UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For Quarterly Period Ended March 31, 1996
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 (IRS Employer Identification Number)
of Incorporation or Organization)
ONE RIVERWAY, SUITE 2300 HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
(713) 688-6600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of May 10,
1996 was 15,954,873 shares.
<PAGE>
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Part I. Condensed Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets ............................ 1
Consolidated Statements of Income ...................... 2
Consolidated Statements of Cash Flows .................. 3
Notes to Unaudited Condensed Consolidated
Financial Statements ................................. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................................ 12
Part II. Other Information ................................................ 17
Signatures ................................................................ 18
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
ASSETS (UNAUDITED) (AUDITED)
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................... $ 224,536 $ 292,666
Accounts receivable, net .................................................... 10,615,364 11,981,393
Inventories ................................................................. 315,427 324,750
Deferred income taxes ....................................................... 661,649 546,227
Other ....................................................................... 748,228 632,104
----------- -----------
Total current assets ........................................... 12,565,204 13,777,140
Property and equipment, net ..................................................... 2,088,729 2,120,249
Excess cost over net assets of acquired companies,
net of amortization of $844,242 and $761,383 ................................ 11,926,856 12,008,946
Other, net ...................................................................... 1,378,177 1,183,821
----------- -----------
Total assets ................................................... $27,958,966 $29,090,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and other debt ................................................ $ 1,003,608 $ 1,171,193
Accounts payable and accrued liabilities .................................... 2,562,716 2,871,216
Accrued compensation and benefits ........................................... 3,031,023 2,752,828
Reserve for government program settlements .................................. 951,198 917,199
Income taxes payable ........................................................ 622,870 841,887
----------- -----------
Total current liabilities ...................................... 8,171,415 8,554,323
Notes payable and other debt .................................................... 9,686,980 10,590,163
Other accrued liabilities ....................................................... 457,090 498,913
Deferred income taxes ........................................................... 113,865 107,453
----------- -----------
Total liabilities .............................................. 18,429,350 19,750,852
----------- -----------
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, 15,954,873 and 15,927,873
shares issued and outstanding ............................................ 119,662 119,459
Additional paid-in capital .................................................. 7,538,790 7,506,917
Retained earnings ........................................................... 1,871,164 1,712,928
----------- -----------
Total stockholders' equity ..................................... 9,529,616 9,339,304
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity ..................... $27,958,966 $29,090,156
=========== ===========
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
1
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues ............................................................... $16,484,226 $15,927,991
----------- -----------
Costs and expenses:
Direct patient care ............................................... 9,556,524 9,868,757
Selling, general and administrative ............................... 6,088,328 5,343,929
Provision for doubtful accounts ................................... 317,013 150,634
----------- -----------
Total costs and expenses ....................................... 15,961,865 15,363,320
----------- -----------
Income from operations ................................................. 522,361 564,671
Interest expense ....................................................... 232,377 242,472
----------- -----------
Income before income taxes ............................................. 289,984 322,199
Provision for income taxes ............................................. 131,748 60,808
----------- -----------
Net income ............................................................. $ 158,236 $ 261,391
=========== ===========
Net income per common and common
equivalent share ................................................... $ 0.01 $ 0.02
=========== ===========
Weighted average common and common
equivalent shares outstanding ...................................... 15,945,785 15,831,584
=========== ===========
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
2
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 158,236 $ 261,391
Noncash adjustments:
Depreciation and amortization ....................................... 300,518 266,470
Provision for doubtful accounts ..................................... 317,013 150,634
Deferred income taxes ............................................... (109,010) (129,706)
Other ............................................................... 324 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ................................................. 1,049,016 (833,591)
Income taxes ........................................................ (213,341) 188,545
Other assets ........................................................ (189,029) (215,282)
Accounts payable and accrued liabilities,
including compensation and benefits .............................. (18,870) 615,543
Reserve for government program settlements .......................... 33,999 (82,742)
Other liabilities ................................................... 24,282 --
----------- -----------
Net cash provided by operating activities ........................... 1,353,138 221,262
----------- -----------
Cash flows from investing activities:
Acquisition of PharmaThera Branch ...................................... -- (56,468)
Acquisition and merger transaction expenses ............................ (177,030) (41,116)
Purchase of property and equipment ..................................... (54,779) (135,463)
----------- -----------
Net cash used by investing activities ............................... (231,809) (233,047)
----------- -----------
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
3
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable ................................................ $ 3,625,000 $ --
Revolving credit facilities:
Borrowings .............................................................. 10,750,000 4,300,000
Repayments .............................................................. (9,975,000) (4,620,000)
Payments on notes payable and capital lease
obligations ............................................................. (5,538,319) (585,946)
Payments on obligation to former owners of PVNS ............................ (73,591) (66,413)
Proceeds from exercise of stock options .................................... 22,451 3,600
------------ ------------
Net cash used by financing activities ............................... (4,814,459) (968,759)
------------ ------------
Net decrease in cash and cash equivalents ....................................... (68,130) (980,544)
Cash and cash equivalents at beginning of period ................................ 292,666 1,322,407
------------ ------------
Cash and cash equivalents at end of period ...................................... $ 224,536 $ 341,863
============ ============
Cash paid during the period for:
Interest ................................................................... $ 283,650 $ 277,969
Income taxes ............................................................... 477,290 4,491
Non-cash transactions (not otherwise disclosed):
Assets acquired under capitalized lease obligations ........................ 67,551 --
</TABLE>
(SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
4
MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 months ended March 31, 1996 and 1995. 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 1995 Annual Report on Form 10-K.
The condensed consolidated financial statements for the prior period 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 - USE OF ESTIMATES:
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 require management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. 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. Because of the inherent subjectivity of the
estimation process, actual future results could differ from that expected at the
reporting date.
NOTE 3 - ACQUISITIONS:
Set forth below is information regarding the Company's material acquisitions
completed in 1993 and 1994 and all of its 1995 acquisitions:
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"), which was accounted for by
the purchase method. Substantially all of the purchase price of approximately
$9,209,000 was allocated to excess cost over net assets of acquired companies.
In connection with the acquisition, 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
5
liabilities, is secured by accounts receivable of 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. At March
31, 1996, the amount remaining on this obligation was approximately $680,000, of
which approximately $291,000 was classified as current.
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"). Of the total purchase price of approximately
$3,726,000, approximately $3,169,000 was allocated to excess cost over net
assets of acquired companies.
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 $474,000, after adjustment. The
acquisition was accounted for by the purchase method. Accordingly, the results
of operations of the PharmaThera Branch are included with those of the Company
for periods subsequent to the acquisition date. The price paid for provider
contracts and a customer base, together with related transaction costs,
totalling $441,116 was allocated to purchased contracts and is being amortized
over ten years.
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 consolidated financial statements have been restated to include the
assets, liabilities and results of operations of HHCC. 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 results of operations for the
three months ended March 31, 1995 do not include HHCC.
PURCHASE PRICE ALLOCATIONS
Set forth below are the principal reasons that a significant portion of the
purchase prices of PVNS, PRN Nevada and certain other acquisitions was allocated
to excess costs over net assets of acquired companies, and not allocated to
other 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.
6
PRO FORMA INFORMATION
The PharmaThera Branch acquisition completed on January 31, 1995 did not have a
material pro forma effect on results of operations for the three month period
ended March 31, 1995.
NOTE 4 - ACCOUNTS RECEIVABLE:
Accounts receivable at March 31, 1996, consisted of the following:
Accounts receivable ................................ $11,508,091
Less allowance for doubtful accounts ............... 892,727
-----------
$10,615,364
===========
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1996 consisted of the following:
Furniture and fixtures ....................................... $1,406,957
Equipment, including computers ............................... 2,141,088
Transportation equipment ..................................... 316,839
Leasehold improvements ....................................... 213,627
----------
4,078,510
Less accumulated depreciation and amortization ............... 1,989,782
----------
$2,088,729
==========
NOTE 6 - NOTES PAYABLE AND OTHER DEBT:
Notes payable and other debt at March 31, 1996 consisted of the following:
Bank revolving credit facilities ............................... $ 5,500,000
Note payable to Bank ........................................... 3,625,000
Notes payable to former owners of PVNS ......................... 101,919
Note payable to former owner of PRN Nevada ..................... 348,022
Note payable to former owner of PharmaThera Branch ............. 291,004
Notes payable to Bank and others, at rates ranging from 8%
to 8.5%, with various maturities through 1997 .................. 17,037
-----------
Capital lease obligations ...................................... 807,606
10,690,588
Less current portion ........................................... 1,003,608
-----------
Noncurrent portion ............................................. $ 9,686,980
===========
7
BANK REVOLVING CREDIT FACILITIES
On March 15, 1996, the Company refinanced all of its debt with a bank (the
"Bank"). The new revolving credit facilities total $7,300,000, bear interest at
rates ranging from prime to prime minus 1% (8.25% to 7.25% at March 31, 1996),
payable monthly, and mature April 15, 1997. Such credit facilities totalling
$5,725,000 are secured by a first priority lien on all accounts receivable of
the Company. In addition, $1,575,000 of such credit facilities are secured by
collateral (marketable securities) pledged to the Bank by the President, another
director and a shareholder of the Company ("Collateral Guarantors") and the
remaining $5,725,000 of these credit facilities are guaranteed by the President
and another director of the Company. The related loan agreements do not include
any covenant requirements; however, such agreements do prohibit certain
additional indebtedness and payments of dividends.
NOTES PAYABLE TO BANK
As described above, the Company refinanced all of its debt with the Bank on
March 15, 1996. In connection therewith, the Company borrowed $3,625,000 from
the Bank ("Term Note"), which matures April 15, 1997. The New Term Note bears
interest at prime minus 1% (7.25% at March 31, 1996), payable monthly, and is
secured by collateral (marketable securities) pledged to the Bank by Collateral
Guarantors. Previously, this collateral was held by the Bank as security for the
Bank's loan to the Collateral Guarantors which was used by these individuals to
make loans to the Company (see also Subordinated Note Payable below).
NOTES PAYABLE TO FORMER OWNERS OF PVNS
In connection with the acquisition of PVNS, the Company issued a $1,000,000 note
payable to the former owners of PVNS ("PVNS Note"). After scheduled and other
principal repayments, together with a settlement reduction of principal
amounting to $275,000, the PVNS Note had been repaid as of March 31, 1996.
In November 1994, the Company borrowed $458,636 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 interest rate on the note was at prime through June 30, 1995, on which
date the interest rate increased to prime plus 1% (9.25% at March 31, 1996). At
March 31, 1996, the principal balance of this note was $101,919.
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 (8.25% at March 31, 1996), 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 through July 1, 1997. During 1995
and 1996, scheduled payments on this note were offset by approximately $155,500
due from the former owner of PRN Nevada for indemnification of applicable
adjustments to PRN Nevada's pre-acquisition Cost Reports (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, subsequently reduced to $400,000, is secured by all
equipment of the Company's Florida operation and is non-interest bearing. The
remaining balance due of $291,004 on this note is payable on May 15, 1996. The
other note, in the amount of $73,956, was repaid in 1995.
8
SUBORDINATED NOTE PAYABLE
In connection with the acquisition of PVNS, the Company issued a $5,500,000 note
payable to the Collateral Guarantors (as defined above), which was subsequently
repaid. In connection with making this subordinated loan, the Collateral
Guarantors were granted warrants to purchase 100 shares of the Company's Class A
preferred stock at $100 per share. As previously described, the collateral
(marketable securities) that the Collateral Guarantors pledged to the Bank as
security for a portion of the revolving credit facilities and the Term Note was
previously held by the Bank as security for a loan to the Collateral Guarantors.
Such loan was used by these individuals to make loans to the Company. Thus, the
Collateral Guarantors' 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 Term
Note and $1,575,000 of the new revolving credit facilities rather than the
subordinated loan. Such warrants are now exercisable only in the event of
certain defaults of the Company or the Collateral Guarantors under the Term
Note, $1,575,000 of the new revolving credit facilities, or the related
collateral maintenance agreements with the Bank, or in the event the Bank
liquidates the Collateral Guarantors' collateral. The warrants expire when the
aggregate outstanding balance of the Term Note and $1,575,000 of the new
revolving credit facilities is $1,175,000 or less and the Company is not in
default under the Term Note and $1,575,000 of the new revolving credit
facilities. If the warrants are exercised and the aggregate outstanding balance
of the Term Note and $1,575,000 of the new revolving credit facilities is
$3,625,000 or more, the holders of the preferred stock have the right to elect
seven of thirteen Company directors. At March 31, 1996, the aggregate principal
outstanding on the $1,575,000 portion of the new revolving credit facilities and
the Term Note was $5,200,000. 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 aggregate
outstanding principal balances of the above referenced debt are less than
$1,175,000.
OTHER
On April 10, 1995, the Company borrowed $300,000 from its President for working
capital purposes at the prime interest rate, which was repaid on May 26, 1995.
FAIR VALUE OF INDEBTEDNESS
Substantially all of the Company's indebtedness bears current rates of interest
and the terms thereof are considered normal for the nature of the instruments.
Accordingly, the Company believes that the carrying value of indebtedness
approximates its fair value.
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.
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.
9
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, all of which have been settled.
The amounts due the Company pursuant to the indemnification for such
pre-acquisition Cost Reports have been received (see also Note 6). PRN Nevada's
Medicare Cost Reports subsequent to December 31, 1994 remain open for
examination and reserves have been established for estimated adjustments that
may result therefrom. Also, PRN Nevada is experiencing difficulties in obtaining
reimbursement of certain receivable claims from Nevada Medicaid due to untimely
billing of such claims and accordingly, a reserve has been established for
estimated losses that may result therefrom. In connection therewith, expense of
$75,000 was recorded during the three months ended March 31, 1995. Collection of
such receivables has been delayed awaiting resolution of a regulatory
investigation for which no claim has been asserted and for which the Company's
internal review indicates that it should have no material liability related
thereto.
During 1995, all remaining open PVNS pre-acquisition Medicare Cost Reports were
settled and the Company recorded the effect of the adjustments resulting
therefrom, which included adjustments to this reserve. Such adjustments did not
have a material effect on the Company's results of operations. PVNS Medicare
Cost Reports subsequent to December 31, 1993 remain open for examination and
reserves have been established for estimated adjustments that may result
therefrom.
During the three month periods ended March 31, 1996 and 1995, the Company
recorded expense of $34,000 and $50,000, respectively, for estimated adjustments
that may result from current year Medicare Cost Reports, of which a portion
thereof increased this reserve. Also, during the first quarter of 1995, the
reserve was reduced by approximately $97,000 for an agreed upon repayment of a
prior year advance received from a Medicare intermediary.
Although the process for estimating final settlements related to government
programs is inherently subjective and such estimates can change as new
developments occur, the Company believes the reserve for government program
settlements is adequate to cover estimated adjustments to open Medicare Cost
Reports and settlements with other government programs, 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 following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the three month periods ended March 31:
1996 1995
---- ----
Federal income taxes at statutory rates .............. 34.0% 34.0%
Nondeductible amortization ........................... 8.8% 8.6%
Other permanent differences .......................... (.4)% 1.6%
Recovery of nontaxable payroll related costs ......... - % (25.8)%
State income taxes ................................... 3.0% .5%
---- ----
Effective income tax rate ............... 45.4% 18.9%
==== ====
NOTE 9 - NEW ACCOUNTING STANDARD - STOCK BASED COMPENSATION:
In October 1995, Statement of Financial Accounting Standards No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, was issued which covers the accounting for
stock-based compensation, principally stock options. The Company adopted this
standard effective January 1, 1996. However, as permitted by the standard, the
Company will not change its existing accounting for stock options. Additional
disclosures,
10
including pro forma effect on income of the difference between existing and the
new accounting method, will be required in the Company's year end financial
statements. The Company does not expect that such pro forma effect on income
will be material.
NOTE 10 -- PROPOSED MERGER OF COMPANY
In February 1996, the Company agreed to be acquired by Horizon/CMS Healthcare
Corporation ("Horizon") pursuant to a merger agreement, under which the
Company's stockholders would receive shares of Horizon. However, the Company and
Horizon have agreed to pursue an alternative structure to the previously
announced acquisition of the Company by Horizon. Such alternative structure is
currently being negotiated. Until a new agreement is completed, the existing
merger agreement remains in full force and effect.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents selected financial information for the periods
indicated:
PERCENTAGE OF REVENUES
----------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
----- -----
Revenues ......................................... 100.0% 100.0%
----- -----
Direct patient care .............................. 58.0% 62.0%
Selling, general and administrative .............. 36.9% 33.6%
Provision for doubtful accounts .................. 1.9% .9%
----- -----
Income from operations ........................... 3.2% 3.5%
Interest expense ................................. 1.4% 1.5%
----- -----
Income before taxes .............................. 1.8% 2.0%
Provision for income taxes ....................... .8% .4%
----- -----
Net income ....................................... 1.0% 1.6%
===== =====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
REVENUES. Revenues for the first quarter of 1996 were $16,484,226, an increase
of $556,235, or 3.5%, over revenues of $15,927,991 for the first quarter of
1995. This increase was primarily due to the growth in the Virginia nursing and
pharmacy operations and in the management services division. Revenue in the
Virginia operations increased by approximately $434,000, or 27.6%, while
management services revenue increased by approximately $345,000, or 104.4%.
These increases were somewhat offset by the closure of the New Jersey operations
in July 1995, which had revenues of approximately $263,000 in the first quarter
of 1995. On a company-wide basis, in the first quarter of 1996, durable medical
equipment (DME) revenues increased by approximately $345,000, or 115.3%,
homemaker revenues increased by approximately $321,000, or 9.9%, nursing and
related revenues decreased by approximately $241,000, or 2.3%, due to reduced
visit volume on a comparable basis between the periods, and pharmacy revenues
decreased by approximately $115,000, or 7.9%, compared to the first quarter of
1995.
DIRECT PATIENT CARE. Costs of direct patient care in the first quarter of 1996
were $9,556,524, a decrease of $312,233, or 3.2%, from the first quarter of
1995. The dollar decrease is due primarily to a reduction in skilled nursing
payroll of approximately $380,000, or 8.2%, in response to the decline in
nursing revenues as set forth above, as well as the reduction of nurse
supervisory personnel in the homemaker division. As a percentage of revenues,
such costs were 58.0% in the first quarter of 1996 compared to 62.0% in the
first quarter of 1995. The decrease in percentage is due to reduction in skilled
nursing payroll referred to above and, to a lesser extent, the increase in
revenues of the management services division, which carries no direct patient
care costs.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the first quarter of 1996,
selling, general and administrative expenses were $6,088,328, an increase of
$744,399, or 13.9% over the first quarter of 1995. Approximately $300,000 of the
increase was due to the addition, subsequent to the first quarter of 1995, of
information services and administrative personnel to support the development and
implementation of an improved clinical and reimbursement system. Also, an
increase of approximately $200,000 was due to increased overhead to support the
growth in revenues of the management services division. The remaining amount of
the increase was due to the reduction of approximately $245,000 in selling,
general and administrative expenses in the first quarter of 1995, resulting from
the recovery of certain nonrecurring payroll related costs attributable to prior
periods, without a corresponding reduction in such expenses for the same period
in 1996. As a percentage of revenues, selling, general and administrative
expenses increased to 36.9% in the first quarter of 1996 compared to 33.6% in
the first quarter of 1995 for the reasons set forth above.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
$317,013 in the first quarter of 1996, an increase of $166,379, or 110.5%,
compared to the first quarter of 1995. This increase was due to additional
provisions to expense, in particular, approximately $102,000 in the Virginia
operations and, to a lesser extent, the increase in revenues described above. As
a percentage of revenues, the provision for doubtful accounts was 1.9% in the
first quarter of 1996, compared to .9% in the first quarter of 1995. Such
percentage increase resulted from the additional provisions to expense as set
forth above.
INCOME FROM OPERATIONS. Income from operations was $522,361 in the first quarter
of 1996, a decrease of $42,310, or 7.5% over the first quarter of 1995. As
previously stated, in the first quarter of 1995, selling, general and
administrative expenses were reduced by approximately $245,000 resulting from
the recovery of certain nonrecurring payroll related costs attributable to prior
periods, without a corresponding reduction in the first quarter of 1996.
Additionally, the Virginia operations incurred operating losses of approximately
$106,000 in the first quarter of 1996, compared to income of approximately
$58,000 in the first quarter of 1995, resulting in a decrease in operating
income of approximately $164,000. Substantial emphasis has been placed on
improving the operating results in Virginia, including the reduction of certain
costs and expenses not expected to impact the Company's ability to achieve
revenue increases in this operation. Offsetting these decreases was an operating
income increase in the Texas operations of $219,000, or 25.7%; an increase in
operating income of the management services division of $100,000, or 43.4%; and
the closing of the New Jersey operations in July 1995, which incurred losses of
$87,000 in the first quarter of 1995. Operating income in the first quarter of
1996 was reduced slightly by the loss of a managed care contract in Texas which
occurred late in the first quarter of 1996. In future periods, quarterly income
from operations is projected to be reduced by approximately $75,000 as a result
of this lost contract. The Company continues to actively market its services to
other managed care companies.
PROVISION FOR INCOME TAXES. The effective tax rate for the first quarter of 1996
was 45.4%, compared to 18.9% for the first quarter of 1995. Such effective tax
rate was substantially higher in 1996 primarily due to a permanent book and tax
difference created by a nontaxable abatement of certain payroll related costs in
1995. See also Note 8 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
factors considered by the Company in its recoverability assessment include
market share 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 circumstances to future periods is inherently
uncertain.
13
Management believes that the "excess cost over net assets of acquired companies"
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
is 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; and (4) the nature of the personal services provided,
which will be continuously needed in the future and are not subject to
obsolescence. Reductions to the estimated useful life of this asset could have a
material effect on the Company's results of operations. The Company is not
currently aware of any events or trends which would indicate a reduction in the
useful life should be made. See also Notes 1, 2, and 3 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, working capital and its current and
debt-to-equity ratios (including the restatement to reflect the merger with HHCC
in May 1995 which was accounted for as a pooling of interests):
LIQUIDITY AND CAPITAL RESOURCES
(DOLLAR AMOUNTS IN THOUSANDS)
---------------------------------
MARCH 31, DECEMBER 31,
1996 1995
---------------- ------------
Cash and cash equivalents ............ $ 225 $ 293
Working capital ...................... $ 4,394 $ 5,223
Current ratio ........................ 1.54 1.61
Debt-to-equity ratio ................. 1.93 2.11
Cash decreased by approximately $68,000 from December 31, 1995 to March 31,
1996. Related thereto, at March 31, 1996, the Company had $800,000 less
outstanding under its revolving credit facilities than at December 31, 1995. For
the three months ended March 31, 1996, net cash of approximately $1,353,000 was
provided by operating activities, while the Company used cash of approximately
$1,189,000 for financing activities. Also during this period, the Company used
cash of approximately $177,000 in investing activities and approximately $55,000
to acquire property and equipment.
Working capital decreased by approximately $829,000 during the three month
period ended March 31, 1996. The current ratio also decreased to 1.54 at March
31, 1996 from 1.61 at December 31, 1995. These decreases are due to various
factors, consisting primarily of a decrease of approximately $1,366,000 in net
accounts receivable between these dates (see discussion set forth below under
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES), without a corresponding
decrease in current liabilities.
The Company's stockholders' equity at March 31,1996 was $9,529,616, which
increased $190,312 from December 31, 1995. Such increase resulted principally
from net income for the period. The Company's debt-to-equity ratio improved from
2.11 to 1.93 between these dates, primarily due to the increase in stockholders'
equity, debt repayments, and as previously discussed, the amount borrowed under
the Company's revolving credit facilities was less at March 31, 1996 than at
December 31, 1995.
14
The Company has entered into various debt obligations with a bank and others,
including the former owners of acquired companies, resulting in total
outstanding borrowings of approximately $10,691,000 at March 31, 1996. Such
total debt amount is exclusive of a contractual obligation to the former owners
of PVNS, which is addressed in the discussion below concerning the Company's
other commitments. The borrowings have been required to finance the Company's
growth including acquisitions and for the reasons set forth below under ITEMS
AFFECTING LIQUIDITY AND CAPITAL RESOURCES. The terms and other information
regarding such borrowings are more fully described in Notes 3 and 6 to the
accompanying condensed consolidated financial statements.
ITEMS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The Company's total debt (including capitalized lease obligations) will require
approximately $2,190,000 for principal and interest payments during the twelve
months ending March 31, 1997, 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
contractual obligations of approximately $332,000 to the former owners of PVNS
over the twelve months ending March 31, 1997. In addition, the Company is
committed under various operating leases (office facilities, automobiles, and
computer and equipment), for payments totalling approximately $2,040,000
(including month-to-month leases that are expected to be continued or replaced)
over the twelve months ending March 31, 1997. As of March 31, 1996, the Company
had no other significant commitments and no material planned purchases of
property and equipment.
The Company has been experiencing some difficulty in collecting certain
receivables. At March 31, 1996, such receivables consist of: (i) approximately
$800,000 of claims receivable from a Texas welfare program that exceed the
normal amount of receivables outstanding for this operation, (ii) approximately
$590,000 of claims receivable from the Nevada Medicaid intermediary relating to
untimely billing thereof, for which an informal appeal for payment has been made
to the Nevada Medicaid program (see also Note 7 to the accompanying condensed
consolidated financial statements), and (iii) approximately $600,000 receivable
under a management services contract, collection of which is being litigated.
With respect to the receivables of $1,990,000 set forth in (i) through (iii)
above, $800,000 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 approximately $110,000 from April 1 through May 8, 1996
and expects to collect a substantial portion of the remaining amount of $690,000
by the end of the third quarter of 1996. The other $1,190,000 of receivables set
forth in (ii) and (iii) above are being appealed or litigated and thus, the
timing and amount of collection are less certain. At March 31, 1996, the Company
had reserves of approximately $550,000 attributable to the receivables set forth
in (i) through (iii) 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 May 8, 1996, 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.
As previously stated, net accounts receivable decreased approximately $1,366,000
from December 31, 1995 to March 31, 1996. Of this decrease, approximately
$900,000 consists of a reduction in PVNS and PRN Nevada Medicare receivables,
which enhanced the Company's liquidity during this three month period. This
reduction was due to payments received from the Medicare intermediary consisting
of (i) advances in connection with a timing change for reimbursing costs which
resulted from a change in Medicare intermediaries and (ii) reimbursement in
excess of costs incurred during 1995 and the first quarter of 1996. Such
remaining amounts of approximately $2,600,000 will be repaid to the Medicare
intermediary through August 1996. These repayments are somewhat offset by
amounts totalling approximately
15
$1,500,000 received from the Medicare intermediary in April 1996 for
reimbursable costs incurred in March 1996. The net amount of approximately
$1,100,000 due the Medicare intermediary after March 31, 1996 will result in the
Company utilizing a substantial portion, if not all, of its available borrowing
capacity under its revolving credit facilities, and may require the Company to
obtain additional financing.
Primary sources of liquidity include cash generated from operations (which has
been used to support accounts receivable growth), borrowing availability under
the Company's existing revolving credit facilities and increases in such
facilities, and loans from and guarantees of loans by the Company's President
and another director. At March 31, 1996 and May 8, 1996, the Company had
available borrowing capacity of $1,500,000 and $1,275,000, respectively, under
its existing revolving credit facilities.
Taking into account the commitments and the matters described above, management
believes that the Company's existing capital resources and the above described
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, debt financing or additional bank financing. The Company's credit
facilities with its primary lender generally prohibit additional borrowings by
the Company without such lender's consent. Although the Company has historically
been able to obtain additional financing from its primary lender, as needed,
there can be no assurance thereof or that the Company would be able to obtain
alternative financing, if required, on acceptable terms.
Certain of the matters discussed in Part I of this quarterly report contain
forward-looking statements that involve risks and uncertainties. Although the
Company believes that its expectations are based on reasonable assumptions, it
can give no assurance that anticipated results will occur.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 19 for location of exhibits required by Item
601 of Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1996.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Innovations, Inc.
Date: May 14, 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
18
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- -------------------
11 Computation of Per Share Earnings
19
EXHIBIT 11
MEDICAL INNOVATIONS, INC.
COMPUTATION OF PER SHARE EARNINGS
QUARTERS ENDED MARCH 31,
-----------------------
1996 1995
--------- ----------
PRIMARY:
Net income applicable to common stock $ 158,236 $ 261,391
Reduce interest expense, net of tax effect,
for assumed debt retirement resulting from the
20% treasury stock repurchase limitation -- --
--------- ----------
Net income applicable to common and common
equivalent shares $ 158,236 $ 261,391
========== ==========
Weighted average common shares outstanding 15,945,785 15,831,584
Effect of stock options and warrants -- --
---------- ----------
Weighted average common and common
equivalent shares 15,945,785 15,831,584
========== ==========
Net income per common and common
equivalent share -- primary $ 0.01 $ 0.02
========== ==========
FULLY DILUTED:
Net income applicable to common stock $ 158,236 $ 261,391
Reduce interest expense, net of tax effect, for
assumed debt retirement resulting from the
20% treasury stock repurchase limitation -- --
---------- ---------
Net income applicable to common and common
equivalent shares $ 158,236 $ 261,391
========== ==========
Weighted average common and common
equivalent shares 15,945,785 15,831,584
Additional effect of stock options and warrants -- --
---------- ----------
Weighted average common and common
equivalent shares 15,945,785 15,831,584
========== ==========
Net income per common and common
equivalent shares -- fully diluted $ 0.01 $ 0.02
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANIES 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 224,536
<SECURITIES> 0
<RECEIVABLES> 10,615,364
<ALLOWANCES> 0<F1>
<INVENTORY> 315,427
<CURRENT-ASSETS> 12,565,204
<PP&E> 2,088,729
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 27,958,966
<CURRENT-LIABILITIES> 8,171,415
<BONDS> 0
0
0
<COMMON> 119,662
<OTHER-SE> 9,409,954<F3>
<TOTAL-LIABILITY-AND-EQUITY> 27,958,966
<SALES> 0
<TOTAL-REVENUES> 16,484,226
<CGS> 9,556,524<F4>
<TOTAL-COSTS> 15,961,865
<OTHER-EXPENSES> 6,405,341
<LOSS-PROVISION> 317,013
<INTEREST-EXPENSE> 232,377
<INCOME-PRETAX> 289,984
<INCOME-TAX> 131,748
<INCOME-CONTINUING> 158,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,236
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
<F1>Allowances are netted against receivables on the balance sheet, but are
disclosed in the Notes.
<F2>Depreciation is included in PP&E and is disclosed in Notes separately.
<F3>Additional Paid-In Capital and Retained Earnings.
<F4>Direct Patient Care Costs.
</FN>
</TABLE>
