UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-69874
GENERAL MEDICAL CORPORATION
VIRGINIA 94-2640465
(State of incorporation) (I.R.S. Employer
Identification No.)
8741 Landmark Road (804) 264-7500
Richmond, Virginia 23228 (Telephone Number)
(Address of principal
executive offices)
Indicate by check (x) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of August 14, 1996, 1,000 shares of the registrant's Common Stock were
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,275 $ 3,637
Trade accounts receivable, net
of reserves of $5,917 and $5,089,
respectively 197,729 202,528
Inventories - merchandise 170,944 163,558
Prepaid expenses 1,631 1,453
Total current assets 375,579 371,176
Property, plant and equipment 44,590 41,152
Accumulated depreciation (14,077) (12,136)
Net property, plant and equipment 30,513 29,016
Excess of purchase price over net
assets acquired, net 252,044 255,407
Other assets 18,619 20,201
TOTAL ASSETS $ 676,755 $ 675,800
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 163,698 $ 149,439
Accrued liabilities 21,699 26,169
Accrued compensation 11,789 8,435
Accrued consolidation costs 6,465 7,839
Current maturities of long-term debt 772 905
Total current liabilities 204,423 192,787
Senior credit agreement 193,089 207,812
Senior subordinated notes 105,000 105,000
Subordinated pay-in-kind debentures 66,744 62,939
Deferred taxes 692 596
Other long-term liabilities 683 1,022
Commitments and contingencies
Stockholder's equity:
Preferred stock, no par value-authorized
100,000 shares; none issued -- --
Common stock, $1 par value-authorized
30,000,000 shares; 1,000 shares issued 1 1
Additional paid-in capital 149,107 149,076
Predecessor basis in accounting (20,814) (20,814)
Retained deficit (22,170) (22,619)
Total stockholder's equity 106,124 105,644
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $ 676,755 $ 675,800
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
Six Months ended June 30,
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Revenues:
Sales $ 842,131 $ 720,942
Other income 847 550
842,978 721,492
Cost of sales 689,501 585,786
Selling, general and
administrative expenses 125,684 113,857
Consolidation costs 1,080 932
Amortization of excess of purchase price
over net assets acquired and other
intangibles 3,792 5,047
Interest expense 19,735 18,415
Income(loss) before income taxes 3,186 (2,545)
Income tax provision 2,435 953
Net income(loss) $ 751 $ (3,498)
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
Three Months ended June 30,
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Revenues:
Sales $ 423,908 $ 364,164
Other income 168 257
424,076 364,421
Cost of sales 347,084 297,451
Selling, general and
administrative expenses 62,187 57,896
Consolidation costs 679 62
Amortization of excess of purchase price
over net assets acquired and other
intangibles 1,891 2,128
Interest expense 9,750 9,126
Income(loss) before income taxes 2,485 (2,242)
Income tax provision 1,506 97
Net income(loss) $ 979 $ (2,339)
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
Six Months ended June 30,
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ 751 $ (3,498)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,398 2,057
Amortization of deferred interest 1,552 1,445
Amortization of deferred debenture interest 3,989 3,547
Amortization of excess of purchase
price over net assets acquired
and other intangibles 3,792 5,047
Deferred income taxes 96 (1,015)
Loss on sale of assets 20 43
Changes in assets and liabilities:
Accounts receivable 4,838 (3,496)
Inventories (7,573) (13,085)
Accounts payable and accrued expenses 9,941 12,924
Income taxes payable 3,291 (2,436)
Accrued interest (968) (1,577)
Other assets and liabilities, net (1,006) 226
Net cash provided by operating activities 21,121 182
Cash flows from investing activities:
Issuance of notes receivable (17) (25)
Proceeds from sale of assets 434 443
Proceeds from sale of manufacturing
assets -- 3,071
Purchase of business, net of cash
acquired -- (26,132)
Capital expenditures (4,130) (2,378)
Net cash used in investing activities (3,713) (25,021)
Cash flows from financing activities:
Proceeds from borrowings under
credit facilities 872,500 792,772
Payments on borrowings under
credit facilities (887,223) (768,635)
Payment of acquisition and
financing fees (453) (1,150)
Other long term debt (324) (517)
Payment of dividend (301) (1,816)
Contribution to capital 31 90
Net cash provided by(used in) financing activities (15,770) 20,744
Net increase(decrease) in cash and
cash equivalents 1,638 (4,095)
Cash and cash equivalents,
beginning of period 3,637 5,772
Cash and cash equivalents,
end of period $ 5,275 $ 1,677
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
GENERAL MEDICAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Interim Financial Statements for the Periods
Ended June 30, 1996 and 1995 (Unaudited)
(Dollars in thousands, except as otherwise noted)
1. FINANCIAL PERIODS
The fiscal quarter ends on the Sunday nearest June 30. The periods ending
June 30, 1996 and 1995 ended on June 30, 1996 and July 2, 1995, respectively.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements include
the accounts of General Medical Corporation (the "Company") for the six and
three month periods ended June 30, 1996 and 1995.
In the opinion of management, the unaudited condensed consolidated interim
financial statements of the Company have been prepared on the basis of
generally accepted accounting principles and contain all normal and recurring
accruals necessary to present fairly the financial position as of June 30,
1996 and December 31, 1995, and the results of operations for the six and
three months ended June 30, 1996 and 1995, and cash flows for the six month
periods ended June 30, 1996 and 1995.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, including notes thereto, of the Company for the year ended
December 31, 1995 contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
3. CONSOLIDATION CHARGES
During 1995, the Company entered into an aggressive plan to redeploy its
distribution resources in order to better service its customers and facilitate
the integration of the acquired companies. The consolidation plan includes
charges for employee termination and relocation, facility shutdown costs and
losses expected from the sale and abandonment of property. The Company
recorded a one time charge of $8.6 million in September 1995 consisting of
severance ($3.7 million), net facility lease cancellation costs ($4.5 million)
and a loss from a plan to dispose of long-lived assets ($0.4 million) related
to facility shutdowns reasonably expected to occur within one year. The
remaining estimated charges of approximately $3.7 million will be recorded as
incurred to reflect the cost of the physical relocation of inventory and
employees related to this plan. For the six and three months ended June 30,
1996, total plan charges amounted to $1.1 million and $0.7 million,
respectively.
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash Paid for Interest and Income Taxes:
Interest $ 15,170 $ 15,021
Income Taxes $ 1,066 $ 4,405
Details of Business Acquired:
Fair value of assets acquired $ 35,781
Cash paid at acquisition, net of
cash acquired (26,132)
Liabilities assumed $ 9,649
Interest accretion:
Subordinated Pay-In-Kind Debentures $ 3,805 $ 3,383
Capital contribution $ 5,000
</TABLE>
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended
June 30, 1995
Revenues increased $121.5 million (16.8%) to $843.0 million for 1996 as
compared to $721.5 million for 1995. On a per day basis, revenues increased
$1.0 million per day to $6.6 million per day for 1996 as compared to $5.6
million per day for 1995. Gross profit increased by $17.8 million (13.1%) to
$153.5 million for 1996 as compared to $135.7 million for 1995.
The increase in sales and gross profit is primarily the result of
internally generated sales and gross profit increases in all markets as a
result of deepening penetration in existing accounts, the addition of new
customers and the introduction of products new to the distribution supply
chain.
As a percentage of sales, gross profit decreased to 18.1% in 1996 as
compared to 18.8% in 1995. This is primarily a result of strong growth in
sales to the lower margin acute care business which grew 23.3% over first and
second quarter 1995 while the gross profit percentage declined 1.1%. In
comparison, the alternate care markets grew 8.1% with the gross profit margin
increasing 1.4%. During the first quarter of 1996, the Company started to
take steps to counteract the decline in the acute care gross profit percentage
by increasing pricing levels where necessary and adjusting pricing to reflect
services provided. The Company is continuing to evaluate opportunities for
gross profit percentage growth, however, it is expected that strong growth in
the lower margin acute care market will continue to outpace the other markets
for the remainder of 1996. This may keep pressure on the Company's overall
gross margin, however costs to deliver to this market are significantly lower
than primary and extended care, therefore the impact should not negatively
affect profitability.
Selling, general and administrative expenses increased $11.8 million
(10.4%) to $125.7 million for 1996 as compared to $113.9 million for 1995.
However, as a percentage of revenues, selling, general and administrative
expenses decreased to 14.9% for 1996 as compared to 15.8% for 1995. This
percentage decrease is attributable to the consolidation plan's reduction in
staffing and distribution facilities as well as the Company's sales growth in
the acute care market where the cost to deliver product is generally lower as
a percentage of sales.
Amortization of intangibles decreased $1.3 million in 1996 as compared to
1995. A $1.6 million decrease was due to several short lived intangibles
reaching full amortization in addition to the write-off of certain trademarks
associated with the manufacturing business that was sold in 1995. This was
partially offset by a $0.3 million increase due to the amortization of
additional intangibles associated with the acquisitions completed in 1995.
Interest expense increased $1.3 million in 1996 as compared to 1995. This
increase is the result of an increase in average borrowings during 1996 to
support the Company's sales growth.
The effective tax rate changed from an expense of 37.4% to an expense of
76.4%. This change is primarily the result of income in 1996 compared to a
loss in 1995, and the effect of nondeductible goodwill amortization as a
percentage of income.
Three Months Ended June 30, 1996 Compared to Three Months Ended
June 30, 1995
Revenues increased $59.7 million (16.4%) to $424.1 million for the three
months ended June 30, 1996 as compared to $364.4 million for the three months
ended June 30, 1995. On a per day basis, revenues increased $0.9 million per
day to $6.6 million per day for 1996 as compared to $5.7 million per day for
1995. Gross profit increased by $10.0 million (15.0%) to $77.0 million for
the three months ended June 30, 1996 as compared to $67.0 million for the
three months ended June 30, 1995.
The increase in sales and gross profit is primarily the result of
internally generated sales and gross profit increases in all markets as a
result of deepening penetration in existing accounts, the addition of new
customers and the introduction of products new to the distribution supply
chain.
As a percentage of sales, gross profit decreased to 18.1% in 1996 as
compared to 18.3% in 1995. This is primarily a result of strong growth in
sales to the lower margin acute care business which grew 23.5% over second
quarter 1995 while the gross profit percentage declined 0.5%. In comparison,
the alternate care markets grew 6.9% with gross profit margin increasing 1.6%.
During the first quarter of 1996, the Company started to take steps to
counteract the decline in the acute care gross profit percentage by increasing
pricing levels where necessary and adjusting pricing to reflect services
provided. The Company is continuing to evaluate opportunities for gross
profit percentage growth, however, it is expected that strong growth in the
lower margin acute care market will continue to outpace the other markets for
the remainder of 1996. This may keep pressure on the Company's overall gross
margin, however costs to deliver to this market are significantly lower than
primary and extended care, therefore the impact should not negatively affect
profitability.
Selling, general and administrative expenses increased $4.3 million (7.4%)
to $62.2 million for the three months ended June 30, 1996 as compared to $57.9
million for the three months ended June 30, 1995. However, as a percentage of
revenues, selling, general and administrative expenses decreased to 14.7% for
1996 as compared to 15.9% for 1995. This percentage decrease is attributable
to the consolidation plan's reduction in staffing and distribution facilities
as well as the Company's sales growth in the acute care market where the cost
to deliver product is generally lower as a percentage of sales.
Amortization of intangibles decreased $0.2 million in the three months
ended June 30, 1996 as compared to the three months ended June 30, 1995. A
$0.3 million decrease was due to several short lived intangibles reaching full
amortization in addition to the write-off of certain trademarks associated
with the manufacturing business that was sold in 1995. This was partially
offset by a $0.1 million increase due to the amortization of additional
intangibles associated with the acquisitions completed in 1995.
Interest expense increased $0.6 million in the three months ended June 30,
1996 as compared to the three months ended June 30, 1995. This increase is
the result of an increase in average borrowings during the quarter to support
the Company's sales growth.
The effective tax rate changed from an expense of 4.3% to an expense of
60.6%. This change is primarily the result of income in 1996 compared to a
loss in 1995, and the effect of nondeductible goodwill amortization as a
percentage of income.
Liquidity and Capital Resources
At June 30, 1996, the outstanding amount of the Company's indebtedness
(other than trade payables) was $366.1 million, including approximately $193.1
million of secured debt.
The Company's primary source of liquidity is cash flow generated from
operations and funds available to it under the Credit Agreement. For the six
months ended June 30, 1996, continuing operating activities provided net cash
of $21.1 million as compared to $0.2 million for the six months ended June 30,
1995. This increase is mainly the result of (i) improved profitability, (ii)
more rapid turnaround in accounts receivable coupled with increased sales and
(iii) improved management of accounts payable in relation to inventory. The
increase in cash provided by operations has funded capital expenditures
related to the consolidation of the Company's distribution resources made
during 1996 and reduced debt outstanding under the senior credit agreement.
Capital expenditures of approximately $8.9 million are expected to continue
until the consolidation plan is completed. As of August 13, 1996, the Company
had borrowings of approximately $187.7 million outstanding under the Credit
Agreement and had unused availability under the Credit Agreement of
approximately $45.1 million. Future availability under the Credit Agreement
will be determined by prevailing levels of the Company's eligible accounts
receivable and inventory. The Credit Agreement terminates in August 1998 and,
accordingly, the Company expects that it will be necessary to refinance, or
obtain an extension to the Credit Agreement at that time.
The Company's most significant use of working capital is for accounts
receivable and inventories, which represented 47% and 41% of total tangible
assets at June 30, 1996, respectively. Due to the magnitude of its accounts
receivable and inventories, the Company's management places significant
emphasis on managing trade receivables including the related credit and
collection processes and inventory levels and turnover.
Days sales of accounts receivable outstanding and days sales of inventory,
for the continuing operations only, were as follows:
June 30 Receivable Days Inventory Days
1996 42.1 45.0
1995 42.8 43.5
The increase in inventory days is due to an initiative to increase service
to our customers and meet the diverse product needs of new customers. It is
anticipated that in the long term this increase will be reversed as new
customer demand matures and the consolidation of distribution centers is
completed.
The foregoing table does not reflect inventory purchases by the Company in
contemplation of price increases or otherwise to take advantage of available
price discounts. Typically, these purchases involve comparable increases in
accounts payable.
The Company continually monitors conditions that may affect the carrying
value of its tangible and intangible long lived assets, including goodwill.
When conditions indicate potential impairment of such assets, the Company
reevaluates projected future earnings associated with these assets. When it
is determined that projected earnings are less than the carrying amount of the
asset, the impaired asset is written down to net realizable value. The
Company is in the process of implementing strategies to increase profitability
at certain of its acquired distribution centers which are currently performing
below expectations. The results of the actions will continue to be closely
monitored to determine if the related goodwill might be impaired.
<PAGE>
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL MEDICAL CORPORATION
By /s/ Donald B. Garber
Donald B. Garber
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Date: August 14, 1996
<PAGE>
Exhibit Index
Exhibit # Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000880123
<NAME> GENERAL MEDICAL CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5275
<SECURITIES> 0
<RECEIVABLES> 197729
<ALLOWANCES> 5917
<INVENTORY> 170944
<CURRENT-ASSETS> 375579
<PP&E> 44590
<DEPRECIATION> 14077
<TOTAL-ASSETS> 676755
<CURRENT-LIABILITIES> 204423
<BONDS> 171744
0
0
<COMMON> 1
<OTHER-SE> 106123
<TOTAL-LIABILITY-AND-EQUITY> 676755
<SALES> 842131
<TOTAL-REVENUES> 842978
<CGS> 689501
<TOTAL-COSTS> 817666
<OTHER-EXPENSES> 1080
<LOSS-PROVISION> 1311
<INTEREST-EXPENSE> 19735
<INCOME-PRETAX> 3186
<INCOME-TAX> 2435
<INCOME-CONTINUING> 751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
