<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Amending Part II - Item 7, Part IV - Item 14 and Financial Statements)
[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, 1997
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:
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Commission File No. 0-26288
CONTOUR MEDICAL, INC.
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(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)
6025 Shiloh Road, Alpharetta, Georgia 30005
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(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (770) 886-2600
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 October 3, 1997, 8,215,543 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 $20,245,000.
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. [ ]
<PAGE> 2
PART II
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEM- YEARS ENDED
JUNE 30, JUNE 30, BER 31, DECEMBER 31,
--------------- ------ ------ ---------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 74.4% 72.1% 72.0% 64.5% 64.5% 57.0%
Gross Profit 25.6% 27.9% 28.0% 35.5% 35.5% 43.0%
Operating Expenses 24.3% 23.1% 20.7% 39.2% 40.1% 44.9%
Other Income
(Expense) (2.0%)
Net Income (Loss)
Before Income
Taxes (Benefit) (0.7%) 5.8% 7.3% (6.0%) (13.4%) (3.5%)
Income Taxes
(Benefit) (0.2%) 2.1% 2.5% -- -- (1.4%)
Net Income (Loss) (0.5%) 3.6% 4.8% (6.0%) (13.4%) (2.0%)
</TABLE>
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
As a result of the factors discussed below, for the year ended June 30,
1997, the Company had a net loss of $259,644 compared to a net profit of
$527,034 for the year ended June 30, 1996.
Sales increased by $38,900,848 for the year ended June 30, 1997 as compared
to the year ended June 30, 1996. Approximately $8,848,000 of the increase
resulted from sales of bulk medical supplies by AmeriDyne and approximately
$26,757,000 from sales of bulk medical supplies by Atlantic. Approximately
$2,392,000 of the increase resulted from the sales of bulk medical supplies to
the Company's majority shareholder. The balance of the increase, or
approximately $903,000, resulted from sales of the Company's manufactured
products.
Gross profit for the year ended June 30, 1997, was $13,667,978 or 25.6% of
sales, as compared to $4,051,318 or 27.9% of sales, for the year ended June 30,
1996. 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.
Operating expenses for the year ended June 30, 1997, were $12,973,675 as
compared to $3,185,620 for the year ended June 30, 1996. The operating expenses
increased approximately 407% as the result of the acquisitions, although as a
percent of sales the increase represented a 2.4% increase. The increase of
$9,788,056 in operating expenses is directly related to the increase of
$38,901,000 in revenues. The largest components of operating expenses are
indirect labor (including sales salaries and commissions), occupancy expense,
depreciation and amortization, and insurance. In particular, prior to the
acquisitions of AmeriDyne and Atlantic, the Company did not have a direct sales
force and therefore incurred minimal selling expenses as a percentage of sales.
Selling expenses as a percentage of sales now represents approximately 5% of
total sales.
Indirect labor, including sales salaries and commissions increased by
$4,541,291 compared to the same period last year, to approximately $5,792,383.
Occupancy expense, depreciation and amortization and insurance costs increased
by $2,009,873 compared to the same period last year, to approximately
$3,071,917.
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Other income and expenses are made up of interest expense, debts recovered
that were previously written off, service charge income, and gains and losses on
the disposition of assets. Interest expense for the year ended June 30, 1997 was
$1,295,557 compared to $170,951 for the same period last year. Interest expense
has increased primarily as a result of (1) the $5,000,000 convertible debentures
issued on July 12, 1997, bearing interest at 9% per annum; (2) the Atlantic and
Facility Notes issued for the purchase of Atlantic and Facility Supply, Inc.;
and (3) the increased usage of the Company's line of credit supporting sales
growth throughout the year.
Gains from the sale of assets for the year ended June 30, 1997 were
approximately $600,000 compared to no such gains for the prior year. These gains
resulted from the sale of the Company's manufacturing assets.
The Company also incurred an expense of $500,000 in financing costs
associated with the guarantee fee paid to the Company's Parent for its guarantee
of the Atlantic and Facility Notes.
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.
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 $4,844,000 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. The balance of the sales increase,
or approximately $496,000, resulted from increased sales of manufactured foam
products and polyethylene bags.
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. Approximately $980,000 of the increase in gross profit
for the period ended June 30, 1996, was the result of the additional sales
generated from the AmeriDyne acquisition.
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 $1,553,000 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. The largest components of operating expenses are indirect
labor (including sales salaries and commissions), occupancy expense,
depreciation and amortization, and insurance. Operating expenses decreased as a
percentage of sales due to the Company's addition of bulk medical supplies to
its product line. While the distribution of these products produces lower gross
margins, this enterprise requires lower operating expenses to support revenues
than the Company's manufacturing business. As revenues from the sales of bulk
medical supplies have increased at a significantly faster rate than
manufacturing (593% growth in distribution revenues during the twelve months
ended June 30, 1996
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<PAGE> 4
compared to the twelve months ended June 30, 1995 versus 12% growth in
manufacturing revenues during the same period), operating expenses as a
percentage of total revenues consequently has declined.
Other income and expenses are made up of interest expense, debts recovered
that were previously written off, service charge income, and gains and losses on
the disposition of assets. Interest expense for the year ended June 30, 1996 was
approximately $171,000 compared to $39,000 for the same period in the previous
year. Interest expense increased primarily as a result of the AmeriDyne
acquisition and an increase in the Company's line of credit during the year from
$250,000 to $500,000. Service charge income and recoveries of bad debts were
approximately $144,000 in the year ended June 30, 1996 compared to $22,000 in
the same period the previous year. These increases were primarily due to the
acquisition of AmeriDyne.
For fiscal year ended June 30, 1996, the Company recorded an allowance for
bad debts of $410,000 when there had been no such allowance recorded in prior
periods primarily as a result of the AmeriDyne acquisition on March 1, 1996.
AmeriDyne maintained an allowance for bad debts of $400,000 at the time
AmeriDyne was acquired by the Company.
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
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<PAGE> 5
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $9,524,930 of working capital as compared
to working capital of $3,931,948 at June 30, 1996. The increase in working
capital was primarily due to the acquisition of Atlantic, which was completed
during August 1996.
Operating activities for the year ended June 30, 1997 utilized cash of
$4,407,477 as compared to operating activities during the year ended June 30,
1996, which utilized cash of $124,047. Inventories increased by approximately
$2,602,000 from June 30, 1996 as a result of increased inventory levels needed
to serve the growing nursing home market, and approximately $2,280,000 of the
increase resulted from the Atlantic acquisition. Cash utilized by the increase
in accounts receivable was approximately $5,343,000, primarily related to the
acquisition of Atlantic, as well as growth in sales generally.
Cash flows from investing activities used cash of $69,183 for the year
ended June 30, 1997 as a result of a loan of $354,267 from the Company's parent,
$1,415,744 used for the acquisition of or deposits on additional equipment and
$1,452,597 used for the Atlantic acquisition. These amounts were offset by
$3,350,000 in proceeds from the sale of the Company's manufacturing business.
Cash flow of $4,642,098 was provided from financing activities for the year
ended June 30, 1997 versus $695,487 for the year ended June 30, 1996. For the
year ended June 30, 1997, $3,909,307 was provided from net bank borrowings,
$211,846 was provided by the exercise of stock options and $609,465 was provided
by the exercise of various classes of the Company's common stock warrants.
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 form 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.
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.
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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 September 30, 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%. In May 1997 this revolving line of credit was increased to $10,000,000.
As of June 30, 1997, $5,886,545 had been borrowed against this line of credit.
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.
Renaissance Capital Group, Inc. of Dallas, Texas manages both of these
investment funds.
The Company plans to open four additional distribution centers around the
United States during the next six months. Total capital expenditures anticipated
to fund this expansion will approximate $1,250,000. The Company has received
commitments from leasing and finance 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 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.
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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:
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PAGE(S)
<S> <C>
Reports of Independent Certified Public Accountants............. F-1 to F-2
Consolidated Balance Sheets as of June 30, 1997, and
June 30, 1996....................................................... F-3
Consolidated Statements of Income for the years ended
June 30, 1997 and 1996; the six months ended June 30, 1996,
and for the year ended December 31, 1994............................ F-4
Consolidated Statements of Shareholders' Equity for
the years ended June 30, 1997 and 1996, the six months ended
June 30, 1996, and for the year ended December 31,
1994............................................................ F-5 to F-8
Consolidated Statements of Cash Flows for the years ended
June 30, 1997 and 1996, the six months ended June 30, 1996,
and for the year ended December 31,
1994............................................................ F-9 to F-10
Notes to Financial Statements................................... F-11 to F-25
</TABLE>
(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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
<S> <C> <C>
2.1 Agreement and Plan of Merger and Incorporated by reference to
Reorganization, dated as of Exhibit 2.1 to the Company's
February 17, 1997, among Sun Current Report on Form 8-K
Healthcare Group, Inc., Nectarine dated February 17, 1997
Acquisition Corporation and
Contour Medical, Inc.
2.2 Amendment No. 1 to the Agreement Incorporated by reference to
and Plan of Merger and Reorgani- Exhibit 2.1 to the Company's
zation dated as of February 17, Current Report on Form 8-K
1997 among Sun Healthcare Group, dated August 21, 1997
Inc., Nectarine Acquisition
Corporation and Contour Medical,
Inc.
2.3 Asset Purchase Agreement with *
RawCar Group, L.L.C.
</TABLE>
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<S> <C> <C>
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 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)
</TABLE>
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<TABLE>
<S> <C> <C>
10.2 Employment Agreement by and be- Incorporated by reference to
tween Contour Medical Fabricaors Exhibit 10.8 to the Company's
of Florida, Inc., Associated Form S-1 Registration State-
Healthcare Industries, Inc. and ment (File No. 33-66024)
Gerald J. Flanagan, dated
July 1, 1993
10.3 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)
10.4 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
10.5 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)
10.6 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)
10.7 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
10.8 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 Convertible Debenture Loan Incorporated by reference to
Agreement with Renaissance Exhibit 10.1 to the Company's
Capital Growth & Income Fund Annual Report on Form 10-K for
III, Inc., and Renaissance US the year ended June 30, 1996
Growth and Income Trust PLC
10.10 Letter Agreement dated August Incorporated by reference to
22, 1996 with Retirement Care Exhibit 10.25 to the Company's
Associates, Inc. Annual Report on Form 10-K for
the year ended June 30, 1996
10.11 Lease Agreement with Meadows *
I/II,LLC for Alpharetta, Georgia
Facility
10.12 Sublease Agreement with Sunscript *
Pharmacy Corporation on Alpha-
retta, Georgia Facility
</TABLE>
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<TABLE>
<S> <C> <C>
10.13 Lease Agreement with Spieker *
Properties, L.P. for Portland,
Oregon Facility
10.14 Sublease Agreement with RawCar *
Group, L.L.C.
10.15 Lease Agreement with Westport *
Business Park Associates for
Ft. Lauderdale facility
21 Subsidiaries of the Registrant *
23.1 Consent of Cherry, Bekaert & *
Holland, L.L.P.
23.2 Consent of BDO Seidman, LLP *
27 Financial Data Schedule *
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</TABLE>
* Previously Filed
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, 1997.
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<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Contour Medical, Inc.
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheets of Contour Medical,
Inc. (a subsidiary of Retirement Care Associates, Inc.) and Subsidiaries (the
Company) as of June 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years 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. 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, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Greensboro, North Carolina
October 9, 1997
F-1
<PAGE> 12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Contour, Medical, Inc.
St. Petersburg, Florida
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Contour Medical, Inc. (a subsidiary of
Retirement Care Associates, Inc.) and Subsidiaries for the six months ended June
30, 1995 and the year ended December 31, 1994. 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 results of operations and cash flows of
Contour Medical, Inc. and Subsidiaries for the six months ended June 30, 1995
and the year ended December 31, 1994, 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 9 which is as of March 15, 1996
F-2
<PAGE> 13
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Cash $ 311,657 $ 146,219
Accounts receivable:
Related parties 5,135,189 1,918,000
Trade, net of allowance for bad debts
of approximately $2,805,000 in 1997
and $410,000 in 1996 7,811,635 2,527,676
Inventories 5,130,142 2,876,792
Refundable income taxes - 21,406
Deferred income taxes 572,875 164,048
Prepaid expenses and other 237,687 51,519
Due from parent 973,164 618,897
Total current assets 20,172,349 8,324,557
Property and equipment, net 1,492,918 1,223,195
Other assets:
Deposit on equipment 311,453 416,184
Other 434,529 8,167
Goodwill, net of accumulated amortization
of approximately $251,000 in 1997 and
$11,000 in 1996 10,109,927 1,286,165
10,855,909 1,710,516
$32,521,176 $11,258,268
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 6,079,086 1,825,193
Accounts payable 3,839,548 2,036,652
Accrued expenses 728,784 366,716
Total current liabilities 10,647,418 4,228,561
Long-term debt, less current maturities 5,473,841 1,352,937
16,121,259 5,581,498
Stockholders' equity:
Preferred stock - Series A convertible;
$.001 par value, shares authorized -
1,265,000; issued and outstanding -
135,000 and 600,000, respectively,
at aggregate liquidation preference 623,414 2,528,000
Common stock; $.001 par value, shares
authorized - 76,000,000; issued and
outstanding - 8,127,376 and 5,214,223,
respectively (net of $765 discount) 7,334 4,449
Additional paid-in capital 15,796,188 2,911,696
Retained earnings (deficit) (27,019) 232,625
Total stockholders' equity 16,399,917 5,676,770
$32,521,176 $11,258,268
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 14
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $53,349,137 $14,542,421 $ 3,568,459 $ 3,945,745
Cost of sales 39,681,159 10,491,103 2,544,376 2,545,925
Gross profit 13,667,978 4,051,318 1,024,083 1,399,820
Selling, general and
administrative expenses 12,973,675 3,185,620 841,275 1,550,385
Litigation settlements -- -- -- 30,000
Income (loss) from
operations 694,303 865,698 182,808 (180,565)
Other income (expenses):
Offering costs -- -- -- (305,731)
Interest (1,295,556) (170,951) (39,098) (53,627)
Other, net 226,352 144,453 22,381 10,741
(1,069,204) (26,498) (16,717) (348,617)
Income (loss) before
income taxes (374,901) 839,200 166,091 (529,182)
Income tax (expense)
benefit 115,257 (312,166) (54,718) --
Net income (loss) $ (259,644) $ 527,034 $ 111,373 $ (529,182)
Earnings (loss) per share $ (0.05) $ 0.09 $ 0.02 $ (0.20)
Weighted average common
shares and share
equivalents outstanding 6,115,127 4,804,292 4,786,126 2,688,927
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 15
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 2,308,239 $ 1,129 $ 140,923 $ 185,971
Conversion of preferred
stock and warrants:
Class A 219,182 220 39,557 (14,777)
Class B 33,333 33 (33) --
Class D 238,450 238 75,212 (47,794)
Class E 172,986 173 295,569 --
Class One 2,000,000 2,000 370,844 --
Net loss -- -- -- (529,182)
Balance, December 31, 1994 4,972,190 3,793 922,072 (405,782)
Issuance of Series A
preferred stock -- -- (214,997) --
Exercise of common stock
options 15,385 15 19,985 --
Correction of Class A
preferred stock Conversion 255 -- -- --
Redemption of Class A
warrants -- -- (40) --
Tax benefit from utilization
of net operating loss
carryforward -- -- 54,718 --
Retirement of treasury stock (414,230) -- -- --
Net loss -- -- -- 111,373
Balance June 30, 1995 4,573,600 3,808 781,738 (294,409)
Issuance of stock 352,018 353 2,045,753 --
Exercise of common stock 25,000 25 49,975 --
1.05-for-1 forward stock split 247,601 247 (247) --
Correction for preferred stock 16,004 16 (16) --
Short-swing liability from a
shareholder -- -- 36,531 --
Preferred dividends in arrears -- -- (128,000)
Tax benefit from utilization
of net operating loss carry-
forward -- -- 125,962 --
Net income -- -- -- 527,034
Balance, June 30, 1996 5,214,223 $ 4,449 $ 2,911,696 $ 232,625
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 16
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit)
--------- ------ ------------ ---------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 5,214,223 $4,449 $ 2,911,696 $ 232,625
Convertible debt from
Atlantic acquisition con-
verted to common stock 1,950,000 1,950 9,748,050 --
Common stock issued for RCA's
guarantee of Contour's debt
for Atlantic 100,000 100 499,900 --
Series A converted to common
stock 488,250 488 1,859,512 --
Series A cumulative dividend
accrual -- -- (43,934) --
Series A dividends paid
Non-qualified options exercised
for common stock 68,083 40 154,306 --
1996 plan options exercised for
common stock 10,000 10 57,490 --
Class B warrants exercised for
common stock 42,285 42 181,182 --
Class C warrants exercised for
common stock 26,250 27 112,473 --
Consultant's warrants exercised
for common stock 228,285 228 315,513 --
Net income -- -- -- (259,644)
Balance, June 30, 1997 8,127,376 $7,334 $ 15,796,188 $ (27,019)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 17
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Convertible Preferred
Treasury Stock Stock - Series A
Shares Amount Shares Amount
-------- ------ -------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 414,230 $ -- -- $ --
Balance, December 31, 1994 414,230 -- -- --
Issuance of Series A
preferred stock -- -- 600,000 2,400,000
Retirement of treasury
stock (414,230) -- -- --
Balance June 30, 1995 -- -- 600,000 2,400,000
Preferred dividends in
arrears -- -- -- 128,000
Balance, June 30, 1996 -- -- 600,000 2,528,000
Series A converted to
common -- -- (465,000) (1,860,000)
Series A cumulative
dividend accrual -- -- -- 43,934
Series A dividends paid -- -- -- (88,520)
Balance June 30, 1997 -- $ -- 135,000 $ 623,414
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 18
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Convertible Preferred Convertible Preferred
Stock - Class A Stock - Series B
Shares Amount Shares Amount
------- -------- -------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 99,525 $ 25,000 2 --
Conversion of preferred
stock and warrants:
Class A (99,525) (25,000) -- --
Class B -- -- (2) --
Balance, December 31, 1994 -- $ -- -- $ --
</TABLE>
<TABLE>
<CAPTION>
Redeemable Cumulative Convertible Preferred
Preferred Stock Class D Stock - Class One
Shares Amount Shares Amount
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 1,074,176 $ 400,500 -- $ --
Conversion of preferred
stock and warrants:
Class D (1,074,176) (400,500) 2,000,000 372,844
Class One -- -- (2,000,000) (372,844)
Balance, December 31, 1994 -- $ -- -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 19
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ (259,644) $ 527,034 $ 111,373 $(529,182)
Adjustments to reconcile
net income (loss)to net
cash used in operating
activities:
Gain on sale of assets (608,423) -- -- --
Depreciation and
amortization 861,241 255,757 51,670 98,684
Guaranty fee 500,000 -- -- --
Offering costs -- -- -- 305,731
Provision for doubtful
accounts 382,188 -- -- --
Tax benefit from util-
ization of net operat-
ing loss carryforward -- 207,990 54,718 --
Cash provided by (used in):
Accounts receivable (5,343,342) (1,364,353) (1,123,856) (34,558)
Inventories 42,501 (318,832) (908,317) 33,978
Refundable income taxes (150,865) (10,726) (2,500) 90,941
Prepaid expenses and
other (121,788) 32,059 (61,325) (6,189)
Accounts payable (71,414) 402,534 767,004 23,263
Accrued expenses 362,069 144,490 80,835 (10,801)
Net cash provided by (used in)
operating activities (4,407,477) (124,047) (1,030,398) (28,133)
Cash flows from investing activities:
Purchases of property and
equipment (969,486) (749,163) (304,762) (46,181)
Decrease (increase) in due
from parent (354,267) 550,004 (1,168,901) --
Deposit on equipment (446,258) -- (228,282) --
Decrease (increase) in
other assets (196,575) -- -- 555
Acquisition of AmeriDyne,
net of cash acquired -- (322,297) -- --
Acquisition of Americare
Group and remaining interest
In Facility Supply (1,452,597) -- -- --
Proceeds on sale of Contour
Fabricators 3,350,000 -- -- --
Net cash provided by (used in)
investing activities $ (69,183) $ (521,456) $(1,701,945) $ (45,626)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 20
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended
June 30, June 30, June 30, December 31,
1997 1996 1995 1994
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities:
Deferred offering costs $ -- $ -- $ -- $ (59,990)
Proceeds from issuance
of notes payable to
bank -- 1,295,635 189,671 --
Repayment on notes
payable to bank -- (686,679) -- (42,177)
Proceeds from issuance
of notes payable and
long-term debt 12,750,473 -- 482,622 --
Payments of notes payable
and long-term debt (8,841,166) -- (34,328) --
Exercise of stock options 211,846 50,000 20,000 --
Increase (decrease) in
due to parent -- -- (165,000) 165,000
Proceeds from issuance of
preferred stock, net of
issuance costs -- -- 2,196,447 --
Redemption of Class A
warrants -- -- (40) --
Payment of Series A stock
dividend (88,520) -- -- --
Class B warrants exercised
for common 181,224 -- -- --
Class C warrants exercised
for common 112,500 -- -- --
Consultants' warrant
exercised for common 315,741 -- -- --
Payment of short-swing
liability by a share-
holder -- 36,531 -- --
Net cash provided by
financing activities 4,642,098 695,487 2,689,372 62,833
Net increase (decrease)
in cash 165,438 49,984 (42,971) (10,926)
Cash, beginning of period 146,219 96,235 139,206 150,132
Cash, end of period $ 311,657 $ 146,219 $ 96,235 $ 139,206
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 21
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Contour Medical, Inc. ("Contour Medical" or the "Company") was incorporated in
Nevada in April 1987 and in 1989 conducted an initial public offering. 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." Approximately 62% of the Company's common stock is owned by
Retirement Care Associates, Inc. ("Retirement Care"), a publicly-held company
engaged in the management and operation of retirement care and long-term nursing
home facilities in the Southeastern United States. The Company's corporate
offices are located in Alpharetta, Georgia.
Prior to 1996, the Company's revenues were derived predominantly through its
manufacturing facilities, Contour Fabricators, Inc. ("CFI") and Contour
Fabricators of Florida, Inc. ("CFFI"), located in Grand Blanc, Michigan and St.
Petersburg, Florida, respectively. These companies manufactured disposable
surgical procedure products and custom packaged procedural trays for use in
specialized medical applications. During 1997, the assets related to these
businesses were sold to an unrelated party.
In 1996, the Company acquired AmeriDyne Corporation ("AmeriDyne"), a Jackson,
Tennessee-based distributor of bulk medical supplies primarily to home health
agencies and hospitals. Sales from AmeriDyne included in the consolidated
statements of operations amounted to approximately $14,464,000 and $3,616,000
for 1997 and 1996, respectively. (See Note 13).
In 1997, the Company acquired Atlantic Medical Supply Company, Inc. ("Atlantic
Medical"), an Augusta, Georgia-based distributor of medical supplies and
ancillary products to long-term care providers. Sales from Atlantic Medical's
facilities in Georgia, North Carolina and Florida amounted to approximately
$26,757,000 in 1997. (See Note 12).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Contour Medical, Inc. and its wholly-owned subsidiaries, Atlantic
Medical Supply Company, Inc., AmeriDyne Corporation, Contour Fabricators, Inc.,
and Contour Fabricators of Florida, Inc., collectively referred to as "the
Company." All material intercompany accounts and transactions have been
eliminated in the consolidation.
MANAGEMENT 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.
REVENUE RECOGNITION - Sales are recognized upon shipment of products to
customers.
TRADE RECEIVABLES - The Company uses the allowance method to provide for
uncollectible accounts. Allowance for doubtful accounts approximated $2,805,000
and $410,000 as of June 30, 1997 and 1996, respectively.
F-11
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORIES - 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 - 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments held by the Company
at June 30, 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
June 30, 1997.
GOODWILL - 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. Amortization charged to continuing operations amounted to approximately
$240,000 and $11,000 for the years ended June 30, 1997 and 1996, respectively.
The Company periodically reviews goodwill to assess recoverability, and any
impairment would be recognized in operating results if anticipated undiscounted
future cash flows of the underlying assets do not exceed the book value of the
goodwill and the underlying assets.
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 $257,000 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.
DEFERRED LOAN COSTS - 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. Amortization of deferred loan costs charged to
operations in 1997 approximated $46,000.
INCOME TAXES - 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 and 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.
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
1.05-for-1 forward stock split which occurred in 1996. Common stock equivalents
for 1996, 1995 and 1994 have not been included, since the effect would be
antidilutive. Annual accruals of cumulative dividends in arrears of
approximately $44,000, $96,000 and $32,000 related to the Company's Class A
preferred stock (see Note 9) have been deducted from 1997, 1996 and 1995 net
income and for the calculation of earnings (loss) per common share,
respectively.
F-12
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
RECLASSIFICATIONS - Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation. These reclassifications had no effect on
operations.
Impact of Recently Issued Accounting Standars-In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is
required to be adopted for the fiscal years ending after December 15, 1997.
SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and specifies
the computation, presentation and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. SFAS 128 essentially replaces the primary EPS and fully diluted EPS
presentations under APB Opinion No. 15 with a basic EPS and a diluted EPS
calculation. The Company will comply with the disclosure requirements of SFAS
No. 128 commencing with its September 30, 1997 Form 10-Q.
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 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.
3. RELATED PARTY TRANSACTIONS
During 1995, the Company began distributing medical supplies to health care
facilities owned, leased, or managed by Retirement Care. Sales to these
facilities approximated $7,848,000, $5,456,000 and $1,426,000 for the years
ended June 30, 1997, 1996 and the six-month period ended June 30, 1995,
respectively. Trade accounts receivable of approximately $5,135,000 and
$1,918,000 related to these health care facility sales are outstanding as of
June 30, 1997 and 1996, respectively. Additionally, the Company had an
outstanding loan receivable due from Retirement Care of approximately $973,000
as of June 30, 1997 with interest at prime and $619,000 as of June 30, 1996
which is due on demand with no stated interest rate.
4. INVENTORIES
Inventories at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ - $ 330,699
Work in process - 96,647
Finished goods 5,130,142 2,449,446
----------- -----------
$ 5,130,142 $ 2,876,792
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C> <C>
Land and land improvements $ 9,841 $ 50,000
Building 5-45 yrs. 6,159 596,247
Machinery and equipment 3-7 yrs. 1,442,614 1,798,520
Furniture and fixtures 5-7 yrs. 498,876 146,536
Leasehold improvements 5 yrs. 74,717 251,352
Vehicles 3-5 yrs. 84,853 72,245
---------- ----------
2,117,060 2,914,900
Less accumulated depreciation 624,142 1,691,705
---------- ----------
$1,492,918 $1,223,195
</TABLE>
F-13
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. PROPERTY AND EQUIPMENT (continued)
All property and equipment are pledged as collateral (see Note 6).
6. NOTES PAYABLE
Notes payable at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Borrowings under $10,000,000 revolving line of
credit, interest based on 30 day LIBOR plus
2.00% (7.68% at June 30, 1997), payable monthly,
principal due October 31, 1997, collateralized by
accounts receivable, inventory, and guarantees
of Retirement Care Associates, Inc. $ 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 -
Borrowings under $750,000 non-revolving line of
credit, interest at prime (8.50% at June 30,
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, Inc. 548,491 -
Note payable to stockholder, interest at 10.00%,
principal and interest of $5,693, due monthly
through March 1999 109,252 163,646
Note payable to equipment company, interest at
14.00%, monthly installments of $405 including
interest, matures August 1998, collateralized by
equipment 5,546 -
Note payable to equipment company, interest at
11.00%, monthly installments of $533 including
interest, matures December 1997, collateralized
by equipment 3,093 8,805
Note payable to bank, interest at prime plus 1.00%
(9.25% at June 30, 1996), principal of $5,000 plus
interest due monthly through June 2000,
collateralized by equipment - 217,559
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
</TABLE>
F-14
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
6. NOTES PAYABLE (continued) 1997 1996
------- ----------
<S> <C> <C>
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
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
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
Note payable to bank, interest at 8.75%, principal
and interest of $1,282 due monthly through April
2001, collateralized by equipment - 60,436
Borrowings under $500,000 line of credit, interest
at prime plus .25% (8.50% at June 30, 1996), payable
monthly, collateralized by accounts receivable,
inventory and equipment, and guarantees by
Retirement Care Associates, Inc. - 433,535
Note payable to leasing institution, interest at
14.60%, monthly installments of $309 plus sales
tax, matures June 1997, collateralized by
computer equipment - 2,924
Note payable to bank, interest at 9.00%, 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
Note payable to bank, interest at 9.00%, 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
Borrowings under $975,000 line of credit,
interest at prime plus 1.25% (9.50% 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 by Retirement Care Associates, Inc. - 958,000
11,552,927 3,178,130
Less current maturities (6,079,086) (1,825,193)
$ 5,473,841 $1,352,937
</TABLE>
F-15
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. NOTES PAYABLE (continued)
The aggregate maturities of long-term debt are as follows as of June 30, 1997:
<TABLE>
<S> <C>
1998 $6,079,086
1999 300,350
2000 744,567
2001 503,534
2002 446,325
Thereafter 3,479,065
</TABLE>
The Company's revolving line of credit and the provisions of indenture relating
to its 9% convertible debentures, which together total $18,294,091 of
indebtedness, contain certain restrictive financial covenants. Under the terms
of the agreements, the Company is required to maintain a debt to net worth
ratio of no more than 2.5, a current ration of no less than 1.50 and an
interest coverage ratio of no less than 4.0. At June 30, 1997, the Company
was out of compliance with the interest coverage ratio requirements. The
lending institutions have waived those requirements as of June 30, 1997 and for
the year then ended.
At June 30, 1997, the Company had approximately $4,113,000 and $202,000 of
unused credit under its revolving line of credit and its non-revolving equipment
line of credit, respectively. Outstanding draws against the revolving and
non-revolving lines of credit bear interest at the prime rate of interest and
LIBOR plus 2%, respectively.
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 if effect. The
adjustment will only be made to adjust the conversion price to a price that is
less than the then-existing conversion price.
7. LEASE COMMITMENTS
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, 1997.
<TABLE>
<S> <C>
1998 $ 603,073
1999 538,680
2000 544,975
2001 406,644
2002 320,190
Thereafter --
</TABLE>
Total rental expense was approximately $935,834, $349,600, $145,500 and $203,000
for the years ended June 30, 1997 and 1996, the six-month period ended June 30,
1995, and the year ended June 30, 1994, respectively.
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." Income tax expense (benefit) includes the following amounts:
F-16
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (continued)
<TABLE>
<CAPTION>
Six Months
Years Ended Ended Year Ended
June 30, June 30, December 31,
1997 1996 1995 1994
---------------------- ---------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $161,951 -- --
State -- 28,101 -- --
Deferred (115,257) 122,114 54,718 --
Total income tax
expense (benefit) $(115,257) $312,166 54,718 --
</TABLE>
The components of deferred tax assets derived from temporary deductible
differences are as follows:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended Year Ended
June 30, June 30, December 31,
1997 1996 1995 1994
------------------------- ---------- ------------
<S> <C> <C> <C> <C>
Allowance for uncollectible
accounts $ 556,875 $ 164,048 -- --
Allowance for inventory
valuation 16,000 -- -- --
Non-deductible accruals -- -- 7,524 --
Net operating loss 444,546 355,108 459,568 485,519
1,017,421 519,156 467,092 485,519
Less valuation allowance (444,546) (355,108) (467,092) (485,519)
Net deferred tax asset
- current $ 572,875 $ 164,048 -- --
</TABLE>
The following summary reconciles differences from income taxes at the federal
statutory rate with the effective tax rate:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended Year Ended
June 30, June 30, December 31,
1997 1996 1995 1994
----------------- ------ --------
<S> <C> <C> <C> <C>
Income taxes (benefits) at federal
statutory rate (34.00)% 34.00% 34.00% (34.00)%
State income taxes, net of
federal tax benefit -- 3.60% 3.10% --
Carryforward of net operating loss -- -- (9.90)% --
Losses not available for carryback 34.00% -- -- 34.00%
Other, net -- (0.04)% 5.00% --
Income taxes at effective rate -- 37.56 % 32.20% --
</TABLE>
As of June 30, 1997, the Company had net operating loss carryforwards 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
F-17
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (continued)
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 and 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 was credited to paid-in
capital.
9. CAPITAL STOCK
STOCK BONUS PLAN - The Company has 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:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------- -------------
<S> <C> <C>
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 21,000
Balance, June 30, 1996 441,000 $1.88 - $4.11
Exercised (68,083) $3.71 - $4.11
Canceled (40,500)
Balance, June 30, 1997 332,417
</TABLE>
All of the above options were granted with an exercise price above fair market
value at the date of grant. In addition, 325,423 stock options related to the
non-qualified employee stock bonus plan were exercisable at June 30, 1996.
Common shares for future issuance under this plan totaled 919,532 at June 30,
1997.
F-18
<PAGE> 29
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 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 815,000 options for the
purchase of the Company's common stock.
Changes in options outstanding are summarized as follows:
<TABLE>
<CAPTION>
Shares Option Price per Share
-------- ----------------------
<S> <C> <C>
Balance, June 30, 1995 - -
Granted 160,000 $4.64 - $5.75
Stock split 4,250
Balance, June 30, 1996 164,250 $4.64 - $5.75
Granted 207,500 $5.50 - $5.75
Canceled (10,000) $5.75
Exercised (65,000) $5.75
Balance, June 30, 1997 296,750
</TABLE>
All of the above options were granted with an exercise price above fair market
value at the time of grant. In addition, all of the stock options related to the
1996 plan were exercisable at June 30, 1997, and 518,250 common shares are
reserved for future issuance under this plan.
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, 1997, the Company had 757,584 stock warrants
outstanding. Information relating to these warrants is summarized as follows:
<TABLE>
<CAPTION>
Number of
Common Exercise
Expiration Number of Shares Per Price Per
Type Date Warrants Warrant Warrant
--------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Class C Feb. 1999 275,000 1.05 $ 4.50
Consultant Oct. 1997 86,334 1.05 $ 1.50
Consultant Oct. 1999 200,000 1.05 $ 3.00
Consultant Oct. 1997 46,250 1.05 $ 3.00
Consultant Sep. 1999 50,000 1.00 $ 5.50
Retirement Care
Associates Aug. 1999 100,000 1.00 $ 5.00
</TABLE>
F-19
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CAPITAL STOCK (continued)
During fiscal year 1997, 40,272 of the Class B warrants were converted into
42,285 shares of common stock. The remaining class B warrants expired in July
1996.
CHANGE OF CONTROL - On September 30, 1994, 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.
During the year ended June 30, 1997, Retirement Care Associates, Inc. converted
a note payable due from Contour Medical, Inc. into 1,950,000 shares of CMI's
common stock. RCA also received 100,000 shares of CMI's common stock as
compensation for a loan guarantee.
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 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
F-20
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CAPITAL STOCK (continued)
stock, or $.16 per share, on a cumulative basis from the date of issuance.
During the year ended June 30, 1997, the Company paid $88,520 in Series A
Preferred Stock dividends. Cumulative dividends in arrears related to the Series
A Preferred Stock amounted to approximately $83,000 ($.61 per share) and
$128,000 ($.21 per share) for the years ended June 30, 1997 and 1996,
respectively. The Series A Preferred Stock may be redeemed by the Company at $4
per share plus dividends in arrears beginning in May 1999. During the year ended
June 30, 1997, 465,000 shares of Series A Preferred Stock was converted into
488,250 shares of common stock. In addition, 840,000 shares of common shares are
reserved for future issuance upon conversion of the total authorized Series A
Preferred Stock.
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 June 30,
1997, the Company issued 1,950,000 shares of common stock in satisfaction of a
$9,750,000 note payable to Retirement Care.
SHARES RESERVED - At June 30, 1997, the Company has reserved common stock for
future issuance under all of the above arrangements amounting to 2,367,720.
ISSUANCE OF STOCK IN SATISFACTION OF A LOAN GUARANTEE FEE - In consideration of
the Parent's agreement to guarantee the Company's obligations with respect to
the Atlantic Medical Notes, the Company agreed to pay the Parent $500,000, which
obligation was satisfied by the issuance of 100,000 shares of the Company's
common stock valued at $5.00 per share on the date of issuance. The loan from
the Parent to the Company was evidenced by a convertible promissory note bearing
interest at a rate of 9% per annum and payable on demand. This note was
converted into 1,950,000 shares of the common stock of the Company on January
10, 1997.
10. MAJOR CUSTOMERS
Sales to significant customers were as follows:
<TABLE>
<CAPTION>
Year ending June 30, Number of Customers Sales Volumes
-------------------- ------------------- -------------
<S> <C> <C>
1994 1 $ 531,000
1995 - -
1996 - -
1997 - -
</TABLE>
As a result of the increased sales volume due to sales to related parties of
approximate $7,848,000 (see Note 3), there were no sales to significant other
customers during the years ended June 30, 1997 and 1996 and the six-month period
ended June 30, 1995, respectively.
F-21
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months
Years Ended Ended Year Ended
June 30, June 30, December 31,
1997 1996 1995 1994
------------------------- ---------- ------------
<S> <C> <C> <C> <C>
Cash paid for interest $ 1,008,735 $ 170,951 $ 39,065 $ 53,627
Cash paid for income taxes $ -- $ 930 $ 2,500 $ 5,000
Noncash financing and
investing activities:
Acquisition of Atlantic
Medical Supply Company,
Inc. and 20% of
Facility Supply, Inc. $10,500,000 $ -- $ -- $ --
Convertible note payable
issued to Retirement
Care Associates, Inc.
used to satisfy notes
payable issued in
connection with Atlantic
Medical Supply Company,
Inc. acquisition $ 9,750,000 $ -- $ -- $ --
Issuance of 100,000 shares
of common stock to
Retirement Care Associates,
Inc. as compensation for
guarantee of notes issued
in Atlantic Medical Supply
Company, Inc. acquisition $ 500,000 $ -- $ -- $ --
Issuance of 369,618 shares
of common stock for
purchase of AmeriDyne
Corporation $ -- $2,100,000 $ -- $ --
Deferred offering costs
charged to additional
paid-in-capital as an
offset to private placement
offering proceeds $ -- $ -- $ 11,444 $ --
Conversion of 1,074,176
shares of Class D Preferred
Stock and 995,012 Class D
Warrants into 250,372
shares of common stock and
2,000,000 shares of Class
One Preferred Stock $ -- $ -- $ -- $400,500
$20,750,000 $2,100,000 $ 11,444 $400,500
</TABLE>
F-22
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. ATLANTIC MEDICAL ACQUISITION
Effective July 1, 1996, the Company acquired all of the outstanding stock of
Atlantic Medical Supply Company, Inc. for approximately $11.9 million in a
transaction accounted for as a purchase. The purchase price exceeded the fair
value of the net assets acquired by approximately $8.6 million. The resulting
goodwill is being amortized on the straight-line basis over 40 years. The
consolidated financial statements include the results of operations of Atlantic
Medical subsequent to 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 year
ended June 30, 1996. The pro forma information is presented for information
purposes only. Although it is based on historical information, it is unaudited
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.
<TABLE>
<CAPTION>
Unaudited Year Ended
June 30, 1996
--------------------
<S> <C>
Sales $ 34,333,727
Net income $ 585,784
Per share $ .10
</TABLE>
13. 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 in a transaction accounted for as a purchase. The purchase price
exceeded fair value of the net assets acquired by approximately $1.3 million.
The resulting goodwill is being amortized on the straight-line basis over 40
years. The consolidated financial statements include the results of operations
of AmeriDyne subsequent to February 29, 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.
<TABLE>
<CAPTION>
Unaudited Year Ended
June 30, 1996
--------------------
<S> <C>
Sales $ 21,406,882
Net income $ 348,880
Per share $ .05
</TABLE>
14. PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation." This new standard defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This statement gives
entities a choice of recognizing related compensation expense by adopting the
new
F-23
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS (continued)
fair value method or to continue to measure compensation using the intrinsic
value approach under Accounting Principles Board (APB) Opinion No.25, the former
standard. If the former standard for measurement is elected, SFAS No. 123
requires supplemental disclosure to show the effects of using the new
measurement criteria. This statement is effective for the Company's 1997 fiscal
year. The Company intends to continue using the measurement prescribefd by APB
Opinion No. 25, and accordingly, this pronouncement will not affect the
Company's financial position or results of operations.
The following is a summary of stock option activity and related information for
the years ended June 30:
<TABLE>
<CAPTION>
NON-QUALIFIED STOCK OPTION PLAN: 1997 1996
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding - Beginning of year 441,000 2.16 400,000 1.97
Granted 0 45,000 4.11
Exercised (68,083) 3.05 (25,000) 4.11
Stock split 21,000 4.11
Forfeited (40,500) 3.85
------- -------
Outstanding - Ending of year 332,417 1.78 441,000 2.16
------- -------
Exercisable - End of year 325,423 367,439
Weighted average fair value
of options granted during
the year 0 2.38
</TABLE>
Exercise prices for options outstanding as of June 30, 1997 ranged from $2 to
$4. The weighted average remaining contractual life of those options is 1.46
years.
<TABLE>
<CAPTION>
STOCK OPTION PLAN: 1997 1996
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding - Beginning of year 164,250 4.97
Granted 207,500 5.30 164,250 4.97
Exercised (10,000) 5.75
Forfeited (65,000) 5.65
------- -------
Outstanding - Ending of year 296,750 5.03 164,250 4.97
------- -------
Exercisable - End of year 296,750 164,250
Weighted average fair value
of options granted during
the year 3.27 3.07
</TABLE>
F-24
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. PRO-FORMA PRESENTATION OF STOCK COMPENSATION COSTS (continued)
Exercise prices for options outstanding as of June 30, 1997 ranged from $5 to
$6. The weighted average remaining contractual life of those options is 3.74
years.
Because the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date of the awards consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and per share data would have been
stated as follows:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Net income (loss) - as reported $(259,644) $527,034
Net income (loss) - pro forma $(667,110) $194,040
Earnings (loss) per share - as reported $ (.05) $ 0.09
Earnings (loss) per share - pro forma $ (0.12) $ 0.02
</TABLE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumption used for grants in 1997 and 1996; expected volatility of 68%,
risk-free interest rate of 6.0%, and expected lives ranging from 3 to 5 years.
F-25
<PAGE> 36
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: March 11, 1998 By: /s/ Donald F. Fox
-------------------------------------
Donald F. Fox, President
