-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B+ACl8tHcDEcBtQiZrXCe67xpkC9QKH+KQfNzZVIWzEycheKT8vpfFebimAt+On3 JREC/SWWa2182OPXGWvYLA== 0000950123-97-004298.txt : 19970515 0000950123-97-004298.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950123-97-004298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAHAM FIELD HEALTH PRODUCTS INC CENTRAL INDEX KEY: 0000709136 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 112578230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08801 FILM NUMBER: 97604691 BUSINESS ADDRESS: STREET 1: 400 RABRO DR E CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5165825800 MAIL ADDRESS: STREET 1: 400 RABNO DRIVE EAST CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: PATIENT TECHNOLOGY INC DATE OF NAME CHANGE: 19880811 10-Q 1 GRAHAM-FIELD HEALTH PRODUCTS, INC. 1 FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 (MARK ONE) [ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1997 or [ ] 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 1-8801 ------ GRAHAM-FIELD HEALTH PRODUCTS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2578230 - ----------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Rabro Drive East, Hauppauge, New York 11788 - ----------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (516) 582-5900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ___ ___ Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes___ No___ Applicable Only to Corporate Issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.025 Par Value--- 19,102,727 shares as of May 12, 1997 2 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES ---------------------------------------------------
I N D E X --------- Part I. Financial Information: Page ---- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - March 31, 1997 (Unaudited) and December 31, 1996 (Audited) 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (Unaudited) 5-6 Notes to Condensed Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II. Other Information: Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16
- 2 - 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES ---------------------------------------------------
March 31, December 31, ASSETS 1997 1996 ------ --------- ------------ (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents $ 2,141,000 $ 1,552,000 Accounts receivable - net 50,922,000 43,651,000 Inventories 49,625,000 45,810,000 Other current assets 3,649,000 3,001,000 Recoverable and prepaid income taxes 256,000 256,000 ------------- ------------- TOTAL CURRENT ASSETS 106,593,000 94,270,000 PROPERTY, PLANT AND EQUIPMENT - net 11,555,000 10,771,000 EXCESS OF COST OVER NET ASSETS ACQUIRED - net 93,299,000 91,412,000 OTHER ASSETS 4,950,000 5,112,000 DEFERRED TAX ASSET 678,000 911,000 ------------- ------------- TOTAL ASSETS $ 217,075,000 $ 202,476,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Note payable to bank $ 33,469,000 $ 13,985,000 Current maturities of long-term debt 2,569,000 2,016,000 Accounts payable 17,181,000 20,781,000 Acceptances payable 14,800,000 19,800,000 Accrued expenses 22,226,000 25,283,000 ------------- ------------- TOTAL CURRENT LIABILITIES 90,245,000 81,865,000 LONG-TERM DEBT 6,550,000 6,057,000 OTHER LONG-TERM LIABILITIES 1,522,000 1,752,000 ------------- ------------- TOTAL LIABILITIES 98,317,000 89,674,000 STOCKHOLDERS' EQUITY: Series A preferred stock -- -- Series B preferred stock 28,200,000 28,200,000 Series C preferred stock 3,400,000 3,400,000 Common stock 475,000 467,000 Additional paid-in capital 105,421,000 101,569,000 (Deficit) (18,583,000) (20,667,000) Cumulative translation adjustment -- (12,000) ------------- ------------- Subtotal 118,913,000 112,957,000 Notes Receivable from sale of shares (155,000) (155,000) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 118,758,000 112,802,000 COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND STOCKHOLDERS' ------------- ------------- EQUITY $ 217,075,000 $ 202,476,000 ============= =============
See notes to condensed consolidated financial statements. - 3 - 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES --------------------------------------------------- (Unaudited)
Three Months Ended March 31 ------------------ 1997 1996 ----------- ----------- REVENUES: Operations $51,204,000 $26,929,000 Interest and other income 128,000 419,000 ----------- ----------- 51,332,000 27,348,000 COST AND EXPENSES: Cost of revenues 34,657,000 18,502,000 Selling, general and administrative 12,149,000 7,329,000 Interest expense 972,000 589,000 ----------- ----------- 47,778,000 26,420,000 ----------- ----------- INCOME BEFORE INCOME TAXES 3,554,000 928,000 INCOME TAXES 1,470,000 418,000 ----------- ----------- NET INCOME $ 2,084,000 $ 510,000 =========== =========== PER SHARE DATA: NET INCOME PER SHARE $ .09 $ .04 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 24,181,000 14,182,000 =========== ===========
See notes to condensed consolidated financial statements. - 4 - 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES --------------------------------------------------- (Unaudited)
Three Months Ended March 31 ------------------ 1997 1996 ------------ ----------- OPERATING ACTIVITIES Net income $ 2,084,000 $ 510,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,459,000 794,000 Provision for losses on accounts receivable 231,000 132,000 Deferred income taxes 833,000 418,000 Gain on sale of product line -- (360,000) Changes in operating assets and liabilities: Accounts receivable (5,212,000) (1,185,000) Inventories, other current assets and recoverable and prepaid income taxes (2,705,000) (1,217,000) Accounts payable and accrued expenses (8,976,000) 1,383,000 ------------ ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (12,286,000) 475,000 ------------ ----------- INVESTING ACTIVITIES Purchases of property, plant and equipment (884,000) (97,000) Notes receivable from officers -- (94,000) Acquisitions, net of cash required (616,000) -- Initial payment in connection with acquisition -- (500,000) Proceeds from sale of property, plant & equipment 24,000 -- Proceeds from sale of product line -- 500,000 Net decrease (increase) in other assets 14,000 (78,000) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES $ (1,462,000) $ (269,000) ------------ -----------
See notes to condensed consolidated financial statements. - 5 - 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES --------------------------------------------------- (Unaudited)
Three Months Ended March 31 ------------------ 1997 1996 ------------ ----------- FINANCING ACTIVITIES Proceeds from notes payable and long-term debt $ 61,921,000 $ 500,000 Principal payments on notes payable and long-term debt (42,787,000) (3,632,000) Proceeds from acceptances 3,500,000 3,000,000 Payments on acceptances (8,500,000) -- Proceeds on exercise of stock options 203,000 76,000 ------------ ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,337,000 (56,000) ------------ ----------- INCREASE IN CASH AND CASH EQUIVALENTS 589,000 150,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,552,000 214,000 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,141,000 $ 364,000 ============ ===========
See notes to condensed consolidated financial statements. - 6 - 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) 1. GENERAL In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of March 31, 1997 (unaudited), the results of operations for the three months ended March 31, 1997 and 1996 (unaudited) and the statements of cash flows for the three months ended March 31, 1997 and 1996 (unaudited). Additionally, it should be noted that the accompanying financial statements and notes thereto do not purport to be complete disclosures in conformity with generally accepted accounting principles. While the Company believes that the disclosures presented are adequate to make the information contained herein not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Inventories at March 31, 1997 have been valued at average cost based on perpetual records or the gross profit method. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share." The new standard applies to entities with publicly held common stock, and simplifies the current standards for computing earnings per share ("EPS") and replaces the presentation of primary EPS with a presentation of basic EPS. The standard requires a dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the diluted EPS computation. Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by giving effect to all dilutive common shares outstanding during the period. The standard is effective for financial statements issued for periods after December 15, 1997, and requires restatement of all prior EPS data presented. The Company has not yet determined the impact of this standard on the consolidated financial statements. The results of operations for the three months ended March 31, 1997 and 1996 are not necessarily indicative of results for the full year. Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. 2. NET INCOME PER SHARE Net income per common share for 1997 and 1996 was computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during the period. For the 1997 period, net income per common share was calculated assuming the conversion of both the Series B Cumulative Convertible Preferred Stock and the Series C Cumulative Convertible Preferred Stock into an aggregate of 4,435,484 common shares and the elimination of a dividend of 1.5% on both series of preferred stock in the aggregate amount of $266,250. - 7 - 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES --------------------------------------------------- (Unaudited) 3. INVENTORIES Inventories consist of the following:
March 31 December 31 1997 1996 ----------- ----------- Raw materials $10,983,000 $ 8,423,000 Work-in-process 3,925,000 4,430,000 Finished goods 34,717,000 32,957,000 ------------ ----------- $49,625,000 $45,810,000 =========== ===========
4. INCOME TAXES As of March 31, 1997, the Company has recorded net deferred tax assets of $678,000. These tax assets are primarily comprised of net operating loss carryforwards (including those acquired in connection with the Everest & Jennings acquisition), which expire at various dates from 2008 to 2010, and investment, research & development, jobs tax and AMT credits. For financial reporting purposes, due to prior year losses of Everest & Jennings and SRLY limitations, a full valuation allowance has been recognized in connection with the acquisition of Everest & Jennings to offset the net deferred tax assets related to the acquired tax attributes. If realized, the tax benefit for such items will be recorded as a reduction to the excess cost over net assets acquired. In addition, the Company provided in the fourth quarter of 1996, a valuation allowance of $400,000 relating to tax credits as such credits are available only through the expiration dates (primarily 1999) and only after the utilization of net operating loss carryforwards and an additional valuation allowance of $600,000 against a portion of its remaining net deferred tax asset due to the acquisition of Everest & Jennings. The amount of the realizable remaining deferred tax asset could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 5. OTHER MATTERS On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary of the Company, acquired substantially all of the assets and certain liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal to Cdn. $2.9 million (Canadian Dollars) (approximately $2.15 million). The purchase price was paid by the issuance of 187,733 shares of the common stock of the Company valued at $11.437 per share, of which 28,095 shares were delivered into escrow. The purchase price is subject to adjustment if the final determination of the closing date net book value of the assets acquired is equal to or less than Cdn. $450,000 (Canadian Dollars) (approximately $333,000). All of the escrowed shares will be held in escrow until the earlier to occur (the "Initial Release Date") of June 28, 1997, or the final resolution of the purchase price. On the Initial Release Date, a portion of the escrowed shares will be released in an amount equal to the difference between (i) 28,095 shares and (ii) the sum of the number of (x) any escrowed shares subject to any indemnification claims, (y) any escrowed shares used to satisfy any adjustment to the purchase price, and (z) 18,729 shares. The balance of the escrowed shares will be released on December 31, 1997, subject to any claims for indemnification. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $1.9 million. - 8 - 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and other rehabilitation products, for a purchase price of $1,510,000, representing the net book value of Kuschall. The purchase price was paid by the issuance of 116,154 shares of the common stock of the Company valued at $13.00 per share, of which 23,230 shares were delivered into escrow. The escrow shares will be released on March 7, 1999, subject to any purchase price adjustments in favor of the Company and claims for indemnification. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. On November 27, 1996, the Company acquired Everest & Jennings, pursuant to the terms and provisions of the Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996 and amended as of October 1, 1996 (the "Merger Agreement"), by and among the Company, Everest & Jennings, Everest & Jennings Acquisition Corp., a wholly-owned subsidiary of the Company and BIL (Far East Holdings) Limited ("BIL"), a Hong Kong corporation and the majority stockholder of Everest & Jennings. The acquisition of Everest & Jennings has been accounted for under the purchase method of accounting and, accordingly, the operating results of Everest & Jennings have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the estimated fair market value of the net assets acquired was approximately $62.2 million. On September 4, 1996, the Company acquired substantially all of the assets of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of medical products in Puerto Rico, for a purchase price consisting of $1,703,829 in cash, and the issuance of 32,787 shares of common stock of the Company, valued at $7.625 per share representing the closing market price of the common stock of the Company on the last trading day immediately prior to the closing. In addition, the Company assumed certain liabilities of V.C. Medical in the amount of $296,721. Under the terms of the transaction, in the event the pre-tax income of the acquired business equals or exceeds $1,000,000 during the twelve (12) months following the closing date, an additional $500,000 will be paid to V.C. Medical. The shares were delivered into escrow, and will be held in escrow until February 4, 1998, subject to any claims for indemnification in favor of the Company. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $988,000. The following summary presents unaudited pro-forma consolidated results of operations for the three months ended March 31, 1997 and 1996 as if the acquisitions described above occurred at the beginning of each of 1997 and 1996. This information gives effect to the adjustment of interest expense, income tax provisions, and to the assumed amortization of fair value adjustments, including the excess of cost over net assets acquired. The 1996 pro-forma information does not include the write-off of certain purchased in-process research and development costs of $12,800,000 and merger related expenses of $3,000,000 associated with the acquisition of Everest & Jennings on November 27, 1996 or the extraordinary item relating to the early retirement of indebtedness under the John Hancock Guaranteed Senior Notes. The pro-forma net loss per common share for 1996 has been calculated by assuming the payment of a dividend of 1.5% on both the Series B Preferred Stock and Series C Preferred Stock in the aggregate amount of $266,250 for the three months ended March 31, 1996. Conversion of the preferred stock was not assumed since the result would have been antidilutive. - 9 - 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES --------------------------------------------------- (Unaudited)
Pro-forma ----------- 1997 1996 ----------- ------------ Net Revenues $52,616,000 $ 47,174,000 =========== ============ Income (Loss) Before Income Taxes $ 3,510,000 $ (446,000) Income Taxes 1,450,000 30,000 ----------- ------------ Net Income (Loss) $ 2,060,000 $ (476,000) =========== ============ Net Income (Loss) per Share $ .09 $ (.04) =========== ============ Weighted Average Number of Common and Dilutive Common Equivalent Shares Outstanding 24,384,000 18,888,000 =========== ============
6. LEGAL PROCEEDINGS On April 28, 1997, the Company settled the civil product liability lawsuit (Chris Trew et al. vs. Smith and Davis Manufacturing Company, Inc., No. SF95-354) against Smith & Davis Manufacturing Company, a wholly-owned subsidiary of Everest & Jennings, and the related case filed in the Circuit Court of the County of St. Louis, Missouri (Chris Trew, et. al. v. Everest & Jennings, et al., Cause No. 96CC-000456, Division 39). The settlement was funded by Everest & Jennings' insurance carriers and BIL under the indemnification terms and provisions contained in the Amended and Restated Stockholder Agreement dated as of September 3, 1996, as amended on September 19, 1996, by and among BIL, the Company and Irwin Selinger. The Company and its subsidiaries are parties to other lawsuits and other proceedings arising out of the conduct of its ordinary course of business, including those relating to product liability and the sale and distribution of its products. While the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the consolidated financial position or results of operations of the Company. - 10 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statement This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements relate to (i) the expansion of the Company's market share, (ii) the Company's growth into new markets, (iii) the development of new products and product lines to appeal to the needs of the Company's customers, (iv) the opening of new distribution and warehouse facilities, including the expansion of the Graham-Field Express program, (v) obtaining regulatory and governmental approvals, (vi) the upgrading of the Company's technological resources and systems and (vii) the retention of the Company's earnings for use in the operation and expansion of the Company's business. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation of healthcare practitioners, the impact of healthcare reform, opportunities for acquisitions and the Company's ability to effectively integrate acquired companies, the termination of the Company's exclusive homecare bed supply agreement, the termination of the Company's exclusive wheelchair supply agreement, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company's business, the failure of the Company to successfully compete with the Company's competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, adverse litigation results, the acceptance and quality of new software and hardware products which will enable the Company to expand its business, the acceptance and ability to manage the Company's operations in foreign markets, possible disruptions in the Company's computer systems or distribution technology systems, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's filings with the Securities and Exchange Commission, which include this report on Form 10-Q, the Company's annual report on Form 10-K for the year ended December 31, 1996, and the section entitled "Risk Factors" in the Company's Registration Statement on Form S-4 dated as of October 18, 1996. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. - 11 - 12 Operating Revenues Operating revenues were $51,204,000 for the three months ended March 31, 1997, representing an increase of 90% from the same period in the prior year. Revenues for the first quarter of 1997 included the Company's first full quarter of results for Everest & Jennings of approximately $11.8 million. Operating revenues, without Everest & Jennings, increased in excess of 46% from the same period in the prior year. The increase in operating revenues, excluding the revenues attributable to Everest & Jennings, was primarily attributable to the continued roll-out of the Company's innovative "Graham-Field Express" program, the expansion of the Company's Consolidation Advantage Program ("CAP"), the introduction of new product lines and the Company's acquisition of the Motion 2000 Companies on February 28, 1997 and Kuschall of America, Inc. on March 7, 1997. In March 1996, Graham-Field Express was introduced to offer "same-day" and "next-day" service to home healthcare dealers of certain strategic home healthcare products, including Temco patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements and other freight and time sensitive products. Revenues attributable to Graham-Field Express were approximately $7,122,000 and $733,000 for the three months ended March 31, 1997 and 1996, respectively. On September 4, 1996, the Company acquired V.C. Medical Distributors, Inc. ("V.C. Medical"), a regional home healthcare wholesaler located in Puerto Rico. V.C. Medical currently operates as Graham-Field Express (Puerto Rico). Revenues attributable to Graham-Field Express (Puerto Rico) were approximately $1,717,000 for the three months ended March 31, 1997. On January 29, 1997, the Company acquired Bobeck Medical Distributors ("Bobeck Medical"), a wholesale distributor of medical products. Bobeck Medical currently operates as Graham-Field Express (Dallas). Revenue attributable to Graham-Field Express (Dallas) was approximately $471,000 for the three months ended March 31, 1997. The Company plans to open an additional three (3) to four (4) Graham-Field Express sites in 1997 and eight (8) in 1998. A new Graham-Field Express location opened in Baltimore, Maryland in April 1997. By late 1999, the Company plans to have a total of approximately twenty-five (25) Graham-Field Express locations serving all of the major U.S. markets. On November 27, 1996, the Company completed its acquisition of Everest & Jennings. The Company believes that the combination of Everest & Jennings' manufacturing operations with the Company's cost-effective delivery systems and advanced technology systems will increase the Company's presence in the home healthcare market with a greater level of service and efficiency, and a broader portfolio of products. The coordination of the manufacturing and distribution of the wheelchair and homecare bed product lines, which represent the leading product lines in the home healthcare market, will enhance the Company's position as the leading "one-stop-shop" distributor in the medical products industry. The Everest & Jennings name, a symbol of quality for more than fifty years, has enabled the Company to introduce its Temco home healthcare product line and other proprietary product lines into the rehabilitation marketplace, a virtually untapped marketplace for the Company in the past. Interest and Other Income Interest and other income for the three months ended March 31, 1997 was $128,000, as compared to $411,000 for the same period last year. The decrease is primarily attributable to the gain of $360,000 recorded in 1996 from the sale of the Company's Gentle Expressions(R) breast pump product line. - 12 - 13 Cost of Revenues Cost of revenues as a percentage of operating revenues decreased for the three months ended March 31, 1997, to 67.7% as compared to 68.7% for the same period last year. The decrease is primarily attributable to the improved operational efficiencies associated with the manufacture and distribution of the Company's product lines and improved purchasing activities. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of operating revenues for the three months ended March 31, 1997 was 24%, as compared to 27% in the same period last year. The decrease is attributable to a number of factors, including the expansion of the Graham-Field Express program in 1997, which contributes revenue with a lower percentage of selling, general and administrative expenses, as well as continued efficiencies generated by the Company's distribution network. Interest Expense Interest expense for the three months ended March 31, 1997 increased to $972,000 as compared to $589,000 for the same period last year. The increase is primarily due to increased borrowings as compared to the same period last year. The increased borrowings are attributable to the Company's continued expansion, including the acquisition of Everest & Jennings and the "roll-out" of the Graham-Field Express program. Net Income Income before income taxes for the three months ended March 31, 1997 was $3,554,000, as compared to $928,000 for the same period last year, an increase of $2,626,000, or 283%. The increase is primarily due to the increase in revenues, the increase in the gross profit margin, and the decrease in selling, general and administrative expenses as a percentage of operating revenue. Net income for the three months ended March 31, 1997 was $2,084,000, as compared to $510,000 for the same period last year, an increase of 309%. The Company recorded income tax expense of $1,470,000 for the three months ended March 31, 1997, as compared to $418,000 for the same period last year. As of March 31, 1997, the Company had a deferred tax asset of $678,000, primarily comprised of net operating loss carryforwards (including those acquired in connection with an acquisition) and investment, research and development, jobs tax and alternative minimum tax credits. The Company has provided a valuation allowance of approximately $400,000 in the fourth quarter of 1996 because certain tax credits are available only through their expiration dates, and only after the utilization of available net operating loss carryforwards. In addition, a full valuation allowance has been recognized to offset the deferred assets related to the acquired tax attributes. If realized, the tax benefit for those items will be recorded as a reduction of goodwill. The Company also provided an additional valuation allowance of $600,000 in the fourth quarter of 1996 as a charge to income tax expense against a portion of the remaining net deferred tax asset due to the recent acquisition of Everest & Jennings. The balance of the deferred tax asset will continue to be evaluated by management as to its realizability on a quarterly basis. The amount of the deferred tax asset considered realizable could be reduced in the near future if estimates of future taxable income during the carryforward period are reduced. Uncertainties which may impact the future realizability but are not expected to occur, include a decline in sales and margins resulting from a possible loss of market share and increased competition. The Company's business has not been materially affected by inflation. - 13 - 14 Liquidity and Capital Resources The Company had working capital of $16,348,000 at March 31, 1997, as compared to $12,405,000 at December 31, 1996. The increase in working capital is primarily attributable to the cash provided by the Company's net income of $2,084,000, which reflects $1,459,000 of depreciation and amortization expense and the net current assets acquired in connection with the Company's acquisitions during the three months ended March 31, 1997. Cash used in operations for the three months ended March 31, 1997 was $12,286,000, as compared to cash provided by operations of $475,000 in the same period last year. The principal reasons for the decrease in cash provided by operations were the Company's net income offset by increases in accounts receivable and inventory levels related to increased revenue levels and the reduction in accounts payable and accrued expenses. The Company anticipates that its cash flow from operations, together with its current cash balance, and the proceeds from its credit facility will be sufficient to meet its working capital requirements. Financing On December 10, 1996, the Company entered into a Credit Facility (as defined below) for up to $55 million of borrowings, including letters of credit and banker's acceptances, arranged by IBJ Schroder Bank & Trust Company ("Credit Facility"), as agent. The proceeds from the Credit Facility were used to (i) refinance certain existing indebtedness of the Company, including the indebtedness (a) under the John Hancock Guaranteed Senior Notes and (b) to The Chase Manhattan Bank and (ii) to provide for working capital needs of the Company. Under the terms of the Credit Facility, borrowings bear interest, at the option of the Company at the bank's prime rate (8.25% at March 31, 1997) or 2.25% above LIBOR, or 1.5% above the bank's bankers' acceptance rate. The Credit Facility is secured by the Company's receivables, inventory and proceeds thereof. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the incurrence of additional debt, liens, transactions with affiliates, consolidations, mergers and acquisitions, sales of assets, dividends and other distributions (other than the payment of dividends to BIL (Far East Holdings) Limited ("BIL")) in accordance with the terms of the Series B and Series C Cumulative Convertible Preferred Stock. In addition, the Credit Facility contains certain financial covenants, which become effective as of the end of the fiscal quarter ending June 30, 1997, including a cash flow coverage and leverage ratio, and an earnings before interest and taxes covenant. Under the terms of the Credit Facility, the Company is prohibited from declaring, paying or making any dividend or distribution on any shares of the common stock or preferred stock of the Company (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or apply any of its funds, property or assets to the purchase, redemption or other retirement of any common or preferred stock, or of any options to purchase or acquire any such shares of common or preferred stock of the Company. Notwithstanding the foregoing restrictions, the Company is permitted to pay cash dividends in any fiscal year in an amount not to exceed the greater of (i) the amount of dividends due BIL under the terms of the Series B and Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of the Company on a consolidated basis, provided that no event of default shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. - 14 - 15 On July 18, 1996, an affiliate of BIL provided the Company with a loan in the amount of $4,000,000, at an effective interest rate of 8.8%. The loan was used to fund the acquisition of V.C. Medical and for general corporate purposes. On December 10, 1996, the loan was converted into the BIL Note, which matures on April 1, 2001, with interest payable quarterly at an effective rate of 7.7% per year. On May 9, 1997, an affiliate of BIL loaned $5 million to the Company at an interest rate of 8.5% per annum. Under the terms of the loan arrangement, interest is payable quarterly with principal payable upon the earlier to occur of the Company's completion of any private or public offering of debt or equity securities or May 9, 1998. - 15 - 16 Part II. Other Information Item 1. Legal Proceedings On April 28, 1997, the Company settled the civil product liability lawsuit (Chris Trew et al. vs. Smith and Davis Manufacturing Company, Inc., No. SF95-354) against Smith & Davis Manufacturing Company, a wholly-owned subsidiary of Everest & Jennings, and the related case filed in the Circuit Court of the County of St. Louis, Missouri (Chris Trew, et. al. v. Everest & Jennings, et al., Cause No. 96CC-000456, Division 39). The settlement was funded by Everest & Jennings' insurance carriers and BIL under the indemnification terms and provisions contained in the Amended and Restated Stockholder Agreement dated as of September 3, 1996, as amended on September 19, 1996, by and among BIL, the Company and Irwin Selinger. The Company and its subsidiaries are parties to other lawsuits and other proceedings arising out of the conduct of its ordinary course of business, including those relating to product liability and the sale and distribution of its products. While the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the consolidated financial position or results of operations of the Company. Item 4. Submission of Matters to a vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K Exhibits: Amendment No. 1, dated as of May 1, 1997, to the Amended and Restated Stockholder Agreement, dated as of September 3, 1996, as amended on September 19, 1996, by among Graham-Field Health Products, Inc., BIL (Far East Holdings) Limited and Irwin Selinger. Reports on Form 8-K: Form 8-K filed on March 12, 1997 (Date of Event: February 28, 1997). Form 8-K filed on March 21, 1997 (Date of Event: March 7, 1997). - 16 - 17 S I G N A T U R E S 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. GRAHAM-FIELD HEALTH PRODUCTS, INC. (Registrant) Date: May 14, 1997 s/Irwin Selinger ---------------------------------------- Irwin Selinger Chairman of the Board and Chief Executive Officer Date: May 14, 1997 s/Gary M. Jacobs ---------------------------------------- Gary M. Jacobs Vice President - Finance Chief Financial and Accounting Officer - 17 - 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE NO. - ------- ----------- -------- Amendment No. 1, dated as of May 1, 1997, to the Amended and Restated Stockholder Agreement, dated as of September 3, 1996, as amended on September 19, 1996, by among Graham-Field Health Products, Inc., BIL (Far East Holdings) Limited and Irwin Selinger. EX-4 2 AMENDMENT NO. 1 TO STOCKHOLDER AGREEMENT 1 EXHIBIT Amendment No. 1, dated as of May 1, 1997, to the Amended and Restated Stockholder Agreement, dated as of September 3, 1996, as amended on September 19, 1996, by among Graham-Field Health Products, Inc., BIL (Far East Holdings) Limited and Irwin Selinger. 2 AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDER AGREEMENT AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDER AGREEMENT, dated as of May 1, 1997 (this "First Amendment"), by and among BIL (FAR EAST HOLDINGS) LIMITED, a Hong Kong corporation ("BIL"), GRAHAM-FIELD HEALTH PRODUCTS, INC., a Delaware corporation (the "Company"), and IRWIN SELINGER ("Mr. Selinger"). WHEREAS, BIL, the Company and Mr. Selinger are parties to an Amended and Restated Stockholder Agreement, dated as of September 3, 1996, as amended on September 19, 1996, pursuant to which BIL, the Company and Mr. Selinger established certain terms and conditions concerning the acquisition and disposition of securities of the Company after the Effective Time (as subsequently amended and restated, the "Stockholder Agreement"; capitalized terms not otherwise defined herein shall have the meanings set forth in the Stockholder Agreement); and WHEREAS, BIL, the Company and Mr. Selinger desire to amend the Stockholder Agreement in accordance with the terms hereof; NOW, THEREFORE, BIL, the Company and Mr. Selinger hereby agree as follows: SECTION 1. Amendment to the Stockholder Agreement. Section 4.01 of the Stockholder Agreement is, effective as of the date hereof, amended in its entirety to read as follows: "4.01 Limitation on Acquisition of Equity Securities. Following the Effective Time and until the Restricted Group beneficially owns Outstanding Voting Securities representing less than 5% of the Voting Power of all Outstanding Voting Securities, no member of the Restricted Group shall acquire beneficial ownership of any Equity Securities, except (i) the acquisition of Equity Securities pursuant to the Merger Agreement or upon the conversion of or as a dividend on the BIL Series B Preferred Shares or the BIL Series C Preferred Shares in accordance with their terms, (ii) by way of stock dividends, stock splits or other distributions or offerings made available to holders of Equity Securities generally, (iii) pursuant to plans established by the Company for members of the Board of Directors, (iv) pursuant to the exercise of BIL's right to acquire Equity Securities directly from the Company as provided for in Section 4.02 or (v) the purchase of Equity Securities in open-market or privately-negotiated transactions, provided that, immediately after giving effect to such purchase, the members of the Restricted Group would not own, in the aggregate, Outstanding Voting Securities representing more than 49% of the Voting Power of all Outstanding Voting Securities." 3 SECTION 2. Representations. (a) The Company represents to BIL that it has the requisite corporate power to enter into this First Amendment and to carry out its obligations hereunder, that the execution and delivery of this First Amendment has been duly authorized by all necessary corporate actions on the part of the Company and that this First Amendment has been duly executed and delivered on behalf of the Company. (b) BIL represents to the Company and Mr. Selinger that it has the requisite corporate power to enter into this First Amendment and to carry out its obligations hereunder, that the execution and delivery of this First Amendment has been duly authorized by all necessary corporate actions on the part of BIL and that this First Amendment has been duly executed and delivered on behalf of BIL. SECTION 3. Effect on the Stockholder Agreement. Except as specifically amended hereby, the original provisions of the Stockholder Agreement remain in full force and effect. SECTION 4. Counterparts. This First Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 5. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of New York applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 4 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written. BIL (FAR EAST HOLDINGS) LIMITED By: ___________________________________ Name: Rodney F. Price Title: Director GRAHAM-FIELD HEALTH PRODUCTS, INC. By: ___________________________________ Name: Irwin Selinger Title: Chairman of the Board and Chief Executive Officer ___________________________________ Irwin Selinger EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AS INCLUDED IN THE FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 MAR-31-1997 2,141 0 50,922 0 49,625 106,593 11,555 0 217,075 90,245 6,550 0 31,600 475 86,683 217,075 51,204 51,332 34,657 34,657 12,149 0 972 3,554 1,470 2,084 0 0 0 2,084 .09 .09
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