U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended March
31, 1996.
[ ] Transition Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
from ____________ to ____________.
Commission file number 1-11534
MEDMARCO, INC.
(Exact name of small business issuer as specified in its charter)
Utah 48-1092064
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
215 South State Street, Suite 535
Salt Lake City, Utah 84111
(Address of principal executive offices)
(801) 532-7525
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or Section 15(d) of the Exchange Act during the past 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] or No [ ]
The number of shares outstanding of the Company's common stock, par value
$.001, as of April 30, 1996 was 3,869,721.
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The interim (unaudited) financial statements of the Company for the
reporting period and the comparable quarter for the preceding year are
attached to and form a part of this report. The financial statements should
be read in conjunction with the following explanatory notes.
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1996. For further information, refer to the consolidated
financial statements and related footnotes included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1995.
2. Short-Term Debt:
In January 1996, the Company paid-off the $700,000 balance of a note
payable to the former stockholders of Oxycare, Inc. ("Oxycare"). The pay-off
was in accordance with the terms of the purchase agreement entered into by
the Company and the sellers on December 21, 1995.
On January 12, 1996, certain holders of the Company's Series A
Convertible Debentures converted debentures with a principal value of $40,000
into shares of the Company's common stock. The Company issued 42,522 shares
pursuant to the conversion at a price of approximately $.94 per share.
3. Long-Term Debt:
On March 31, 1996, the Company was obligated to retire approximately
$220,000 of amounts owning on a note payable to a bank. Subsequent to the
period covered by this report, the bank agreed to extend the note for an
additional six months on terms similar to those previously existing.
4. Commitments and Contingencies:
Litigation
As reported in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995, on February 26, 1996, the former president of Health
Industries, Inc. ("HII") and his wife filed a lawsuit against HII, the
Company, and certain of its former officers and directors and a current
director, alleging, among other things, breach of purchase agreement, breach
of employment agreement and wrongful termination. Due to the preliminary
state of the lawsuit, management, after consultation with legal counsel, is
unable to estimate the ultimate liability, if any, that the Company might be
subject to in this matter. Management believes that the lawsuit is without
merit and that the Company will ultimately prevail in this action. However,
the ultimate resolution of this matter could result in additional expense and
liability to the Company in the near term. Subject to the resolution of this
matter, the Company has ceased making payments on a note payable to the former
president (see "Legal Proceedings" under Part II, Item 1. below).
Registration Rights
In connection with its acquisition of Oxycare the Company agreed to
register, within six months from the date of the acquisition, 275,000 shares
of common stock and 225,000 common shares subject to the exercise of the
warrants issued as consideration for the purchase of the outstanding capital
stock of Oxycare. The Company is obligated to pay all expenses (except those
related to the shares of the former Oxycare stockholders' legal counsel)
related to this offering under the agreement.
5. Stockholders' Equity:
On February 12, 1996, the Board of Directors of the Company granted the
current Chief Executive Officer and Chief Financial Officer non-qualified
options to purchase common stock in connection with the Company's 1993 Stock
Option Plan. The aggregate number of shares subject to the issuance upon
exercise of options granted these officers totals 400,000. All options have
an exercise price of $1.00 (the quoted market value of the common stock on
the date the options were granted). In accordance with APB Opinion No., 25,
the Company will not be required to record any compensation expense related
to these options. The options vest over a four year period with 20% vesting
on the date of grant, and 20% to vest for each full year of service
thereafter.
6. Impact of Business Combination:
The Company acquired all of the issued and outstanding stock of Oxycare,
a supplier of DME medical equipment, on December 21, 1995. The acquisition
was accounted for as a purchase, and as such, Oxycare's operating results have
been included with those of the Company since the date of acquisition. For
the three months ending March 31, 1996, Oxycare's revenues and related pre-
tax income were approximately $360,000 and $80,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the first quarter of 1996 totaled $3,139,000 compared to
revenues of $3,159,000 during the same quarter in 1995. This is a decrease
of approximately one percent. Revenues for the quarter remained level due
primarily to the addition of Oxycare (which contributed about $360,000 in
additional revenue to the first quarter) offset by a reduction in revenue due
to the elimination and consolidation of certain unprofitable product lines,
primarily in retail pharmacy.
Cost of revenues decreased approximately 10% during the three months
ended March 31, 1996 when compared to the same quarter in 1995, or $1,484,000
compared to $1,639,000. The reduction in the cost of revenues was a result
of a reduction in retail pharmacy sales which carry a lower gross margin, and
a corresponding increase in DME related revenue, which has higher gross
margins.
Selling, general and administrative expenses for the quarter ending
March 31, 1996 totaled $1,772,000, compared to $1,931,000 for the first
quarter in 1995, and compared to $2,340,000 for the immediately preceding
quarter (the fourth quarter of 1995). This is a reduction of 9% and 25%,
respectively. The reason for the decline in operating expenses of
approximately $159,000 over the same period in 1995, and the decline in
expenses of approximately $568,000 over the immediately preceding fourth
quarter of 1995, was due in large part to Management's restructuring efforts
which commenced in the first quarter of 1996.
The Company incurred a loss during the first quarter of 1996 of
$(189,000) or $(.05) per share, compared to a net loss of $(373,000) or $(.08)
per share for the same period in 1995. The reduction in the net loss for the
first quarter of 1996 as compared to the first quarter of 1995 was due to the
factors mentioned above, primarily the Company's cost cutting efforts and the
consolidation of the profitable Oxycare operations commencing in January 1996.
Management continues to stress reduction of operating expenses and the
elimination of unprofitable operating units, and will continue to aggressively
pursue additional managed care provider contracts and service agreements. The
Company is continually negotiating and bidding for new agreements and for
profitable acquisition opportunities.
Liquidity and Capital Resources
During the first three months of 1996, the Company generated $153,000 in
cash from operating activities, compared to a use of cash of $(99,000) for the
first quarter of 1995. This was due primarily to a reduction in the loss for
the first quarter as compared to last year, and an increase in accounts
payable. The Company used cash in both investing and financing activities as
it continued to purchase DME rental equipment for its growing equipment
business, and as it paid down short and long-term debt during the quarter.
At March 31, 1996, total current assets were $3,655,000 and total current
liabilities were $4,207,000. Included in current liabilities is approximately
$1,500,000 due to a financial institution which represents a credit agreement
secured by accounts receivable and inventories. The credit agreement is due in
late 1997 but has been classified as short-term as the Company currently is
not in compliance with the covenants of the agreement (see Part II Item 3.
below). Current liabilities increased by $74,000 during the first quarter
due primarily to an increase in accounts payable and additional borrowing
under the credit agreement, net of the pay-off of a $700,000 short-term note
payable which represented the final payment for the Oxycare acquisition.
Management believes that cash flows from operating activities and
available credit lines should provide the necessary working capital for
operations during 1996. Management is currently seeking additional equity
capital for the Company to help restructure the Company's current working
capital deficit and to help finance any future acquisitions. In addition to
obtaining new equity capital, Management intends to use securities of the
Company in conjunction with asset-based financing to facilitate future
acquisitions.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the period covered by this report, the Company was involved in
the following material legal matter outside the ordinary course of business:
Louis Goldstein and Barbara Goldstein v. Medmarco, Inc., et al., filed
in Superior Court, Maricopa County, Phoenix, Arizona. Mr. and Mrs. Goldstein
brought the above-titled action in February 1996, alleging wrongful
termination, fraud and breach of contract against the Company and its
officers and directors. The Company denies all of the plaintiffs' claims and
allegations and intends to vigorously defend the action and to assert
counterclaims against the Goldsteins for their actions in connection with
the original sale of HII to the Company and management of HII following the
acquisition.
ITEM 2. CHANGES IN SECURITIES.
During the period covered by this report, the Company extended the
expiration date of its Series A and Series B Stock Purchase Warrants from
April 8, 1996 to January 31, 1997, as permitted by the terms of the Warrant
Agreement governing such securities. As a consequence of this extension,
these Warrants will not terminate as originally scheduled and the rights of
the holders of such Warrants to exercise the same subject to the remaining
terms and conditions of the Warrant Agreement and the Warrants will be
unaffected. Without the extension, the Warrants would have expired and the
holders would not have any continuing rights to acquire shares of the
Company's common stock under such securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has a credit agreement with a financial institution which
enables the Company to borrow on a line-of-credit through November 30, 1997.
As of March 31, 1996, the maximum borrowing limit was $2,500,000 with a
balance outstanding of approximately $1,500,000. Amounts borrowed by the
Company are secured by accounts receivable and inventories and are limited
to the borrowing base formula set forth under the credit agreement. In
addition, the credit agreement requires that the Company maintain certain
working capital, debt to worth and earnings related loan covenants. The
Company was not in compliance with these covenants at March 31, 1996, and
the lender has not waived its rights to seek remedy under the provisions of
the credit agreement. Management does not believe this obligation will be
called in advance of its scheduled maturity due to the adequacy of the related
collateral.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
reporting period.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEDMARCO, INC.
By: /s/ Thomas O. Bushell Date: May 10, 1996
----------------------------- -------------------
Thomas O. Bushell
Chief Executive Officer
By: /s/ William V. Trowbridge Date: May 10, 1996
----------------------------- --------------------
William V. Trowbridge
Chief Financial Officer
<PAGE>
MEDMARCO, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Assets
--------------------------------------------------------------
Current Assets: (unaudited)
Cash and cash equivalents $ 677,000 $ 966,000
Trade accounts receivable, net 1,813,000 1,555,000
Inventories 1,065,000 1,146,000
Current portion of note receivable 58,000 59,000
Current portion of notes receivable from related party 17,000 17,000
Prepaid expenses 25,000 51,000
-------------- --------------
3,655,000 3,794,000
Rental Equipment, net 918,000 906,000
Property and Equipment, net 351,000 380,000
Note Receivable, less current portion 131,000 146,000
Notes Receivable from Related Party, less current portion 22,000 22,000
Goodwill 1,156,000 1,184,000
Deposits 54,000 53,000
-------------- --------------
$ 6,287,000 $ 6,485,000
============== ==============
Liabilities and Stockholders' Equity
--------------------------------------------------------------
Current Liabilities:
Note payable and convertible debentures $ 220,000 $ 960,000
Current portion of long-term debt 2,271,000 1,807,000
Current portion of long-term debt to related party 44,000 45,000
Accounts payable 1,147,000 737,000
Accrued liabilities 525,000 584,000
-------------- --------------
4,207,000 4,133,000
Long-term Debt, less current portion 654,000 777,000
Long-term Debt to Related Party, less current portion 121,000 121,000
Other Liabilities 49,000 49,000
-------------- --------------
5,031,000 5,080,000
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.001 par value; authorized 20,000,000
shares; none issued
Common stock $.001 par value; authorized 30,000,000
shares; 3,869,721 and 3,827,094 shares issued
respectively 4,000 4,000
Additional paid-in capital 6,428,000 6,388,000
Common stock warrants and options 668,000 668,000
Accumulated deficit (5,844,000) (5,655,000)
-------------- --------------
1,256,000 1,405,000
-------------- --------------
$ 6,287,000 $ 6,485,000
============== ==============
</TABLE>
The notes to the Consolidated Financial Statements are an integral part of
these statements.
<PAGE>
MEDMARCO, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
---------------------------
March 31, March 31,
1996 1995
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 3,139,000 $ 3,159,000
Cost of revenues 1,484,000 1,639,000
------------ -----------
Gross profit 1,655,000 1,520,000
Selling, general and administrative expenses 1,772,000 1,931,000
------------ -----------
(Loss) from operations (117,000) (411,000)
Other income (expense) (72,000) 38,000
------------ -----------
Net (loss) before income taxes (189,000) (373,000)
Provision for income taxes - -
------------ -----------
Net (loss) $ (189,000) $ (373,000)
============ ===========
Net (Loss) Per Common Share $ (0.05) $ (0.08)
============ ===========
Weighted Average Common Shares Outstanding 3,869,721 4,686,581
============ ===========
</TABLE>
The notes to the Consolidated Financial Statements are an integral part of
these statements.
<PAGE>
MEDMARCO, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
March 31, March 31,
1996 1995
-------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (189,000) $ (373,000)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 142,000 175,000
Loss from disposition of assets - 31,000
(Increase) decrease in trade accounts receivable (258,000) 143,000
(Increase) decrease in inventories 81,000 (191,000)
(Increase) decrease in prepaid expenses 26,000 (44,000)
Increase in accounts payable 410,000 88,000
Increase (decrease) in accrued liabilities (59,000) 72,000
--------------- ----------------
Net cash provided by (used in) operating activities 153,000 (99,000)
--------------- ----------------
Cash flows from investing activities:
Issuance of notes and loans receivable - (25,000)
Payments received on notes receivable 16,000 15,000
Purchase of property and rental equipment (98,000) (25,000)
--------------- ----------------
Net cash (used in) investing activities (82,000) (35,000)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 431,000 796,000
Repayments of long-term debt and notes payable (791,000) (41,000)
--------------- ----------------
Net cash provided by (used in) financing activities (360,000) 755,000
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (289,000) 621,000
Cash and cash equivalents, beginning of period 966,000 474,000
--------------- ----------------
Cash and cash equivalents, end of period $ 677,000 $ 1,095,000
=============== ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 52,000 $ 31,000
=============== ================
Cash paid for income taxes $ - $ -
=============== ================
Supplemental disclosure of noncash financing activities:
Conversion of debentures into common stock $ 40,000 $ -
=============== ================
</TABLE>
The notes to the Consolidated Financial Statements are an integral part
of these statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> $677,000
<SECURITIES> 0
<RECEIVABLES> $3,075,000
<ALLOWANCES> $1,813,000
<INVENTORY> $1,065,000
<CURRENT-ASSETS> $3,655,000
<PP&E> $4,840,000
<DEPRECIATION> $3,571,000
<TOTAL-ASSETS> $6,287,000
<CURRENT-LIABILITIES> $4,207,000
<BONDS> $775,000
0
0
<COMMON> $4,000
<OTHER-SE> $1,252,000
<TOTAL-LIABILITY-AND-EQUITY> $6,287,000
<SALES> $3,139,000
<TOTAL-REVENUES> $3,139,000
<CGS> $1,484,000
<TOTAL-COSTS> $1,772,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $72,000
<INCOME-PRETAX> $(189,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $(189,000)
<EPS-PRIMARY> $(.05)
<EPS-DILUTED> 0
</TABLE>
