1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Amending Part I - Items 1 and 2)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 31, 1997
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 (IRS Employer Identification Number)
Incorporation or Organization)
6025 Shiloh Road,
Alpharetta, Ga 30005
----------------------------------------
(Address of Principal Executive Offices)
(770) 886-2600
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
There were 8,293,331 shares of the Registrant's $.001 par value Common Stock
outstanding as of December 31, 1997.
2
CONTOUR MEDICAL, INC.
FORM 10-Q/A
INDEX
Part I: Financial Information
Item 1. Financial Statements Page
------
Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997 3-4
Consolidated Statements of Operations for the Six
Months ended December 31, 1997 and 1996 5
Consolidated Statements of Operations for the Three
Months Ended December 31, 1997 and 1996 6
Consolidated Statement of Stockholder's Equity
for the Six Months Ended December 31, 1997 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1997 and 1996 9-10
Notes to Consolidated Financial Statements 11-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-19
2
3
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, June 30,
1997 1997
------------ -----------
(Unaudited)
ASSETS
Current:
Cash $ 128,777 $ 311,657
Accounts receivable
Related parties (Note 4) 8,156,936 5,135,189
Trade, net of allowance for bad
debts of $2,923,000 and $2,805,000
at December 31, 1997 and June 30,
1997, respectively. 10,954,452 7,811,635
Inventories 8,525,411 5,130,142
Refundable income taxes 559,209 572,875
Prepaid expenses and other 571,773 237,687
Due from parent (Note 4) 1,031,925 973,164
----------- -----------
Total Current Assets 29,928,483 20,172,349
----------- -----------
Property and Equipment, less
accumulated depreciation (Note 5) 2,603,849 1,492,918
----------- -----------
Other Assets:
Goodwill, net of accumulated
amortization of approximately
$400,000 and $251,000 at
December 31, 1997 and June 30,
1997, respectively 9,960,843 10,109,927
Deposit on equipment 0 311,453
Other 585,803 434,529
----------- -----------
Total Other Assets 10,546,646 10,855,909
----------- -----------
$43,078,978 $32,521,176
See accompanying notes to consolidated financial statements
3
4
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, June 30,
1997 1997
------------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 5,959,335 3,839,548
Accrued expenses 713,987 728,784
Current maturities of long-term
debt (Note 6) 13,607,339 6,079,086
---------- ----------
Total Current Liabilities 20,280,661 10,647,418
Long-term debt, less current
maturities (Note 6) 6,020,150 5,473,841
---------- ----------
Total Liabilities 26,300,811 16,121,259
Stockholders' Equity:
Preferred stock - Series A conver-
tible, $.001 par value, shares
authorized 1,265,000; issued
600,000, outstanding 135,000,
at aggregate liquidation preference 623,414 623,414
Common stock $.001 par - shares
authorized 76,000,000; issued and
outstanding 8,293,331 and 8,127,376
(net of $765 discount) 7,500 7,334
Additional paid-in capital 16,116,667 15,796,188
Retained earnings 30,586 (27,019)
---------- -----------
Total stockholders' equity 16,778,167 16,399,917
$43,078,978 $32,521,176
See accompanying notes to consolidated financial statements
4
5
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Six Months Ended
December 31, December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
SALES TO NON-RELATED PARTIES $21,243,689 $22,967,078
SALES TO RELATED PARTIES 5,827,045 2,948,238
----------- -----------
27,070,734 25,915,316
COST OF SALES 20,247,842 18,471,484
----------- -----------
GROSS PROFIT 6,822,892 7,443,832
OPERATING EXPENSES 6,309,061 6,141,502
INTEREST EXPENSE (310,822) (350,000)
OTHER:
Interest Expense (608,144) (686,075)
Other Income 86,768 31,898
Interest Income 77,562 20,786
Guarantee Fee -- (500,000)
----------- -----------
OTHER INCOME (EXPENSES) (443,814) (1,133,391)
----------- -----------
INCOME BEFORE INCOME TAXES 70,017 168,939
INCOME TAX EXPENSE 12,412 64,197
----------- -----------
NET INCOME $ 57,605 $ 104,742
BASIC EARNINGS PER SHARE $ .01 $ .01
DILUTED EARNINGS PER SHARE $ .01 $ .01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES 8,210,354 5,838,369
See accompanying notes to consolidated financial statements
5
6
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
December 31, December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
SALES TO NON-RELATED PARTIES $10,320,899 $11,890,548
SALES TO RELATED PARTIES 2,965,000 1,112,238
----------- -----------
13,285,899 13,002,786
COST OF SALES 9,879,317 9,197,949
----------- -----------
GROSS PROFIT 3,406,582 3,804,837
OPERATING EXPENSES 3,399,641 2,957,419
OTHER INCOME (EXPENSES)
Interest Expense (310,822) (350,000)
Other Income 71,621 31,898
Interest Income 24,442 12,361
----------- -----------
(214,759) (305,741)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (207,818) 541,677
INCOME TAX EXPENSE 0 205,837
----------- -----------
NET INCOME (LOSS) $ (207,818) $ 335,840
BASIC EARNINGS PER SHARE $ (.03) $ .06
DILUTED EARNINGS PER SHARE $ (.03) $ .05
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES 8,171,460 5,959,837
See accompanying notes to consolidated financial statements
6
7
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
Additional
Common Stock Paid-in
Shares Amount Capital
----------- ----------- -----------
Balance, June 30, 1997 8,127,376 $ 7,334 $15,796,188
Exercise of common stock
warrants 119,788 120 232,209
Non-qualified options exercised
for common stock 46,167 46 88,270
Balance, December 31, 1997 8,293,331 7,500 16,116,667
=========== =========== ===========
See accompanying notes to consolidated financial statements
7
8
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
Convertible
Preferred Stock
---------------------- Retained
Shares Amount Earnings(Deficit)
-------- -------- -----------------
Balance, June 30, 1997 135,000 $623,414 $(27,019)
Net income -- -- 57,605
Balance, December 31, 1997 135,000 $623,414 $ 30,586
======== ======== ========
See accompanying notes to consolidated financial statements
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9
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
December 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,605 $ 104,742
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Depreciation & Amortization 450,231 385,807
Tax benefit from NOL -- --
(Increase) decrease in accounts
receivable (6,164,564) (5,766,071)
(Increase) decrease in inventories (3,395,269) (3,632,562)
(Increase) decrease in other
current assets and other assets (471,694) (9,540,741)
Increase (decrease) in accounts
payable 2,119,787 1,191,503
Increase (decrease) in accrued
expenses and other liabilities (14,797) 539,984
------------ ------------
Net cash provided by
operating activities (7,418,701) (16,717,338)
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,412,078) (1,150,723)
Deposit on equipment 311,453 --
(Increase) decrease in due
from parent (58,761) (355,715)
------------ ------------
Net cash used by investing
activities (1,159,386) (1,506,438)
See accompanying notes to consolidated financial statements
9
10
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
December 31, December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition Notes Issued $ -- $10,850,000
Convertible Debentures Issued -- 5,000,000
Net borrowing (payments) on loans 8,074,562 1,786,433
Proceeds from exercise of options 88,316 --
Payment of short-swing liability
by shareholder -- --
Exercise of Warrants 232,329 625,506
----------- -----------
Net cash provided by financing
activities 8,395,207 18,261,939
----------- -----------
NET INCREASE (DECREASE) IN CASH (182,880) 38,163
CASH BEGINNING OF PERIOD 311,657 146,219
----------- -----------
CASH END OF PERIOD $ 128,777 $ 184,382
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION AND NON-CASH
ACTIVITIES:
Cash paid for interest $ 609,707 $ 362,244
Cash paid for income tax $ -- $ --
See accompanying notes to consolidated financial statements.
10
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CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the June 30, 1997, audited financial statements for
Contour Medical, Inc. The results of operations for the periods ended December
31, 1997 and 1996 are not necessarily indicative of the operating results for
the full year.
The consolidated financial statements include the accounts of Contour
Medical, Inc. ("CMI") and its wholly-owned subsidiaries, Contour Medical -
Michigan, Inc. (formerly Contour Fabricators, Inc.) ("CFI"), Contour Medical
of Central Florida, Inc. (formerly Contour Fabricators of Florida, Inc.)
("CFFI") and, since March 1, 1996, AmeriDyne Corporation ("AmeriDyne"), and
effective July 1, 1996 Atlantic Medical Supply Company, Inc. ("Atlantic")
collectively referred to as the Company. All material intercompany accounts
and transactions have been eliminated. CMI is a majority-owned subsidiary of
Retirement Care Associates, Inc. ("Parent").
On June 27, 1997, the Company sold all of its manufacturing assets,
including equipment, accounts receivable, customer lists, prepaid assets,
deposits, inventory and other assets. These assets were sold for $3,350,000 in
cash to an unrelated third party, RawCar, L.L.P. The Company retained all
liabilities related to the assets sold. Upon completion of this sale, the
Company ceased all manufacturing activity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There currently are no additional
disclosures in the financial statements of the Company that are expected to be
required by the provisions of this statement.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which changes the way
public companies report information about segments of their business in annual
financial statements and requires segment information in quarterly reports to
shareholders. SFAS 131 also requires that public companies report certain
information about their products and services, the geographic areas in which
they operate and their major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not determined what
additional disclosures may be required by the provisions of SFAS 131."
SFAS 128 - The Company has adopted SFAS 128 with respect to computing
earnings per share. The following table reflects items reconciling net income
for purposes of calculating basic and diluted earnings per share:
Three Months Ended
December 31, 1997 December 31, 1996
==============================================================================================================================
Income Shares Per-Share Income Shares Per-Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (207,818) 335,840
Less: Preferred Stock Dividends 5,400 5,400
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
- ------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders (213,218) 8,171,460 (0.03) 330,440 5,959,837 0.06
- ------------------------------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
Warrants 184,138
Options 233,475
- ------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
- ------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders (213,218) 8,171,460 (0.03) 330,440 6,377,450 0.05
==============================================================================================================================
11
12
Six Month Ended
December 31, 1997 December 31, 1996
==============================================================================================================================
Income Shares Per-Share Income Shares Per-Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------
Net Income 57,605 104,742
Less: Preferred Stock Dividends 10,800 31,571
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
- ------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders 46,805 8,210,354 0.01 73,171 5,838,369 0.01
- ------------------------------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
Warrants 328,878 242,658
Options 354,714 249,184
- ------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
- ------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders 46,805 8,893,946 0.01 73,171 6,330,211 0.01
==============================================================================================================================
Certain securities are not included in the calculation of diluted EPS as they
would be anti-dilutive. See the Company's 1997 annual report for a description
of securities which potentially could be dilutive in future periods.
Inventories are valued at lower of cost (first-in, first-out) or market.
AmeriDyne inventories are valued at the lower of average cost or market.
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.
Financial instruments held by the Company at December 31, 1997 include
cash, deposits and long-term debt. Management believes that, considering current
terms of similar financial instruments, the carrying value of the company's
financial instruments approximated their fair values at December 31, 1997.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of Atlantic Medical and AmeriDyne acquired in purchase
transactions. Goodwill is being amortized on the straight-line method over 40
years. The Company periodically reviews goodwill to assess recoverability, and
any impairment would be recognized in operating results. Anticipated
undiscounted future cash flows of the underlying assets do not exceed the book
value of the goodwill and the underlying assets.
Fees, costs and expenses related to the issuance of long-term debt are
deferred and amortized over the term of the related debt using the straight-line
method.
Income taxes are accounted for using the asset and liability method for
financial accounting and reporting purposes. Accordingly, deferred tax assets
and liabilities are recognized for temporary differences between the financial
reporting basis of assets and liabilities an their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets when management considers it more likely than not that some
portion or all of the asset will not be realized.
3. CHANGE IN METHOD OF ACCOUNTING FOR TAXES AND INCOME
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 carry forwards. Measurement of
deferred income tax assets being reduced by available tax benefits not expected
to be realized.
4. RELATED PARTY TRANSACTIONS
During 1995, the Company began distributing medical supplies to health care
facilities owned, leased or managed by the Parent. Sales to these facilities
approximated $5,827,045 for the six month period ended December 31, 1997 and
$2,965,000 for the three month period ended December 31, 1997. Trade accounts
receivable of $8,156,936 and $5,135,189 were outstanding as of December 31, 1997
and June 30, 1997, respectively, as related to the sale of medical supplies to
the Parent. Additionally, the Company had an outstanding loan receivable due
from its Parent of $1,031,925 at December 31, 1997, which is due within 45 days
from the date of such loan and bears interest at the prime rate.
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5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Useful Lives December 31, 1997 June 30, 1997
------------ ----------------- -------------
Land & Land Improvements -- 16,004 $ 9,841
Building and Improvements 5-45 years 1,164 6,159
Machinery and equipment 3-7 years 1,628,650 1,442,614
Furniture and fixtures 5-7 years 996,147 498,876
Leasehold improvements 5 years 708,085 74,717
Vehicles 3-5 years 179,092 84,853
------------- -----------
3,529,138 2,117,060
Less accumulated depreciation (925,293) (624,142)
------------- -----------
$ 2,603,849 $ 1,492,918
All property and equipment are pledged as collateral.
6. NOTES PAYABLE
Notes payable at December 31, 1997 and June 30, 1997 consisted of the
following:
December 31, June 30,
1997 1997
------------ ---------
Borrowings under $15,000,000 line of credit,
interest at 30 day libor plus 200bp (7.94%
at December 31, 1997), payable monthly,
collateralized by accounts receivable,
inventory and guarantees by Retirement
Care Associates, Inc. Principal due
October 31, 1998 13,294,090 5,886,545
Convertible debentures, interest at 9.00%
Payable monthly, principal due July 1, 2003,
Convertible into shares of common stock 5,000,000 5,000,000
Borrowings under $1,250,000 line of credit,
interest at prime (8.50% at December 31, 1997),
principal of $20,833 plus interest due monthly,
collateralized by accounts receivable,
inventory, furniture, fixtures, equipment,
machinery, bank accounts and guarantees
of Retirement Care Associates 1,250,000 750,000
Note payable to stockholder, interest at 10%,
principal and interest of $5,693, due monthly
through March 1999 79,955 109,252
Note payable to equipment company, interest at
14.0%, monthly installments of $405 including
interest. Matures October 1998 collataralized
by equipment 3,444 5,546
13
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Note payable to equipment company, interest at
11%, monthly installments of $533 including
interest. Matures December 1997,
collateralized by equipment -- 3,093
----------- -----------
$19,627,489 $11,552,927
Less current maturities (13,607,339) (6,079,086)
----------- -----------
$ 6,020,150 $ 5,473,841
The Company's revolving line of credit totaling $13,294,091 at December 31,
1997 contains certain restrictive financial covenants. Under the terms of the
agreement, the Company is required to maintain a debt to net worth (or equity)
ratio of no more than 2.5, a current ratio of no less than 1.50, an EBIT
coverage ratio of no less than 2.0 and an interest coverage ratio of no less
than 4.0. At December 31, 1997, the Company was out of compliance with the
interest coverage ratio, the total debt to equity ratio, the EBIT coverage ratio
and the current ratio requirements. The lending institution has waived such
defaults as of December 31, 1997 and for the quarter then ended.
The aggregate maturities of long-term debt are as follows as of December 31,
1997:
1998 $13,607,339
1999 270,143
2000 249,996
2001 249,996
2002 249,996
Thereafter 5,000,019
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 those loans
has been estimated to be approximately equal to their carrying value.
The Company's 9% convertible debentures are convertible into shares of the
Company's common stock from the date of issuance until the date that any
adjustment may occur at a conversion price of $5.00 per share of common stock.
The conversion price may be adjusted one time to seventy-five percent (75%) of
the average closing bid price of the common stock for the 21 consecutive trading
days following the Company's public press release of the 1997 fiscal year end
financial results if (y) the Company has failed to earn before taxes, a minimum
of $3,372,000, and (z) the average closing bid price of the common stock for the
21 consecutive trading days following the Company's public press release of the
1997 fiscal year end financial results is less than the then-existing conversion
price. If an adjustment is required, then the Company must furnish to the
holders of the debentures a statement, signed by the Chief Executive Officer of
the Company, of the facts creating such adjustment and specifying the resultant
adjusted conversion price then in effect. The adjustment will only be made to
adjust the conversion price to a price that is less than the then-existing
conversion price. As of December 31, 1997, the adjustment period expired and no
adjustment was required.
On December 31, 1997, Sun Healthcare Group, Inc. ("Sun") purchased all of
the Company's 9% convertible debentures from Renaissance Capital Growth and
Income Fund II, Inc. and Renaissance U.S. Growth and Income Trust, PLC
("Renaissance") in a privately negotiated transaction for an aggregate purchase
price of $8.4 million in cash. As of June 30, 1997, September 30, 1997 and
December 31, 1997, the Company was not in compliance with the current ratio,
debt to equity ratio and interest coverage ratio requirements of the indenture
underlying the debentures. On April 2, 1998, Sun agreed to waive such defaults
until 10 business days after the termination of the merger agreement with Sun.
-14-
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7. LEASE COMMITMENTS
The Company is obligated under various non-cancelable leases for equipment
and office space. Future minimum lease commitments under operating leases were
as follows as of December 31, 1997.
1998 $823,473
1999 759,080
2000 765,375
2001 627,044
2002 540,590
Employment Agreement - The Company has entered into an employment agreement
with a key executive for a five-year period ending June 1998. The agreement
provides for annual base compensation of $100,000.
Litigation - During 1997 the Company was a defendant in a lawsuit filed by
one of its customers in a contractual dispute. On October 27, 1997 the Company
settled this suit for approximately $66,000.
-15-
16
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."
As of June 30, 1997, the Company had net operating loss carry-forwards for
tax purposes, expiring at various dates ending July 30, 2012, of approximately
$1.1 million which includes approximately $516,000 attributable to Contour
Medical, Inc. 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 increased approximately $89,000 during
1997.
The income tax benefit arising from the utilization of the net operating
losses attributable to CMI will be credited to additional paid-in capital when
recognized.
9. YEAR 2000 DISCLOSURE:
The Company has reviewed all of its current computer applications with
respect to the date change from 1999 to the year 2000, as discussed in the
Securities and Exchange Commission Staff Legal Bulletin No. 5 (the "Year 2000
Problem"). The Company believes that certain of its applications are
substantially in compliance with the Year 2000 Problem and that any additional
costs with respect to compliance with the Year 2000 Problem will not be material
to the Company. The Company is currently unable to determine the effect of
compliance with the Year 2000 Problem by its customers and suppliers.
-16-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following should be read in conjunction with the attached Financial
Statements and Notes thereto of the Company.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996
As a result of the factors discussed below, for the three months ended
December 31, 1997, the Company had a net loss of $(207,818) compared to net
income of $335,840 for the three months ended December 31, 1996.
Sales increased by $283,113 for the three months ended December 31, 1997 as
compared to the three months ended December 31, 1996. Revenues in the quarter
ended December 31, 1996 included sales from the Company's manufacturing
operations of approximately $1.4 million. The Company sold its manufacturing
assets and discontinued manufacturing operations in June, 1997. All of the
Company's sales generated in the quarter ended December 31, 1997 were
attributable to its distribution of medical supplies. The increase of
approximately $1.7 million was the result of an increase in sales to the
Company's parent.
Gross profit for the three months ended December 31, 1997, was $3,406,582
or 25.6% of sales, as compared to $3,804,837 or 29.2% of sales, for the same
period of the previous year. The decrease in gross profit as a percentage of
sales is primarily the result of lower gross profit margins typically earned on
the distribution of bulk medical supplies as compared to the gross profit
margins historically earned by the Company's manufacturing enterprise, the
assets of which were sold in June, 1997. Following the sale of its manufacturing
assets, the Company ceased all manufacturing activities.
Operating expenses for the three month period ending December 31, 1997,
were $3,399,641 as compared to $2,957,419 in 1996. Operating expenses increased
$442,222 from the same period last year. Approximately $300,000 of the increase
relates to expenses incurred in the start-up of two new distribution centers in
Randolph, Massachusetts and Portland, Oregon. All the costs associated with the
start-up of these facilities were incurred in the three month period ending
December 31, 1997. The balance of the increase, or approximately $142,000,
relates to the additional costs incurred as a result of the consolidation of the
Company's administrative support functions to the new corporate office building
in Atlanta, Georgia. The largest components of operating expenses are indirect
labor (including sales salaries and commissions), occupancy expense,
depreciation and amortization, and insurance.
Other income consists of service charge income and rent refunds received
on leased facilities. Interest income was $24,442 for the three month period.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
As a result of the factors discussed below, for the six months ended
December 31, 1997, the Company had net income of $57,605 compared to $104,742
for the six months ended December 31, 1996.
Sales increased by $1,155,418 for the six months ended December 31, 1997 as
compared to the six months ended December 31, 1996. Revenues in the six months
ended December 31, 1996 included sales from the Company's manufacturing
operation of approximately $2.5 million. The Company sold its manufacturing
assets and discontinued manufacturing operations in June 1997. All of the
Company's revenue in the six months ended December 31, 1997 were attributable to
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its distribution of medical supplies. The increase of approximately $3.6 million
was the result of an increase in sales to the Company's parent of approximately
$2.8 million, with the balance of the increase or approximately $800,000, due to
the expansion of the Company's customer base.
Gross profit for the six months ended December 31, 1997, was $6,822,892 or
25.2% of sales, as compared to $7,443,832 or 28.7% of sales, for the same period
of the previous year. The decrease in gross profit as a percentage of sales is
primarily the result of lower gross profit margins typically earned on the
distribution of bulk medical supplies as compared to the gross profit margins
historically earned by the Company's manufacturing enterprise, the assets of
which were sold in June, 1997. Following the sale of its manufacturing assets,
the Company ceased all manufacturing activities.
Operating expenses for the six month period ending December 31, 1997 were
$6,309,061 as compared to $6,141,502 in 1996. The operating expenses increased
from the same period last year as a result of expenses incurred in the start-up
of two new distribution centers in Randolph, Massachusetts and Portland, Oregon.
The costs associated with the start-up of these two facilities were incurred in
the three month period from October through November. The balance of the
increase relates to additional costs incurred as a result of the consolidation
of the Company's administrative support functions to the new corporate office
building in Atlanta, Georgia.
Indirect labor, including sales salaries and commissions were approximately
$3,153,487, an increase of $196,000 compared to the same period last year.
Occupancy expense, depreciation and amortization and insurance costs decreased
to approximately $1,550,891, a decrease of $16,000 compared to the same period
last year.
Other income consists of service charge income and miscellaneous rent
refunds received on leased facilities. For the six month period ending December
31, 1997, service charge income was $63,636. The remaining $23,132 relates to
rent refunds received at the end of the fiscal year. Interest expense for the
six month period ending December 31, 1997 was $608,144 compared to $686,000 for
the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $9,647,822 of working capital as
compared to $9,524,931 on June 30, 1997.
Operating activities for the six months ended December 31, 1997, utilized
cash of $7,418,701 as compared to operating activities during the six months
ended December 31, 1996, which utilized cash of $16,717,338. The decreased use
of cash was primarily due to the acquisition of Atlantic Medical Supply in 1996.
The cash flows utilized for investing activities of $1,159,386 during the
six months ended December 31, 1997, were a result of the acquisition of
additional equipment for two new distribution centers and costs associated with
the completion of the construction of the new corporate office.
Cash flow of $8,395,207 was provided from financing activities in 1997,
whereas in 1996, cash flows from financing activities provided cash of
$18,261,939. During the six months ended December 31, 1996, $5,000,000 was
provided from debenture borrowings, $10,850,000 was provided by acquisition
notes and $625,506 was provided by the exercise of stock warrants to fund the
acquisition of Atlantic.
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On October 31, 1997, $9.5 million under the line of credit was due for
repayment. The Company obtained a forbearance from Barnett Bank on the line of
credit until November 11, 1997, at which time, the line of credit was renewed
and increased to $15 million. The line of credit is due for repayment on
October 31, 1998. As of December 31, 1997, $13,294,091 had been borrowed
against the line for short-term working capital and expansion needs.
The Company's revolving line of credit and the provisions of indenture
relating to its 9% convertible debentures totaling $18,294,091 at December 31,
1997 contain certain restrictive financial covenants. As of December 31, 1997,
the Company was out of compliance with a covenant in its line of credit
requiring the Company to maintain a current ratio of no less than 1.50, an EBIT
coverage ratio of no less than 2.0 and an interest coverage ratio of no less
than 4.0. Barnett Bank has granted the Company a waiver of such default as of
December 31, 1997 and for the quarter then ended. As of June 30, 1997, September
30, 1997 and December 31, 1997, the Company was not in compliance with the
current ratio, the debt to equity ratio and the interest coverage ratio
requirements of the indenture underlying the Company's 9% Convertible
Debentures. On April 2, 1998, the holder of the debentures agreed to waive such
defaults until 10 business days after the termination of the merger agreement
with Sun.
On December 31, 1997, Sun purchased all of the Company's 9% convertible
debentures from Renaissance in a privately negotiated transaction for an
aggregate purchase price of $8.4 million in cash.
On August 6, 1996, the Company acquired all of the outstanding stock of
Atlantic, 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 promissory notes totaling $10.5 million (the "Atlantic
Promissory Notes") for the stock of Atlantic, and subsequently paid an
additional $50,000 in cash and issued a promissory note for $350,000 to acquire
a minority interest in a subsidiary of Atlantic . The cash for this transaction
came from the $5 million debenture placement that was completed on July 12,
1996. The Company paid the Atlantic Promissory Notes from the proceeds of a
$9.75 million loan from its parent, payable in accordance with the terms of a
promissory note that was convertible into shares of the Company's Common Stock
at the option of the note holder. The Company's parent simultaneously converted
this promissory note into 1,950,000 shares of Contour Common Stock. The balance
of the Atlantic Promissory Notes was paid by borrowing under the Company's lines
of credit.
As a result of the acquisition of Atlantic, Contour acquired Medicare and
trade receivables totaling more than $1.8 million that were deemed to be
uncollectible. The entire amount of these receivables was reserved at the date
of the acquisition. The remaining reserve for uncollectible accounts represents
approximately 16% of trade receivables.
The Company plans to open three additional distribution centers around the
United States during the next nine months. Total capital expenditures
anticipated to fund this expansion will approximate $1 million. The Company has
received commitments from leasing and financing organizations in amounts
sufficient to meet these anticipated needs.
The Company presently does not anticipate any commitments for any other
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 prior three fiscal
periods.
In addition, the Company does not believe that inflation has had a material
effect on its results from operations during the past three fiscal years. There
can be no assurance, however, that the Company's business will not be affected
by inflation in the future.
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SIGNATURES
Pursuant to the requirements of the Securities and 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.
Date: April 8, 1998 By:/s/ Donald F. Fox
---------------------------------
Donald F. Fox, President,
Treasurer and Chief Financial
Officer