of 133,334
shares of common stock and 133,333 each of Class A and Class B warrants. During
1991 and 1992, all of the underwriter units were exercised with total proceeds
of $120,000 received by the Company. The Class A and Class B warrants included
in the underwriter units were exercisable at 125% of the exercise price of the
public Class A and Class B warrants and expired December 31, 1993. None of the
warrants were exercised.
In April 1992, the Company entered into an agreement with a consulting firm to
provide services to the Company for a one-year term. In consideration of these
services, the consulting firm was issued warrants to purchase 220,000 shares of
common stock of the Company. In October 1994, 50,000 warrants were redeemed by
the Company for a nominal amount. In connection with the Company's 1993 Warrant
Offering, the remaining 170,000 warrants were exercised at $1.50 per share.
The Company received proceeds of $255,000 from the warrant exercise.
In April 1992, the Company entered into an agreement with an investment banking
firm to provide investment banking services to the Company for a two and
one-half year term. In consideration of these services, the investment banking
firm was granted warrants to purchase up to 350,000 shares of common stock of
the Company at $1.50 per share exercisable from January 1, 1993 to June 30,
1996. The warrants were assigned a value of approximately $16,500, which is
being amortized over the term of the service agreement, and include customary
demand and piggyback registration rights for the underlying shares. As of
December 31, 1994, none of the warrants have been exercised.
F-19
<PAGE>
In May 1992, the Company entered into an agreement with a public relations firm
to provide consultation to the Company. In addition to a monthly fee, the public
relations firm was granted warrants to purchase up to 64,000 shares of the
Company's common stock at $1.56 per share, exercisable immediately for a period
of five years. The warrants were assigned a value of approximately $2,000, which
is being amortized over the term of the service agreement, and include customary
piggyback registration rights for the underlying shares. As of December 31,
1994, none of the warrants have been exercised.
In June 1993, in connection with the issuance of the subordinated note payable
to finance the acquisition of PVNS and a guarantee of the PVNS Note, the Payees
were granted warrants to purchase a total of 1,000,000 shares of the Company's
common stock for the price of $1.45625 per share, which are exercisable anytime
prior to June 29, 1998. As of December 31, 1994, none of the warrants have been
exercised. The warrants were assigned a value of $150,000, which is being
amortized over a five year period, and include customary demand and piggyback
registration rights for the underlying shares. Also, as described in Note 6,
these individuals were granted warrants to purchase preferred stock of the
Company.
On July 21, 1993, in connection with the guarantee of the Company's Bank debt,
including the Bank debt of PVNS, the president and another director of the
Company were also granted warrants to purchase a total of 713,000 shares of the
Company's common stock at prices ranging from $1.2375 to $1.5844 per share,
which are exercisable anytime prior to the one-year anniversary of the date that
their guarantees are no longer required by the Bank. As of December 31, 1994,
none of the warrants have been exercised. The warrants were assigned a value of
$50,000, which is being amortized over a two year period, and include customary
demand and piggyback registration rights for the underlying shares.
NOTE 12 - RELATED PARTY TRANSACTIONS:
As more fully described in Notes 5 and 6, the Company borrowed various amounts
from the president, another director and a shareholder of the Company. All such
loans were repaid as of December 31, 1994. However, these individuals continue
to guarantee and collaterize various borrowings by the Company from unrelated
third parties.
Through April 30, 1994, the president and another director of the Company were
stockholders of a company that sold office supplies to the Company. Total
purchases from this company were $73,708 in 1994, $112,878 in 1993, and $1,178
in 1992.
As described in Note 2, the Company acquired substantially all of the operating
assets of Preferred, of which the president and another director of the Company
were shareholders.
In 1993, as compensation for services rendered in connection with the
Company's acquisition of PVNS, a shareholder was awarded 100,000 shares of
unregistered restricted stock valued at $83,500.
In March 1993, the Company sold the rights to its home infusion software
programs to a start-up company, Sequel Solutions, Inc. ("SSI"), owned by a group
of employees (including a shareholder who was also a director of the Company).
In connection with the sale, the Company received notes of $335,000 which were
reserved to their cost basis of $245,000. No gain was recognized at the sale
date because the Company concluded that the business risks had not transferred
to SSI because it was a thinly capitalized start-up company and the related
party aspects of the transaction. After the sale, the Company provided
personnel, office space and administrative services to SSI in 1993 for which the
Company received a reimbursement of approximately $56,000. The Company utilizes
the software support services provided by SSI for which the Company paid $13,670
in 1994 and $6,610 in 1993. In December 1993, the Company entered into an
F-20
<PAGE>
agreement with the above referenced individual in which the Company exchanged
the aforementioned notes and its future rights to royalties from the SSI
software sales in return for the relinquishment by such individual of all rights
to past and future bonuses stipulated in an employment agreement. As a result of
this agreement, the Company recorded a pretax charge to income of $26,000 in
1993, which is included in general and administrative expenses.
NOTE 13 - LEASE COMMITMENTS:
At of December 31, 1994, future minimum payments under noncancellable lease
obligations for office space and various property and equipment, were as
follows:
Capital Operating
LEASES LEASES
------- -------
1995 $ 254,249 $1,707,752
1996 236,077 1,270,316
1997 209,426 620,470
1998 85,051 116,106
1999 and thereafter ........................... 36,905 3,060
---------- ----------
Total minimum lease payments .................. 821,708 $3,717,704
==========
Less imputed interest ......................... (122,304)
----------
Present value of minimum lease payment ........ 699,404
Less current portion .......................... (193,275)
----------
Noncurrent portion ............................ $ 506,129
==========
The amounts under capital leases above are included in notes payable and other
debt in Note 5.
Rental expense under noncancellable operating leases was $2,389,410 in 1994,
$632,049 in 1993 and $238,160 in 1992.
NOTE 14 - GAIN ON SALE OF MINORITY INTEREST:
In June 1994, the Company sold a 20% ownership interest and a 5% net profits
interest in its then existing Pensacola, Florida homecare business for cash and
realized a pretax gain of $128,500. The acquiring company also holds a 12-1/2%
net profits interest in this business which it received for services provided in
connection with the start-up of this operation in April 1994.
NOTE 15 - SUBSEQUENT ACQUISITION:
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") for cash of
approximately $56,000 and two notes with net obligations totalling approximately
$566,000, which are payable to the seller over six and fifteen-month periods
through May 15, 1996, and are subject to a reduction of up to $100,000 based on
certain performance criteria of the post acquisition operations. The acquisition
will be accounted for by the purchase method. Accordingly, the results of
operations of the PharmaThera Branch will be 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, will be
allocated to purchased contracts and amortized over ten years. The acquisition
of the PharmaThera Branch is not material to the Company's financial position
and results of operations. Accordingly, pro forma combined results of operations
of the Company, including the PharmaThera Branch, are not presented.
F-21
<PAGE>
SCHEDULE VIII
MEDICAL INNOVATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
Balance at Charged to Charged
beginning costs and to other Balance at
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ---------- -------- ---------- -------------
DECEMBER 31, 1994
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts . $ 572,330 $ 892,611 $ 67,000(A) $ 803,785(B) $ 728,156
Reserve for government settlement
programs ..................... 893,126 54,000 974,931(C) 533,000(D) 1,784,256
962,625(A) 567,426(E)
DECEMBER 31, 1993
Allowance for doubtful accounts . 141,553 622,536 285,000(F) 476,759(B) 572,330
Reserve for government settlement
programs ..................... -- 893,126(F) 893,126
</TABLE>
(A) Recorded in connection with the acquisition of PRN Nevada, effective
April 1, 1994.
(B) Bad debts charged off against allowance.
(C) Recorded in connection with PVNS settlement.
(D) Reduction in PVNS reserve credited to income.
(E) Utilization of reserve for settlement of PVNS and PRN Nevada preacquisition
Cost Reports.
(F) Recorded in connection with the acquisition of PVNS, effective May 1, 1993.
F-22
EXHIBIT 11
MEDICAL INNOVATIONS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
PER SHARE EARNINGS
-------------------------------------------------------
`YEARS ENDED DECEMBER 31: 1994 1993 1992
---- ---- ----
PRIMARY:
<S> <C> <C> <C>
Net income (loss) applicable to common stock ...... $ 804,026 $ 845,690 $ (313,299)
Reduce interest expense, net of tax effect,
for assumed debt retirement resulting from
the 20% treasury stock repurchase limitation .... 20,251 125,565 *
----------- ----------- -----------
Net income (loss) to common and
common equivalent shares ....................... $ 824,277 $ 971,255 $ (313,299)
=========== =========== ===========
Weighted average common shares outstanding ........ 13,282,426 10,769,893 7,187,652
Effect of stock options and warrants .............. 1,141,073 2,493,304 *
----------- ----------- -----------
Weighted average common and common
equivalent shares .............................. 14,423,499 13,263,197 7,187,652
=========== =========== ===========
Net income (loss) per common and common
equivalent share - primary ..................... $ 0.06 $ 0.07 $ (0.04)
=========== =========== ===========
FULLY DILUTED:
Net income (loss) applicable to common stock ...... $ 804,026 $ 845,690 $ (313,299)
Reduce interest expense, net of tax effect,
for assumed debt retirement resulting from
the 20% treasury stock repurchase limitation ... 18,024 106,941
----------- -----------
Net income (loss) applicable to common and
common equivalent shares ....................... $ 822,050 $ 952,631 $ (313,299)
=========== =========== ===========
Weighted average common and common
equivalent shares .............................. 14,423,499 13,263,197 7,187,652
Additional effect of stock options and warrant .... -- * *
Weighted average shares issuable upon
conversion of subordinated debt ................. -- -- --
----------- ----------- -----------
Weighted average common and common
equivalent shares ............................... 14,423,499 13,263,197 7,187,652
=========== =========== ===========
Net income (loss) per common and common
equivalent share - fully diluted ............... $ 0.06 $ 0.07 $ (0.04)
=========== =========== ===========
</TABLE>
*Not considered as effect would be antidilutive.
EXHIBIT 22
MEDICAL INNOVATIONS, INC.
LIST OF SUBSIDIARIES
The Great Eastern Nursing Corp. - incorporated in Texas(1)
Nurses PRN of Virginia, Inc. - incorporated in Texas(1)
Medical Innovations (Texas), Inc. - incorporated in Texas(1)
Medical Innovations, Inc. of New Jersey - incorporated in Delaware(1)
Medical Innovations of Virginia, Inc. - incorporated in Texas(1)
Physician's Visiting Nurse Service, Inc. - incorporated in Texas(2)
Nursing Innovations, Inc. - incorporated in Texas(1)
Desert Corporation - incorporated in Nevada(3)
Home Health Associates, Inc. - incorporated in Nevada(4)
Home Care Management Corporation - incorporated in Nevada(5)
PRN Home Health Care, Inc. - incorporated in Nevada(6)
Southern Nevada Hospice, Inc. - incorporated in Nevada(7)
Nevada Home Care Partners, Inc. - incorporated in Nevada(8)
(1)Does business as "Medical Innovations"
(2)Does business as "Physician's Visiting Nurse Service"
(3)Does business as "PRN Extended Care"
(4)Does business as "Home Health Associates"
(5)Does business as "Home Care Management"
(6)Does business as "PRN Extended Care"
(7)Does business as "PRN Home Hospice"
(8)Does business as "Charleston Home Health Care"
