<PAGE> 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 September 30, 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 8,215,543 shares of the Registrant's $.001 par value Common Stock
outstanding as of September 30, 1997.
<PAGE> 2
CONTOUR MEDICAL, INC.
FORM 10-Q/A
INDEX
-----
<TABLE>
<CAPTION>
Part I. Financial Information
- ------ ---------------------
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997 3-4
Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996 5
Consolidated Statement of Stockholder's Equity
for the Three Months Ended September 30, 1997 6-7
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1996 8-9
Notes to Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-18
</TABLE>
2
<PAGE> 3
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current:
Cash $ 104,309 $ 311,657
Accounts receivable
Related parties (Note 4) 6,347,267 5,135,189
Trade, net of allowance for
bad debts of approximately
$2,863,385 and $2,805,000
at September 30, 1997 and June
30, 1997, respectively. 11,355,079 7,811,635
Inventories 5,285,373 5,130,142
Refundable income taxes 559,209 572,875
Prepaid expenses and other 309,454 237,687
Due from parent (Note 4) 973,164 973,164
----------- -----------
Total Current Assets 24,933,855 20,172,349
----------- -----------
Property and Equipment, less
accumulated depreciation (Note 5) 2,319,971 1,492,918
----------- -----------
Other Assets:
Goodwill, net of accumulated
amortization of approximately
$325,000 and $251,000 at September
30, 1997 and June 30, 1997,
respectively 10,035,100 10,109,927
Deposit on equipment 45,400 311,453
Other 459,518 434,529
----------- -----------
Total Other Assets 10,540,018 10,855,909
----------- -----------
$37,793,844 $32,521,176
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 5,111,457 3,839,548
Accrued expenses 537,995 728,784
Current maturities of long-term
debt (Note 6) 9,856,895 6,079,086
----------- -----------
Total Current Liabilities 15,506,347 10,647,418
Long-term debt, less current
maturities (Note 6) 5,473,841 5,473,841
----------- -----------
Total Liabilities 20,980,188 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 8,215,543 and
8,127,376 (net of $765 discount) 7,422 7,334
Additional paid-in capital 15,944,416 15,796,188
Retained earnings 238,404 (27,019)
----------- -----------
Total stockholders' equity 16,813,656 16,399,917
$37,793,844 $32,521,176
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
SALES TO NON-RELATED PARTIES $10,922,790 $11,076,530
SALES TO RELATED PARTIES 2,862,045 1,836,000
----------- -----------
TOTAL SALES 13,784,835 12,912,530
COST OF SALES 10,368,525 9,273,535
----------- -----------
GROSS PROFIT 3,416,310 3,638,995
OPERATING EXPENSES 2,909,420 3,184,083
OTHER:
Interest Expense 297,322 336,075
Other Income 15,147 --
Interest Income 53,120 8,425
Guarantee Fee -- (500,000)
----------- -----------
OTHER INCOME (EXPENSE) (229,055) (827,650)
INCOME (LOSS) BEFORE INCOME TAXES 277,835 (372,738)
INCOME TAX EXPENSE (BENEFIT) 12,412 (141,640)
----------- -----------
NET INCOME (LOSS) $ 265,423 $ (231,098)
BASIC EARNINGS PER SHARE $ .03 $ (.04)
DILUTED EARNINGS PER SHARE .03 (.04)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES 8,127,376 5,716,891
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
--------- ------ -----------
<S> <C> <C> <C>
Balance, June 30, 1997 8,127,376 $7,334 $15,796,188
Exercise of common stock
warrants 42,000 42 59,958
Non-qualified options exercised
For common stock 46,167 46 88,270
Balance, September 30, 1997 8,215,543 $7,422 $15,944,416
--------- ------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Convertible
Preferred Stock
----------------- Retained
Shares Amount Earnings
-------- -------- -----------
<S> <C> <C> <C>
Balance, June 30, 1997 135,000 $623,414 $(27,019)
Net income -- -- 265,423
Balance, September 30, 1997 135,000 $623,414 $238,404
------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE> 8
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 265,423 $ (231,098)
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation & Amortization 230,447 163,661
(Increase) decrease in accounts
receivable (4,755,522) (5,040,970)
(Increase) decrease in inventories (155,231) (3,491,430)
(Increase) decrease in other
current assets and other assets (83,090) (9,927,652)
Increase (decrease) in accounts
payable 1,271,909 1,308,576
Increase (decrease) in accrued
expenses and other liabilities (190,789) 761,501
----------- ------------
Net cash provided (used) by
operating activities (3,416,853) (16,457,412)
CASH FLOW FROM INVESTING ACTIVITIES:
Deposit on equipment 266,053 (86,834)
Acquisition of equipment (982,673) (720,106)
Decrease (increase) in due
from parent -- (136,436)
----------- ------------
Net cash used by investing
activities (716,620) (943,376)
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE> 9
CONTOUR MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition Notes Issued $ -- $10,850,000
Convertible debentures issued -- 5,000,000
Net borrowing on loans 3,777,809 1,179,552
Proceeds from exercise of options 88,270 --
Exercise of Warrants 60,000 625,506
------------ -----------
Net cash provided by financing
activities 3,926,125 17,655,058
------------ -----------
NET INCREASE (DECREASE) IN CASH (207,348) 254,270
CASH BEGINNING OF PERIOD 311,657 146,219
------------ -----------
CASH END OF PERIOD $ 104,309 $ 400,489
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION AND NON-CASH
ACTIVITIES:
Cash paid for interest $ 291,374 $ 199,255
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
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 September
30, 1997 and 1996 are not necessarily indicative of the operating results for
the full year.
The consolidated financial statements include the accounts of the Company
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. The Company 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 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:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1997 September 30, 1996
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Net Income 265,423 (231,098)
Less: Preferred Stock Dividends 5,400 26,171
BASIC EPS
Income available to common
stockholders 260,023 8,127,376 0.03 (257,269) 5,836,369 -0.04
EFFECT OF DILUTIVE SECURITIES
Warrants 418,750
Options 357,759
DILUTED EPS
Income available to common
stockholders 260,023 8,903,885 0.03 (257,269) 5,838,369 -0.04
</TABLE>
Certain securities are not included in the calculation of diluted EPS as they
would be antidilutive. See the Company's 1997 annual report for a description
of securities which potentially could be dilutive in future periods.
10
<PAGE> 11
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 September 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 September 30, 1997.
Goodwill - The Company has classified as goodwill the cost in excess of
fair value of the net assets of Atlantic 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.
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.
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.
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 $2,862,045 for the three month period ended September 30, 1997.
Trade accounts receivable of $6,347,267 and $5,135,189 were outstanding as of
September 30, 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 $973,164 at September 30, 1997 and June
11
<PAGE> 12
30, 1997, which is due within 45 days from the date of such loan and bears
interest at the prime rate.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Useful Lives September 30, 1997 June 30, 1997
------------ ------------------ -------------
<S> <C> <C> <C>
Land & Land Improvements -- 16,005 $ 9,841
Building and Improvements 5-45 years 1,165 6,159
Machinery and equipment 3-7 years 1,771,963 1,442,614
Furniture and fixtures 5-7 years 645,332 498,876
Leasehold improvements 5 years 486,176 74,717
Vehicles 3-5 years 179,092 84,853
---------- ----------
3,099,733 2,117,060
Less accumulated depreciation 779,762 624,142
---------- ----------
$2,319,971 $1,492,918
</TABLE>
All property and equipment are pledged as collateral.
6. NOTES PAYABLE
Notes payable at September 30, 1997 and June 30, 1997 consisted of the
following:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ---------
<S> <C> <C>
Borrowings under $10,000,000 line of credit,
interest at 30 day libor plus 200bp (7.68%
at September 30, 1997), payable monthly,
collateralized by accounts receivable,
inventory and guarantees by Retirement Care
Associates, Inc. Principal due
October 31, 1997 $9,479,873 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 $750,000 line of credit,
interest at prime (8.50% at September 30,
1997), principal of $20,833 plus interest
due monthly, collateralized by accounts
receivable, inventory, furniture, fixtures,
equipment, machinery, bank accounts and
guarantees Retirement Care Associates 750,000 750,000
Note payable to stockholder, interest at 10%,
principal and interest of $5,693, due monthly
through March 1999 94,786 109,252
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
Note payable to equipment company, interest at
14.0%, monthly installments of $405 including
interest. Matures October 1998 collateralized
by equipment. 4,513 5,546
Note payable to equipment company, interest at
11%, monthly installments of $533 including
interest. Matures December 1997,
collateralized by equipment 1,564 3,093
----------- -----------
$15,330,736 $11,552,927
Less current maturities (9,856,895) (6,079,086)
----------- -----------
$ 5,473,841 $ 5,473,841
</TABLE>
The Company's revolving line of credit totaling $9,479,873 at September 30,
1997 contain 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 September 30, 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 those
requirements as of September 30, 1997 and for the quarter then ended.
The aggregate maturities of long-term debt are as follows as of September 30,
1997:
<TABLE>
<S> <C>
1998 $9,856,895
1999 300,350
2000 744,567
2001 503,534
2002 446,325
Thereafter 3,479,065
</TABLE>
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 September 30, 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 Company's 9% Convertible Debentures which total $5
million outstanding as of September 30, 1997. Renaissance Capital Growth and
Income Fund II and Renaissance U.S. Growth and Income Trust, PLC has waived such
defaults as of September 30, 1997 and for the quarter then ended.
7. LEASE COMMITMENTS
13
<PAGE> 14
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 September 30, 1997.
<TABLE>
<S> <C>
1998 $823,473
1999 759,080
2000 765,375
2001 627,044
2002 540,590
</TABLE>
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.
14
<PAGE> 15
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 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 Contour will be credited to additional paid-in capital
when recognized.
9. YEAR 2000 DISCLOSURE
The Company has reviewed all of its comment 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.
15
<PAGE> 16
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 September 30, 1997 COMPARED TO THREE MONTHS ENDED September
30, 1996
As a result of the factors discussed below, for the three months ended
September 30, 1997, the Company had net income of $265,423 compared to a net
loss of $(231,098) for the three months ended September 30, 1996.
Sales increased by $872,305 for the three months ended September 30, 1997
as compared to the three months ended September 30, 1996. Revenues in the
quarter ended September 30, 1996 included sales from the Company's manufacturing
operations of approximately $1.1 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 September 30, 1997 were
attributable to its distribution of medical supplies. The increase of
approximately $2 million was the result of an increase in sales to the Company's
parent of approximately $1,026,000, with the balance of the increase, or
approximately $950,000, due to the expansion of the Company's customer base.
Gross profit for the three months ended September 30, 1997, was $3,416,310
or 24.8% of sales, as compared to $3,638,995 or 28.2% 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 September 30, 1997,
were $2,909,420 as compared to $3,184,083 in 1996. The operating expenses
remained relatively consistent, however as a percent of sales operating expenses
decreased 3.6%. The largest components of operating expenses are indirect labor
(including sales salaries and commissions), occupancy expense, depreciation and
amortization, and insurance.
Indirect labor, including sales salaries and commissions were approximately
$1,804,000, an increase of $272,179 compared to the same period last year.
Occupancy expense, depreciation and amortization and insurance costs increased
to approximately $779,072, an increase of $23,421 compared to the same period
last year.
Other income is made up of service charge income and gains and losses on
the disposition of assets. Interest expense for the three month period ending
September 30, 1997 was $297,322 compared to $336,075 for the same period last
year. Interest expense has decreased primarily as a result of interest paid on
the notes used to fund the acquisition of Atlantic Medical during the same
period last year.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $9,427,508 of working capital as
compared to $9,524,931 on June 30, 1997.
16
<PAGE> 17
Operating activities for the three months ended September 30, 1997,
utilized cash of $3,416,853 as compared to operating activities during the three
months ended September 30, 1996, which utilized cash of $16,457,412. The
decrease in the use of cash was primarily due to the acquisition of Atlantic
Medical Supply in the first quarter of 1996.
The cash flows utilized for investing activities of $716,620 during the
three months ended September 30, 1997, were a result of the acquisition of
additional property and equipment for the expansion of the Company distribution
facilities.
Cash flow of $3,926,125 was provided from financing activities in the three
months ended September 30, 1997, whereas in the same period in 1996, cash flows
from financing activities provided cash of $17,655,058. The cash flows provided
from financing activities in the three months ended September 30, 1996 were used
in the acquisition of Atlantic Medical Supply, Inc. ("Atlantic").
The Company currently maintains revolving lines of credit totaling $10
million with its banks for short-term working capital needs. As of September 30,
1997, $9,479,873 had been borrowed against these lines. On October 31, 1997, the
borrowings under the line of credit were due for repayment. The Company obtained
a forebearance 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.
The Company's revolving line of credit totaling $9,479,873 at September 30,
1997 contains certain restrictive financial covenants. Under the terms of the
agreement relating to the line of credit, 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 September 30, 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 under the line of credit has waived such defaults as of September
30, 1997 and for the quarter then ended.
As of September 30, 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 Company's 9% Convertible Debentures which total $5
million as of September 30, 1997. Renaissance has waived such defaults as of
September 30, 1997 and for the quarter then ended.
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, Facility Supply, Inc. 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 four additional distribution centers around the
United States during the next six months. Total capital expenditures anticipated
to fund this expansion will approximate $1.25 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.
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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 19934,
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
