UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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 33-69874
GENERAL MEDICAL CORPORATION
VIRGINIA 94-2640465
(State of incorporation) (I.R.S. Employer
Identification No.)
8741 Landmark Road (804) 264-7500
Richmond, Virginia 23228 (Telephone Number)
(Address of principal
executive offices)
Indicate by check (x) 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
As of November 13, 1996, 1,000 shares of the registrant's Common Stock were
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
September 30, December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,243 $ 3,637
Trade accounts receivable, net
of reserves of $6,279 and $5,089,
respectively 212,900 202,528
Inventories - merchandise 159,619 163,558
Prepaid expenses 1,812 1,453
Total current assets 379,574 371,176
Property, plant and equipment 48,567 41,152
Accumulated depreciation (15,192) (12,136)
Net property, plant and equipment 33,375 29,016
Excess of purchase price over net
assets acquired, net 249,607 255,407
Other assets 17,543 20,201
TOTAL ASSETS $ 680,099 $ 675,800
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 172,233 $ 149,439
Accrued liabilities 18,926 26,169
Accrued compensation 9,017 8,435
Accrued consolidation costs 6,099 7,839
Current maturities of long-term debt 722 905
Total current liabilities 206,997 192,787
Senior credit agreement 187,661 207,812
Senior subordinated notes 105,000 105,000
Subordinated pay-in-kind debentures 70,779 62,939
Deferred taxes 740 596
Other long-term liabilities 611 1,022
Commitments and contingencies
Stockholder's equity:
Preferred stock, no par value-authorized
100,000 shares; none issued -- --
Common stock, $1 par value-authorized
30,000,000 shares; 1,000 shares issued 1 1
Additional paid-in capital 149,107 149,076
Predecessor basis in accounting (20,814) (20,814)
Retained deficit (19,983) (22,619)
Total stockholder's equity 108,311 105,644
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $ 680,099 $ 675,800
<FN>
See notes to condensed consolidated financial statements.
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
Nine Months ended September 30,
(Unaudited)
(In thousands)
1996 1995
Revenues:
Sales $ 1,270,512 $ 1,098,502
Other income 916 940
1,271,428 1,099,442
Cost of sales 1,036,701 895,775
Selling, general and
administrative expenses 189,704 174,290
Consolidation costs 2,031 9,561
Amortization of excess of purchase price
over net assets acquired and other
intangibles 5,673 7,235
Interest expense 29,466 27,936
Income(loss) before income taxes 7,853 (15,355)
Income tax provision(benefit) 4,915 (3,238)
Net income(loss) $ 2,938 $ (12,117)
<FN>
See notes to condensed consolidated financial statements.
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
Three Months ended September 30,
(Unaudited)
(In thousands)
1996 1995
Revenues:
Sales $ 428,381 $ 377,560
Other income(expense) 69 390
428,450 377,950
Cost of sales 347,200 309,989
Selling, general and
administrative expenses 64,020 60,433
Consolidation costs 951 8,629
Amortization of excess of purchase price
over net assets acquired and other
intangibles 1,881 2,188
Interest expense 9,731 9,521
Income(loss) before income taxes 4,667 (12,810)
Income tax provision(benefit) 2,480 (4,191)
Net income(loss) $ 2,187 $ (8,619)
<FN>
See notes to condensed consolidated financial statements.
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
Nine Months ended September 30,
(Unaudited)
(In thousands)
1996 1995
Cash flows from operating activities:
Net income(loss) from continuing operations $ 2,938 $ (12,117)
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization 3,663 3,164
Amortization of deferred interest 2,328 2,169
Amortization of deferred debenture interest 6,073 5,400
Amortization of excess of purchase
price over net assets acquired
and other intangibles 5,673 7,235
Deferred income taxes 144 (4,716)
Loss(gain) on sale of assets (138) 59
Loss on sale of idle facility 207 --
Changes in assets and liabilities:
Accounts receivable (11,156) (17,740)
Inventories 3,678 (14,422)
Accounts payable and accrued expenses 17,228 14,829
Income taxes payable 4,827 (3,618)
Accrued interest (5,453) (4,597)
Other assets and liabilities, net (1,787) 95
Net cash provided by(used in) operating activities 28,225 (24,259)
Cash flows from investing activities:
Receipts(issuance) of notes receivable (17) 3
Proceeds from sale of assets 718 852
Proceeds from sale of manufacturing
assets -- 3,071
Proceeds from sale of idle facilities 382 --
Purchase of business, net of cash
acquired -- (27,339)
Settlement on purchase price of acquired
business 2,055 --
Capital expenditures (8,302) (5,853)
Net cash used in investing activities (5,164) (29,266)
Cash flows from financing activities:
Proceeds from borrowings under
credit facilities 1,310,400 1,207,522
Payments on borrowings under
credit facilities (1,330,551) (1,153,370)
Payment of acquisition and
financing fees (636) (1,765)
Other long term debt (398) (640)
Payment of dividend (301) (1,816)
Contribution to capital 31 90
Net cash provided by(used in) financing activities (21,455) 50,021
Net increase(decrease) in cash and
cash equivalents 1,606 (3,504)
Cash and cash equivalents,
beginning of period 3,637 5,772
Cash and cash equivalents,
end of period $ 5,243 $ 2,268
<FN>
See notes to condensed consolidated financial statements.
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Interim Financial Statements for the Periods
Ended September 30, 1996 and 1995 (Unaudited)
(Dollars in thousands, except as otherwise noted)
1. FINANCIAL PERIODS
The fiscal quarter ends on the Sunday nearest September 30. The periods
ending September 30, 1996 and 1995 ended on September 29, 1996 and October 1,
1995, respectively.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements include
the accounts of General Medical Corporation (the "Company") for the nine and
three month periods ended September 30, 1996 and 1995.
In the opinion of management, the unaudited condensed consolidated interim
financial statements of the Company have been prepared on the basis of
generally accepted accounting principles and contain all normal and recurring
accruals necessary to present fairly the financial position as of September
30, 1996 and December 31, 1995, and the results of operations for the nine and
three months ended September 30, 1996 and 1995, and cash flows for the nine
month periods ended September 30, 1996 and 1995.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, including notes thereto, of the Company for the year ended
December 31, 1995 contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
3. CONSOLIDATION CHARGES
During 1995, the Company entered into an aggressive plan to realign its
distribution network in order to better service its customers and facilitate
the integration of the acquired companies. The realignment plan includes
charges for employee termination and relocation, facility shutdown costs and
losses expected from the sale and abandonment of property. The Company
recorded a one time charge of $8.6 million in September 1995 consisting of
severance ($3.7 million), net facility lease cancellation costs ($4.5 million)
and a loss from a plan to dispose of long-lived assets ($0.4 million) related
to facility shutdowns reasonably expected to occur within one year. However,
the completion of this plan has been delayed primarily due to the inability of
the Company to secure satisfactory warehouse space for the relocating
facilities. Management now expects that the plan will be substantially
complete by December of 1997. The remaining estimated charges of
approximately $2.8 million will be recorded as incurred to reflect the cost of
the physical relocation of inventory and employees related to this plan. For
the nine and three months ended September 30, 1996, total plan charges
amounted to $2.0 million and $0.9 million, respectively.
4. SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995
Cash Paid for Interest and Income Taxes:
Interest $ 26,526 $ 24,912
Income Taxes $ 1,960 $ 5,097
Details of Business Acquired:
Fair value of assets acquired $ 37,298
Cash paid at acquisition, net of
cash acquired (27,339)
Liabilities assumed $ 9,959
Interest accretion:
Subordinated Pay-In-Kind Debentures $ 7,840 $ 6,973
Capital contribution $ 5,090
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues increased $172.0 million, or 15.6%, to $1,271.4 million for 1996
as compared to $1,099.4 million for 1995. On a per day basis, revenues
increased $0.9 million per day to $6.7 million per day for 1996 as compared to
$5.8 million per day for 1995. Gross profit increased by $31.0 million, or
15.3%, to $234.7 million for 1996 as compared to $203.7 million for 1995.
The increase in revenues and gross profit was primarily the result of
internally generated sales and gross profit increases in all markets as a
result of increased sales to existing accounts, the addition of new customers
and the introduction of products new to the distribution supply chain. During
this period the Company's acute care sales increased 22.8%; approximately one-
third of this increase was derived from a new customer contract. Sales in the
alternate-site market (which includes physicians and extended care providers)
increased 6.1%. Sales in the alternate-site market were impaired by the
Company's decision to focus on profitability while completing the integration
of its acquisitions.
As a percentage of revenues, gross profit remained at 18.5% in 1996.
During 1996, the Company took several steps that improved gross profit margin
in each of the individual markets which were offset by a shift in the mix of
sales by market. First, the Company renegotiated a number of group contracts
to better reflect the costs associated with the products and services
provided. Second, the Company realized the full effect of the reorganization
of its management structure which established dedicated account managers and
sales management for each of the Company's markets and allowed the sales force
to concentrate on creating value-added sales. Third, the Company has
developed better margin management tools which allow account managers to
identify opportunities to both maximize value for the customer and profit for
the Company. The Company continually evaluates opportunities for gross profit
percentage growth.
Selling, general and administrative expenses increased $15.4 million, or
8.8%, to $189.7 million for 1996 as compared to $174.3 million for 1995.
However, as a percentage of revenues, selling, general and administrative
expenses decreased to 14.9% for 1996 as compared to 15.9% for 1995. This
percentage decrease is attributable to the elimination of duplicative
positions, the reorganization of the Company's management structure, the
realignment of the Company's distribution network and sales growth in the
acute care market, where the cost to deliver product is generally lower as a
percentage of sales.
Amortization of intangibles decreased $1.6 million in 1996 as compared to
1995. There was a $1.9 million decrease due to several short lived
intangibles reaching full amortization and the write-off of certain trademarks
associated with the manufacturing business that was sold in 1995. This
decrease was partially offset by a $0.3 million increase due to the
amortization of additional intangibles associated with the acquisitions
completed in 1995.
Interest expense increased $1.5 million in 1996 as compared to 1995. This
increase is the result of an increase in average borrowings during 1996 to
support the Company's sales growth.
The effective tax rate changed from a benefit of 21.1% to an expense of
62.6%. This change was primarily the result of income in 1996 compared to a
loss in 1995, and the effect of nondeductible goodwill amortization as a
percentage of income.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Revenues increased $50.5 million, or 13.4%, to $428.5 million for the three
months ended September 30, 1996 as compared to $378.0 million for the three
months ended September 30, 1995. On a per day basis, revenues increased $0.8
million per day to $6.8 million per day for 1996 as compared to $6.0 million
per day for 1995. Gross profit increased by $13.3 million, or 19.6%, to $81.3
million for the three months ended September 30, 1996 as compared to $68.0
million for the three months ended September 30, 1995.
The increase in revenues and gross profit was primarily the result of
internally generated sales and gross profit increases in all markets as a
result of increased sales to existing accounts, the addition of new customers
and the introduction of products new to the distribution supply chain. During
this period the Company's acute care sales increased 21.0%; approximately one-
third of this increase was derived from a new customer contract. Sales in the
alternate-site market (which includes physicians and extended care providers)
increased 4.0%. Sales in the alternate-site market were impaired by the
Company's decision to focus on profitability while completing the integration
of its acquisitions.
As a percentage of revenues, gross profit increased to 19.0% in 1996 as
compared to 18.0% in 1995. This increase is the result of several factors.
First, the Company renegotiated a number of group contracts to better reflect
the costs associated with the products and services provided. Second, the
Company realized the full effect of the reorganization of its management
structure which established dedicated account managers and sales management
for each of the Company's markets and allowed the sales force to concentrate
on creating value-added sales. Third, the Company has developed better margin
management tools which allow account managers to identify opportunities to
both maximize value for the customer and profit for the Company. The Company
continually evaluates opportunities for gross profit percentage growth.
Selling, general and administrative expenses increased $3.6 million, or
5.9%, to $64.0 million for the three months ended September 30, 1996 as
compared to $60.4 million for the three months ended September 30, 1995.
However, as a percentage of revenues, selling, general and administrative
expenses decreased to 14.9% for 1996 as compared to 16.0% for 1995. This
percentage decrease is attributable to the elimination of duplicative
positions, the reorganization of the Company's management structure, the
realignment of the Company's distribution network and sales growth in the
acute care market, where the cost to deliver product is generally lower as a
percentage of sales.
Amortization of intangibles decreased $0.3 million in the three months
ended September 30, 1996 as compared to the three months ended September 30,
1995. The decrease was due to several short lived intangibles reaching full
amortization and the write-off of certain trademarks associated with the
manufacturing business that was sold in 1995.
Interest expense increased $0.2 million in the three months ended September
30, 1996 as compared to the three months ended September 30, 1995. This
increase is the result of an increase in average borrowings during the quarter
to support the Company's sales growth.
The effective tax rate changed from a benefit of 32.7% to an expense of
53.1%. This change was primarily the result of income in 1996 compared to a
loss in 1995, and the effect of nondeductible goodwill amortization as a
percentage of income.
Liquidity and Capital Resources
The Company's primary cash needs consist of the funding of working capital,
interest expense, capital expenditures and acquisitions, if any.
At September 30, 1996, the outstanding amount of the Company's indebtedness
(other than trade payables) was $ 364.6 million, including approximately
$187.7 million of secured debt.
The Company's primary sources of liquidity are cash flow from operations
and funds available to it under the Credit Agreement. For the nine months
ended September 30, 1996, continuing operating activities provided net cash of
$28.2 million as compared to net cash used in operating activities of $24.3
million for the nine months ended September 30, 1995. This increase is mainly
the result of (i) improved operating profitability, (ii) a reduction in
inventory levels as a result of the Company's realignment of its distribution
network, (iii) improved management of accounts payable in relation to
inventory and (iv) more rapid turnover of accounts receivable. In addition,
the Company realized $2.1 million from the final accounting related to the
purchase of Foster and generated $1.1 million from the sale of fixed assets.
As of October 30, 1996, the Company had borrowings of approximately $170.0
million outstanding under the Credit Agreement and had unused availability
under the Credit Agreement of approximately $63.0 million.
The Company expended $8.3 million on capital items during the nine month
period ended September 30, 1996. The majority of these expenditures ($7.6
million) was used to purchase warehouse equipment and racking attributed to
the modernization of the Company's warehouse operations in connection with the
realignment of the Company's distribution network. It is anticipated that an
additional $6.0 million will be spent during the remainder of 1996 and 1997
related to this plan. The remaining capital expenditures of $0.7 million
relate to small office equipment, replacement warehouse equipment and to a
lesser extent computer hardware and software upgrades. The Company has
embarked on an initiative to upgrade its information system hardware and
software. The Company anticipates spending approximately $7.0 to $10.0
million on this initiative over the next 15 months and an additional $3.0 to
$5.0 million in 1998 and 1999.
The Company's most significant use of working capital is for accounts
receivable and inventories, which represented 50% and 37% of total tangible
assets at September 30, 1996, respectively. Due to the magnitude of its
accounts receivable and inventories, the Company's management places
significant emphasis on managing trade receivables including the related
credit and collection processes and inventory levels and turnover.
Days sales of accounts receivable outstanding and days sales of inventory,
for the continuing operations only, were as follows:
September 30 Trade Receivable Days Inventory Days
1996 43.8 42.4
1995 43.7 44.5
The decrease in inventory days is due to improved inventory management
related to the realignment of the Company's distribution network. The
foregoing table does not reflect inventory purchases by the Company in
contemplation of price increases or otherwise to take advantage of available
price discounts. Typically, these purchases involve comparable increases in
accounts payable.
The Company expects that funds generated from operations and borrowings
under the Credit Agreement will be sufficient to meet its cash needs for the
foreseeable future.
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 20, 1995, a former shareholder of the Predecessor, purportedly for
himself and on behalf of all others similarly situated, commenced a proceeding
in New York State Supreme Court against General Medical, Holdings, Kelso and
one of its officers, and certain present and former officers and directors of
the Company alleging fraud, breach of fiduciary duty, and inducing breach of
fiduciary duty in connection with the Original Acquisition. On September 30,
1996, an order was entered granting the defendants' motion to dismiss the
proceeding. On November 1, 1996, the plaintiff filed a notice of appeal from
such final disposition decision and order. The Company and the other
defendants intend vigorously to defend this action. The outcome of this
litigation cannot be reasonably estimated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL MEDICAL CORPORATION
By /s/ Donald B. Garber
Donald B. Garber
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Date: November 13, 1996
Exhibit Index
Exhibit # Description
27 Financial Data Schedule