U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from:
Commission File No. 0-26288
CONTOUR MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 77-0163521
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
3340 Scherer Drive
St. Petersburg, Florida 33716
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (813) 572-0089
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
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 [ ]
As of September 9, 1996, 5,946,793 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $13,260,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
PART I
ITEM 1. BUSINESS.
THE COMPANY
Contour Medical, Inc. and its Michigan and Florida subsidiaries (the
"Company") manufactures a full line of orthopedic care and rehabilitation
products in addition to a full line of disposable surgical products. The
orthopedic and rehabilitative products include pads and positioning aids
for X-rays, CAT scans, mammograms and MRI's; braces for reconstructive
rehabilitation after surgery; and finger spreaders, leg spreaders and leg
positioning devices to prevent atrophy and speed recovery from surgery.
Sterile and non-sterile products such as sponges, swabs, instrument
holders, equipment covers and drapes make up the Company's disposable
product line.
In addition to the standard product lines offered, the Company offers
customers the benefit of specialty manufacturing. The Company's staff
assists in total product development from concept to completed product
manufacturing and distribution.
In 1994, the Company began manufacturing and marketing its "REDI
NURSE SYSTEM[TM]" product line, which provides custom packaged procedural
trays for use in clinics and nursing homes as well as by home health care
nurses. The Company also designs and fabricates disposable medical
products for sports medicine applications.
Beginning in 1995, the Company commenced distribution of medical
supply products to nursing home and retirement facilities owned, leased or
managed by Retirement Care Associates, Inc., the Company's majority
shareholder. The Company has now expanded this activity to other nursing
home operators and other health care providers.
In March 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne"), a bulk medical supply company based in Jackson, Tennessee.
AmeriDyne distributes supplies to hospitals, clinics, physicians,
pharmacies, nursing homes and other health care providers in Tennessee,
Arkansas, Mississippi, Alabama, Illinois, Texas, Kentucky, Missouri and
Virginia.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996.
The Company's principal executive offices are located at 3340 Scherer
Drive, St. Petersburg, Florida 33716, and its telephone number is (813)
572-0089.
BACKGROUND
The Company was organized in the State of Nevada under the name
Master Acquisitions, Inc. in April 1987. Its name was changed to Best
Acquisitions, Inc. in March 1988, and in 1989, the Company conducted an
initial public offering as a "blank check" company seeking business
opportunities. In 1991, the Company's name was again changed to Associated
Healthcare Industries, Inc. ("AHII"). The Company was a development stage
company operating in the health care industry prior to the acquisition of
all of the issued and outstanding stock of the Michigan and Florida
Subsidiaries in May 1993, as discussed below. In connection with the
acquisition of the stock of the Michigan and Florida Subsidiaries, the
Company's name was changed to Contour Medical, Inc. on June 30, 1993.
On May 14, 1993, effective as of January 1, 1993, the Company
acquired all of the issued and outstanding stock of the Michigan and
Florida Subsidiaries in exchange for the issuance of (I) 1,000,000 shares
of the Company's Class D Redeemable Preferred Stock and 666,666 Class D
Warrants (valued by the parties at $6,000,000); and (ii) 666,669 shares of
the Company's Class C Convertible Preferred Stock (valued by the parties at
$2,000,000). In April 1994, all Class D Redeemable Preferred Stock and
Class D Warrants were exchanged for shares of Class One Convertible
Preferred Stock and Common Stock.
The Michigan Subsidiary operates from a 30,000 square foot
company-owned facility located on twelve acres in Grand Blanc, Michigan,
approximately 50 miles north of Detroit and about 15 minutes from Flint.
The Michigan Subsidiary was established in 1974 to develop and manufacture
products for the imaging industry. These product lines today include a
full line of pads and positioning aids for X-rays, MRI, CAT and mammography
usages. The business has further diversified its orthopedic products used
in therapy procedures for patient's recovery from surgery, and prolonged
immobilization resulting from disease or nerve damage. The Michigan
Subsidiary's products are primarily reusable products which typically can
be used for one to two years.
In 1984, the Michigan Subsidiary's management decided to diversify
its operations into the disposable products market, and established a
sister company in St. Petersburg, Florida, the Florida Subsidiary. The
Florida Subsidiary began manufacturing disposable, sterile and non-sterile
single-use products for hospital, surgical and emergency room environments
in 1984. These products include bags, covers and drapes for protection of
equipment and patients in these special procedure areas. Additional
products have been developed for the kit-packers "kit" market. Products
for this market include foam products such as sponges, prep swabs and
instrument holders which are included in the kits sold by other
manufacturers.
In 1994, the Florida Subsidiary's operation was expanded to include
the new REDI NURSE SYSTEM[TM] production. In this connection, the
warehouse facility in St. Petersburg was expanded to include an additional
12,500 square feet of warehouse space to accommodate increased product
orders for the established products and new product lines.
On September 30, 1994, Retirement Care Associates, Inc. ("Retirement
Care") acquired 889,003 shares of the Company's outstanding Common Stock
and all 2,000,000 shares of the Company's Class One Convertible Preferred
Stock from three persons who were Officers and Directors of the Company.
Subsequently, Retirement Care converted the Class One Convertible Preferred
Stock into 2,100,000 shares of Common Stock. The Common Stock acquired by
Retirement Care in these transactions represented approximately 63% of the
Company's Common Stock outstanding after the completion of these
transactions. Retirement Care's beneficial ownership is currently 61.5%.
Retirement Care acquired the stock from William D. Gabriele, Rudolph
J. Dallessandro and Howard E. Hagon in exchange for shares of Retirement
Care's common and preferred stock. In connection with the exchange of
shares, Messrs. Gabriele, Dallessandro and Hagon each resigned as Officers
and Directors of the Company, and each resigned as employees within 90 days
of the closing. Following these resignations, three new Directors of the
Company selected by Retirement Care were elected. These three persons also
serve as directors of Retirement Care.
Retirement Care is a publicly-held company (listed on the New York
Stock Exchange) which is engaged in the management and operation of
retirement care and long-term nursing home facilities in the Southeastern
United States. Although Retirement Care now has three representatives on
the Board of Directors, it does not intend to take an active role in the
day-to-day management of the Company.
Beginning in 1995, the Company commenced distribution of medical
supply products to nursing home and retirement facilities owned, leased or
managed by Retirement Care. The Company has now expanded this activity to
other nursing home operators and other health care providers.
On March 1, 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne") through a merger with a newly formed, wholly-owned subsidiary
of the Company. The Company issued 369,619 shares of its Common Stock and
paid $250,000 to Scott F. Lochridge, the sole shareholder of AmeriDyne, for
his shares of AmeriDyne in the merger. AmeriDyne is a bulk medical supply
company based in Jackson, Tennessee which has annual sales of approximately
$10 million. Scott F. Lochridge will continue to serve as the President of
AmeriDyne which will operate as a wholly-owned subsidiary of the Company.
The shares issued to Mr. Lochridge in the merger represent approximately
7.1% of the shares of the Company's Common Stock outstanding after the
transaction.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996. The Company
paid $1,400,000 in cash and promissory notes totaling $10,500,000 for the
stock of Atlantic Medical. The promissory notes bear interest at 7% per
annum and are due in full on January 10, 1997. In the event of a default
in the payment of the promissory notes, they are convertible into shares of
common stock of Retirement Care. The cash for this transaction came from a
$5 million debenture placement that was completed on July 12, 1996. These
debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1,
2003. The debentures are convertible into shares of the Company's Common
Stock. The two debentures, each in the amount of $2.5 million, were
purchased by Renaissance U.S. Growth and Income Trust, P.C., a fund listed
on the London Stock Exchange, and by Renaissance Capital Growth & Income
Fund III, Inc., a closed-end, publicly traded fund that invests in emerging
growth companies. Both of these investment funds are managed by
Renaissance Capital Group, Inc., of Dallas, Texas.
In July 1993 the Company effected a 1 for 13 reverse stock split and
in March 1996 the Company effected a 1.05 for 1 forward stock split. All
financial information and share data in this report gives retroactive
effect to these stock splits.
EXISTING PRODUCTS
The Company provides a full line of orthopedic care and
rehabilitation products for patients. These products range from braces
designed for reconstructive rehabilitation of patients after surgery to
finger spreaders, leg spreaders and leg positioning devices (designed to
prevent muscle atrophy and speed recovery after surgery) and a full line of
proprietary orthopedic devices used in rehabilitative therapy procedures.
Some of these products are utilized for long-term care of wheelchair or
bed-bound patients in the hospital and the home. During the year ended
June 30, 1996, positioning aids and orthopedic products accounted for
approximately 18% of the Company's sales.
The Company manufactures disposable surgical procedure products for
outpatient surgery, X-ray, radiology and other imaging technology within
the hospital, emergency room, integrated patient care facilities and clinic
market. These products, such as pads, bags, equipment covers and drapes
are used to protect equipment, patient and attending personnel in the
surgery or emergency room environment. These products are designed to meet
the requirements of infection control for medical, industrial, and
institutional applications. In general, these rules require emergency
rooms, clinics and similar areas to cover all equipment to protect the
patient from infection from prior patients. The Company also produces over
300 configurations of disposable foam products, such as sponges, swabs,
prep-swabs, vaginal swabs, instrument rests and holders, pocket liners, and
positioning and comfort aids which are used during surgery, emergency
treatment, X-ray and radiology procedures. Most products are available for
either sterile or non-sterile applications. Specialty items such as face
shields, esmark bandages, safety pins, and rubber bands are provided with
or as part of the Company's products to fill specific needs within the use
environment. Revenues from these disposable surgical and special procedure
products comprised approximately 15% of the Company's sales revenue during
the year ended June 30, 1996.
In addition to the standard product lines offered, the Company offers
specialty manufacturing for customers with special product needs. The
Company's staff assists in the product development, from concept to
completed product manufacturing and distribution.
During March-April 1994, the Company introduced a new product line
named the REDI NURSE SYSTEM[TM] following the grant of four new 510(K)
applications by the U.S. Food and Drug Administration. This product line
consists of custom packaged procedural trays which can be used for
specified applications. The applications for which products are available
include wound care, catheter irrigation, catheter insertion, IV therapy and
precautionary procedures.
The Company presently does not sterilize its products. Products
requiring sterilization are shipped via truck to the Atlanta, Georgia area,
where the products are sterilized, and then sent back to the Company's
plant in St. Petersburg. The sterilization process adds approximately a
week to the Company's delivery schedule. Once a year, the Company must
provide validation of its product sterility to the FDA. The inspection is
done on a product load designated by the Company by an inspection company
engaged by the Company. The sterilization validation process generally
takes several weeks and results in delayed shipment of the sterilized
products to customers. In order to eliminate the delays caused by shipping
products out for sterilization, the Company has ordered sterilization
equipment which is expected to be installed in the Company's Florida
facility in October 1996. At June 30, 1996, approximately $416,000 had
been paid toward the purchase of this equipment.
Suppliers for the materials used by the Company in manufacturing its
products, i.e. foam and plastic, are plentiful. The Company purchases
supplies only from companies with proven consistent quality. The Company
does not use any recycled materials as it has found the quality of such
materials is not consistent.
The Company's bulk medical supply distribution operations involves
the purchase of large quantities of medical supplies from manufacturers and
distributing such supplies to nursing homes, home health agencies,
hospitals, clinics and other health care providers. Revenues from the sale
of bulk medical supplies accounted for approximately 67% of the Company's
sales revenue during the year ended June 30, 1996.
MANUFACTURING
The Company presently meets product demand by operating its
manufacturing and assembly facilities with a single shift, which represents
about 40% of the Company's operating capacity. The manufacturing processes
used by the Company include plastic molding, contour fabrication of foams
and plastics, metal fabrication, specialized foam product coating, and heat
sealing and sewing.
The Company owns and operates a 30,000 square foot facility on
approximately 12 acres in Michigan, in which it manufactures imaging and
orthocare products. The Company also leases approximately 33,000 square
feet in Florida, in which it manufactures its disposable surgical and
special procedure products, and produces its new REDI NURSE SYSTEM[TM]
product line, as well as an additional 32,000 square feet for its bulk
medical supply distribution activities.
SALES, MARKETING AND MARKETS
Historically, the Company has focused on the disposable and limited
life medical product markets for both sterile and non-sterile applications.
The Company markets to three distinct markets: (i) the end user; (ii) the
dealer, and (iii) the value added reseller ("VAR").
The following is a historical perspective of the sales mix for the
year ended June 30, 1996, the six months ended June 30, 1995, and for the
preceding three calendar years in each of these markets, which are further
discussed below, for the Michigan Subsidiary and for the Florida and
AmeriDyne Subsidiaries:
MICHIGAN
1996 1995 1994 1993 1992
VAR Sales 96% 49% 62% 69% 54%
Dealer Sales 3% 42% 27% 13% 27%
End User (Hospital)
Sales 1% 9% 11% 18% 19%
FLORIDA AND AMERIDYNE
1996 1995 1994 1993 1992
VAR Sales 19% 53% 57% 59% 78%
Dealer Sales 2% 4% 12% 27% 14%
End User (Hospital)
Sales 3% 4% 31% 14% 8%
Bulk Supply Sales 76% 39% -- -- --
During the year ended June 30, 1996, and the six months ended June
30, 1995, the Company sold approximately $5,456,000 and $1,426,000,
respectively, in products (primarily bulk medical supplies) to facilities
owned, leased or managed by Retirement Care Associates, Inc., the Company's
majority shareholder. Such sales represented 37% of total sales for the
year ended June 30, 1996, and 40% of total sales for the six months ended
June 30, 1995. However, no individual customer represented more than 10%
of total sales during the periods.
During the years ended December 31, 1993 and 1994, only one customer
each year accounted for more than 10% of the Company's combined revenues.
Sales to Baxter Medical accounted for approximately 13.8% and 23% in 1993
and 1994, respectively.
END USERS. The end user market is common to all three of these
markets, and is made up of three primary care sectors: hospitals, clinics
and orthopedic care facilities.
HOSPITALS. The Company currently focuses on the surgical
procedure and emergency room products within the hospital markets. These
products, such as bags, equipment covers and drapes, are used to protect
equipment, patient and attending personnel in the surgery or emergency room
environment. The Company custom manufactures these products to suit the
customer's needs. Additionally, the Company produces several disposable
foam items, such as a variety of sponges, swabs, instrument holders, and
positioning aids, which are used during surgery, emergency treatment, X-ray
and radiology procedures. Specialty items, such as face shields, esmark
bandages, safety pins and rubber bands, are provided to fill specific needs
within the hospital environments.
The hospital market is a stable market for the Company's
disposable product lines designed for use within the traditional roles of
health service by the hospital community. The hospital market for
disposable products is represented by over 6,000 hospital units. The
Company currently deals with approximately 300 of these hospital units.
With the spread of Hepatitis B and HIV related diseases, the emphasis on
single patient use products and special coatings on multi-use products
places the Company in the forefront of the industry within this market
niche. Management believes that substantial future growth is available
within this market by vertical penetration of additional departments within
the hospital.
CLINICS. At present, the Company is focused on outpatient
surgery centers, large integrated care facilities, X-ray, radiology and
other imaging technology centers within the clinic market. These
facilities have similar product needs as their comparable departments
within the hospital markets. According to the American Hospital
Association, hospital outpatient surgeries outnumbered inpatient surgeries
for the first time in 1990. Hospital inpatient admissions declined by 10%,
while outpatient visits grew nearly 44%. Management believes outpatient
servicing through clinics shows definite trends for continued aggressive
growth through the year 2000 and beyond.
ORTHOPEDIC CARE FACILITIES. The orthopedic care facility
represents a combination of product markets due to its function as a
surgery center as well as rehabilitative care center. The Company provides
a full line of orthopedic care and rehabilitation products for patients,
from braces designed for reconstructive rehabilitation of patients after
surgery to a leg spreader device, which would be utilized by a long-term
care patient who is wheelchair or bed-bound. These products are utilized
in the home and in long-term care facilities.
DEALERS. The dealer market covers the full spectrum of the Company's
product lines. The Company sells its products at a discount to volume
dealers which sell the Company's products.
VAR MARKET. The VAR market consists of original equipment
manufacturers (OEM's) and dealers. Many of the foam products produced by
the Company are sold to OEM's for use in packaging their kits for special
surgical procedures. Additional OEM products include pads and positioning
aids for imaging units such as MRI's, CAT scans, and X-rays. The Company's
diversified manufacturing capability allows the Company to offer OEM's
custom product design.
Prior to 1993, the Company relied on four marketing methods: sales
made by Company management, trade shows, direct order catalogs and
referrals from customers. Sales were made directly to OEM's and kit
packers by the Company's management, and sales to hospitals were solicited
by direct mail catalogues. Accordingly, sales were limited due to time
constraints on management imposed by their other duties. The Company
currently employs two sales directors, who are responsible for soliciting
new business, maintaining contact with the Company's present customer base
and directing the efforts of an independent sales representation
organization employed by the Company effective July 19, 1994, to market the
Company's REDI NURSE SYSTEM[TM] product line to the home healthcare and
nursing home industry in the southeast. This sales organization has 11
direct sales representatives who service approximately 4,500 dealers
throughout the southeastern U.S. The Company's agreement with the sales
organization is for a two year period, and is automatically renewable
unless canceled by either party. The Company is required to pay the
organization a commission of 10% of sales.
The independent manufacturer's representative program is intended to
provide representation of the Company's products by an established network
of sales representatives across the country. The Company hopes to reach
new customers in the home health care and nursing home markets, as well as
the private clinic markets. In addition, the Company hopes to access new
departments within the hospital structure which as yet have not been a part
of the Company's markets. Because these institutions have historically
purchased products from the Company, the Company is optimistic this new
representative program will develop additional uses for existing products
as well as providing outlets for new products. New products, such as the
REDI NURSE SYSTEM[TM], combine service benefits as well as product benefits
which have a wide range of applications in nursing homes and for home
healthcare providers.
The Company is also selling products to its majority shareholder,
Retirement Care Associates, Inc., and a warehouse has been stocked to
accommodate the medical supply needs of the nursing homes and retirement
facilities which it operates or manages. In addition, the Company is now
also selling bulk medical supplies to other nursing homes and health care
providers.
MARKET EXPANSION
Nursing homes, adult congregate living facilities and home health
care markets are currently expanding markets with expected high growth in
the next ten years. The Federal home care budget was $12.5 billion for
1992. The November 18, 1992, issue of "Home Health Line," the home care
industry's national independent newsletter, reports conservative estimates
for growth at an annual rate of 15-20% or more. The continuing emphasis on
cost containment and the continuing AIDS epidemic are two reasons for this
projected growth. Additional factors and trends reported as fostering this
growth include: the boom in medical technology; care rendered in the
patient's home is far less expensive than that delivered in hospitals; the
increasing age of our population; patients prefer home care, resulting in
faster recovery from illness and injury; and home care offers emotional
advantages to people who benefit from the support of family members and the
comfort of a familiar environment.
The Company is introducing new products and product lines, such as
its REDI NURSE SYSTEM[TM], which combine service benefits as well as
product benefits and have a wide range of applications in the nursing home
and home health care markets. Special procedure trays, positioning aids,
foam products, are all used within these environments. Special order
products, such as procedure trays for use within the home and the nursing
home markets, offer ease-of-help, which enable a non-skilled home helper to
assist with the health care process after simple instruction. With the
changing demographics of the population base moving toward an over
sixty-five majority, the Company expects the market for products which can
be used by non-skilled home helpers to increase.
Private radiology centers and walk-in clinics are also markets which
are expected to offer avenues of growth. The Company intends to continue
to diversify its markets through the development of both products and
marketing strategies to provide access to new markets within its
manufacturing focus.
AMERIDYNE CORPORATION
In March 1996, the Company acquired AmeriDyne Corporation
("AmeriDyne") through a merger of that company with a newly-formed wholly-
owned subsidiary of the Company. AmeriDyne is a bulk medical supply
company based in Jackson, Tennessee, which distributes supplies to
hospitals, clinics, physicians, pharmacies, nursing homes and other health
care providers in Tennessee, Arkansas, Mississippi, Alabama, Illinois,
Texas, Kentucky, Missouri and Virginia.
AmeriDyne's product line includes approximately 3,500 items
maintained in stock and over 150,000 additional items available from over
200 manufacturers. AmeriDyne's sales efforts have emphasized supplies for
home health care such as gloves, urological products, wound care products,
sponges, etc. However, AmeriDyne's wide range of products also includes
medical furniture and equipment such as examination tables, cabinets and
carts; diagnostic equipment such as vision and hearing testing equipment,
stethoscopes and blood pressure testing equipment; laboratory testing
equipment such as microscopes, incubators, blood chemistry analysis and
centrifuges; surgical products such as scissors, forceps, scalpels and
lasers; and physical therapy and convalescent care equipment such as
crutches, walkers, wheelchairs and bathroom safety aids.
AmeriDyne has had only one customer which has represented over 10% of
its sales during the last three years. Sales to Jackson - Madison County
General Hospital represented 16%, 17% and 28% of AmeriDyne's sales during
the ten months ended February 29, 1996 and its fiscal years ended April 30,
1995 and 1994, respectively.
AmeriDyne is not dependent on any of the suppliers of the products it
distributes.
Marketing of AmeriDyne's products is handled through a fully
dedicated, full time sales staff selling in Tennessee, Arkansas and
Mississippi and the distribution of catalogs.
ATLANTIC MEDICAL SUPPLY COMPANY, INC.
On August 6, 1996, the Company acquired all of the outstanding stock
of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a
distributor of disposable medical supplies and a provider of third-party
billing services to the nursing home and home health care markets. The
acquisition was made effective retroactively to July 1, 1996.
Atlantic Medical is based in Grovetown, Georgia (a suburb of
Augusta), and also has facilities in St. Petersburg, Florida, Miami,
Florida, and Fayetteville, North Carolina, and employs approximately 95
persons.
Atlantic Medical's product line includes approximately 4,100 items
maintained in stock and over 150,000 additional items available from over
200 manufacturers. Atlantic Medical's sales focus has been on supplies for
long-term care providers, including skilled nursing and assisted living
facilities. These supplies include such items as latex and vinyl
examination gloves, nutritional and personal care products, urological
products, wound care products, adult diapers, etc. Atlantic Medical also
offers its customers a wide array of durable medical equipment, including
wheelchairs, walkers, medical monitoring devices, including stethoscopes
and blood pressure testing equipment, surgical products, etc. Sales of
medical supplies to long-term care facilities accounted for 81% of Atlantic
Medical's revenues during the six months ended June 30, 1996.
Atlantic Medical also operates a subsidiary that provides Medicare
Part B billing services for clients, both under its own Medicare provider
number and, optionally, under its customer's provider number. Services for
the latter are done so on a fee-for-service basis. As a part of these
billing services, Atlantic Medical provides Medicare reimbursable wound
care products, enteral (tube-feeding/nutritional) products, ostomy,
colostomy and urological products, etc. for qualified patients in its
customers skilled nursing facilities. Sales of Medicare Part B billing
services and related products accounted for 19% of Atlantic Medical's
revenues during the six months ended June 30, 1996.
Atlantic Medical has not had any one customer who has represented
over 10% of its sales during the last three years.
Atlantic Medical is not singularly dependent on any of the suppliers
of the products it distributes.
Marketing of Atlantic Medical's products is handled through a fully
dedicated, full-time sales staff selling in North Carolina, Georgia, South
Carolina, Alabama and Florida, as well as through the direct mail
distribution of its product catalogs. Marketing of Atlantic Medical's
third party billing services is handled through a fully dedicated, full-time
staff of registered and licensed nurse/clinicians who assist in the
evaluation of patient care in consultation with the Company's customers.
COMPETITION
The Company is a small manufacturing concern engaged in a specialized
niche of the health care supply business. It therefore competes with all
of the health care product suppliers, most of which are better capitalized
and have significantly greater resources and industry name recognition than
does the Company.
Management is not aware of any companies which offer the product
variety, quality and delivery schedule offered by the Company. The
Company's competitors in the disposable markets are primarily companies or
individuals who establish small bag manufacturing facilities, but are not
able to offer the variety of bag sizes, configurations, and consistent
quality, as the Company. Larger manufacturers such as Microtech and Xomed,
are not direct competitors in these products because they are not focused
on specialty disposable products, but rather manufacture primarily for
their own use. These specialized products are offered to customers in
limited variety according to their internal usages because of the high
fixed overhead of the larger manufacturer relative to the volume of
available sales. Therefore, specialty bags make up a very small percentage
of their business. The Company believes its competitive edge to be its
ability to deliver small or large numbers of its products, in 300 different
sizes, and on a same day delivery schedule (except for specialty orders).
The imaging and orthocare markets are limited by total volume
requirements for product. These products represent a significant volume of
sales with high profit margins because of the Company's low fixed overheads
and tightly controlled variable costs. These products are highly
specialized and the Company offers a proprietary line within these products
which is not available from the Company's competition. Five companies
located across the U.S., which are of a similar size in volume to the
Company, represent the primary competition within these markets; however,
these companies do not presently offer the product diversity, quality or
proprietary design offered by the Company.
AmeriDyne competes with a number of large medical products
distributors. In the home healthcare market, its primary competitors
include Gulf South, National Medical and Southland. In this market,
AmeriDyne competes by offering customized ordering programs and other
specialized services not offered by larger competitors. AmeriDyne competes
with Gulf South, Metro Medical and Redline in the nursing home market,
emphasizing AmeriDyne's high level of service in this market. AmeriDyne
now also offers Medicare reimbursed Enteral and Wound Management products
to stay competitive in the nursing home market.
Atlantic Medical competes with a number of large medical products
distributors in the Southeastern United States. In the distribution of
medical supplies to long-term care providers, its primary competitors
include Gulf South Medical Supply, Redline Medical, General Medical and
Durr Medical. In addition, there are a number of smaller, regional
competitors. Atlantic Medical competes by offering an extremely high level
of customer service, as well as customized ordering and inventory control
programs and other more specialized services, some of which are not offered
by its competitors.
In the provisions of third party billing services, Atlantic Medical
competes with several small regional service providers, including Spectrum
Health Services, Appalachian and Grove Medical. Atlantic Medical competes
effectively in this category by offering superior customer service and a
variety of programs from which its customers can choose, including fee-for-
service billing under the customer's own Medicare provider number.
PATENTS AND TRADEMARKS
The Company has been assigned the rights to two patents on products
it markets. The patents expire within the next two years, and are not
considered significant to the Company's overall sales or product lines.
Letters Patent No. 4370976, dated February 1, 1983, covers a dynamic foam
orthosis, a splinting device which is used to straighten and support joints
following surgery or trauma. The rights to this Patent were assigned to
the Company in 1976 by its inventors, William T. Gabriele and his son,
Joseph M. Gabriele.
The Company also holds the rights to Letters Patent No. 4030719,
dated June 21, 1977, covering a child immobilizing device for X-rays, also
invented by William T. Gabriele and Joseph M. Gabriele. This device
immobilizes infants and young children during a radiographic examination.
All of the materials used in the device are radiolucent, thus showing no
trace of shadows or foreign artifacts on radiographic film.
The Company has a registered trademark under the Trademark Act of
1946, as amended, Reg. No. 1,680,218, registered on March 24, 1992, for the
Hugger[TM], the child immobilizing device.
In December 1994, the Company received trademark registration for the
REDI NURSE SYSTEM[TM] mark. The Company believes the trademark will
contribute to product identification with the Company.
EMPLOYEES
As of September 13, 1996, the Company had approximately 121 employees,
including 66 full-time, including management, and 55 hourly, part-time
employees, AmeriDyne had approximately 33 full-time employees, and Atlantic
Medical had approximately 95 full-time employees. None of the Company's,
AmeriDyne's or Atlantic Medical's employees are represented by unions.
Management considers its employee labor relations to be good.
ITEM 2. PROPERTIES.
The Company owns a 30,000 square foot facility located on twelve
acres in Grand Blanc, Michigan, sixty miles north of Detroit, from which
its Michigan Subsidiary operates. This building is subject to mortgages
payable to a banking institution of approximately $456,000 as of June 30,
1996.
The Company's corporate offices are maintained in the offices of its
Florida Subsidiary in St. Petersburg, Florida. The Company leases
approximately 65,000 square feet under a lease from an unaffiliated lessor,
for which it currently pays $24,521 per month. Beginning on July 1, 1997,
the rent will be increased based on changes in the Consumer Price Index on
an annual basis. The lease expires on June 30, 2000. The Company believes
these facilities are adequate for the Company's present and planned
operations.
AmeriDyne's offices and warehouse facilities are located in Jackson,
Tennessee. AmeriDyne leases approximately 33,000 square feet of space at
this location, including approximately 4,500 square feet of office space,
for which it pays a base rent of $8,750 per month. The lease expires on
March 31, 1999, but AmeriDyne has an option to extend this lease an
additional two years at a rental rate adjusted for changes in the Consumer
Price Index.
Atlantic Medical's primary office location is in August, Georgia,
where it also maintains three leased warehouse facilities. At its primary
location, Atlantic Medical leases approximately 18,000 square feet of
space, including approximately 3,000 square feet of office space, for which
it pays a base rent of $8,400 per month. This lease expires on August 31,
1997. Atlantic Medical leases an additional 8,000 square feet in another
Augusta location, of which approximatley 1,000 square feet is office space,
for which it pays a base rent of approximately $2,000 per month. Atlantic
Medical also leases a third 8,000 square foot warehouse in Augusta, of
which approximately 1,500 square feet is office space, for which it pays a
base rent of approximately $2,000 per month. Both of these additional
Augusta warehouses are leased on a quarter-to-quarter basis.
Atlantic Medical maintains branch warehouse and office facilities in
Fayetteville, North Carolina. At this location, it leases approximately
38,500 square feet of space, including approximately 4,000 square feet of
office space, for which it pays a base rent of approximately $6,400 per
month. This lease expires on March 31, 1997, but Atlantic Medical has two
one-year renewal options at which time the base rent can be increased by up
to 3%.
Atlantic Medical maintains branch warehouse and office facilities in
St. Petersburg, Florida. At this location, it leases approximately 41,000
square feet of space, including approximately 2,000 square feet of office
space, for which it pays a base rent of approximately $13,000 per month.
This lease expires on May 31, 1997.
Atlantic Medical maintains branch warehouse and office facilities in
Miami, Florida. At this location, it leases approximately 18,000 square
feet of space, including approximately 3,000 square feet of office space,
for which it pays a base rent of approximatley $5,100 per month. This
lease expires on March 31, 1997.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings, and the Company is not aware
of any threatened legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock is traded in the
over-the-counter market, and since September 21, 1995, has been traded on
the Nasdaq Small-Cap Market under the symbol "CTMI."
The following table sets forth the closing high and low bid prices of
the Company's Common Stock as reported on the OTC Bulletin Board for the
periods indicated. These prices are believed to be representative inter-
dealer quotations, without retail markup, markdown or commissions, and may
not represent prices at which actual transactions occurred.
Bid<FN1>
Quarter Ended High Low
March 31, 1993 . . . . . . . . . . . . . $2.97 $0.87
June 30, 1993. . . . . . . . . . . . . . $2.60 $0.99
September 30, 1993 . . . . . . . . . . . $2.86 $0.25
December 31, 1993. . . . . . . . . . . . $2.14 $0.48
March 31, 1994 . . . . . . . . . . . . . $2.14 $0.95
June 30, 1994. . . . . . . . . . . . . . $1.90 $0.48
September 30, 1994 . . . . . . . . . . . $1.90 $1.67
December 31, 1994. . . . . . . . . . . . $4.76 $1.90
March 31, 1995 . . . . . . . . . . . . . $4.88 $3.38
June 30, 1995. . . . . . . . . . . . . . $5.24 $3.57
September 30, 1995 . . . . . . . . . . . $7.62 $4.17
December 31, 1995. . . . . . . . . . . . $5.95 $3.81
March 31, 1996 . . . . . . . . . . . . . $6.07 $4.05
June 30, 1996. . . . . . . . . . . . . . $6.00 $4.63
___________________
<FN>
<FN1>
As restated to give retroactive affect to a 1 for 13 reverse stock split
which
occurred in July 1993, and a 1.05 for 1 forward stock split which occurred
in March 1996.
</FN>
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of
record holders of the Company's $.001 par value common stock at September
9, 1996, was 188. Based on security position listings, the Company believe
that it has in excess of 700 shareholders which hold stock in street name
at broker dealers.
(c) DIVIDENDS. No cash dividends have been declared or paid by the
Company since inception and none is contemplated at any time in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data with
respect to the Company, and is qualified by reference to the financial
statements and notes thereto filed herewith:
BALANCE SHEET DATA:
AT JUNE 30, AT DECEMBER 31,
----------------------------------
- ----------------------------------
1996 1995 1994 1993 1992
1991
---------- ---------- ---------- ---------- ----------
- ----------
Current Assets $ 8,160,509 $4,351,326 $1,129,398 $1,224,496 $1,054,020
$1,078,858
Total Assets 11,258,268 5,176,426 1,484,568 1,878,465 1,375,726
1,427,362
Current
Liabilities 4,228,561 1,377,578 410,162 829,200 601,727
653,178
Working Capital 3,931,948 2,973,748 719,236 395,296 452,293
425,680
Long-Term Debt 1,352,937 907,711 554,323 -0- 480,000
559,311
Shareholders'
Equity 5,676,770 2,891,137 520,083 648,765 293,999
214,973
STATEMENT OF INCOME DATA:
For The For the Six Months
Year Ended Ended June 30,
June 30, 1996 1995 1994
------------- ---------- ----------
Sales $14,542,421 $3,568,459 $1,929,200
Net Income (Loss) 527,034 111,373 (478,798)
Net Income (Loss)per Common Share $ .09 $ .02 $ (.20)
Weighted Average Shares and
Share Equivalents Outstanding 4,804,292 4,786,126 2,341,996
Cash Dividends Per Share -0- -0- -0-
STATEMENT OF INCOME DATA:
FOR THE YEAR ENDED DECEMBER 31,
1994 1993 1992 1991
---------- ---------- ---------- ----------
Sales $3,945,745 $3,618,359 $3,440,701 $3,516,135
Net Income (Loss) (529,182) (73,536) 79,126 20,383
Net Income (Loss)
Per Common Share $ (0.20) $ (0.05) $ 0.07 $ 0.03
Weighted Average
Shares and Share
Equivalents
Outstanding 2,688,927 1,434,466 1,180,407 689,123
Cash Dividends
Per Share -0- -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
sales for the periods indicated:
SIX
MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30,
- ----------------------------------
1996 1995 1994 1994 1993 1992
---------- -------- ------ ------ ------
- ------
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
100.0%
Cost of Sales 72.1% 71.3% 73.8% 64.5% 57.0%
51.0%
Gross Profit 27.9% 28.7% 26.2% 35.5% 43.0%
49.0%
Operating Expenses 23.1% 23.6% 34.1% 40.1% 44.9%
43.6%
Net Income (Loss)
Before Income
Taxes (Benefit) 5.8% 4.6% (24.8%) (13.4%) (3.5%)
3.0%
Income Taxes
(Benefit) 2.1% 1.5% -- -- (1.4%)
0.7%
Net Income (Loss) 3.6% 3.1% (24.8%) (13.4%) (2.0%)
2.3%
YEAR ENDED JUNE 30, 1996 COMPARED TO THE TWELVE MONTHS ENDED JUNE 30, 1995
As a result of the factors discussed below, the Company had net income
of $527,034 for the year ended June 30, 1996, as compared to a net loss of
$9,997 for the twelve months ended June 30, 1995.
Sales for the year ended June 30, 1996 increased to $14,542,421 as
compared to $5,585,004 for the twelve months ended June 30, 1995, due to
growth in sales volume of the existing product lines and the addition of the
Company's new product line, bulk medical supplies. Approximately $4,030,000
of the sales increase is attributable to sales of bulk medical supplies and
prepacked kits to nursing homes managed or operated by the Company's majority
shareholder; the AmeriDyne acquisition on March 1, 1996, resulted in
additional sales of bulk medical supplies of approximately $3,617,000.
Gross profit for the year ended June 30, 1996, was $4,051,318 or 27.8%
of sales as compared to $1,739,553 or 31.1% of sales for the twelve months
ended June 30, 1995. The gross profit percentage decreased in 1996 as
compared to the comparable period in 1995 because the sales mix for 1996 was
substantially higher in bulk medical supplies, which have a lower gross profit
than the manufactured products. The AmeriDyne acquisition contributed
approximately $980,000 of gross profit for the period ended June 30, 1996.
Operating expenses for the year ended June 30, 1996, increased to
$3,185,620 as compared to $1,632,015 for the same period in 1995. Total
operating expenses increased approximately $1,725,000 as a result of the
increased volumes, but as a percentage of sales they decreased to
approximately 23% of sales in 1996 versus 29% of sales in the same period in
1995. The AmeriDyne acquisition increased operating expenses by $635,000 for
the year ended June 30, 1996.
Net income before taxes for the year ended June 30, 1996, was $839,200
as compared to $44,721 for the twelve months ended June 30, 1995. The
AmeriDyne acquisition contributed approximately $295,000 to net income before
taxes for the year ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1995, COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
As a result of the factors discussed below, the Company had net income
of $111,373 for the six months ended June 30, 1995, as compared to a net loss
of $478,798 for the six months ended June 30, 1994.
Sales for the six months ended June 30, 1995, increased to $3,568,459 as
compared to $1,929,200 during the same period in 1994, due to growth in sales
volume of the existing product lines and the addition of bulk medical supply
sales. Approximately $1,426,000 of the sales increase was attributable to
sales of bulk medical supplies and pre-packaged kits to nursing homes managed
or operated by the Company's parent. These sales, which started during April
1995 represent a new market for the Company. Approximately $175,000 of these
nursing home sales represents sales of the Company's prepackaged kits and the
remainder of the nursing home sales represents sales of bulk medical supplies.
The remaining $213,000 of the overall sales increase was due to an increased
demand for the Company's existing product line.
Gross profit for the six months ended June 30, 1995, was $1,024,083 or
28.7% of sales as compared to $505,500 or 26.2% of sales for the six months
ended June 30, 1994. The gross profit percentage remained relatively constant
in 1995 as compared to the comparable period in 1994 because the product mix
in both periods included about the same percentage of REDI NURSE kits which
have a lower gross profit than the manufactured products. The 1995 period
included approximately $1,251,000 in sales of bulk medical supplies which also
have a lower gross profit, and the 1994 period margin was reduced due to the
costs of developing and shipping numerous prototype kits for customer
evaluation and introduction prior to FDA approvals. In prior years, the
Company had higher gross profit margins because most of the Company's sales
were of products manufactured by the Company.
Operating expenses for the six months ended June 30, 1995, increased to
$841,275 as compared to $657,199 for the same period in 1994. Total operating
expenses increased approximately $184,000 as a result of the increased
staffing necessary to service the increased volumes, but as a percentage of
sales they decreased to approximately 24% of sales in 1995 versus 34% of sales
in the same period in 1994.
Net income before taxes for the six months ended June 30, 1995, was
$166,091 as compared to a net loss before income taxes for the six months
ended June 30, 1994, of $478,798, after deducting offering costs of $305,731.
1994 COMPARED TO 1993
As a result of the factors discussed below, the Company had a net loss
of $529,182 in 1994 as compared to a net loss of $73,536 in 1993.
Sales for 1994 increased by 9% to $3,945,745 as compared to $3,618,359
in 1993 due to growth in sales of existing product lines and increasing sales
in the new REDI NURSE product lines which were introduced during March - April
1994.
Gross profit for 1994 was $1,399,820 or 35.5% of sales, as compared to
$1,557,109 or 43.0% of sales, in fiscal year 1993. The lower gross profit in
1994 resulted from a change in the sales mix of products and the fact that
profit margins on the REDI NURSE lines (introduced during March-April 1994)
are lower since those products are assembled as opposed to being manufactured.
Operating expenses in 1994 were $1,580,385 as compared to $1,623,465 in
1993. The operating expenses decreased primarily due to a reduction of
litigation related fees and expenses of approximately $55,000.
The net loss before income taxes in 1994 was $529,182 after deducting
offering costs totaling $305,731, as compared to a net loss before income
taxes in 1993 of $125,325.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $3,931,948 of working capital as
compared to working capital of $2,973,748 at June 30, 1995. The increase in
working capital was primarily due to the AmeriDyne acquisition which was
completed during March, 1996.
Operating activities for the year ended June 30, 1996 utilized cash of
$124,047 as compared to operating activities during the six months ended June
30, 1995, which utilized cash of $1,030,398.
Inventories increased by approximately $1,579,000 from June 30, 1995 as
a result of increased inventory levels needed to serve the growing nursing
home market, and approximately $1,240,000 of the increase resulted from the
AmeriDyne acquisition. Accounts receivable and accounts payable have
increased due to the increased level of sales and inventories.
Cash flows from investing activities used cash of $521,456 for the year
ended June 30, 1996 as a result of the repayment of $550,004 from the
Company's parent which was offset by the use of $749,163 for the acquisition
of additional equipment and $322,297 for the AmeriDyne acquisition.
Cash flow of $695,487 was provided from financing activities in fiscal
1996 versus $2,163,773 in 1995. For the year ended June 30, 1996, $608,956
was provided from net bank borrowings, $50,000 was provided by the exercise of
stock options and $36,531 was provided by payment of a short-swing liability
by a shareholder.
Operating activities for the six month period ended June 30, 1995,
utilized cash of $1,030,398 as compared to $120,699 for the same period in
1994. The increased utilization of cash resulted primarily from higher
receivable and inventory levels, net of increased accounts payable, necessary
to support the increase in sales. Operating activities for the years ended
December 31, 1994, and 1993 utilized cash of $28,133 and $209,284,
respectively.
Investing activities for the six months ended June 30, 1995, utilized
$1,701,945 of cash, of which $533,054 was for the acquisition of equipment and
$1,168,901 was advanced to the Company's majority shareholder as compared to
$6,597 of cash used during the six months ended June 30, 1994, which was
expended for equipment. The cash flows for the years ended December 31, 1994
and 1993, were used substantially for the acquisition of additional equipment
as needed.
Cash flow of $2,689,372 was provided from financing activities for the
six months ended June 30, 1995, as compared to cash utilized during the six
months ended June 30, 1994, of $17,468. During the six months ended June 30,
1995, cash of $2,216,447 was provided from the issuance of preferred stock and
exercise of stock options, and $482,622 was provided from equipment financing
at favorable long-term rates, utilization of credit line funds of $189,671,
all of which was reduced by repayments on bank loans and advances to the
Company's majority shareholder totaling of $199,328. For the year ended
December 31, 1994, cash flow of $62,833 was provided from financing
activities, whereas in 1993 cash flow of $448,944 was provided due to the sale
of preferred stock of $430,500.
At June 30, 1996, the Company has a mortgage payable with Michigan
National Bank with an outstanding balance of $456,233, bearing interest at
8.58% with monthly payments of $6,793, including interest, collateralized by
real estate; and a second mortgage with a balance of $64,284 with monthly
principal payments of $1,190 and interest at prime plus .75% (9.0% at June 30,
1996); and a loan secured by equipment with a balance of $496,171, bearing
interest at prime plus .75% with monthly payments of $11,380 including
interest. The Company secured an equipment loan with Fidelity Bank with an
outstanding balance of $217,559 as of June 30, 1996, interest at prime plus 1%
(9.25% at June 30, 1996), principal of $5,000 plus interest, collateralized by
equipment. At June 30, 1996, the Company had a note payable with Republic
Bank with a balance of $60,436, interest at 8.75%, with principal and interest
of $1,282 due monthly, collateralized by accounts receivable, inventory and
equipment of the Florida subsidiary.
As of June 30, 1996, the Company maintained a total of $1,575,000 in
lines of credit with its banks for short-term working capital needs, and
$1,456,535 had been borrowed against these lines. On August 5, 1996, the
Company's line of credit with Republic Bank was increased from $500,000 to
$1,750,00. On September 20, 1996, the Company replaced all of its existing
lines of credit with a $7,000,000 revolving line of credit with Barnett Bank,
secured by inventory and accounts receivable and bearing interest at the
30-day
LIBOR rate plus 2%. Management believes that the Company's working
capital, together with anticipated net income from operations and unused lines
of credit, will be adequate to meet the Company's needs for liquidity for at
least the next twelve months. If additional short-term capital is needed,
management believes that Retirement Care, the Company's majority shareholder,
would pay down the amount it owes to the Company.
The Company completed a $5 million debenture placement on July 12, 1996.
These debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1, 2003.
The debentures are convertible into shares of the Company's Common Stock. The
two debentures, each in the amount of $2.5 million, were purchased by
Renaissance U.S. Growth and Income Trust, PLC, a fund listed on the London
Stock Exchange, and by Renaissance Capital Growth & Income Fund III, Inc., a
closed-end, publicly traded fund that invests in emerging growth companies.
Both of these investment funds are managed by Renaissance Capital Group, Inc.,
of Dallas, Texas.
On August 6, 1996, the Company acquired all of the oustanding stock of
Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of
disposable medical supplies and a provider of third-party billing services to
the nursing home and home health care markets. The acquisition was made
effective retroactively to July 1, 1996. The Company paid $1,400,000 in cash
and promissory notes totaling $10,500,000 for the stock of Atlantic Medical.
The promissory notes bear interest at 7% per annum and are due in full on
January 10, 1997. In the event of a default in the payment of the promissory
notes, they are convertible into shares of common stock of Retirement Care
Associates, Inc., the Company's majority shareholder. The cash for this
transaction came from the $5 million debenture placement that was completed on
July 12, 1996. The Company intends to pay the promissory notes from the
proceeds of an offering of the Company's securities to be conducted by the
Company.
The Company presently does not anticipate any commitments for material
capital expenditures.
SEASONALITY AND INFLATION
The Company's business is relatively consistent and stable on a monthly
basis, and has not indicated any seasonality over the past three years.
In addition, the Company does not believe that inflation has had a
material effect on its results from operations during the past three years.
There can be no assurance, however, that the Company's business will not be
affected by inflation in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Reports appear at pages F-1 through F-3, and
the Financial Statements and Notes to Financial Statements appear at pages F-4
through F-33 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
Donald F. Fox 47 President, Treasurer and Chief
Financial Officer
Gerald J. Flanagan 55 President of Michigan and Florida
Subsidiaries
Scott F. Lochridge 43 Vice-President- Purchasing
R. Scott Williams 35 Vice President - Strategic Development
Chris Brogdon 47 Chairman of the Board and Director
Edward E. Lane 59 Director
Darrell C. Tucker 37 Director
Philip M. Rees 32 Secretary
There is no family relationship between any Director or Executive
Officer of the Company.
The Company presently has no Nominating Committee, Compensation
Committee or Audit Committee.
Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
Donald F. Fox - President, Treasurer and Chief Financial Officer. Mr.
Fox has been employed by the Company as its President, Treasurer and Chief
Financial Officer since April 1996, and served as a consultant to the Company
from December 1995 to April 1996. From August 1995 to December 1995, he was a
consultant to the City of Roswell, Georgia. From May 1987 to August 1995 he
was Chief Financial Officer of Argenbright Holdings Limited (US) and The ADI
Group Limited (UK). In this capacity, Mr. Fox managed the growth of these
security and transportation businesses from approximately $11 million in
annual sales to approximately $160 million in annual sales during this time
period. From March 1986 to May 1987, he was Chief Executive Officer of
Juiceco Distributors, Inc., a food service distribution company in Atlanta,
Georgia. From November 1982 to March 1986, Mr. Fox was Vice President -
Finance of RTM, Inc. which was engaged in restaurant operations. Mr. Fox
received a Bachelor's Degree in Business Administration from Georgia State
University in 1972 and an MBA Degree from Wharton Graduate School, University
of Pennsylvania in 1974.
Gerald J. Flanagan - President of Michigan and Florida Subsidiaries.
Mr. Flanagan has been employed by the Company since July 1993, and from July
1993 to April 1996 was President, Treasurer, Chief Financial Officer and a
Director of the Company. From 1984 until July 1993, he served as the
independent certified public accountant for the Company's Florida Subsidiary.
Mr. Flanagan has been a certified public accountant for more than 23 years,
specializing in international financial transactions and tax. Mr. Flanagan
earned a Bachelor of Science in Business Administration degree from St. Mary's
College, Winona, Minnesota, in 1963. He has been a certified financial
planner in Florida since 1989. From 1969 to 1978, Mr. Flanagan was a
treasurer successively for Velsicol Chemical Corp., a subsidiary of Northwest
Industries, Chicago, Illinois, and Milton Roy Company, St. Petersburg,
Florida, companies listed on the New York Stock Exchange and the American
Stock Exchange, respectively. Mr. Flanagan was responsible for cash
management, which included establishing international credit lines, cash
transfer arrangements, management of world wide banking relationships,
including foreign subsidiaries, accounts receivable management, corporate tax
policy and investment coordination. From 1979 through 1992, Mr. Flanagan
maintained his own public accounting firm specializing in tax, financial
planning and management advisory services in St. Petersburg, Florida.
R. Scott Williams - Vice President - Strategic Development. Mr.
Williams has been employed by the Company since March 1993. From 1988 to
1991, he was an Account Representative for Motorola Communications, Inc., a
communication systems manufacturing company. In 1991, he was employed with
Med-Equip, Inc., a medical distribution company. From 1991 to 1992, he was
Vice President of Sales for Zygiene Medical Technology, Inc., a medical
manufacturing company.
Scott F. Lochridge - Vice President - Purchasing. Since 1991, Mr.
Lochridge has been President of AmeriDyne Corporation, which has been a
wholly-owned subsidiary of the Company since March 1, 1996, and has been Vice
President-Purchasing for the Company since September 1996. He received a
Bachelor's Degree in Business from Texas Christian University in 1975.
Chris Brogdon - Chairman of the Board and Director. Mr. Brogdon has
been a Director of the Company since September 30, 1994. He has served as
President and a Director of Retirement Care Associates, Inc. ("Retirement
Care"), a New York Stock Exchange company, since October, 1991. He also
served as Treasurer of Retirement Care from October, 1991, to November, 1993.
He served as Secretary of Capitol Care Management Company, Inc. ("Capitol
Care"), a wholly-owned subsidiary of Retirement Care, since July, 1990. Mr.
Brogdon has been involved in financing and operating nursing homes and
retirement communities since 1982. From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a retail salesman. Mr. Brogdon
attended Georgia State University in Atlanta, Georgia. Since March, 1987, Mr.
Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc. ("WHH") and
since August, 1990, he has been Secretary/Treasurer of National Assistance
Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business of owning
and operating nursing homes and retirement communities. These two companies
either own or operate pursuant to long-term leases with options to purchase,
or are the sole or managing general partner of limited partnerships that own
or lease a total of ten nursing home properties. Mr. Brogdon is also a
Director of Perennial Development Corporation, a publicly-held company which
provides physical, speech and occupational therapists to nursing homes and
other long-term care providers.
Edward E. Lane - Director. Mr. Lane has been a Director of the Company
since September 30, 1994. He has served as Secretary and a Director of
Retirement Care since October, 1991. Mr. Lane graduated from the University
of Iowa in 1959. From 1961 until 1968, he was self-employed as Gene Lane &
Associates where he was engaged in industrial financing with municipal tax
exempt bonds. From 1968 until 1971, he was employed by the investment banking
firm of Johnson, Lane, Space, Smith & Co. in Atlanta, Georgia. From 1972
until 1984, he was self-employed as Gene Lane & Associates where he was
involved with private investment banking principally in the areas of municipal
and industrial finance. In 1984, he was involved in the creation of the full
service investment banking firm of Lane, McNally & Jackson where he was a
principal until the firm was sold and merged into Bay City Securities, Inc. in
1987. In 1988, Mr. Lane co-founded Winter Haven Homes, Inc. to acquire
defaulted retirement centers and nursing homes. Mr. Lane also serves as
President and a Director of Gordon Jensen Health Care Association, Inc., a
nonprofit corporation that owns nine nursing homes and three personal care
facilities and National Assistance Bureau, Inc., a nonprofit corporation that
owns four health care facilities.
Darrell C. Tucker - Director. Mr. Tucker has been a Director of the
Company since September 30, 1994. He has been a Director of Retirement Care
since November, 1991, and Treasurer since November, 1993. Mr. Tucker also
serves as President of Capitol Care. He also served as President of Capitol
Care from October, 1990, until it was merged into the Company in November,
1992. From September, 1988, to July, 1990, he was a risk manager for Pruitt
Corporation where he was involved in insurance management for 30 long-term
health care facilities. From April, 1987 to August, 1988, he was Chief
Financial Officer for Allgood Health Care, Inc. which managed 12 nursing home
facilities. Mr. Tucker received a Bachelors Degree in Accounting from the
University of Georgia in 1980.
Philip M. Rees - Secretary. Mr. Rees has been Secretary of the Company
since October 18, 1994. He has been general counsel for Retirement Care since
July 1994. From May 1989 to July 1994, Mr. Rees was an attorney with the law
firm of Vincent, Chorey, Taylor & Feil in Atlanta, Georgia. He received a
Bachelors Degree in Economics in 1985 and a Juris Doctorate Degree in 1989
from the University of North Carolina.
SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, the following persons who
were either a director, officer or beneficial owner of more than 10% of the
Company's Common Stock, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year: Chris
Brogdon failed to timely report three transactions on a timely basis; Edward
E. Lane failed to timely report one transaction; and Gerald J. Flanagan filed
one Form 4 late, which reported two transactions.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's Chief Executive Officer and each other
executive officer who received compensation in excess of $100,000 for the year
ended June 30, 1996, the six months ended June 30, 1995, and the years ended
December 31, 1994 and 1993:
SUMMARY COMPENSATION TABLES
ANNUAL COMPENSATION
OTHER
ANNUAL
NAME AND PRINCIPAL COMPEN-
POSITION YEAR SALARY BONUS SATION
Donald F. Fox, 1996 $ 30,000 -0- -0-
President
Gerald J. Flanagan, 1996 $100,000 -0- -0-
President<FN1> 1995 $ 50,000 -0- -0-
1994 $ 69,250 -0- -0-
1993 $ 75,000 -0- -0-
William J. Gabriele, 1994 $114,500 -0- -0-
Chief Executive 1993 $150,000 $ 70,000 -0-
Officer<FN2>
Rudolf J. Dallessandro, 1994 $ 62,200 -0- -0-
Executive Vice Presi- 1993 $100,000 -0- -0-
dent (Sales & Market-
ing)<FN2>
Howard H. Hagon, 1994 $ 82,200 -0- -0-
Executive Vice Presi- 1993 $100,000 -0- -0-
dent (Operations)<FN2>
<FN>
<FN1>
Mr. Flanagan relinquished his title as President of the Company in April 1996.
<FN2>
These persons resigned as Officers and Directors of the Company on September
30, 1994.
</FN>
LONG-TERM COMPENSATION
AWARDS PAYOUTS
SECURITIES
UNDERLYING ALL
RESTRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL STOCK SARS LTIP COMPEN-
POSITION YEAR AWARD(S) (NUMBER) PAYOUTS SATION
Donald F. Fox, 1996 -- 75,000 -- -0-
President
Gerald J. Flanagan, 1996 -- -- -- -0-
President<FN1> 1995 -- -- -- -0-
1994 -- -- -- -0-
1993 -- 262,500 -- -0-
William J. Gabriele, 1994 -- -- -- -0-
Chief Executive 1993 -- -- -- -0-
Officer<FN2>
Rudolf J. Dallessandro, 1994 -- -- -- -0-
Executive Vice Presi- 1993 -- -- -- -0-
dent (Sales & Market-
ing)<FN2>
Howard H. Hagon, 1994 -- -- -- -0-
Executive Vice Presi- 1993 -- -- -- -0-
dent (Operations)<FN2>
<FN>
<FN1>
Mr. Flanagan relinquished his title as President of the Company in April 1996.
<FN2>
These persons resigned as Officers and Directors of the Company on September
30, 1994.
</FN>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES UNDER- VALUE OF UNEXER-
SHARES LYING UNEXER- CISED-IN-THE
ACQUIRED CISED OPTIONS MONEY\OPTIONS/
ON SARS AT FY-END SARS AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
Donald F. Fox -0- -0- 0/75,000 $0/$0
Gerald J. Flanagan 26,250 $115,625 236,250/0 $790,256/$0
EMPLOYMENT AGREEMENTS
On January 1, 1993, the Florida Subsidiary and the Michigan Subsidiary
executed employment agreements (the "Agreements") with Messrs. Gabriele,
Dallessandro and Hagon. Each Agreement provided that the employee was to
devote his full time and energy to the Company. The Agreements provided for a
base salary for Messrs. Gabriele, Dallessandro and Hagon of $150,000, $100,000
and $100,000, respectively, and incentive quarterly bonuses equal to 15.18%,
5.36% and 4.46%, respectively, of combined net income of the Michigan and
Florida Subsidiaries (defined as net operating income before taxes),
calculated without giving effect to net operating loss carryforwards or
carrybacks. The Agreements further provided for the same medical and life
insurance coverage as the Company provides for its other senior executive
officers. Each of the Agreements required payment of the employee's full
salary through the Scheduled Termination Date, irrespective of whether the
employee's employment terminates, the employee renders the services specified
or whether such services are deemed satisfactory by the Company. However,
each of these persons agreed to cancel their Agreements, and effective
December 29, 1994, no further compensation will be paid to these persons.
In November 1993, effective as of July 1, 1993, the Florida Subsidiary
and the Company executed a five year employment agreement with Gerald J.
Flanagan. The agreement shall be automatically extended for additional one
year periods unless terminated by either party on 60 days' notice. The
agreement provides for a base salary of $75,000 per year plus incentive
bonuses, and the same medical and life insurance benefits as are provided to
the Company's senior executive officers. The agreement contains trade
secrets, confidentiality and non-competition covenants. Effective October 1,
1994, Mr. Flanagan's salary was increased to $100,000 per year.
R. Scott Williams, the Company's Vice President of Marketing, has an
employment agreement with the Company pursuant to which he presently receives
an annual salary of $75,000. The initial term of this agreement was through
February 21, 1995, but is automatically extendable for additional one year
periods unless either party gives 60 days' notice of an intent to terminate
prior to the end of a term.
Scott F. Lochridge, President of the Company's AmeriDyne subsidiary, has
a two-year employment agreement with AmeriDyne which became effective on March
1, 1996. Under this agreement, Mr. Lochridge will receive a base salary of
$150,000 during the first year and $165,000 during the second year. He will
also be entitled to performance-based bonuses under a plan to be agreed upon
which would allow him to earn up to 30% of his annual salary as additional
compensation. Mr. Lochridge is also entitled to a $500,000 term life
insurance policy, the beneficiary of which is to be named by him, and a $500
per month automobile allowance.
Donald F. Fox, who became President of the Company in April 1996,
presently has no employment agreement with the Company. From April to July
1996 he received a salary of $120,000 per year. Effective July 15, 1996, his
salary was increased to $160,000 per year.
NON-QUALIFIED EMPLOYEE STOCK BONUS PLAN
On April 20, 1993, the Company's Board of Directors and a majority of
the owners of its Common Stock approved the adoption by the Company of a
Non-Qualified Employee Stock Bonus Plan (the "Plan") to reward individual
performance, provide incentives for employee performance, and to attract and
retain employees. The Company set aside 1,050,000 shares of its Common Stock
under the Plan, which is administered by the Board of Directors. Shares may
be awarded to employees of the Company, including its Subsidiaries, at a
purchase price of not less than $.01 per share. Options awarded under the
Plan will vest over a three year period and are exercisable for a period of
five years from date of grant. The only options which have been granted under
the Plan are an option to purchase 262,500 shares granted to Gerald J.
Flanagan in July 1993, exercisable at $1.905 per share; an option to purchase
105,000 shares granted to R. Scott Williams in October 1994, exercisable at
$2.143 per share; and options to purchase an aggregate of 52,500 shares
granted to two employees in May 1995, exercisable at $3.714 per share; and
options to purchase an aggregate of 47,250 shares granted to six employees in
December, 1995, exercisable at $4.11 per share.
1996 STOCK OPTION PLAN
On February 1, 1996, the Company's Board of Directors adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"). The plan must be approved
by the Company's shareholders within 12 months of February 1, 1996. The 1996
Plan allows the Board to grant stock options from time to time to employees,
officers and directors of the Company and consultants to the Company. The
Board has the power to determine at the time the option is granted whether the
option will be an Incentive Stock Option (an option which qualifies under
Section 422 of the Internal Revenue Code of 1986) or an option which is not an
Incentive Stock Option. However, Incentive Stock Options will only be granted
to persons who are key employees of the Company. Vesting provisions are
determined by the Board at the time options are granted. The total number of
shares of Common Stock subject to options under the 1996 Plan may not exceed
315,000, subject to adjustment in the event of certain recapitalizations,
reorganizations and similar transactions. The option price must be satisfied
by the payment of cash.
The Board of Directors may amend the 1996 Plan at any time, provided
that the Board may not amend the 1996 Plan to materially increase the number
of shares available under the 1996 Plan, materially increase the benefits
accruing to Participants under the 1996 Plan, or materially change the
eligible class of employees without shareholder approval.
On February 1, 1996, the Board of Directors granted non-qualified stock
options to purchase an aggregate of 89,250 shares of Common Stock subject to
shareholder approval of the 1996 Plan. All of the options are exercisable at
$4.643 per share and, once the 1996 Plan is approved by the Company's
shareholders, will be fully vested. The options will expire five years after
the date of grant.
Included in options granted on February 1, 1996, are non-qualified stock
options granted to Chris Brogdon, Edward E. Lane and Darrell C. Tucker,
Directors of the Company, to purchase 26,250 shares each, and non-qualified
stock options granted to Phillip M. Rees, Secretary of the Company, to
purchase 10,500 shares.
On April 15, 1996, the Board of Directors granted a non-qualified stock
option to Donald F. Fox, the Company's President, to purchase 75,000 shares of
the Company's Common Stock at $5.375 per share. Once the 1996 Plan is
approved, the option will be fully vested, and will expire five years after
the date of grant.
On July 1, 1996, the Board of Directors granted a non-qualified stock
option to an employee of a subsidiary to purchase 25,000 shares of Common
Stock at $5.75 per share. Once the 1996 Plan is approved, the option will be
fully vested, and will expire five years after the date of grant.
On August 6, 1996, the Board of Directors granted a non-qualified stock
option to an employee to purchase 25,000 shares of Common Stock at $5.75 per
share. Once the 1996 Plan is approved, the options will be fully vested, and
will expire five years after the date of grant.
On September 3, 1996, the Board of Directors granted non-qualified stock
options to two employees each to purchase 25,000 shares of Common Stock at
$5.50 per share. Once the 1996 Plan is approved, the options will be fully
vested, and will expire five years after the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of September 1, 1996, as
to the shares of the Common Stock beneficially owned by each person who is the
beneficial owner of more than five percent (5%) of the Company's shares, each
of the Company's Directors and by all of the Company's Directors and Executive
Officers as a group. Each person has sole voting and investment power with
respect to the shares shown except as noted.
AMOUNT OF BENE- PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER FICIAL OWNERSHIP OF CLASS
Retirement Care Associates, Inc.<FN1> 3,290,878 <FN2> 54.1%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Donald F. Fox 10,000 <FN3> 0.2%
3340 Scherer Drive
St. Petersburg, FL 33716
Gerald J. Flanagan 268,155 <FN4> 4.3%
3340 Scherer Drive
St. Petersburg, FL 33716
R. Scott Williams 113,077 <FN5> 1.9%
3340 Scherer Drive
St. Petersburg, FL 33716
Chris Brogdon 60,300 <FN6> 1.0%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Edward E. Lane 14,450 <FN7> 0.2%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Darrell C. Tucker 5,250 <FN8> 0.1%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Scott F. Lochridge 367,119 6.2%
231 Bobick Drive
Jackson, TN 39301
All Directors and Executive Officers 838,351 13.3%
as a Group (7 Persons)
__________________
<FN>
<FN1>
Retirement Care Associates, Inc. ("Retirement Care") is a publicly-held
corporation of which Chris Brogdon is President, Director and a principal
shareholder; Edward E. Lane is Secretary, Director and a principal
shareholder; Darrell C. Tucker is a Director and a President of a subsidiary;
and Julian S. Daley and Harlan Mathews are Directors.
In addition, Connie Brogdon, the wife of Chris Brogdon, is a principal
shareholder of Retirement Care. The following sets forth the percentage
ownership beneficially held by such persons in Retirement Care:
Chris Brogdon 20.7%
Edward E. Lane 19.5%
Darrell C. Tucker 4.1%
Julian S. Daley 0.3%
Harlan Mathews 0.1%
Connie Brogdon 20.7%
<FN2>
Includes 3,157,003 shares held by Retirement Care Associates, Inc., 44,625
shares underlying Class C Warrants held by Retirement Care Associates, Inc.
and 89,250 shares of Common Stock into which shares of Series A Convertible
Preferred Stock held by Retirement Care Associates, Inc. may be converted.
<FN3>
Does not include shares underlying stock options held by Mr. Fox under the
1996 Stock Option Plan because the options are contingent on shareholder
approval of such plan.
<FN4>
Represents 31,905 shares of Common Stock held by Mr. Flanagan and 236,250
shares issuable upon the exercise of currently exercisable stock options held
by Mr. Flanagan.
<FN5>
Includes 8,077 shares of Common Stock held directly by Mr. Williams and
105,000 shares issuable upon the exercise of currently exercisable stock
options held by him.
<FN6>
Includes 45,300 shares held directly by Mr. Brogdon; 10,000 shares held by Mr.
Brogdon's wife; and 5,000 shares which represents one-half of the shares owned
by Winter Haven Homes, Inc. of which Mr. Brogdon's wife is a 50% owner. Does
not include shares held by Retirement Care Associates, Inc. of which Mr.
Brogdon is an officer, director and a principal shareholder. Also does not
include shares underlying stock options granted to Mr. Brogdon under the
Company's 1996 Stock Option Plan because the options are contingent on
shareholder approval of such plan.
<FN7>
Includes 9,450 shares held directly by Mr. Lane and 5,000 shares which
represents one-half of the shares owned by Winter Haven Homes, Inc. of which
Mr. Lane is 50% owner. Does not include shares held by Retirement Care
Associates, Inc. of which Mr. Lane is an officer, director and a principal
shareholder. Also does not include shares underlying stock options granted to
Mr. Lane under the Company's 1996 Stock Option Plan because the options are
contingent on shareholder approval of such plan.
<FN8>
Represents 5,250 shares held directly by Mr. Tucker. Does not include shares
held by Retirement Care Associates, Inc. of which Mr. Tucker is an officer and
diretor. Also does not include shares underlying stock options granted to Mr.
Tucker under the Company's 1996 Stock Option Plan because the options are
contingent on shareholder approval of such plan.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1994, Retirement Care Associates, Inc., the Company's majority
shareholder, advanced the Company $165,000. This was repaid without interest
during February 1995.
In February 1995, Retirement Care Associates, Inc. ("Retirement Care"),
the Company's majority shareholder, purchased 85,000 shares of Series A
Preferred Stock and 42,500 Class C Redeemable Common Stock Purchase Warrants
for a total of $340,000 in cash as part of a private offering conducted by the
Company. Also in February 1995, the Company advanced $1,168,901 out of the
proceeds of the private offering to Retirement Care. The advance to
Retirement Care is due on demand and is interest free. This transaction was
approved by the only disinterested member of the Board of Directors based on
an understanding among the Board members that Retirement Care will repay the
advance as the Board determines the Company needs the money. In addition, if
the Company needs to borrow money from Retirement Care, as it did in 1994,
Retirement Care will loan the money on an interest free basis. It is the
Company's policy that all transactions with affiliates, including major
shareholders and members of management, must be approved by a majority of the
disinterested directors. On July 11, 1996, Retirement Care repaid $613,563 to
the Company, representing the entire outstanding balance owed to the Company
from the proceeds of the private offering advanced to Retirement Care in
February, 1995. On August 22, the Company advanced $750,000 to Retirement
Care out of the proceeds of the sale of Convertible Debentures in July, 1996,
pursuant to an agreement between the Company and Retirement Care dated August
22, 1996. This agreement stipulates that funds advanced to Retirement Care by
the Company, or by Retirement Care to the Company, must be repaid within 45
days of the date of the advance and will bear interest at the prime interest
rate published in the Wall Street Journal.
During the year ended June 30, 1996, nursing home and retirement
facilities owned, leased or managed by Retirement Care purchased a total of
approximately $5,456,000 in bulk medical supplies from the Company. The sales
made to these facilities are at the same prices the Company would receive from
non-affiliated persons. As of June 30, 1996, such facilities owed the Company
$1,918,000 in accounts receivable in connection with such sales.
Retirement Care has guaranteed a $500,000 line of credit of the Company
from a commercial bank. As of June 30, 1996, $433,535 had been drawn on this
line of credit. In September 1996, this line of credit was paid in full and
replaced.
In August 1996, the Company issued promissory notes totaling $10,500,000
in connection with the acquisition of Atlantic Medical Supply, Inc.
Retirement Care has agreed that in the event of a default in the payment of
such promissory notes, they may be converted into shares of Retirement Care's
common stock, and that Retirement Care will register such stock for resale
under the Securities Act of 1933.
Retirement Care has also guaranteed loans and lines of credit of the
Company's AmeriDyne subsidiary totaling approximately $1,255,000. As of
June 30, 1996, approximately $1,040,000 was outstanding under these
obligations. In September 1996 this line of credit was paid in full.
Scott F. Lochridge, the President of AmeriDyne, holds a promissory note
from AmeriDyne dated March 1, 1996, in the principal amount of $176,419. The
note bears interest at 10% per annum and is payable in 36 equal monthly
installments of $5,693 commencing April 1, 1996. As of June 30, 1996,
$163,646 in principal was outstanding under this promissory note.
On September 12, 1996, the Company loaned $55,332 to Donald F. Fox, the
Company's President. The loan is due on demand and bears interest at 7% per
annum.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following financial statements are
filed as part of this report:
PAGE(S)
Reports of Independent Certified Public Accountants............. F-1 to F-3
Consolidated Balance Sheets as of June 30, 1996, and
June 30, 1995....................................................... F-4
Consolidated Statements of Income for the year ended
June 30, 1996, the six months ended June 30, 1996,
and for the years ended December 31, 1994 and 1993.................. F-5
Consolidated Statements of Shareholders' Equity for
the year ended June 30, 1996, the six months ended
June 30, 1996, and for the years ended December 31,
1994 and 1993................................................... F-6 to F-17
Consolidated Statements of Cash Flows for the
year ended June 30, 1996 and the six months ended
June 30, 1996, and for the years ended December 31,
1994 and 1993................................................... F-18 to F-19
Notes to Financial Statements................................... F-20 to F-33
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been
omitted, as the required information is inapplicable or the information is
presented in the financial statements or the notes thereto.
(a) 3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Restated Articles of Incorpora- Incorporated by reference to
tion of Associated Health Care Exhibit 3.1 to the Company's
Industries, Inc. Form S-1 Registration State-
ment (File No. 33-66024)
3.2 Amendment to the Restated Incorporated by reference to
Articles of Incorporation Exhibit 3.2 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.3 Bylaws of the Registrant Incorporated by reference to
Exhibit 3.3 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.4 Second Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.4 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
July 26, 1993 ment (File No. 33-66024)
3.5 Third Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.5 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
August 27, 1993 ment (File No. 33-66024)
3.6 Fourth Amendment to the Restated Incorporated by reference to
Articles of Incorporation of Exhibit 3.6 to the Company's
Contour Medical, Inc., dated Form S-1 Registration State-
November 10, 1993 ment (File No. 33-66024)
3.7 Amended Bylaws Incorporated by reference to
Exhibit 3.7 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
3.8 Sixth Amendment to Articles of Incorporated by reference to
Incorporation, dated November 9, Exhibit 3.8 to the Company's
1993 (there is no "Fifth" Amend- Form S-1 Registration State-
ment) ment (File No. 33-66024)
3.9 Amendment Number Five to Incorporated by reference to
Articles of Incorporation, Exhibit 3.9 to the Company's
dated April 25, 1994 Form S-1 Registration State-
ment (File No. 33-66024)
3.10 Amendment Number Six to Incorporated by reference to
Articles of Incorporation, Exhibit 3.10 to the Company's
dated May 13, 1994 Form S-1 Registration State-
ment (File No. 33-66024)
10.1 Lease Agreement, effective Incorporated by reference to
August 1, 1994, between Contour Exhibit 10.1 to the Company's
Fabricators of Florida, Inc., Transition Report on Form10-K
and William A. and Gerald for the period ended June30,
Gehrand relating to the Regis- 1995
trant's office and manufacturing
space in St. Petersburg, Florida
10.2 Lease Agreement, dated March 1, Incorporated by reference to
1993, between the Registrant Exhibit 10.2 to the Company's
and William A. and Gerald Form S-1 Registration State-
Gehrand, relating to the Regis- ment (File No. 33-66024)
trant's office and manufacturing
space in St. Petersburg, Florida
10.3 Employment Agreement, dated Incorporated by reference
January 1, 1993, between the Exhibit 10.3 to the Company's
Registrant and William J. Form S-1 Registration State-
Gabriele ment (File No. 33-66024)
10.4 Employment Agreement, dated Incorporated by reference to
January 1, 1993, between the Exhibit 10.4 to the Company's
Registrant and Rudolph J. Form S-1 Registration State-
Dallessandro ment (File No. 33-66024)
10.5 Employment Agreement, dated Incorporated by reference to
January 1, 1993, between the Exhibit 10.5 to the Company's
Registrant and Howard E. Hagon Form S-1 Registration State-
ment (File No. 33-66024)
10.6 Non-Qualified Employee Stock Incorporated by reference to
Bonus Plan Exhibit 10.6 to the Company's
Form S-1 Registration State-
ment (File No. 33-66024)
10.7 Employment Agreement by and Incorporated by reference to
between Contour Medical Fabrica- Exhibit 10.8 to the Company's
tors of Florida, Inc., Associa- Form S-1 Registration State-
ted Healthcare Industries, Inc. ment (File No. 33-66024)
and Gerald J. Flanagan, dated
July 1, 1993
10.8 Lease Agreement with William A. Incorporated by reference to
and Gerald Gehrand dated Exhibit 10.8 to the Company's
February 1, 1995, relating to Transition Report on Form
Registrant's warehouse space in 10-K for the period ended
St. Petersburg, Florida June 30, 1995
10.9 1996 Stock Option Plan Incorporated by reference to
Exhibit 10.9 to the Company's
Form S-1 Registration State-
ment (File No. 33-64977)
10.10 Agreement and Plan of Merger by Incorporated by reference to
and among Contour Medical, Inc. Exhibit 10 to the Company's
Contour Merger Sub, Inc., Scott Current Report on Form 8-K
F. Lochridge and AmeriDyne Dated March 1, 1996
Corporation
10.11 Employment Agreement with Incorporated by reference to
Scott F. Lochridge Exhibit 10.11 to the Company's
Form S-1 Registration State-
ment (File No. 33-64977)
10.12 Promissory Note from AmeriDyne Incorporated by reference to
Corporation from Scott F. Exhibit 10.13 to the Company's
Lochridge Form S-1 Registration State-
ment (File No. 33-64977)
10.13 Share Purchase Agreement for Incorporated by reference to
the acquisition of Atlantic Exhibit 10.1 to the Company's
Medical Supply Company, Inc. Report on Form 8-K dated
August 6, 1996
10.14 Convertible Debenture Loan Filed herewith electronically
Agreement with Renaissance
Capital Growth & Income Fund
III, Inc., and Renaissance
US Growth and Income Trust
PLC
10.25 Letter Agreement dated August Filed herewith electronically
22, 1996 with Retirement Care
Associates, Inc.
21 Subsidiaries of the Registrant Filed herewith electronically
23.1 Consent of Coopers & Lybrand, Filed herewith electronically
L.L.P.
23.2 Consent of BDO Seidman, LLP Filed herewith electronically
23.3 Consent of Pender Newkirk &
Company Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
All financial statement schedules have been omitted, as the required
information is inapplicable or the information is presented in the financial
statements or the notes thereto.
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated balance sheet of Contour
Medical, Inc. (a subsidiary of Retirement Care Associates, Inc.) and
Subsidiaries (the Company) as of June 30, 1996, and the related consolidated
statement of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Contour Medical,
Inc. and Subsidiaries as of June 30, 1996, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Tampa, Florida
September 13, 1996, except for the second paragraph in Note 13,
for which the date is September 20, 1996
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated balance sheets of Contour
Medical, Inc. (a subsidiary of Retirement Care Associates, Inc.) and
Subsidiaries as of June 30, 1995 and December 31, 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the six months and year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Contour
Medical, Inc. and Subsidiaries as of June 30, 1995 and December 31, 1994 and
the results of their operations and their cash flows for the six months and
year then ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Orlando, Florida
August 18, 1995, except for the stock split
discussed in Note 10 which is as of March 15, 1996
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Contour Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Contour Medical, Inc. and
Subsidiaries for the year ended December 31, 1993. These consolidated
financial statements are the responsibility of the management of Contour
Medical, Inc. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
changes in stockholders' equity, and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Contour Medical, Inc. and Subsidiaries for the year ended December
31, 1993 in conformity with generlaly accepted accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
January 21, 1994
100 South Ashley Drive, Suite 1650, Tampa, Florida 33602
813/229-2321
813/229-2359 FAX
PENDER NEWKIRK & COMPANY - CERTIFIED PUBLIC ACCOUNTANTS
Member of Private Companies Practice Section
and SEC Practice Section of American Institute
of Certified Public Accountants
F-3
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
1996 1995
----------- ----------
ASSETS
Cash $ 146,219 $ 96,235
Accounts receivable:
Related parties 1,918,000 943,094
Trade, net of allowance for bad debts
of approximately $410,000 in 1996 2,527,676 760,703
Inventories 2,876,792 1,297,394
Refundable income taxes 21,406 10,680
Prepaid expenses and other 51,519 74,319
Due from parent 618,897 1,168,901
------------ -----------
8,160,509 4,351,326
------------ -----------
Property and equipment, less
accumulated depreciation 1,223,195 592,243
------------ -----------
Other assets:
Deposit on equipment 416,184 228,282
Other 172,215 4,575
Goodwill, net of accumulated amorti-
ation of approximately $11,000 in 1996 1,286,165 0
------------ -----------
1,874,564 232,857
------------ -----------
$ 11,258,268 $ 5,176,426
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,825,193 $ 414,077
Accounts payable 1,954,824 882,524
Accrued expenses 366,716 80,977
------------ -----------
4,146,733 1,377,578
Long-term debt, less current maturities 1,352,937 907,711
------------ -----------
Total liabilities 5,499,670 2,285,289
------------ -----------
Stockholders' equity:
Preferred stock - Series A convertible;
$.001 par value, shares authorized -
1,265,000; issued and outstanding -
600,000 at aggregate liquidation
preference 2,528,000 2,400,000
Common stock; $.001 par value, shares
authorized - 76,000,000; issued and
outstanding 5,214,223 and 4,573,600,
respectively, (net of $765 discount) 4,449 3,808
Additional paid-in capital 2,911,696 781,738
Retained earnings (deficit) 232,625 (294,409)
------------ -----------
Total stockholders' equity 5,676,770 2,891,137
------------ -----------
$ 11,258,268 $ 5,176,426
The accompanying notes are an integral part of these financial statements.
F-4
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31,
JUNE 30, JUNE 30,
- ------------------------
1996 1995 1994
1993
----------- ---------- ----------
- -----------
Sales $14,542,421 $3,568,459 $3,945,745
$3,618,359
Cost of sales 10,491,103 2,544,376 2,545,925
2,061,250
----------- ---------- ----------
- ----------
Gross profit 4,051,318 1,024,083 1,399,820
1,557,109
Selling, general and adminis-
trative expenses 3,185,620 841,275 1,550,385
1,538,465
Litigation settlements 0 0 30,000
85,000
----------- ---------- ----------
- ----------
Income (loss) from operations 865,698 182,808 (180,565)
(66,356)
----------- ---------- ----------
- ----------
Other income (expenses):
Offering costs 0 0 (305,731)
0
Interest (170,951) (39,098) (53,627)
(63,758)
Other 144,453 22,381 10,741
4,789
----------- ---------- ----------
- ----------
(26,498) (16,717) (348,617)
(58,969)
----------- ---------- ----------
- ----------
Income (loss) before taxes
on income (benefit) 839,200 166,091 (529,182)
(125,325)
Taxes on income (benefit) 312,166 54,718 0
(51,789)
----------- ---------- ----------
- ----------
Net income (loss) $ 527,034 $ 111,373 $ (529,182) $
(73,536)
=========== ========== ==========
==========
Earnings (loss) per common share $ 0.09 $ 0.02 $ (0.20) $
(0.05)
=========== ========== ==========
==========
Weighted average common shares and
share equivalents outstanding 4,804,292 4,786,126 2,688,927
1,434,466
=========== ========== ==========
==========
The accompanying notes are an integral part of these financial statements.
F-5
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUBSCRIBED
COMMON STOCK COMMON STOCK
ADDITIONAL
---------------------- ---------------------
PAID-IN
SHARES AMOUNT SHARES AMOUNT
CAPITAL
----------- -------- --------- ---------
- ----------
Balance, January 1,
1993 6,900 $ 6,900 0 $ 0 $
0
Acquisition of CMI 16,315,034 16,315 150,000 75
517,939
Recapitalization (6,900) (23,215) 0 (75)
(517,939)
Issuance of stock 180,045 33 (150,000) 0
4,967
Contribution of stock 0 0 0 0
0
1-for-13 reverse stock
split (15,226,227) (30) 0 0
30
Conversion of Class A
preferred stock 365,704 366 0 0
27,226
Conversion of Class C
preferred stock 846,669 847 0 0
404,356
Issuance of Class E
preferred stock in
exchange for common
stock (172,986) (87) 0 0
(295,656)
Net loss 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, December 31,
1993 2,308,239 1,129 0 0
140,923
Conversion of Class A
preferred stock 219,182 220 0 0
39,557
Conversion of Class B
preferred stock 33,333 33 0 0
(33)
Converson of Class D
preferred stock and
warrants 238,450 238 0 0
75,212
Conversion of Class E
preferred stock 172,986 173 0 0
295,569
Conversion of Class One
preferred stock 2,000,000 2,000 0 0
370,844
Net loss 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, December 31,
1994 4,972,190 3,793 0 0
922,072
Issuance of Series A
preferred stock 0 0 0 0
(214,997)
Exercise of common
stock options 15,385 15 0 0
19,985
Correction of Class A
preferred stock conver-
sion 255 0 0 0
0
Redemption of Class A
warrants 0 0 0 0
(40)
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0 0
54,718
F-6
Retirement of treasury
stock (414,230) 0 0 0
0
Net income 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, June 30, 1995 4,573,600 3,808 0 0
781,738
Issuance of stock 352,018 353 0 0
2,045,753
Exercise of common stock
options 25,000 25 0 0
49,975
1.05-for-1 forward stock
split 247,601 247 0 0
(247)
Correction of preferred
stock 16,004 16 0 0
(16)
Short-swing liability from
a shareholder 0 0 0 0
36,531
Preferred dividends in
arrears 0 0 0 0
(128,000)
Tax benefit from utilization
of net operating loss
carryforward 0 0 0 0
125,962
Net income 0 0 0 0
0
----------- --------- -------- ---------
- ---------
Balance, June 30, 1996 5,214,223 $ 4,449 0 $ 0
$2,911,696
The accompanying notes are an integral part of these financial statements.
F-7
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
CONVERTIBLE
PREFERRED
STOCK
RETAINED TREASURY STOCK SERIES
A
EARNINGS ---------------------
- -------------------
(DEFICIT) SHARES AMOUNT SHARES
AMOUNT
----------- ----------- ------- -------
- ----------
Balance, January 1,
1993 $ 287,099 0 $ 0 0 $
0
Acquisition of CMI (1,039,673) 0 0 0
0
Recapitalization 1,039,673 0 0 0
0
Issuance of stock 0 0 0 0
0
Contribution of stock 0 5,385,000 0 0
0
1-for-13 reverse stock
split 0 (4,970,770) 0 0
0
Conversion of Class A
preferred stock (27,592) 0 0 0
0
Conversion of Class C
preferred stock 0 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common
stock 0 0 0 0
0
Net loss (73,536) 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, December 31,
1993 185,971 414,230 0 0
0
Conversion of Class A
preferred stock (14,777) 0 0 0
0
Conversion of Class B
preferred stock 0 0 0 0
0
Converson of Class D
preferred stock
and warrants (47,794) 0 0 0
0
Conversion of Class E
preferred stock 0 0 0 0
0
Conversion of Class One
preferred stock 0 0 0 0
0
Net loss (529,182) 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, December 31,
1994 (405,782) 414,230 0 0
0
Issuance of Series A
preferred stock 0 0 0 600,000
2,400,000
Exercise of common
stock options 0 0 0 0
0
Correction of Class A
preferred stock
conversion 0 0 0 0
0
Redemption of Class A
warrants 0 0 0 0
0
F-8
Tax benefit from utili-
zation of net operating
loss carryforward 0 0 0 0
0
Retirement of treasury
stock 0 (414,230) 0 0
0
Net income 11,373 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, June 30, 1995 (294,409) 0 0 600,000
2,400,000
Issuance of stock 0 0 0 0
0
Exercise of common stock
options 0 0 0 0
0
1.05-for-1 forward stock
split 0 0 0 0
0
Correction of preferred
stock 0 0 0 0
0
Short-swing liability
from a shareholder 0 0 0 0
0
Preferred dividends in
arrears 0 0 0 0
128,000
Tax benefit from utili-
zation of net operating
loss carryforward 0 0 0 0
0
Net income 527,034 0 0 0
0
----------- ----------- ------- -------
- ----------
Balance, June 30, 1996 $ 232,625 0 $ 0 600,000
$2,528,000
The accompanying notes are an integral part of these financial statements.
F-9
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
REDEEMABLE CUMULATIVE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS D CLASS ONE
-----------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 1,000,000 0 0
0
Recapitalization 0 0 0
0
Issuance of stock 74,176 400,500 0
0
Contribution of stock 0 0 0
0
1-for-13 reverse stock
split 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 1,074,176 400,500 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and
warrants (1,074,176) (400,500) 2,000,000
372,844
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class One
preferred stock 0 0 (2,000,000)
(372,844)
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-10
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Preferred dividends in
arrears 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
The accompanying notes are an integral part of these financial statements.
F-11
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS A CLASS B
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 36,325 33,919 2
100,000
Recapitalization 0 (33,919) 0
(100,000)
Issuance of stock 334,319 25,000 0
0
Contribution of stock 0 0 0
0
1-for-13 reverse stock
split 0 0 0
0
Conversion of Class A
preferred stock (271,119) 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Net loss 0 0 0
0
--------- -------- ---------
- ---------
Balance, December 31, 1993 99,525 25,000 2
0
Conversion of Class A
preferred stock (99,525) (25,000) 0
0
Conversion of Class B
preferred stock 0 0 (2)
0
Converson of Class D
preferred stock and
warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class
One preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- -------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- -------- ---------
- ---------
F-12
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Tax benefit from utiliza-
tion of net operating
loss carryforward 0 0 0
0
Net income 0 0 0
0
--------- -------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
The accompanying notes are an integral part of these financial statements.
F-13
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
CONVERTIBLE CUMULATIVE CLASS C
PREFERRED STOCK PREFERRED STOCK
CLASS C SERIES E
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 666,669 0 325,000
0
Recapitalization 0 (74,797) 0
0
Issuance of stock 0 0 0
0
Issuance of stock in
satisfaction of loans 180,000 480,000 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class C
preferred stock (846,669) (405,203) 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 0
0
Acquisition and retirement
of stock 0 0 (325,000)
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 0
0
Conversion of Class One
preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-14
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Preferred dividends in
arrears 0 0 0
0
Tax benefit from utiliza-
tion of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
The accompanying notes are an integral part of these financial statements.
F-15
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
SUBSCRIBED CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
CLASS A CLASS E
------------------------
- -----------------------
SHARES AMOUNT SHARES
AMOUNT
--------- ---------- ---------
- ---------
Balance, January 1, 1993 0 $ 0 0 $
0
Acquisition of CMI 309,319 289,728 0
0
Recapitalization 0 (289,728) 0
0
Issuance of stock (309,319) 0 0
0
Issuance of stock in
satisfaction of loans 0 0 0
0
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class C
preferred stock 0 0 0
0
Issuance of Class E
preferred stock in
exchange for common stock 0 0 172,986
295,742
Acquisition and retirement
of stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1993 0 0 172,986
295,742
Conversion of Class A
preferred stock 0 0 0
0
Conversion of Class B
preferred stock 0 0 0
0
Converson of Class D
preferred stock and warrants 0 0 0
0
Conversion of Class E
preferred stock 0 0 (172,986)
(295,742)
Conversion of Class One
preferred stock 0 0 0
0
Net loss 0 0 0
0
--------- ---------- ---------
- ---------
Balance, December 31, 1994 0 0 0
0
Issuance of Series A
preferred stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
Correction of Class A
preferred stock conversion 0 0 0
0
Redemption of Class A
warrants 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Retirement of treasury stock 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
F-16
Balance, June 30, 1995 0 0 0
0
Issuance of stock 0 0 0
0
Exercise of common stock
options 0 0 0
0
1.05-for-1 forward stock
split 0 0 0
0
Correction of preferred
stock 0 0 0
0
Short-swing liability from
a shareholder 0 0 0
0
Tax benefit from utilization
of net operating loss
carryforward 0 0 0
0
Net income 0 0 0
0
--------- ---------- ---------
- ---------
Balance, June 30, 1996 0 $ 0 0 $
0
The accompanying notes are an integral part of these financial statements.
F-17
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31,
JUNE 30, JUNE 30,
- -----------------------
1996 1995 1994
1993
------------ ------------ ----------
- ----------
Cash flows from operating
activities:
Net income (loss) $ 527,034 $ 111,373 $(529,182)
$ (73,536)
Adjustments to reconcile
net income (loss) to net cash
used in operating activities:
Depreciation and amortization 255,757 51,670 98,684
53,397
Offering costs 0 0 305,731
0
Tax benefit from utilization
of net operating loss
carryforward 207,990 54,718 0
0
Cash provided by (used in):
Accounts receivable (1,364,353) (1,123,856) (34,558)
(12,505)
Inventories (318,832) (908,317) 33,978
50,654
Refundable income taxes (10,726) (2,500) 90,941
(99,121)
Prepaid expenses and other 32,059 (61,325) (6,189)
(6,805)
Accounts payable 402,534 767,004 23,263
(74,444)
Accrued expenses 144,490 80,835 (10,801)
(46,924)
------------- ------------- ----------
- ----------
Net cash used in operating
activities (124,047) (1,030,398) (28,133)
(209,284)
------------- ------------- ----------
- ----------
Cash flows from investing
activities:
Purchases of property and
equipment (749,163) (304,762) (46,181)
(123,917)
Cash acquired from acquisition 0 0 0
778
Decrease (increase) in due
from parent 550,004 (1,168,901) 0
0
Deposit on equipment 0 (228,282) 0
0
Decrease (increase) in
other assets 0 0 555
(1,055)
Acquisition of AmeriDyne,
net of cash acquired (322,297) 0 0
0
------------- ------------- ----------
- ----------
Net cash used in investing
activities (521,456) (1,701,945) (45,626)
(24,194)
------------- ------------- ----------
- ----------
Cash flows from financing
activities:
Deferred offering costs 0 0 (59,990)
(138,136)
Proceeds from issuance of notes
payable to bank 1,295,635 0 0
80,000
Proceeds (repayments) on notes
payable to bank (686,679) 189,671 (42,177)
100,000
Increase (decrease) in due to
parent 0 (165,000) 165,000
0
F-18
Proceeds from issuance of
long-term debt 0 482,622 0
0
Payments of long-term debt 0 (34,328) 0
0
Payments on loans to
stockholder 0 0 0
(23,420)
Proceeds from issuance of
stock 0 0 0
430,500
Proceeds from issuance of
preferred stock, net of
offering costs 0 2,196,447 0
0
Exercise of stock options 50,000 20,000 0
0
Redemption of Class A
warrants 0 (40) 0
0
Payment of short-swing
liability by a shareholder 36,531 0 0
0
------------- ------------- ----------
- ----------
Net cash provided by
financing activities 695,487 2,689,372 62,833
448,944
------------- ------------- ----------
- ----------
Net increase (decrease)
in cash 49,984 (42,971) (10,926)
115,466
Cash, beginning of period 96,235 139,206 150,132
34,666
------------- ------------- ----------
- ----------
Cash, end of period $ 146,219 $ 96,235 $ 139,206
$ 150,132
The accompanying notes are an integral part of these financial statement.
F-19
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the
accounts of Contour Medical, Inc. (CMI) and its wholly owned subsidiaries,
Contour Fabricators, Inc. (CFI), Contour Fabricators of Florida, Inc. (CFFI),
and AmeriDyne Corporation (AmeriDyne), collectively referred to as "the
Company." All material intercompany accounts and transactions have been
eliminated in the consolidation. CMI is a majority owned subsidiary of
Retirement Care Associates, Inc. (Parent Company).
Inventories - Inventories are valued at the lower of cost (first-in,
first-out)
or market. AmeriDyne inventories are valued at the lower of average cost or
market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets by
accelerated methods for financial reporting and income tax purposes.
Goodwill - The Company has classified as goodwill the cost in excess of fair
value of the net assets (including tax attributes) of AmeriDyne acquired in a
purchase transaction. Goodwill is being amortized on the straight-line method
over 40 years. Amortization charged to continuing operations amounted to
$11,261 for the year ended June 30, 1996. The Company periodically reviews
goodwill to assess recoverability, and any impairment would be recognized in
operating results if a permanent diminution in value were to occur.
Offering Costs - Fees, costs and expenses related to offerings of securities
are
deferred and charged against the proceeds therefrom or, if the offering is
unsuccessful, charged to operations. Costs of $257,185 related to a proposed
public offering were deferred at December 31, 1993 and charged to operations
in
the second quarter of 1994, when the offering was abandoned. Deferred costs
at
December 31, 1994, related to the private placement discussed in Note 9, were
charged against the proceeds therefrom in 1995.
Change in Method of Accounting for Income Taxes - Effective January 1, 1993,
the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting
for Income Taxes" (FAS 109), which requires recognition of estimated income
taxes payable or refundable on income tax returns for the current year and
for the estimated future tax effect attributable to temporary differences and
carryforwards. Measurement of deferred income tax is based on enacted tax
laws
including tax rates, with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be realized.
Revenue Recognition - Sales are recognized upon shipment of products to
customers.
Earnings (Loss) Per Share - Earnings (loss) per common share are based on the
weighted average number of common shares outstanding and dilutive common stock
equivalent shares outstanding during each period, after giving effect to the
one-for-thirteen reverse stock split which occurred in 1993, and the
1.05-for-1
forward stock split which occurred in 1996. Common stock equivalents for
1996,
1995, 1994 and 1993 have not been included, since the effect would be
antidilutive. Cumulative dividends in arrears of $96,000 and $32,000 related
to
the Company's Class A preferred stock (see Note 9) have been deducted from
1996
and 1995 net income for the calculation of earnings per common share,
respectively.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, Continued:
Change in Year-End - The Company changed its fiscal year-end from December 31
to
June 30 during 1995. Accordingly, the June 30, 1995 statements of operations,
stockholders' equity and cash flows are for the six months then ended.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to
make estimates and assumptions that affect the reported amounts of
consolidated
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Estimates also affect the
reported amounts of consolidated revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Pronouncements - The Financial Accounting Standards Board has released
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No.121 requires that long-lived assets and certain identifiable
intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This standard would be effective for the company's fiscal
year
ended June 30, 1997.
The Financial Accounting Standards Board also released SFAS No. 123,
"Accounting
for Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expense based on the fair value of grants
of
stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS
No. 123 requires that companies not adopting must disclose pro forma net
income
and earnings per share. The Company will continue to apply the prior
accounting
rules and make pro forma disclosures. This standard would be effective for
the
Company's fiscal year ending June 30, 1997.
2. ORGANIZATION AND BUSINESS ACQUISITION:
Contour Fabricators, Inc., incorporated in March 1974 and located in Grand
Blanc, Michigan, manufactures orthopedic devices used in rehabilitative
therapy
procedures and positioning aids for imaging procedures. Contour Fabricators
of
Florida, Inc., incorporated in December 1984 and located in St. Petersburg,
Florida, manufactures disposable medical products, which consist primarily of
plastic and foam items for use in surgical and other special medical
procedures.
Contour Medical, Inc. (formerly Associated Healthcare Industries, Inc.) was
incorporated in Nevada in April 1987 as a "blank check" company and in 1989
conducted an initial public offering. In May 1993, effective as of January 1,
1993, the stockholders of CFI and CFFI received, in exchange for all their
shares, the following from CMI: 1,000,000 shares of Class D redeemable
preferred stock, 666,669 shares of Class C convertible preferred stock and
666,666 Class D warrants. Through December 31, 1992, CMI was a development
stage company in the health care industry. As a result of this acquisition,
the stockholders of CFI and CFFI had effectively acquired CMI and control
thereof. Accordingly, this acquisition was accounted for as a reverse
acquisition and the financial statements have been prepared as if the
entities had operated as a single entity effective as of January 1, 1993.
The operating results of CMI are included in the accompanying consolidated
financial statements since January 1, 1993.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ORGANIZATION AND BUSINESS ACQUISITION, Continued:
Beginning in 1995, CMI established a medical supply distribution business to
service Parent Company health care facilities. CMI also distributes medical
supplies to other nursing home operators and health care providers.
3. RELATED PARTY TRANSACTIONS:
During 1995, CMI began distributing medical supplies to health care facilities
owned, leased or managed by the Parent Company. Sales to these facilities
approximated $5,456,000 for the year ended June 30, 1996, and $1,426,000 for
the
six-month period ended June 30, 1995. Trade accounts receivable of
approximately $1,918,000 and $943,000 related to these health care facility
sales are outstanding as of June 30, 1996 and 1995, respectively.
Additionally, the Company had an outstanding loan receivable due from its
Parent Company of approximately $619,000 and $1,169,000 as of June 30, 1996
and 1995, respectively, which is due on demand with no stated interest rate.
4. INVENTORIES:
Inventories at June 30, 1996 and 1995 consisted of the following:
1996 1995
Raw materials $ 330,699 $ 259,952
Work in process 96,647 58,704
Finished goods 2,449,446 978,738
$ 2,876,792 $ 1,297,394
All inventories are pledged as collateral (see Note 6).
5. PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 1996 and 1995 consisted of the following:
Useful Lives 1996 1995
Land $ 50,000 $ 50,000
Building 5-45 yrs. 596,247 596,247
Machinery and equipment 3-7 yrs. 1,798,520 1,034,568
Furniture and fixtures 5-7 yrs. 146,536 124,651
Leasehold improvements 5 yrs. 251,352 13,923
Vehicles 3-5 yrs. 72,245 9,109
2,914,900 1,828,498
Less accumulated depreciation 1,691,705 1,236,255
$ 1,223,195 $ 592,243
All property and equipment are pledged as collateral (see Note 6).
6. NOTES PAYABLE:
Notes payable at June 30, 1996 and 1995 consisted of the following:
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
1996 1995
Note payable to bank, interest at prime
plus 1% (9.25% at June 30, 1996), principal
of $5,000 plus interest due monthly
through June 2000, collateralized by
equipment $ 217,559 $ 300,000
Note payable to bank, interest at prime plus
.75% (9.00% at June 30, 1996) principal of
$7,605 plus interest due monthly through
May 2000, collateralized by accounts
receivable, inventory, equipment and real
property 496,171 182,622
Mortgage payable to bank, bearing interest
at 8.58%, principal and interest of $6,793
due monthly through December 2003,
collateralized by accounts receivable,
inventory, equipment and real property 456,233 491,662
Mortgage payable to bank, interest at
prime plus .75% (9.00% at June 30,
1996), principal of $1,190 plus interest
due monthly through December 2000,
collateralized by accounts receivable,
inventory, equipment and real property 64,284 78,571
Borrowings under $100,000 line of credit,
interest at prime plus .75% (9.00% at
June 30, 1996), payable monthly,
collateralized by accounts receivable,
inventory, equipment, and real property 65,000 0
Note payable to bank, interest at prime plus
1% (10% at June 30, 1995), principal and
interest of $1,667 due monthly through
August 1996, collateralized by accounts
receivable, inventory and equipment 0 23,333
Note payable to bank, interest at 8.75%,
principal and interest at $1,282 due
monthly through April 2001, collateralized
by equipment 60,436 0
Borrowings under $250,000 line of credit,
interest at prime plus 1% (10% at June 30,
1995) payable monthly, collateralized by
accounts receivable and inventory 0 245,600
Borrowings under $500,000 line of credit,
interest at prime plus .25% (8.5% at June 30,
1996) payable monthly, collateralized by
accounts receivable, inventory and equipment,
and guarantees by Retirement Care Associates, Inc. 433,535 0
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
Note payable to leasing institution, interest
at 14.6%, monthly installments of $309 plus
sales tax. Matures June 1997, collateralized
by computer equipment 2,924 0
Note payable to equipment company, interest at
11%, monthly installments of $533 including
interest. Matures December 1997,
collateralized by equipment 8,805 0
Note payable to stockholder, interest at 10%,
principal and interest of $5,693, due monthly
through March 1999. $ 163,646 $ 0
Note payable to bank, interest at 9%,
principal and interest of $3,600 due monthly
through May 1997, collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 38,924 0
Note payable to bank, interest at 9%,
principal and interest of $5,266 due monthly
through October 1997, collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 212,613 0
Borrowings under $975,000 line of credit,
interest at prime plus 1.25% (9.5% at June 30,
1996). Principal is due on demand but no later
than May 15, 1997. Collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts, and
guarantees of Retirement Care Associates, Inc. 958,000 0
3,178,130 1,321,788
Less current maturities (1,825,193) (414,077)
$ 1,352,937 $ 907,711
Certain of the above agreements contain financial and operating covenants,
including requirements that the Company maintain certain net worth levels, and
current and debt-to-net worth ratios. The Company was in compliance with all
debt covenants as of June 30, 1996.
The aggregate maturities of long-term debt are as follows as of June 30, 1996:
1997 $ 1,825,193
1998 468,665
1999 303,777
2000 491,884
2001 83,674
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
Fair value is defined as the price at which a financial instrument could be
liquidated in an orderly manner over a reasonable time period under present
market conditions. The rates of the Company's fixed obligations approximate
those rates of the adjustable loans. Therefore, the fair value of these loans
has been estimated to be approximately equal to their carrying value.
7. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under various noncancelable leases for equipment and
office space. Future minimum lease commitments under operating leases were as
follows as of June 30, 1996.
1997 $ 389,974
1998 412,224
1999 385,974
2000 307,224
2001 305,062
Total rental expense was approximately $349,600, $145,500, $203,000, and
$189,500 for the year ending June 30, 1996, the six-month period ended June
30, 1995, and the years ended December 31, 1994 and 1993, respectively.
Employment Agreement - The Company has entered into an employment agreement
with
a key executive for a five-year period ending in June 1998. The agreement
provides for annual base compensation of $100,000.
Litigation - During 1994, the Company was a defendant in an employment injury
lawsuit filed by one of its employees. The Company settled this dispute for
approximately $30,000.
The Company was a defendant in a lawsuit filed by one of its former employees
for wrongful discharge of employment. During the year ended December 31,
1993, the Company settled this dispute for $85,000.
8. INCOME TAXES:
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
The components of the provisions for income taxes for the year ended June 30,
1996 are as follows:
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. INCOME TAXES, Continued:
Current:
Federal $ 161,951
State 28,101
Total current 190,052
Deferred:
Federal 104,266
State 17,848
Total deferred 122,114
Total tax provision $ 312,166
Deferred tax assets for the year ended June 30, 1996 are as follows:
Deferred tax assets:
Allowance for bad debts $ 164,048
Net operating losses 355,108
Total gross deferred tax assets 519,158
Less valuation allowance (355,108)
Net deferred tax assets $ 164,048
As of June 30, 1996, the Company had net operating loss carryforwards for tax
purposes, expiring during the years 2007 and 2009, of approximately $944,000,
which includes approximately $516,000 attributable to Contour Medical, inc.
(CMI) for the period prior to January 1, 1993. Due to certain change of
ownership requirements of Section 382 of the Internal Revenue Code,
utilization of the Company's operating losses is expected to be limited to
approximately $414,000 per year. The deferred tax asset related to the tax
benefit of these losses has been offset by a valuation allowance due to
uncertainty of realization. The valuation allowance decreased approximately
$112,000 during 1996.
The income tax benefit arising from any utilization of the net operating
losses
attributable to CMI will be credited to additional paid-in capital when
recognized. During 1996, the income tax benefit of utilization of net
operating
losses attributable to CMI of approximately $126,000 were credited to paid-in
capital.
The following summary reconciles differences from taxes at the federal
statutory
rate with the effective rate:
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. INCOME TAXES, Continued:
Six
Year Months
Ended Ended
June 30, June 30, Year Ended December 31,
1996 1996 1994 1993
Taxes on Income (benefit)
at statutory rate 34.00% 34.00% (34.00)% (34.00)%
State income taxes, net of
federal tax benefit 3.60% 3.10% 0 1.00%
Carryforward of net
operating loss 0 (9.90)% 0 0
Carryback of net
operating loss 0 0 0 (8.30)%
Losses not available for
carryback 0 0 34.00% 0
Other (0.04)% 5.00% 0 0
37.56% 32.20% 0.00% (41.30)%
9. CAPITAL STOCK:
Stock Bonus Plan - In March 1993, the Company adopted a non-qualified employee
stock bonus plan. The Plan provides for the granting of up to 1,000,000
options
for the purchase of the Company's common stock to eligible employees at
purchase
prices of at least $.01 per share. Options awarded under the Plan vest over a
three-year period from the date of grant and are exercisable over a five-year
period from the date of grant.
Changes in options outstanding are summarized as follows:
Option Price
Shares per Share
Balance, January 1, 1993 15,386 $1.30
Granted 250,000 $2.00
Balance, December 31, 1993 265,386 $1.30-$2.00
Granted 100,000 $2.25
Balance, December 31, 1994 365,386 $1.30-$2.25
Granted 50,000 $3.90
Exercised (15,385) $1.30
Canceled (1) $1.30
Balance, June 30, 1995 400,000 $2.00-$3.90
Granted 45,000 $4.11
Exercised (25,000) $2.00
Stock split 23,500
Balance, June 30, 1996 443,500 $1.88-$4.11
All of the above options were granted with an exercise price above fair market
value at the date of grant. In addition, 351,249 options were exercisable at
June 30, 1996. In addition, 959,615 common shares are reserved for future
issuance under this plan.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Stock Option Plan - In February 1996, the Company adopted the 1996 Stock
Option
Plan (the "1996 Plan"). The 1996 Plan must be approved by the Company's
shareholders within 12 months of February 1, 1996. The 1996 Plan allows the
Board of Directors to grant stock options from time to time to employees,
officers and directors of the Company and consultants to the Company. The
Board
of Directors has the right to determine, at the time of option, whether the
option will be an Incentive Stock Option or an option which is not an
Incentive
Stock Option. Vesting provisions are determined by the Board of Directors at
the time the options are granted. The 1996 Plan provides for the granting of
up to 315,000 options for the purchase of the Company's common stock.
Changes in options outstanding are summarized as follows:
Option Price
Shares per Share
Balance, June 30, 1995 - -
Granted 160,000 $4.643-$5.75
Stock split 4,250
Balance, June 30, 1996 164,250 $4.643-$5.75
All of the above options were granted with an exercise price above fair market
value at the time of grant. In addition, none of the options were exercisable
at June 30, 1996 and 315,000 common shares are reserved for future issuance
under this plan.
Stock Split - In March 1993, the Board of Directors authorized a 1-for-13
reverse stock split of its common stock effective June 30, 1993. All common
shares and per share amounts have been retroactively adjusted to give effect
to the reverse stock split. In February 1996, the Board of Directors
authorized a 1.05-for-1 forward stock split of its common stock effective
March 1996. All common shares and per share amounts have been retroactively
adjusted to give effect to the forward stock split.
Stock Warrants - At June 30, 1996, the Company had 969,225 stock warrants
outstanding. Information relating to these warrants is summarized as follows:
Number of
Common Exercise
Expiration Number of Shares Per Price Per
Type Date Warrants Warrant Warrant
Class B July 1996 119,225 1.05 $4.50
Class C Feb. 1999 300,000 1.05 $4.50
Consultant Oct. 1997 300,000 1.05 $1.50
Consultant Oct. 1999 200,000 1.05 $3.00
Consultant Oct. 1997 50,000 1.05 $3.00
The Class B warrants are redeemable by the Company under certain
circumstances.
Of the total outstanding warrants, 969,225 were exercisable at June 30, 1996.
In addition, 1,017,686 common shares are reserved for future issuance related
to
these warrants.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Change of Control - On September 30, 1994, Retirement Care Associates, Inc.
(Retirement Care) acquired 889,002 shares of the Company's outstanding common
stock and 2,000,000 shares of the Company's Class One Convertible Preferred
Stock from three persons who were officers and directors of the Company.
Subsequently, Retirement Care converted the Class One Convertible Preferred
Stock into 2,100,000 shares of common stock.
Class One Convertible Preferred Stock - During 1994, the holders of 1,000,000
shares of Class D Redeemable Cumulative Preferred Stock exchanged their shares
for 2,000,000 shares of newly created no par Class One Convertible Preferred
stock. The Class One Preferred Stock had a liquidation preference of $3.00
per
share. Each Class One Preferred Share was convertible into 1.05 shares of the
Company's common stock. All 2,000,000 shares of Class One Preferred Stock
were
converted into 2,100,000 shares of common stock in November 1994.
Class A Convertible Preferred Stock - During 1994, 99,525 shares of Class A
Convertible Preferred stock were converted into 230,141 shares of common
stock.
The conversion included a stock dividend of $14,777 for dividends in arrears
through the date of conversion.
Class B Convertible Preferred Stock - During 1994, two shares of Class B
Convertible Preferred Stock were converted into 35,000 shares of common stock.
Class D Redeemable Cumulative Preferred Stock - In April 1994, 74,176 shares
of
Class D Redeemable Cumulative Preferred Stock and 148,345 Class D Warrants
were
converted into 250,354 shares of common stock and 119,225 Class B warrants.
In
addition, 1,000,000 shares of Class D Redeemable Cumulative Preferred stock
and
846,667 Class D warrants were converted into 2,000,000 shares of a new Class
One
Convertible Preferred Stock. In November 1994, the Class One shares were
converted into 2,100,000 shares of common stock. These conversions included a
stock dividend of $47,794 for dividends in arrears through the date of
conversion.
Class E Convertible Preferred Stock - In April 1994, 172,986 shares of Class E
Convertible Preferred Stock were converted into 181,635 shares of common
stock.
Series A Convertible Preferred Stock and Class C Warrants - During 1995, the
Company completed a private placement of its securities consisting of 60 units
sold at a price of $40,000 per unit. Each unit sold in the private placement
consisted of 10,000 shares of the Company's Series A Convertible Preferred
Stock
and 5,000 Class C Redeemable Common Stock Purchase Warrants. Each share of
Series A Preferred Stock has a $4 liquidation preference and is convertible
into
1.05 shares of the Company's common stock beginning in May 1996.
Additionally,
the holders of the Series A Preferred Stock are entitled to receive annual
cash
dividends (payable semiannually) of 4% of the liquidation preference of the
stock, or $.16 per share, on a cumulative basis from the date of issuance. At
June 30, 1996, cumulative dividends in arrears related to the Series A
Preferred
Stock amounted to $128,000 ($.21 per share). The Series A Preferred Stock may
be redeemed by the Company at $4 per share plus dividends in arrears beginning
in May 1999. In addition, 1,328,250 common shares are reserved for future
issuance upon conversion of the total authorized Series A preferred stock.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. CAPITAL STOCK, Continued:
Preferred Stock Cancellation - Subsequent to the conversion of the preferred
stock classes, the Company canceled the Class A, Class B, Class C, Class E and
Class One Convertible Preferred Stock and the Class D Redeemable Convertible
Preferred Stock.
Issuance of Stock in Satisfaction of Loans - During the year ended December
31,
1993, the Company issued 180,000 shares of Class C Convertible Cumulative
Preferred Stock in satisfaction of $480,000 of loans payable to stockholders.
All of the Class C Preferred Stock of 846,669 shares were converted into
889,002
shares of common stock in 1993.
Shares Reserved - At June 30, 1996, the Company has reserved common stock for
future issuance under all of the above arrangements amounting to 3,620,551.
10. MAJOR CUSTOMERS:
Sales to significant customers were as follows:
Year ending December 31, Number of Customers Sales Volume
1994 1 $ 531,000
1993 2 692,000
As a result of the increased sales volume due to sales to related parties of
approximately $5,456,000 and $1,426,000 (see Note 3), there were no sales to
significant other customers during the year ended June 30, 1996 and the six-
month period ended June 30, 1995, respectively.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Six
Year Months
Ended Ended
June 30, June 30, Year Ended December 31,
1996 1996 1994 1993
Cash paid for interest $ 170,951 $39,065 $ 53,627 $ 65,251
Cash paid for income taxes $ 930 $ 2,500 $ 5,000 $ 40,054
Noncash financing and
investing activities:
Issuance of 369,618
shares of common stock
for purchase of Ameri-
Dyne Corporation (see
Note 12) $2,100,000 $ 0 $ 0 $ 0
Conversion of 1,074,176
shares of Class D pre-
ferred stock and
995,012 Class D
Warrants into 250,372
shares of common stock
and 2,000,000 shares of
Class One preferred
stock (see Note 9) 0 0 400,500 0
Issuance of 180,000
shares of Class C pre-
ferred stock as payment
of stockholder loans
(see Note 9) 0 0 0 480,000
Deferred offering costs
charged to additional
paid-in capital as an
offset to private
placement offering
proceeds (see Note 9) 0 11,444 0 0
$2,100,000 $11,444 $400,500 $480,000
As discussed in Note 2, the stockholders of CFI and CFFI exchanged all of
their
shares of stock for shares of stock of CMI. As a result of this transaction,
the following assets and liabilities of CMI were acquired effective January 1,
1993 which were recorded at predecessor basis:
Cash $ 778
Other assets 54,897
Accounts payable and accrued expenses (137,372)
Capital deficit assumed $ (81,697)
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. AMERIDYNE ACQUISITION:
Effective March 1, 1996, the Company acquired all of the outstanding common
stock of AmeriDyne Corporation (AmeriDyne) for approximately $2.475 million
in cash and stock. AmeriDyne distributes medical supplies to hospitals,
clinics, physicians, pharmacies, nursing homes and other health care
providers.
The purchase price exceeded the fair value of the net assets acquired by
approximately $1.3 million. The acquisition was accounted for as a purchase.
The resulting goodwill is being amortized on the straight-line basis over 40
years. The consolidated statement of income includes the results of
operations
of AmeriDyne for the period from March 1, 1996 through June 30, 1996.
The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the fiscal
year. The pro forma information is provided for information purposes only.
It
is based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the combined enterprise.
Unaudited Year Ended
June 30, 1996
Sales $ 21,406,882
Net income $ 348,880
Per share $ 0.05
13. SUBSEQUENT EVENTS:
On July 12, 1996, the Company completed a $5 million debenture placement.
These
debentures bear interest at 9% per annum and are to be repaid in monthly
installments beginning on July 1, 1999, with full payment due by July 1, 2003.
The debentures are convertible into shares of the Company's common stock.
On September 20, 1996, the Company replaced all of its existing lines of
credit
with a $7 million revolving line of credit, secured by inventory and accounts
receivable, and bearing interest at the 30-day LIBOR rate plus 2%.
On August 6, 1996, the Company acquired all of the outstanding stock of
Atlantic
Medical Supply Company, Inc. (Atlantic Medical), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets. The acquisition was made retroactively to
July 1, 1996. The Company paid $1.4 million in cash and $10.5 million in
promissory notes for all of the outstanding stock of Atlantic Medical. The
promissory notes bear interest at 7% per annum and are due in full on January
10, 1997. In the event of a default in the payment of the promissory notes,
they are convertible into shares of common stock of the Parent Company.
The following unaudited pro forma consolidated results of operations presents
information as if the acquisition had occurred at the beginning of the fiscal
year. The pro forma information is provided for information purposes only.
It
is based on historical information and does not necessarily reflect the
results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined enterprise.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. SUBSEQUENT EVENTS, Continued:
Unaudited
Year Ended
June 30, 1996
Sales $ 34,333,727
Net Income $ 585,784
Per share $ 0.10
F-33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CONTOUR MEDICAL, INC.
Dated: September 27, 1996 By /s/ Donald F. Fox
Donald F. Fox, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Donald F. Fox President, Treasurer September 27, 1996
Donald F. Fox (Principal Financial
and Accounting Officer)
and Chief Financial
Officer
/s/ Chris Brogdon Director September 27, 1996
Chris Brogdon
/s/ Edward E. Lane Director September 27, 1996
Edward E. Lane
/s/ Darrell C. Tucker Director September 27, 1996
Darrell C. Tucker