UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1995
or
[ ] Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Transition Period From ____ To ____
Commission File Number 0-17787
MEDICAL INNOVATIONS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 76-0280551
(State or Other Jurisdiction of Incorporation (IRS Employer Identification
or Organization) 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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of November
8, 1995 was 15,927,880 shares.
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Part I. Condensed Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets ....................................... 1
Consolidated Statements of Income ................................. 2
Consolidated Statements of Cash Flows ............................. 3
Notes to Unaudited Condensed Consolidated Financial Statements .... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12
Part II. Other Information ............................................ 19
Signatures ............................................................ 20
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
(Unaudited) (Audited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 623,126 $ 1,415,294
Short-term investments ............................ -- 201,000
Accounts receivable, net .......................... 11,810,955 9,830,269
Inventories ....................................... 255,246 257,360
Deferred income taxes ............................. 723,329 347,047
Other ............................................. 733,101 532,046
----------- -----------
Total current assets .............................. 14,145,757 12,583,016
Property and equipment, net ....................... 2,056,374 1,926,209
Excess cost over net assets of acquired companies,
net of amortization of $684,761 and $438,896 .. 12,085,568 12,258,000
Other, net ........................................ 1,247,142 825,656
----------- -----------
Total assets ...................................... $29,534,841 $27,592,881
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and other debt ...................... $11,054,091 $ 1,773,798
Accounts payable and accrued liabilities .......... 2,598,982 2,690,836
Accrued compensation and benefits ................. 2,962,888 2,450,995
Reserve for government program settlements ........ 1,271,104 1,784,256
Income taxes payable .............................. 916,932 70,773
----------- -----------
Total current liabilities ................. 18,803,997 8,770,658
Notes payable and other debt ...................... 958,331 10,040,016
Other accrued liabilities ......................... 501,302 678,236
Deferred income taxes ............................. 80,430 32,804
----------- -----------
Total liabilities ......................... 20,344,060 19,521,714
----------- -----------
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, 15,923,873
and 15,828,873 shares issued and outstanding ... 119,429 118,717
Additional paid-in capital ........................ 7,502,134 7,349,517
Retained earnings ................................. 1,569,218 602,933
----------- -----------
Total stockholders' equity ................ 9,190,781 8,071,167
----------- -----------
Commitments and contingencies ..................... -- --
----------- -----------
Total liabilities and stockholders' equity $29,534,841 $27,592,881
=========== ===========
(See notes to unaudited condensed consolidated financial statements)
1
<PAGE>
MEDICAL INNOVATIONS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ............................................... $17,925,508 $16,000,410 $51,883,610 $44,163,172
Costs and expenses:
Direct patient care .................................. 10,970,758 10,353,720 31,721,341 27,214,988
Selling, general and administrative .................. 5,809,681 4,876,275 17,229,447 14,898,224
Provision for doubtful accounts ...................... 247,130 216,233 573,566 473,652
----------- ----------- ----------- -----------
17,027,569 15,446,228 49,524,354 42,586,864
----------- ----------- ----------- -----------
Income from operations ................................. 897,939 554,182 2,359,256 1,576,308
Gain on sale of minority interest ...................... -- -- -- 128,500
Interest expense ....................................... 307,802 266,972 837,498 609,225
----------- ----------- ----------- -----------
Income before income taxes ............................. 590,137 287,210 1,521,758 1,095,583
Provision for income taxes ............................. 239,921 116,231 555,473 456,732
----------- ----------- ----------- -----------
Net income ............................................. $ 350,216 $ 170,979 $ 966,285 $ 638,851
=========== =========== =========== ===========
Net income per common and common
equivalent share ................................... $ 0.02 $ 0.01 $ 0.06 $ 0.04
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding ...................... 17,214,684 17,662,319 16,671,056 17,755,750
=========== =========== =========== ===========
</TABLE>
(See notes to unaudited condensed consolidated financial statements)
2
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net income ..................................... $ 966,285 $ 638,851
Noncash adjustments:
Depreciation and amortization ................ 823,221 546,886
Provision for doubtful accounts .............. 573,566 473,652
Deferred income taxes ........................ (328,656) 9,790
Other ........................................ 7,702
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable .......................... (2,554,252) (3,089,303)
Income taxes ................................. 863,703 155,825
Other assets ................................. (1,007) (251,826
Accounts payable and accrued liabilities,
including compensation and benefits ....... 217,201 519,932
Reserve for government program settlements ... (513,152) (635,924)
Other liabilities ............................ (265,019) (59,760)
----------- -----------
Net cash used by operating activities ........ (218,110) (1,684,175)
----------- -----------
Cash flows from investing activities:
Acquisition of PharmaThera Branch .............. (56,468) --
Acquisition of PRN Nevada ...................... -- (907,533)
Acquisition of STAT ............................ -- (276,992)
Acquisition and merger transaction expenses .... (92,487) (56,086)
Acquisition of property and equipment, net ..... (164,821) (1,016,448)
Other .......................................... -- 9,125
----------- -----------
Net cash used by investing activities ........ (313,776) (2,247,934)
----------- -----------
(See notes to unaudited condensed consolidated financial statements)
3
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable ......................... $ 50,438 $ 8,226,082
Proceeds from demand loan payable to
related parties .................................. 300,000 2,100,000
Revolving credit facilities:
Borrowings ....................................... 9,470,000 9,161,764
Repayments ....................................... (8,720,020) (7,186,764)
Payments on notes payable and capital lease
obligations, including related party loans ....... (1,570,558) (9,611,834)
Payments on obligation to former owners of PVNS ..... 203,838 --
Proceeds from exercise of stock options ............. 6,000 51,882
Issuance of stock ................................... -- (10,270)
----------- -----------
Net cash provided (used) by financing activities (260,302) 2,730,860
----------- -----------
Net increase (decrease) in cash and cash equivalents .. (792,168) (1,201,249)
Cash and cash equivalents at beginning of period ...... 1,415,294 1,982,875
----------- -----------
Cash and cash equivalents at end of period ............ $ 623,126 $ 781,626
=========== ===========
Cash paid during the period for:
Interest ............................................ $ 849,675 $ 643,642
Income taxes ........................................ 23,791 274,876
Non-cash transactions (not otherwise disclosed):
Assets acquired under capitalized lease obligations . 295,772 246,819
Issuance of stock to acquire minority interest ...... 143,437 --
</TABLE>
(See notes to unaudited condensed consolidated financial statements)
4
<PAGE>
MEDICAL INNOVATIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION:
The condensed consolidated financial statements of Medical Innovations, Inc. and
its subsidiaries (the "Company") have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. As
applicable under such regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes that the presentation and disclosures herein are adequate to make the
information not misleading, and that the financial statements reflect all
elimination entries and adjustments (consisting of only normal recurring
adjustments) which are necessary for a fair statement of the operating results
for the three and nine months ended September 30, 1995 and 1994. Operating
results for these interim periods are not necessarily indicative of the results
for full years. It is suggested that these condensed consolidated interim
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1994 Annual Report on
Form 10-K.
The condensed consolidated financial statements for prior periods have been
restated to reflect the merger completed in May 1995 as more fully described in
Note 3. In addition, certain reclassifications have been made to previously
reported information to conform to the current period presentation.
Net income per share is based on the weighted average number of common shares
and equivalents outstanding during the periods, which has also been restated to
reflect the merger completed in 1995 as more fully described in Note 3. Common
stock equivalents consisting of stock options and warrants are included in the
computation of weighted average shares when their effect is dilutive.
NOTE 2 - ESTIMATES INVOLVED IN PREPARING THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS:
The Company's interim financial statements are prepared in accordance with the
same accounting policies as those followed at year-end. Certain items in the
financial statements can be determined on an interim basis only by making
accounting estimates. The accuracy of such amounts is dependent upon facts that
will exist and procedures that will be accomplished by the Company later in the
year.
NOTE 3 - ACQUISITION AND PRO FORMA INFORMATION:
Physician's Visiting Nurse Service
Effective May 1, 1993, the Company purchased all of the outstanding common stock
of Physician's Visiting Nurse Service, Inc. ("PVNS") for total consideration of
approximately $7,743,000, as adjusted for the settlement described below. In
connection therewith, the Company entered into agreements to make future
payments to the former owners resulting in a total obligation of approximately
$1,295,000, net of amounts attributable to compensation and imputed interest at
7-1/2%. This obligation, which is included in accrued liabilities at September
30, 1995 and December 31, 1994, 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. Of the remaining obligation of $751,790 at September 30,1995,
approximately $289,000 is classified as current. 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
5
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
PVNS Note (see Note 6), 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.
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 of approximately $3,600,000, as adjusted (see Note
6), 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 a contingent payment estimated to be approx-imately $95,000. 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.
PharmaThera Branch
On January 31, 1995, the Company acquired certain assets, consisting primarily
of inventory, equipment, provider contracts and a customer base, of PharmaThera,
Inc.'s branch operation in Pensacola, Florida ("PharmaThera Branch"), a provider
of infusion therapy services, for cash of approximately $56,000 and two notes
with obligations totalling approximately $574,000, which are subject to
reductions of up to $117,500 based primarily on certain performance criteria of
the post-acquisition PharmaThera Branch operations. The acquisition was
accounted for by the purchase method. Accordingly, the results of operations of
the PharmaThera Branch are included with those of the Company for periods
subsequent to the acquisition date.
Hospital HomeCare
In May 1995, the Company issued 3,262,473 shares of its common stock in exchange
for all of the issued and outstanding common stock of Hospital HomeCare
Corporation ("HHCC"), a provider of hospital-based home healthcare management
services. Five percent of the shares issued to HHCC have been escrowed to
indemnify the Company for certain specified pre-merger contingencies. This
transaction was accounted for as a pooling of interests. Accordingly, the
Company's condensed consolidated financial statements have been restated to
include the assets, liabilities and results of operations of HHCC, as more fully
described below.
Prior to the combination, HHCC's fiscal year ended on March 31, which has been
subsequently changed to conform with that of the Company. HHCC's results of
operations for the fiscal year ended March 31, 1995 are combined with the
Company for the year ended December 31, 1994. Accordingly, the Company's
6
results of operations for the three months ended March 31, 1995 do not include
HHCC. Separate results of operations of the Company and HHCC for the pre-merger
interim periods included herein and for the year ended December 31, 1994 are as
follows:
Revenues Company HHCC Combined
Three months ended:
March 31, 1995 ................... $15,927,991 $ - $15,927,991
September 30, 1994 ............... $15,728,393 $ 272,017 $16,000,410
Nine months ended September 30, 1994 $43,138,609 $ 1,024,563 $44,163,172
Year ended December 31, 1994 ........ $59,110,330 $ 1,267,818 $60,378,148
Net income (loss)
Three months ended:
March 31, 1995 ................... $ 261,391 $ - $ 261,391
September 30, 1994 ............... $ 201,835 $ (30,856) $ 170,979
Nine months ended September 30, 1994 $ 614,261 $ 24,590 $ 638,851
Year ended December 31, 1994 ........ $ 804,026 $ (194,220) $ 609,806
Transaction costs of $240,039 (without income tax benefit) were incurred by the
Company and HHCC, of which $61,774 were expensed in the three month period ended
June 30, 1995. The remaining costs of $178,265, which were incurred by HHCC in
the fiscal year ended March 31, 1995, were included in the restated combined net
income for the year ended December 31, 1994.
Purchase price allocations
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, since
patients do not determine the services provided or the duration thereof, and the
Company is prohibited from marketing additional services to them, patients
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 and its 1994 and
1995 acquisitions (STAT, PRN Nevada and PharmaThera Branch) and the 1995 merger
(HHCC), after giving effect to certain pro forma adjustments and assuming these
acquisitions and the merger had been completed as of the beginning of the
respective nine month periods ended September 30, are as follows:
1995 1994
----------- -----------
Revenue .................................. $52,191,000 $48,040,000
Net income ............................... $ 983,000 $ 743,000
Net income per common and
common equivalent share ............... $ .06 $ .04
The pro forma information is not necessarily indicative of results which may
occur in the future.
7
<PAGE>
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable at September 30, 1995 consist of the following:
Accounts receivable $12,692,571
Less allowance for doubtful accounts 881,616
-----------
$11,810,955
===========
NOTE 5 - INCOME TAXES:
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the nine month periods ended September
30:
1995 1994
---- ----
Federal income tax at statutory rate .............. 34.0% 34.0%
Nondeductible amortization ........................ 5.3% 5.6%
Recovery of nontaxable payroll related costs ...... (5.5)% --
Other permanent differences ....................... 2.0% .7%
State taxes ....................................... .7% 1.4%
---- ----
Effective tax rate ................................ 36.5% 41.7%
==== ====
NOTE 6 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at September 30, 1995 consist of the following:
Bank revolving credit facilities ............................... $ 4,175,000
Notes payable to Bank .......................................... 5,450,000
Term note payable to Bank ...................................... 100,000
Notes payable to former owners of PVNS ......................... 361,303
Note payable to former owner of PRN Nevada ..................... 464,502
Notes payable to former owner of PharmaThera Branch ............ 470,419
Notes payable to Bank and others in monthly installments
totalling approximately $7,040, including interest ranging
from prime (8.75% at September 30,1995) to 11.5%, with various
maturities through 1998, secured by property and equipment ..... 95,522
Capital lease obligations ...................................... 895,676
12,012,422
Less current portion ........................................... (11,054,091)
Noncurrent portion ............................................. $ 958,331
============
8
Bank Revolving Credit Facilities
In December 1994, the Company entered into new revolving credit facilities
totalling $3,725,000 with a bank (the "Bank") that mature March 31, 1996. In
connection with this refinancing, the then outstanding balances of the credit
facilities entered into in March 1994 (total borrowing availability of
$2,125,000) and certain other debt were repaid and the Company's borrowing
availability was increased. The new credit facilities, which bear interest at
prime plus 1/4% (9.0% at September 30, 1995), 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
September 30, 1995, the Company was in compliance with such loan covenants.
In May 1995, the Company entered into an additional revolving credit facility
with the Bank in the amount of $1,000,000. This new credit facility, which was
obtained for working capital purposes, is secured by a first priority lien on
all accounts receivable of the Company and is guaranteed by the president and
another director of the Company. Interest only at the prime rate (8.75% at
September 30, 1995) is due monthly through the extended maturity date of April
1, 1996.
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 (obtained for working
capital purposes in March 1994) and substantially all of the remaining balance
on the subordinated note payable as described below. The New Term Note bears
interest at prime minus 1% (7.75% at September 30, 1995), payable monthly
through maturity of June 6, 1996, and is secured by collateral (marketable
securities) pledged to the Bank by the president, another director and a
shareholder of the Company (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 these individuals to make the above referenced loans to the Company. In
October 1995, the Company prepaid principal of $250,000 on the New Term Note.
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
(8.75% at September 30, 1995), 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. Also, the principal
balance of the PVNS Note was further reduced by $275,000 in November 1994 as a
result of the settlement with the former owners of PVNS as more fully described
in Note 3. This note reduction was also
9
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, which increased to prime plus 1% (9.75% at September 30,
1995) on June 28, 1995. At September 30, 1995, the principal balance of the PVNS
Note was $106,505.
In November 1994, the Company borrowed $458,636 of previously escrowed cash from
the former owners of PVNS for working capital purposes. Interest only was due on
this note through February 1, 1995, at which date monthly principal and interest
payments commenced in eighteen equal installments with a final payment due on
July 1, 1996. The note bore interest at prime through June 30, 1995 and then
increased to prime plus 1% (9.75% at September 30, 1995) through maturity. At
September 30, 1995, the principal balance of this note was $254,798.
Note Payable to Former Owner of PRN Nevada
In connection with the 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
(8.75% at September 30, 1995), payable monthly, and is secured by the common
stock of PRN Nevada. Monthly principal payments of $23,611 commenced August 1,
1994 and are payable in such amount for thirty-six months. On July 1, 1995, the
principal balance of this note was reduced $125,776 by offsetting amounts due
from the former owner of PRN Nevada for indemnification of applicable
adjustments to PRN Nevada's pre-acquisition Cost Reports through December 31,
1993 (see also Note 7).
Notes Payable to Former Owner of PharmaThera Branch
In connection with the acquisition of the PharmaThera Branch, the Company issued
two notes payable to the former owner of the PharmaThera Branch. The larger note
in the amount of $500,000, which is secured by all equipment of the Company's
Florida operation, is non-interest bearing and is payable at various dates
through May 15, 1996, based on collected revenues of the PharmaThera Branch.
This note is subject to reductions of up to $117,500 based primarily on certain
performance criteria of the post-acquisition PharmaThera Branch operations. The
other note in the amount of $73,956 was paid in six equal monthly principal
installments of $12,326 through August 1, 1995.
Subordinated Note Payable
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the Payees. In March 1994, the Company repaid principal of $1,675,000
on this note, pursuant to its contractual obligation to apply as debt reduction
a portion of the net proceeds from the Company's Warrant Offering completed in
December 1993. On the date of such repayment, the Payees agreed to waive any
defaults on the note and a replacement note was issued to the Payees in the
amount of $3,802,370, which was repaid in June 1994 as described above.
In connection with making this subordinated loan, the Payees were granted
warrants to purchase 100 shares of the Company's preferred stock at $100 per
share. As previously described, the collateral (marketable securities) that the
Payees pledged to the Bank as security for the New Term Note was, prior to the
refinancing, held by the Bank as security for a loan to the Payees which was
used by the Payees to make loans to the Company. Thus, the Payees' risk position
has not significantly changed and accordingly, the agreement governing the
preferred stock warrants has been amended so that the warrants remain
outstanding under substantially the same terms, except that the exercisability
of the warrants now relates to the New Term Note rather than the subordinated
loan. Such warrants are now exercisable only in the event of
10
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 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, anytime after the
outstanding principal balance on the New Term Note and the PVNS Note is less
than $1,175,000. At September 30, 1995, the aggregate principal outstanding on
the New Term Note and the PVNS Note was $5,556,505.
Other
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. On April
10, 1995, the Company borrowed $300,000 from its president for working capital
purposes at prime, which was repaid on May 26, 1995.
NOTE 7 - RESERVE FOR GOVERNMENT PROGRAM SETTLEMENTS:
The Company's Medicare operations are subject to regulations administered by the
Health Care Financing Administration. Other government programs served by the
Company are also subject to regulations of various state agencies. Amounts
reimbursed by the Medicare and other government programs are subject to audit
and retroactive adjustment. Such adjustments which affect income are included in
revenue.
As more fully described in Note 3, the Company entered into a settlement in
November 1994 with the former owners of PVNS pertaining to various acquisition
contingencies including open pre-acquisition Medicare Cost Reports. In
connection with this settlement, the Company assumed the total liability and
increased the reserve for estimated final adjustments to the preacquisition PVNS
Medicare Cost Reports, which were previously the responsibility of the former
owners of PVNS. In October 1995, final audit adjustments for these Cost Reports
were received from the Medicare intermediary in a total amount less than the
reserve established. Certain post-acquisition PVNS Medicare Cost Reports also
remain open for examination and a reserve has been established for estimated
adjustments thereto.
In connection with the acquisition of PRN Nevada, the Company received an
indemnification from the former owner of PRN Nevada for adjustments to PRN
Nevada's pre-acquisition Medicare Cost Reports open for examination. Such Cost
Reports through December 31, 1993 have been settled and the amounts due the
Company pursuant to the indemnification have been received (see also Note 6).
Adjustments to other pre-acquisition Medicare Cost Reports open for examination
are expected to be recovered from the above referenced indemnification or
applied against the reserve established at the acquisition date. The Medicare
Cost Reports for the post-acquisition period are also open for examination and a
reserve has been established for estimated adjustments thereto. Also, PRN Nevada
is experiencing difficulties in obtaining reimbursement of certain receivable
claims from Nevada Medicaid and a reserve has been established for estimated
losses that may result therefrom.
In reviewing its reserve for government program settlements for adequacy, the
Company considers, among other factors, recent Medicare and other 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.
11
As a result of the foregoing, management believes the Company's reserve for
government program settlements is adequate to cover estimated adjustments to
open Medicare Cost Reports and estimated losses from other government programs,
and that final determinations in connection therewith will not have a material
adverse effect on the Company's financial position or results of operations.
NOTE 8 - ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS:
Effective January 1, 1995, the Company adopted a new standard (Statement of
Financial Accounting Standards No. 121) 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 previous impairment policy was
substantially similar to the new requirements. Accordingly, the new standard did
not have a significant effect on the Company's financial position or results of
operations. The Company's revised policy is described in the following
paragraph.
The Company reviews the realizability of the "excess cost over net assets of
acquired companies" whenever events or circumstances occur which indicate the
recorded cost may not be recoverable. Principal factors considered by the
Company in this review include changes in market share and competitive
conditions, technological and regulatory changes (including reimbursment),
demand trends and earnings trends of the acquired companies. If such a review
indicates that the undiscounted future cash flows from operations of the
acquired business are less than the recorded asset, its carrying amount will be
reduced to its estimated fair value. In the absence of an active market for the
asset, fair value will be estimated using accepted valuation techniques,
including discounted cash flow analysis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS. The following table presents selected financial
information as a percentage of revenues for the periods indicated (including the
restatement to reflect the merger with HHCC in May 1995, which was accounted for
as a pooling of interests):
PERCENTAGE OF REVENUES
--------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1995 1994 1995 1994
----- ----- ----- -----
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Direct patient care .................... 61.2% 64.7% 61.2% 61.6%
Selling, general and administrative .... 32.4% 30.4% 33.2% 33.8%
Provision for doubtful accounts ........ 1.4% 1.4% 1.1% 1.1%
----- ----- ----- -----
Income from operations ................. 5.0% 3.5% 4.5% 3.5%
Gain on sale of minority interest ...... -- -- -- .3%
Interest expense ....................... 1.7% 1.7% 1.6% 1.4%
----- ----- ----- -----
Income before taxes .................... 3.3% 1.8% 2.9% 2.4%
Provision for income taxes ............. 1.3% .7% 1.0% 1.0%
----- ----- ----- -----
Net income ............................. 2.0% 1.1% 1.9% 1.4%
===== ===== ===== =====
12
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
REVENUES. Revenues for the third quarter of 1995 were $17,925,508, an increase
of $1,925,098, or 12.1%, over revenues of $16,000,410 for the third quarter of
1994. This increase was primarily due to the growth in the Texas nursing and
pharmacy operations, where revenue increased by $1,425,000, or 13.5%. Also, the
management services division's revenues increased by $377,000, or 97.4%,
primarily as the result of contracts entered into after September 30, 1994.
Revenues from Virginia nursing and pharmacy operations increased by $618,000, or
36.3%. To a lesser extent, the acquisition of the PharmaThera Branch contributed
to the revenue increase in the amount of $221,000. The above increases were
somewhat offset by decreases in the PRN Nevada nursing operations of $311,000,
or 10.8%, and the New Jersey nursing and pharmacy operations of $362,000, or
89.3%. The New Jersey operation was closed in July 1995. On a company-wide
basis, in the third quarter of 1995, pharmacy revenues increased by $786,000, or
56.4%, nursing and related revenues increased by $837,000, or 7.8%, and
homemaker services decreased by $54,000, or 1.5%, compared to the same period in
1994.
DIRECT PATIENT CARE. Costs of direct patient care in the third quarter of 1995
were $10,970,758, an increase of $617,038, or 6.0%, over the third quarter of
1994, resulting primarily from the corresponding increase in revenues described
above. As a percentage of revenues, such costs were 61.2% in the third quarter
of 1995, compared to 64.7% in the third quarter of 1994. The decrease as a
percentage of revenues is attributable to several factors, including (i) the
increase in management services revenue, which carries no direct patient care
cost, (ii) elimination of unprofitable nurse staffing services in one of the
Houston, Texas branches, which had a higher than normal direct patient care cost
as a percentage of revenues, (iii) reduction in employee injury claims in the
self-insured Texas nursing and homemaker operations and (iv) the substantial
increase in pharmacy revenues which have a lower direct patient care cost as a
percentage of revenues than nursing services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the third quarter of 1995,
selling, general and administrative expenses were $5,809,681, an increase of
$933,406, or 19.1%, over the third quarter of 1994. A large portion of the
increase amounting to approximately $690,000 is attributable to the addition of
key management and other administrative personnel in the clinical operating
divisions to support the Company's growth. The remaining increase consists
primarily of $132,000 associated with the Pharma-Thera Branch which was acquired
on January 31, 1995 and $86,000 due to increased overhead in the management
services division to support additional contracts. Corporate overhead increased
nominally between the two comparable periods. As a result of the foregoing, such
expenses, as a percentage of revenues, increased to 32.4% in the third quarter
of 1995, compared to 30.4% in the third quarter of 1994.
INCOME FROM OPERATIONS. Income from operations was $897,939 in the third quarter
of 1995, an increase of $343,757, or 62.0%, over the third quarter of 1994. The
increase is primarily attributable to management services contracts entered into
after September 30, 1994, which increased profitability by $419,000.
Additionally, the Company benefited from the closure of its New Jersey operation
in July 1995 where losses were reduced by $91,000 in the third quarter of 1995,
compared to the same period in 1994. These increases were offset by a revenue
decrease of $108,000 in the PRN Nevada nursing operations and losses of $73,000
incurred in the Florida operation which is expected to reach break-even during
the fourth quarter of 1995. Further, in the third quarter of 1994, income of
$333,000 was recognized in connection with a change in estimate of the reserve
for government program settlements that resulted from favorable revisions in
proposed audit adjustments and reopenings of the PVNS Medicare Cost Reports for
the years ended June 30, 1990 and 1991.
13
INTEREST EXPENSE. Interest expense increased $40,830, or 15.3%, to $307,802 in
the third quarter of 1995, compared to $266,972 in the third quarter of 1994,
primarily as a result of increases in the prime interest rate charged in 1995
over 1994. The weighted average of the prime interest rate in the third quarter
of 1995 was 8.8%, compared to 7.5% during the same period in 1994, which equates
to a $46,000 increase in the third quarter of 1995 interest expense when
applying the percentage increase in average interest rates to the interest
expense incurred in the third quarter of 1994.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
REVENUES. Revenues for the nine months ended September 30, 1995 were
$51,883,610, an increase of $7,720,438, or 17.5%, over revenues of $44,163,172
for the same period in 1994. Of this increase, approximately $2,658,000 was due
to the acquisition of PRN Nevada effective April 1, 1994. The first nine months
of 1995 included nine months of PRN Nevada revenues, while the comparable period
in 1994 included only six months of PRN Nevada revenues. Also, an increase of
approximately $562,000 is attributable to the PharmaThera Branch acquisition on
January 31, 1995. The management services division's revenues increased by
$740,000, or 64.2%, primarily as the result of contracts entered into after
September 30, 1994. The remaining increase of $3,760,000 was comprised of (i) an
increase in revenues of $4,170,000, or 13.6%, in the Texas nursing and pharmacy
operations, (ii) an increase in revenues from Virginia nursing and pharmacy
operations of $1,005,000, or 20.0%, (iii) a decrease in revenues of $763,000, or
54.7%, in the New Jersey operation which was closed in July 1995, and (iv) a
decrease in revenues of $615,000, or 10.6%, in the PRN Nevada nursing
operations. On a company-wide basis, in the nine months ended September 30,
1995, nursing and related revenues increased by $4,301,000, or 14.3%, homemaker
revenues increased by $1,254,000, or 14.5%, and pharmacy revenues increased
$1,451,000, or 32.6%, compared to the same period in 1994.
DIRECT PATIENT CARE. Costs of direct patient care in the nine months ended
September 30, 1995 were $31,721,341, an increase of $4,506,353, or 16.6%, over
the nine months ended September 30, 1994, resulting primarily from the
corresponding increase in revenues described above. As a percentage of revenues,
such costs were 61.1% in the nine months ended September 30, 1995, compared to
61.6% in the nine months ended September 30, 1994. The decrease is primarily
attributable to the increase in management services revenue, which carries no
direct patient care cost, and to a lesser extent, the reasons set forth above
under DIRECT PATIENT CARE for the three months ended September 30, 1995 and
1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the nine months ended September
30, 1995, selling, general and administrative expenses were $17,229,447, an
increase of $2,331,223, or 15.7%, over the nine months ended September 30, 1994.
A large portion of the increase amounting to approximately $1,500,000 is
attributable to the addition of key management and other administrative
personnel in the clinical operating divisions and increased corporate overhead
(primarily personnel) to support the Company's growth. Also, $725,000 of the
increase is associated with the PRN Nevada acquisition, effective April 1, 1994.
The nine months ended September 30, 1995 included nine months of PRN Nevada
selling, general and administrative expenses, while the comparable period in
1994 included only six months of such expenses. Additionally, an increase of
$357,000 is attributable to the PharmaThera Branch which was acquired on January
31, 1995. During the nine months ended September 30, 1995, selling, general and
administrative expenses were reduced by approximately $245,000, resulting from
the abatement of nonrecurring payroll tax penalties and interest attributable to
prior periods. As a percentage of revenues, selling, general and administrative
expenses were consistent in the comparable nine month periods ended September
30.
INCOME FROM OPERATIONS. Income from operations was $2,359,256 in the nine months
ended September 30, 1995, an increase of $782,948, or 49.7%, over the nine
months ended September 30, 1994. The increase is attributable to growth in the
management services division, which had an increase in income from operations of
$1,023,000. Also, income from the Texas operations increased 13.1%, or $331,000.
In
14
the nine months ended September 30, 1995, a recovery of certain nonrecurring
payroll related costs reduced selling, general and administrative expense by
$245,000, thus increasing income from operations. These increases in the nine
months ended September 30, 1995 were offset by increased corporate overhead of
$482,000 to support the growth and losses of $172,000 in the Florida operation,
which had only nominal losses in the comparable 1994 period. Emphasis has been
placed on improving the operating results in Florida and such operation is
projected to reach break-even in the fourth quarter of 1995. The New Jersey
operation, which was closed in July 1995 at a nominal cost, had operating losses
of $172,000 for the nine months ended September 30, 1995, compared to losses of
$85,000 for the same period in 1994. In the nine months ended September 30,
1995, the Company incurred transaction costs of approximately $62,000 in
connection with the merger with HHCC. Further, in the nine months ended
September 30, 1994, income of $533,000 was recognized in connection with changes
in estimates of the reserve for government program settlements that resulted
from the final settlement of the PVNS June 30, 1992 Medicare Cost Report
($200,000) and favorable revisions in proposed audit adjustments and reopenings
of the PVNS Medicare Cost Reports for the years ended June 30, 1990 and 1991
($333,000).
GAIN ON SALE OF MINORITY INTEREST. In the nine months ended September 30, 1994,
the Company sold a 20% ownership interest and a 5% net profits interest in its
Pensacola, Florida homecare business for cash and a realized pre-tax gain of
$128,500.
INTEREST EXPENSE. Interest expense increased $228,273, or 37.5%, to $837,498 in
the nine months ended September 30, 1995, primarily due to increases in the
prime interest rate in 1995 over 1994. The weighted average of the prime
interest rate in the nine months ended September 30, 1995 was 8.9%, compared to
6.8% in the same period in 1994, which equates to a $188,000 increase in expense
for the nine months ended September 30, 1995, when applying the percentage
increase in average interest rates to interest expense incurred in the same
period in 1994. The remainder of the increase results from interest on
additional debt incurred in connection with the Company's acquisitions and for
working capital purposes.
PROVISION FOR INCOME TAXES. The effective tax rate for the nine months ended
September 30, 1995 was 36.5% compared to 41.7% for the same period in 1994. Such
effective tax rate was substantially lower in 1995 primarily due to a permanent
book and tax difference created by a nontaxable abatement of certain payroll tax
penalties and interest in 1995. See also Note 5 to the accompanying condensed
financial statements for more detailed information concerning the items causing
the difference between the effective tax rate and the statutory tax rate of 34%
for these periods and the differences between the two periods.
EXCESS COST OVER NET ASSETS OF ACQUIRED COMPANIES
"Excess cost over net assets of acquired companies" comprises a significant
portion of the Company's total assets. The Company reviews the carrying value of
this asset for potential impairment at each balance sheet date. The principal
facts and circumstances considered by the Company in its recoverability
assessment include market shar and competitive conditions, technological and
regulatory changes (including reimbursement), demand trends and earnings trends
of the acquired companies. The Company is not currently aware of any adverse
changes in these factors that would result in an impairment of this asset in the
future. However, projection of current facts and circumstnaces to future periods
is inherently uncertain.
Management believes that the excess cost over net assets of acquired has an
unlimited useful life and therefore has assigned a forty-year amortization
period for this asset. In determining that the life of this asset unlimited,
management considered factors such as: (1) the market share, locations,
reputation and related business attributes of each acquisition as discussed
above; (2) the nature of the home healthcare industry which is positively
impacted by aging trends and the continued transfer of patients from high-cost,
acute care settings to home healthcare; (3) the increasing acceptance by medical
professionals of home healthcare as a better alternative to institutionalized
care; (4) the nature of the personal services provided which will be
continuously needed in the future and are not subject to obsolencence; and (5)
to a lesser extent the policies of other home healthcare companies. Reductions
to the estimated useful life for this asset could have a material effect on the
Company's results of operations. The Company isnot currently aware of any events
or trends which would indicate a reduction in the useful life should be made.
See Notes 1 and 2 to the accompanying condensed consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES. The following table sets forth, for the periods
indicated, the level of the Company's cash and cash equivalents (including
short-term investments), working capital (deficiency) and its current and
debt-to-equity ratios (including the restatement to reflect the merger with HHCC
which was accounted for as a pooling of interests):
LIQUIDITY AND CAPITAL RESOURCES
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1995 1994
--------- ---------
Cash and cash equivalents ................. $ 623 $ 1,616
Working capital (deficiency) .............. $ (4,658) $ 3,812
Current ratio ............................. .75 1.43
Debt-to-equity ratio ...................... 2.21 2.42
15
GENERAL
Cash and cash equivalents at September 30, 1995 decreased by approximately
$993,000 from December 31, 1994. Working capital (a deficiency at September 30,
1995) also decreased by approximately $8,470,000 during this period. This
decrease resulted primarily because, at December 31, 1994, the Company's
revolving credit facilities with outstanding balances totalling $3,225,000
($3,175,000 at September 30, 1995) and the New Term Note of $5,450,000 were
classified as noncurrent, but were classified as current at September 30, 1995
due to their maturity dates of March 31, 1996 and June 6, 1996, respectively; a
change of $8,625,000 in the noncurrent to current classifications between the
two balance sheet dates. This change in balance sheet classification is also
primarily the reason that the current ratio decreased from 1.43 at December 31,
1994 to .75 at September 30, 1995. See the last paragraph under ITEMS AFFECTING
LIQUIDITY AND CAPITAL RESOURCES below concerning the refinancing of this Bank
debt. Further, accounts receivable, net of reserves, at September 30, 1995
increased by approximately $1,980,000, or 20.1%, from December 31, 1994, due to
the Company's growth in revenues and the other matters as set forth below.
Additionally, accrued compensation and benefits increased by approximately
$512,000, whereas accounts payable and accrued liabilities decreased by
approximately $92,000, from December 31, 1994 to September 30, 1995. For the
nine months ended September 30, 1995, net cash of approximately $260,000 was
used for financing activities, while net cash of approximately $218,000 was used
for operating activities during this period. Also during this period, the
Company used net cash of approximately $165,000 to acquire property and
equipment and approximately $149,000 for other investing activities.
The Company has entered into various debt obligations (including capitalized
leases) with the Bank and others, including the former owners of acquired
companies, resulting in total outstanding borrowings of approximately
$12,012,000 at September 30, 1995. Such total debt amount is exclusive of an
obligation to the former owners of PVNS, which is addressed in the discussion
below concerning the Company's other commitments. At September 30, 1995, the
Company had borrowing availability of $550,000 under its revolving credit
facilities with the Bank. The terms and other information regarding such
borrowings are described more fully in Note 6 to the accompanying condensed
consolidated financial statements.
During the nine months ended September 30, 1995, primarily for the reasons set
forth below in the third paragraph under ITEMS AFFECTING LIQUIDITY AND CAPITAL
RESOURCES, the Company entered into additional borrowings for working capital
purposes, including $1,000,000 from the Bank under a new revolving credit
facility with an original maturity date of November 1, 1995 (extended to April
1, 1996 in October 1995) and $300,000 from the Company's president, which was
repaid prior to the end of the second quarter. The previously existing revolving
credit facilities were also utilized at increased levels.
The Company's stockholders' equity at September 30, 1995 was $9,190,781, which
increased approximately $1,120,000 from December 31, 1994, including the effect
of the restatement for the merger of HHCC which was accounted for as a pooling
of interests. The debt-to-equity ratio remained approximately the same at these
dates.
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company's total debt outstanding (including
capitalized lease obligations) will require approximately $12,125,000 for
principal and interest payments during the twelve months ending September 30,
1996, based on the assumptions that interest rates and the Company's borrowing
levels remain constant and such debt is not refinanced with extended maturity
dates. The Company also has commitments under employment agreements to various
officers and other employees, as well as an obligation to the former owners of
PVNS that requires total payments over the twelve months ending September 30,
1996 of approximately $332,000, as more fully described in Note 3 to the
accompanying condensed consolidated financial statements. In addition, the
Company is committed under various operating leases (primarily office facilities
and equipment), for payments totalling approximately $3,230,000 (including
month-to-month leases that are expected to be continued or replaced) over the
twelve months ending September 30, 1996. As
16
of September 30, 1995 and through this date, the Company had no other
significant commitments and no material planned purchases of property and
equipment.
Primary sources of liquidity include cash generated from operations, which has
been used to support accounts receivable growth, amounts available under the
Company's revolving credit facilities with the Bank and loans from and
guarantees of loans by the Company's president and another director (see above
and Note 6 in the accompanying condensed consolidated financial statements). At
September 30, 1995, (i) approximately $1,440,000 was being withheld by a
Medicare intermediary in connection with determination letters issued for the
PVNS June 30, 1990 and 1991 Cost Reports which had been reopened, (ii)
approximately $1,050,000 of receivable claims were due from the Medicaid
intermediary for PRN Nevada that exceed the normal amount of receivables
outstanding for this operation (included therein are claims totalling
approximately $550,000 relating to timely billing on which an informal appeal
for payment has been made to the Nevada Medicaid program), (iii) approximately
$1,250,000 were due from a Medicare intermediary for the PVNS 1994 tentative
Cost Report settlement and 1995 lump sum payments, (iv) approximately $1,300,000
of receivable claims were due from a Texas welfare program that exceed the
normal amount of receivables outstanding for this operation and (v) a receivable
of approximately $600,000 was due under a management services contract which is
currently in dispute. Such amounts totalling approximately $5,640,000 were
somewhat offset by excess and accelerated payments of approximately $1,700,000
received by PRN Nevada from Medicare intermediaries for the 1995 cost reporting
period, which credits are included in accounts receivable in the accompanying
condensed consolidated balance sheet at September 30, 1995. These withheld and
delayed receivable collections (net of excess and accelerated payments) were the
primary reasons for the need to obtain the additional working capital loans and
in October 1995, to extend the maturity date of the new $1,000,000 revolving
credit facility as described above. A substantial portion of the excess and
accelerated payments received by PRN Nevada will be repaid as the Medicare
intermediaries withhold future cost reimbursements that would normally be paid
to PRN Nevada through the end of 1995. With respect to the $5,640,000 in
receivables set forth in (i) through (v) above, $4,490,000 is related to timing
and documentation delays and as such is not believed to be subject to any
material collection risk. Of this amount, the Company has collected $1,633,000
through December 15, 1995 and expects to collect substantially all of the
remaining amount ($2,857,000) in the first quarter of 1996. The other $1,150,000
of receivables are in dispute or appeal and thus, the timing and amount of
collection are less certain. At September 30, 1995, the Company had reserves of
approximately $930,000 attributable to the receivables set forth in (i) through
(v) above, which it believes to be adequate for any loss that will be incurred
thereon.
The receivable amounts referred to above, not yet collected as of December 15,
1995, could be withheld longer than expected, could continue to be delayed in
collection and could be adversely impacted by third-party determinations. 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.
Taking into account the commitments and the matters described above, management
believes that the Company's existing capital resources and sources of liquidity
are sufficient to finance its existing operations during the next twelve months.
If cash generated from operations is less than anticipated, or if other
currently unforeseen events occur including the outcome of the matters described
above, the Company may be required to seek additional financing. Potential
sources of additional financing include private or public equity or debt
financing or additional bank financing. The Company's credit facilities with the
Bank generally prohibit additional borrowings by the Company without the Bank's
consent. Although the Company has historically been able to refinance its debt
with the Bank, as needed, there can be no assurance thereof or that the Company
would be able to obtain additional or alternative financing, if required, on
acceptable terms. In addition, at September 30, 1995, the Company had
approximately $11,000,000 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.
17
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, a new standard (Statement of Financial Accounting Standards No.
123) was issued which covers the accounting for stock-based compensation,
principally stock options. The Company believes at this time, as permitted by
the standard, that it will not change its existing accounting for stock options.
Additional disclosures, including pro forma effects on income of the difference
between existing and the new accounting methods, will be required. The Company
is required to adopt the standard no later than January 1, 1996.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 21 for location of exhibits required by Item
601 of Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1995.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Innovations, Inc.
Date: January 22, 1996 By /S/ Mark H. Fisher
Mark H. Fisher
President and Chief Executive
Officer
By /S/ David C. Horn
David C. Horn
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
DESCRIPTION
10.37(a) Renewal Revolving Promissory Note by and between Physician's Visiting
Nurse Service, Inc. and Texas Commerce Bank National Association,
dated November 1, 1995, and attachments.
11 Computation of Per Share Earnings
21
EXHIBIT 11
MEDICAL INNOVATIONS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Net income applicable to common stock ...................... $ 350,216 $ 170,979 $ 966,285 $ 638,851
Reduce interest expense, net of tax effect,
for assumed debt retirement resulting
from the 20% treasury stock repurchase
limitation .............................................. -- -- 17,921 --
----------- ----------- ----------- -----------
Net income applicable to common and
common equivalent shares ................................ $ 350,216 $ 170,979 $ 984,206 $ 638,851
=========== =========== =========== ===========
Weighted average common shares outstanding ................. 15,904,732 16,654,906 15,857,063 16,513,783
Effect of stock options and warrants ....................... 1,309,952 1,007,413 813,993 1,241,967
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares ....................................... 17,214,684 17,662,319 16,671,056 17,755,750
=========== =========== =========== ===========
Net income per common and common
equivalent share - primary .............................. $ 0.02 $ 0.01 $ 0.06 $ 0.04
=========== =========== =========== ===========
FULLY DILUTED:
Net income applicable to common stock ...................... $ 350,216 $ 170,979 $ 966,285 $ 638,851
Reduce interest expense, net of tax effect,
for assumed debt retirement resulting
from the 20% treasury stock repurchase
limitation .............................................. -- -- 8,431 --
----------- ----------- ----------- -----------
Net income applicable to common and
common equivalent shares ................................ $ 350,216 $ 170,979 $ 974,716 $ 638,851
=========== =========== =========== ===========
Weighted average common and common
equivalent shares ....................................... 17,214,684 17,662,319 16,671,056 17,755,750
Additional effect of stock options and warrants ............ 195,679 -- 65,226 54,774
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares ....................................... 17,410,363 17,662,319 16,736,282 17,810,524
=========== =========== =========== ===========
Net income per common and common
equivalent shares - fully diluted ....................... $ 0.02 $ 0.01 $ 0.06 $ 0.04
=========== =========== =========== ===========
</TABLE>
