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 JUNE 30, 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 July 22, 1996 was 3,903,909.
Transitional Small Business Disclosure Format (Check one)
Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim (unaudited) consolidated financial statements of the
Company for the 1996 reporting periods and the comparable periods 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 and six-months ended June 30, 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
payment was in accordance with the terms of the purchase agreement entered
into by the Company and the former stockholders of Oxycare 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 common shares pursuant to this conversion at a price of
approximately $.94 per share. On May 31, 1996, the Company issued an
additional 34,188 shares for $20,000, or a price of $.585 per share to the
same debenture holders. The debentures originally matured on May 31,
1996, but were extended by mutual agreement to November 30, 1996. The
debentures are convertible to common stock at the lesser of (a) market
price less 28 percent, or (b) $.875 per share.
3. Long-Term Debt:
On March 31, 1996, the Company was obligated to retire approximately
$220,000 of amounts owing on a note payable to a bank. During 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 costs of defense and 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
file a registration statement within six months from the date of the
acquisition. The Company agreed to file a registration statement for
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.
During the second quarter of 1996, the Company filed a registration
statement on Form S-3 for registration of 500,000 shares of common stock
and shares underlying the warrants related to the Oxycare acquisition. In
addition, the Company registered the underlying shares related to
previously issued bridge warrants. A total of 303,000 common shares
related to the bridge warrants were registered. The warrants are
exercisable at a price of $1.65 per share through October 31, 1996.
5. 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 six months ended June 30, 1996, Oxycare's
revenues and related pre-tax income were approximately $690,000 and
$150,000, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations - Second Quarter
Revenues for the second quarter of 1996 totaled $2,951,000 compared
to revenues of $3,247,000 during the same quarter in 1995, or a decrease
of approximately nine percent. Revenues for the quarter were down due to
the elimination and consolidation of certain unprofitable product lines,
primarily in retail pharmacy.
The Company's gross margin percentage increased to 58% for the second
quarter of 1996 compared to 46% for the second quarter of 1995. On an
absolute dollar basis, gross margin increased to $1,709,000 for the second
quarter compared to $1,483,000 for 1995. The increase in gross margin was
a result of a reduction in retail pharmacy sales which carry a lower gross
margin, and an increase in DME and infusion related revenue, which have
higher gross margins.
Selling, general and administrative expenses for the quarter ended
June 30, 1996 totaled $1,656,000, compared to $1,950,000 for the second
quarter in 1995, or a reduction of approximately 15%. The reduction in
operating expenses of approximately $294,000 was due in large part to the
continuation of Management's restructuring efforts which commenced in the
first quarter of 1996.
The Company generated income from operations of $53,000 for the
second quarter of 1996, compared to a loss from operations of $(467,000)
for the second quarter of 1995. The Company was able to generate the
positive operating results due to the factors mentioned above, primarily
the Company's cost reduction efforts, a refocusing on profitable business
units, and the consolidation of the profitable Oxycare operations which
commenced in January, 1996. The Company incurred a net loss during the
second quarter of 1996 of $(37,000) or $(.01) per share, compared to a net
loss of $(393,000) 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.
Results of Operations - Year-to-Date
Revenues year-to-date for 1996 aggregated $6,090,000 compared to
revenues of $6,406,000 during the same period in 1995, or a decrease of
approximately five percent. Revenues for the quarter were down due to the
elimination and consolidation of certain unprofitable product lines,
primarily in retail pharmacy.
The Company's gross margin percentage increased to 55% year-to-date
for 1996 compared to 47% for the first six months of 1995. On an absolute
dollar basis, gross margin increased by $361,000 over 1995 despite a
reduction in total revenue of $316,000 for the period. The increase in
gross margin was a result of a reduction in retail pharmacy sales which
carry a lower gross margin, and a corresponding increase in DME and
infusion related revenue, which have higher gross margins.
Selling, general and administrative expenses for the first half of
1996 totaled $3,428,000, compared to $3,881,000 for the second quarter in
1995, or a reduction of approximately 12%. The reduction in operating
expenses of approximately $453,000 was due to the aforementioned
restructuring efforts which commenced at the beginning of 1996.
The Company incurred a loss for the first six months of 1996 of
$(226,000) or $(.06) per share, compared to a net loss of $(766,000) or
$(.16) per share for the same period in 1995. The reduction in the net
loss for the first half of 1996 as compared to the first half of 1995 was
due to the factors mentioned above, primarily the Company's cost reduction
efforts, a refocusing on profitable business units, and the consolidation
of the profitable Oxycare operations.
Management continues its efforts to reduce operating expenses,
primarily through the centralization of certain administrative and
accounting related functions. Management will continue to aggressively
pursue additional managed care provider contracts and service agreements,
and is continually negotiating and bidding for new agreements and for
profitable acquisition opportunities.
Liquidity and Capital Resources
During the first six months of 1996, the Company used $41,000 of cash
for operating activities, compared to a use of cash of $429,000 for the
first half of 1995. This was due primarily to a reduction in the loss for
the first six months of 1996. Management recognizes the need to improve
the management and collection of accounts receivable. At the end of the
second quarter, the Company began efforts to streamline Company wide
invoicing and collection processes. In addition, the Company has hired
experienced, home health care accounts receivable management personnel who
will provide service to all Company operating units. Management expects to
see continued material improvement in its billing and collection
processes.
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 period.
At June 30, 1996, total current assets were $3,601,000 and total
current liabilities were $4,252,000. Included in current liabilities is
approximately $1,600,000 due to a financial institution under a credit
agreement secured by accounts receivable and inventories. Amounts under
the credit agreement are due in November 1997 but have 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 $119,000 during the first six months of 1996 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.
The large operating losses sustained and reported by the Company in
previous periods have continued to cause the Company to operate in a
deficit working capital position. Consequently, the Company continues to
require additional capital to expand its business and to meet its debt
obligations. Management continues to seek such capital through a number
of possible sources and intends to obtain such capital through additional
borrowing, one or more private placements of equity or debt securities, or
through the sale of such securities to off-shore investors under
Regulation S, or a combination of such transactions. Management may also
consider possible public offerings of the Company's securities. In
pursuing its goal of securing financing, Management will make every
effort to minimize the dilutive effect of its money raising efforts.
However, such transactions may result in substantial dilution to existing
shareholders as restricted securities sold in private placements and
shares offered in off-shore transactions are typically sold at prices that
represent a discount from the market price of publicly traded securities.
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. The ultimate resolution of this matter
could result in additional expense and liability to the Company.
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 had any continuing rights to
acquire shares of the Company's common stock under such securities.
Effective May 31, 1996, the Company and the holders of certain
convertible debentures with a principal value of $200,000 agreed to extend
the maturity date of such debentures to November 30, 1996.
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 June 30, 1996, the maximum borrowing limit was $2,500,000
with a balance outstanding of approximately $1,600,000. 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 June
30, 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.
Effective July 31, 1996, Mr. James C. McNees resigned as Chairman of
the Company's Board of Directors. Mr. McNees, age 74, retired due to
health reasons. As of the same date, Mr. Charles W. McLaughlin, an
existing Board member and current President and CEO of Forte
Communications, Inc., was appointed the new Chairman. In addition, Mr.
William D. Carraway, President and CEO of Oasis Environmental, Inc. (a
corporation with securities registered under and subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended), was
elected by the Board to fill the vacancy left by Mr. McNees. Mr.
Carraway, age 52, has over 25 years executive management and Board level
experience with over ten years experience in the health care industry.
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: August 9, 1996
Thomas O. Bushell
Chief Executive Officer
By: /s/ William V. Trowbridge Date: August 9, 1996
William V. Trowbridge
Chief Financial Officer
<PAGE>
MEDMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 332,000 $ 966,000
Trade accounts receivable, net 2,170,000 1,555,000
Inventories 975,000 1,146,000
Current portion of note receivable 59,000 59,000
Current portion of notes receivable from related party 17,000 17,000
Prepaid expenses 48,000 51,000
-------------- ---------------
3,601,000 3,794,000
Rental Equipment, net 1,049,000 906,000
Property and Equipment, net 341,000 380,000
Note Receivable, less current portion 114,000 146,000
Notes Receivable from Related Party, less current portion 22,000 22,000
Goodwill 1,128,000 1,184,000
Deposits 78,000 53,000
-------------- --------------
$ 6,333,000 $ 6,485,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable and convertible debentures $ 200,000 $ 960,000
Current portion of long-term debt 2,338,000 1,807,000
Current portion of long-term debt to related party 45,000 45,000
Accounts payable 1,074,000 737,000
Accrued liabilities 595,000 584,000
-------------- --------------
4,252,000 4,133,000
Long-term Debt, less current portion 672,000 777,000
Long-term Debt to Related Party, less current portion 121,000 121,000
Other Liabilities 49,000 49,000
-------------- --------------
5,094,000 5,080,000
-------------- --------------
Commitments and Contingencies (note 4)
Stockholders' Equity:
Preferred stock, $.001 par value; authorized 20,000,000
shares; none issued - -
Common stock, $.001 par value; authorized 30,000,000
shares; 3,903,909 and 3,827,094 shares issued,
respectively 4,000 4,000
Additional paid-in capital 6,448,000 6,388,000
Common stock warrants and options 668,000 668,000
Accumulated deficit (5,881,000) (5,655,000)
-------------- --------------
1,239,000 1,405,000
-------------- --------------
$ 6,333,000 $ 6,485,000
============== ==============
</TABLE>
The notes to the Consolidated Financial Statements are an integral part of
these statements.
<PAGE>
MEDMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
----------------------------------
June 30, June 30,
1996 1995
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 2,951,000 $ 3,247,000
Cost of revenues 1,242,000 1,764,000
------------- --------------
Gross Margin 1,709,000 1,483,000
Selling, general and administrative expenses 1,656,000 1,950,000
-------------- --------------
Income (loss) from operations 53,000 (467,000)
Other income (expense) (90,000) 74,000
-------------- --------------
Net loss before income taxes (37,000) (393,000)
Provision for income taxes - -
-------------- --------------
Net loss $ (37,000) $ (393,000)
============== ==============
Net Loss Per Common Share $ (0.01) $ (0.08)
============== ==============
Weighted Average Common Shares Outstanding 3,892,513 4,868,581
============== ==============
</TABLE>
The notes to the Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
MEDMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
----------------------------------
June 30, June 30,
1996 1995
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 6,090,000 $ 6,406,000
Cost of revenues 2,726,000 3,403,000
-------------- --------------
Gross Margin 3,364,000 3,003,000
Selling, general and administrative expenses 3,428,000 3,881,000
-------------- --------------
Loss from operations (64,000) (878,000)
Other income (expense) (162,000) 38,000
-------------- --------------
Net loss before income taxes (226,000) (840,000)
Provision for income taxes - 74,000
-------------- --------------
Net loss $ (226,000) $ (766,000)
============== ==============
Net Loss Per Common Share $ (0.06) $ (0.16)
============== ==============
Weighted Average Common Shares Outstanding 3,881,117 4,868,581
============== ==============
</TABLE>
The notes to the Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
MEDMARCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
-----------------------------------
June 30, June 30,
1996 1995
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (226,000) $ (766,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 278,000 361,000
Loss from disposition of assets - 54,000
Increase in trade accounts receivable (615,000) (129,000)
(Increase) decrease in inventories 171,000 (139,000)
Decrease in prepaid expenses 3,000 57,000
Increase in accounts payable 337,000 58,000
Increase in accrued liabilities 11,000 75,000
-------------- --------------
Net cash used in operating activities (41,000) (429,000)
-------------- --------------
Cash flows from investing activities:
Issuance of notes and loans receivable - (29,000)
Payments received on notes receivable 32,000 31,000
Purchase of property and rental equipment and other (351,000) (200,000)
-------------- --------------
Net cash used in investing activities (319,000) (198,000)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 633,000 961,000
Repayments of long-term debt and notes payable (907,000) (117,000)
-------------- --------------
Net cash provided by (used in) financing activities (274,000) 844,000
-------------- --------------
Net increase (decrease) in cash and cash equivalents (634,000) 217,000
Cash and cash equivalents, beginning of period 966,000 474,000
-------------- -------------
Cash and cash equivalents, end of period $ 332,000 $ 691,000
============== =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 140,000 $ 54,000
============== ==============
Supplemental disclosure of noncash financing activities:
Conversion of debentures into common stock $ 60,000 $ -
============== ==============
</TABLE>
The notes to the Consolidated Financial Statements are an integral part
of these statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> $332,000
<SECURITIES> 0
<RECEIVABLES> $3,444,000
<ALLOWANCES> $1,274,000
<INVENTORY> $975,000
<CURRENT-ASSETS> $3,601,000
<PP&E> $2,727,000
<DEPRECIATION> $1,337,000
<TOTAL-ASSETS> $6,333,000
<CURRENT-LIABILITIES> $4,252,000
<BONDS> $842,000
0
0
<COMMON> $4,000
<OTHER-SE> $1,235,000
<TOTAL-LIABILITY-AND-EQUITY> $6,333,000
<SALES> $6,090,000
<TOTAL-REVENUES> $6,090,000
<CGS> $2,726,000
<TOTAL-COSTS> $2,726,000
<OTHER-EXPENSES> $3,378,000
<LOSS-PROVISION> $50,000
<INTEREST-EXPENSE> $176,000
<INCOME-PRETAX> $(226,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $(226,000)
<EPS-PRIMARY> $(0.06)
<EPS-DILUTED> $(0.06)
</TABLE>
