-----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, Svj8PGXv0ySdON82aG1JJgJ+SDWpzBCPAQUBNk140o/3XJ4JqX2JLLTgdoedtCyd Y2rU8oewh5jN/UmJCkVnVA== 0000950123-98-007800.txt : 19980820 0000950123-98-007800.hdr.sgml : 19980820 ACCESSION NUMBER: 0000950123-98-007800 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980819 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: SEC FILE NUMBER: 001-08801 FILM NUMBER: 98694210 BUSINESS ADDRESS: STREET 1: 400 RABRO DR E CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5165825900 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 FORM 10-Q RE: GRAHAM FIELD HEALTH PRODUCTS 1 Page 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 June 30, 1998 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 --- 31,234,668 shares as of August 11, 1998 2 Page 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 - June 30, 1998 (Unaudited) and December 31, 1997 (Audited) 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1998 and 1997 (Unaudited) 4-5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (Unaudited) 6-7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-25 Part II. Other Information: Item 1. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Matters 26 Item 6. Exhibits and Reports on Form 8-K 26 3 Page 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
June 30, December 31, ASSETS 1998 1997 ------------- ------------- (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents $ 3,426,000 $ 4,430,000 Accounts receivable - less allowances for doubtful accounts of $8,636,000 and $13,199,000, respectively 102,069,000 91,451,000 Inventories 76,365,000 73,532,000 Other current assets 16,225,000 8,103,000 Recoverable and prepaid income taxes 5,225,000 4,422,000 Deferred tax assets 10,843,000 10,695,000 Asset held for sale -- 61,706,000 ------------- ------------- TOTAL CURRENT ASSETS 214,153,000 254,339,000 PROPERTY, PLANT AND EQUIPMENT - net 37,664,000 35,955,000 EXCESS OF COST OVER NET ASSETS ACQUIRED - net of accumulated amortization of $15,561,000 and $11,512,000, respectively 234,433,000 240,071,000 DEFERRED TAX ASSETS 3,383,000 3,044,000 OTHER ASSETS 15,611,000 13,709,000 ------------- ------------- TOTAL ASSETS $ 505,244,000 $ 547,118,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Credit facility $ 35,462,000 $ 65,883,000 Current maturities of long-term debt 1,803,000 2,619,000 Accounts payable 32,541,000 33,888,000 Accrued expenses 42,949,000 54,331,000 ------------- ------------- TOTAL CURRENT LIABILITIES 112,755,000 156,721,000 Long-term debt and Senior Subordinated Notes 106,933,000 107,733,000 Other long-term liabilities 15,144,000 13,816,000 ------------- ------------- TOTAL LIABILITIES 234,832,000 278,270,000 STOCKHOLDERS' EQUITY: Series A preferred stock -- -- Series B preferred stock 28,200,000 28,200,000
4 Page 4 Series C preferred stock 3,400,000 3,400,000 Common stock 799,000 764,000 Additional paid-in capital 284,261,000 279,341,000 (Deficit) (46,227,000) (42,953,000) Cumulative translation adjustment (21,000) 96,000 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 270,412,000 268,848,000 COMMITMENTS AND CONTINGENCIES ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 505,244,000 $ 547,118,000 ============= =============
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 -------------------------------- -------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- NET REVENUES: Medical equipment and supplies $ 96,936,000 $ 62,579,000 $ 194,663,000 $ 118,770,000 Interest and other income 520,000 252,000 935,000 396,000 ------------- ------------- ------------- ------------- 97,456,000 62,831,000 195,598,000 119,166,000 COSTS AND EXPENSES: Cost of revenues 67,030,000 42,503,000 134,132,000 80,941,000 Selling, general and administrative 30,239,000 14,765,000 58,449,000 27,958,000 Interest expense 3,015,000 1,169,000 5,758,000 2,163,000 ------------- ------------- ------------- ------------- 100,284,000 58,437,000 198,339,000 111,062,000 ------------- ------------- ------------- ------------- (LOSS) INCOME BEFORE INCOME TAXES (2,828,000) 4,394,000 (2,741,000) 8,104,000 INCOME TAX PROVISION (BENEFIT) (800,000) 1,681,000 -- 3,208,000 ------------- ------------- ------------- ------------- NET (LOSS) INCOME (2,028,000) 2,713,000 (2,741,000) 4,896,000 PREFERRED STOCK DIVIDENDS 267,000 -- 533,000 -- ------------- ------------- ------------- ------------- NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS $ (2,295,000) $ 2,713,000 $ (3,274,000) $ 4,896,000 ============= ============= ============= ============= PER SHARE DATA:
5 Page 5 Common shares outstanding - basic 31,100,000 20,204,000 30,990,000 19,985,000 Convertible preferred stock -- 4,435,000 -- 4,435,000 Common equivalent shares outstanding -- 849,000 -- 908,000 ------------- ------------- ------------- ------------- Common shares outstanding - diluted 31,100,000 25,488,000 30,990,000 25,328,000 Basic (loss) earnings per share $ (.07) $ .13 $ (.11) $ .24 Diluted (loss) earnings per share $ (.07) $ .11 $ (.11) $ .19
See notes to condensed consolidated financial statements. 6 Page 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited)
Six Months Ended June 30, ------------------------------ 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net (loss) income $ (2,741,000) $ 4,896,000 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 7,470,000 2,662,000 Deferred income taxes -- 911,000 Provisions for losses on accounts receivable 1,263,000 295,000 Changes in operating assets and liabilities: Accounts receivable (11,758,000) (14,832,000) Inventories (3,250,000) (2,416,000) Other current assets and recoverable and prepaid income taxes (5,854,000) (2,949,000) Accounts payable, accrued expenses and other liabilities (13,173,000) (6,360,000) ------------ ------------ NET CASH USED IN OPERATING (28,043,000) (17,793,000) ACTIVITIES INVESTING ACTIVITIES Purchases of property, plant and equipment (5,168,000) (1,643,000) Proceeds from sale of asset held for sale 60,167,000 -- Acquisitions, net of cash acquired (419,000) (1,003,000) Increase in excess of cost over net assets acquired -- (559,000) Net decrease in other assets (543,000) (802,000) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 54,036,000 $ (4,007,000)
See notes to condensed consolidated financial statements. 7 Page 7 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited)
Six Months Ended June 30, -------------------------------- 1998 1997 ------------- ------------- FINANCING ACTIVITIES: Proceeds from credit facility and long-term debt $ 191,090,000 $ 118,763,000 Principal payments on credit facility and long-term debt (222,774,000) (80,658,000) Payments on acceptances -- (16,300,000) Proceeds from exercise of stock options 4,687,000 591,000 ------------- ------------- NET CASH (USED IN) PROVIDED BY (26,997,000) 22,396,000 FINANCING ACTIVITIES (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,004,000) 596,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,430,000 1,241,000 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,426,000 $ 1,837,000 ============= ============= SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid $ 6,228,000 $ 1,680,000 ============= ============= Income taxes paid $ 237,000 $ 339,000 ============= ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Investment in preferred stock received as partial proceeds from sale of asset $ 1,539,000 ============= Decrease in excess of cost over net assets acquired offset by increase in other current assets $ 2,385,000 ============= Increase in excess of cost over net assets acquired offset by adjustments to property, plant and equipment, inventory, prepaid and deferred taxes, accrued expense and debt $ 375,000 =============
See notes to condensed consolidated financial statements. 8 Page 8 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 June 30, 1998 (unaudited), the results of operations for the three months and the six months ended June 30, 1998 and 1997 (unaudited) and the statements of cash flows for the six months ended June 30, 1998 and 1997 (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, 1997. Inventories at June 30, 1998 have been valued at standard cost for manufactured goods and at average cost for other inventories based primarily on perpetual records or the gross profit method. As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components, however, the adoption of this Statement had no impact on the Company's net loss or shareholders' equity. SFAS No. 130 requires foreign translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income, net of tax effect. During the three and six months ended June 30, 1998, total comprehensive (loss) income amounted to ($2,093,000) and ($2,810,000), respectively, as compared with $2,748,000 and $4,938,000 for the same periods in 1997. The results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of results for the full year. Certain amounts in the 1997 financial statements have been reclassified to conform to the 1998 presentation. 2. EARNINGS PER SHARE Earnings per share amounts are calculated in accordance with SFAS No. 128 "Earnings 9 Page 9 per Share." Diluted earnings per share is calculated for the three and six months ended June 30, 1997 assuming the conversion of the Series B and Series C Cumulative Convertible Preferred Stock and elimination of the related dividends and conversion of dilutive common equivalent shares outstanding using the treasury stock method. Conversion of the preferred stock and common stock equivalent shares was not assumed for the three and six months ended June 30, 1998 since the result would have been antidilutive. 10 Page 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) 3. INVENTORIES Inventories consist of the following:
June 30, December 31, 1998 1997 ----------- ----------- Raw materials $16,103,000 $16,553,000 Work-in-process 7,982,000 6,735,000 Finished goods 52,280,000 50,244,000 ----------- ----------- $76,365,000 $73,532,000 =========== ===========
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
June 30, December 31, 1998 1997 ------------ ------------ Land and buildings $ 17,968,000 $ 16,358,000 Equipment 30,236,000 29,831,000 Furniture and fixtures 2,411,000 1,297,000 Leasehold improvements 3,512,000 3,089,000 Construction in progress 2,501,000 2,191,000 ------------ ------------ $ 56,628,000 $ 52,766,000 Accumulated depreciation and amortization (18,964,000) (16,811,000) ------------ ------------ $ 37,664,000 $ 35,955,000 ============ ============
5. INCOME TAXES At June 30, 1998, the Company has net deferred tax assets of approximately $14,226,000, which consist principally of net operating loss carryforwards, reserves and restructuring charges not currently deductible for tax return purposes. A valuation allowance of approximately $14,500,000 has been provided against certain gross deferred tax assets of the Company, of which approximately $13,300,000 are attributable to the acquired net operating loss carryforwards and other deferred tax assets of Everest & Jennings International Ltd. ("Everest & Jennings"). When realized, the tax benefit for those items will be recorded as a reduction of the excess of cost over net assets acquired. In addition, the Company has a valuation allowance of approximately $1,200,000 against a portion of its remaining gross deferred tax assets as a result of recent acquisitions. The amount of the net deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income are reduced. The Company has not provided any income taxes or benefit for the six months ended June 30, 1998 reflecting the impact of nondeductible goodwill amortization expense on the statutory Federal rate for 1998. 11 Page 11 The effective tax rate for 1997 approximates the statutory rate after adjustment for state taxes and non-deductible goodwill amortization expense. 6. ACQUISITION OF BUSINESSES On December 30, 1997, the Company acquired Fuqua Enterprises, Inc. (currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement, Sub was merged with and into Fuqua with Fuqua continuing as the surviving corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua Merger, each share of Fuqua's common stock, par value $2.50 per share (the "Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant to the Fuqua Merger Agreement, was converted into the right to receive 2.1 shares of common stock, par value $.025 per share of the Company (the "Company Common Stock"). There were 4,482,709 shares of Fuqua Common Stock outstanding on December 30, 1997, which converted into 9,413,689 shares of the Company Common Stock. In accordance with the terms of the Fuqua Merger Agreement, each Fuqua stock option was assumed by Graham-Field and was converted into the right to purchase shares of the Company Common Stock. As of the effective date of the Fuqua Merger, there were Fuqua stock options outstanding representing the right to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of shares of the Company Common Stock to be issued, after giving effect to the exercise price of the Fuqua stock options as adjusted for the exchange ratio of 2.1, is approximately 364,319 shares of the Company Common Stock. For purposes of calculating the purchase price, the Company Common Stock was valued at $16.69 per share, which represents the average closing market price of the Company Common Stock for the period three business days immediately prior to and three business days immediately after the announcement on September 8, 1997 of the execution of the Fuqua Merger Agreement. The acquisition of Fuqua has been accounted for under the purchase method of accounting and, accordingly, the operating results of Fuqua have been included in the Company's consolidated financial statements from the date of acquisition. The excess of the aggregate purchase price over the estimated fair market value of the net assets acquired is approximately $132,500,000, as adjusted, which is being amortized on a straight line basis over 30 years. The purchase price allocations were made on a preliminary basis, and are subject to additional adjustment. In connection with the Fuqua Merger, the Company acquired the leather operations of Fuqua ("Leather Operations"). It was the Company's intention to dispose of this Leather Operations as soon as reasonably practicable following the consummation of the Fuqua Merger. Accordingly, the net assets of the Leather Operations have been reflected as "Assets held for sale" in the accompanying consolidated balance sheet as of December 31, 1997. The net asset value of the Leather Operations includes the value of the proceeds that were realized from the sale of the Leather Operations. The Company did not record any earnings or losses for the Leather Operations for the period December 30, 1997 to January 27, 1998 (date of disposal). 12 Page 12 On January 27, 1998, Fuqua disposed of the Leather Operations (the "Leather Sale Transaction") through the sale of all of the capital stock of Irving Tanning Company ("ITC"), Hancock Ellsworth Tanners, Inc., Kroy Tanning Company, Incorporated and Seagrave Leather Corporation (collectively, the "Leather Companies"), to the management of ITC pursuant to a (i) Stock Purchase Agreement dated as of January 27, 1998, by and among IT Acquisition Corporation ("ITAC"), the Company and Fuqua, and (ii) Stock Purchase Agreement dated as of January 27, 1998, by and among HEKS Corporation, the Company and Fuqua. The aggregate selling price for the Leather Companies consisted of (a) $60,167,400 in cash, (b) an aggregate of 5,000 shares of Series A Preferred Stock of ITAC with a stated value of $4,250,000 (which has been valued at $1,539,000), and (c) the assumption of debt of $2,341,250. In addition, as the holder of the ITAC Preferred Stock, the Company is entitled to appoint one director to the Board of Directors of ITAC. On August 28, 1997, the Company acquired all of the issued and outstanding shares of the capital stock of Medical Supplies of America, Inc., a Florida corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization (the "Reorganization Agreement") dated August 28, 1997, by and among the Company, S.E. (Gene) Davis and Vicki Ray (collectively the "Medapex Selling Stockholders"). In accordance with the terms of the Reorganization Agreement, Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling Stockholders received in the aggregate 960,000 shares of Company Common Stock in exchange for all of the issued and outstanding shares of the capital stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of August 28, 1997 (the "Real Estate Sales Agreement"), by and between the Company and BBD&M, a Georgia Limited Partnership and an affiliate of Medapex, the Company acquired Medapex's principal corporate headquarters and distribution facility in Atlanta, Georgia for a purchase price consisting of (i) $622,335 payable (a) by the issuance of 23,156 shares of the Company Common Stock and (b) in cash in the amount of $311,167, and (ii) the assumption of debt in the amount of $477,664. Each of the Medapex Selling Stockholders entered into a two-year employment agreement and non-competition agreement with the Company. The Medapex transaction was accounted for as a pooling of interests and the Company's historical financial statements have been restated to reflect this transaction. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below.
Three Months Six Months Ended Ended June 30, 1997 June 30, 1997 ------------- ------------ Net revenues: Graham-Field $ 57,828,000 $109,160,000 Medapex 5,003,000 10,006,000 ------------ ------------ Combined $ 62,831,000 $119,166,000 Net income: Graham-Field $ 2,616,000 $ 4,700,000 Medapex 97,000 196,000 ------------ ------------ Combined $ 2,713,000 $ 4,896,000
13 Page 13 On August 17, 1997, the Company acquired substantially all of the assets and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a privately-owned distributor of medical supplies, for $4.5 million in cash. The Company also entered into a five (5) year non-competition agreement with the previous owner in the aggregate amount of $301,000 payable over the five (5) year period. 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 the purchase price over net assets acquired was approximately $3.7 million. On June 25, 1997, the Company acquired all of the capital stock of LaBac Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company, LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling Stockholders"). In connection with the acquisition, LaBac became a wholly-owned subsidiary of the Company, and the LaBac Selling Stockholders received in the aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in exchange for all of the issued and outstanding shares of the capital stock of LaBac. The Company also entered into a three (3) year consulting agreement with the LaBac Selling Stockholders and an entity controlled by the LaBac Selling Stockholders, and non-competition agreements with each of the LaBac Selling Stockholders. 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 net assets acquired amounted to approximately $7.7 million, as adjusted. On March 7, 1997, Everest & Jennings, Inc., 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 $1.5 million representing the net book value of Kuschall. The purchase price was paid by the issuance of 116,154 shares of Company Common Stock 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 February 28, 1997, Everest & Jennings Canadian Limited ("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 U.S. $2.15 million). The purchase price was paid by the issuance of 187,733 shares of the Company Common Stock valued at $11.437 per share. 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 $2.5 million. 14 Page 14 The following summary presents unaudited pro forma consolidated results of operations for the six months ended June 30, 1997 as if the acquisitions described above occurred at the beginning of 1997. 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 pro forma information does not include the write-off of certain purchased in-process research and development costs of $3.3 million, and merger, restructuring and other related charges of $31,202,000 associated with the Company's strategic restructuring initiatives recorded in the fourth quarter ended December 31, 1997. 15 Page 15
Pro Forma Six Months Ended June 30, 1997 ---------------- Net Revenues $182,439,000 ------------ Income Before Income Taxes $ 8,667,000 Income Taxes $ 4,145,000 ------------ Net Income $ 4,522,000 ============ Net income per common share: Net income $ 4,522,000 Preferred stock dividends -- (a) ------------ Net income available to common $ 4,522,000 ============ shareholders Common shares outstanding - basic 30,254,000 ------------ Convertible preferred stock 4,435,000 Incremental shares using treasury stock method 1,272,000 ------------ Common shares outstanding - diluted 35,961,000 ============ Basic earnings per share $ .15 Diluted earnings per share $ .13
(a) Assumes conversion of the preferred stock and elimination of any dividends relating to such preferred stock. 7. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN In connection with the acquisition of Fuqua on December 30, 1997, the Company adopted a plan to implement certain strategic restructuring initiatives (the "Restructuring Plan") and recorded restructuring reserves of $23,470,000. The plan consists of a broad range of efforts, including the consolidation of the Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex manufacturing facility in New York and relocation of the Company's corporate headquarters to the Lumex facility. In addition, the Company plans to consolidate certain distribution facilities and other operations in an effort to improve manufacturing, distribution and operating efficiencies. Throughout 1998, the Company will continue to evaluate its Restructuring Plan and additional restructuring charges may be necessary. The following summarizes the activity in the restructuring reserves for the six months ending June 30, 1998: 16 Page 16
Merger and Restructuring Reserve charges Write-offs and Reserve Balances Write-offs and Balances recorded in cash payments December 31, cash payments June 30, 1997 in 1997 1997 in 1998 1998 ------------ -------------- ---------------- -------------- ----------- Exit costs $18,237,000 $(1,294,000) $16,943,000 $ (658,000) $16,285,000 Severance 650,000 -- 650,000 (122,000) 528,000 Merger related 4,583,000 (1,788,000) 2,795,000 (2,245,000) 550,000 ----------- ----------- ----------- ----------- ----------- Total reserves $23,470,000 $(3,082,000) $20,388,000 $(3,025,000) $17,363,000 =========== =========== =========== =========== ===========
8. LEGAL PROCEEDINGS Following the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the Company and certain of its directors and officers were named as defendants in at least thirteen putative class action lawsuits filed primarily in the United States District Court for the Eastern District of New York on behalf of all purchasers of the Company Common Stock (including former Fuqua shareholders who received shares of the Company Common Stock when the Company acquired Fuqua in December 1997) during various periods within the time period May 1997 to March 1998. The complaints assert claims against the Company and the other defendants for violations of Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to the Company's business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the Company Common Stock was artificially inflated during the putative class periods. Several of the complaints focus on statements made concerning the Company's integration of its various recent acquisitions. The plaintiffs seek unspecified compensatory damages and costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative classes. The Company believes that it has complied with all of its obligations under the Federal securities laws, considers the plaintiffs' allegations to be without merit and intends to defend these suits vigorously. On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug Administration arrived at the Company's principal headquarters and one other Company location and retrieved several documents pursuant to search warrants. The Company has subsequently been advised by an Assistant United States Attorney for the Southern District of Florida that the Company is a target of an ongoing grand jury investigation involving alleged fraud by one or more of the Company's suppliers relating to the unauthorized 17 Page 17 diversion of medical products intended for sale outside of the United States into United States markets. The Company has also been advised that similar search warrants were obtained with respect to approximately 14 other participants in the distribution of medical products. The Company is presently investigating these matters. The Company does not know when the grand jury investigation will conclude or what action, if any, may be taken by the government against the Company or any of its employees, so it cannot yet assess the impact of this investigation on the Company. The Company intends to cooperate fully with the government in its investigation. In March 1994, the Suffolk County Authorities initiated an investigation to determine whether regulated substances had been discharged in excess of permitted levels from Fuqua's Lumex division (the "Lumex Division") located in Bayshore, New York. An environmental consulting firm was engaged by the Lumex Division to conduct a more comprehensive site investigation, develop a remediation work plan and provide a remediation cost estimate. These activities were performed to determine the nature and extent of contaminants present on the site and to evaluate their potential off-site extent. In connection with Fuqua's April 1996 acquisition of the Lumex Division, Fuqua assumed the obligations associated with this environmental matter. In late 1996, Fuqua conducted surficial soil remediation at the Bayshore facilities and reported the results to the Suffolk County Authorities in March 1997. A ground water work plan was submitted concurrently with the soil remediation report and Fuqua is waiting for the necessary approvals from the Suffolk County Authorities before proceeding with execution of the ground water work plan. Management is not currently able to determine when any required remediation and monitoring efforts with respect to the ground water contamination will be completed. In May 1997, the Suffolk County Authorities approved the soil remediation conducted by Fuqua and provided comments on the ground water work plan. In November 1997, the Lumex Division received the results of additional ground water testing that had been performed in August and September 1997. The results revealed significantly lower concentrations of contaminants than were known at the time the "Ground Water Work Plan" was prepared in March 1997. Due to the relatively low levels of contaminants detected, the Lumex Division proposed sampling the groundwater on a quarterly basis for two years to ensure that the groundwater was not significantly affected. In January and April 1998, additional confirmatory samples were taken and analyzed. These analytical results provide further support that the groundwater is not significantly contaminated. The Lumex Division will continue to monitor the quality of the groundwater to confirm that it remains acceptable. At June 30, 1998, the Lumex Division had reserves for remediation costs and additional investigation costs which will be required. Reserves are established when it is probable that a liability has been incurred and such costs can be reasonably estimated. The Lumex Division's estimates of these costs were based upon currently enacted laws and regulations and the professional judgment of independent consultants and counsel. Where available information was sufficient to estimate the amount of liability, that estimate has been used. Where information was only sufficient to establish a range of probable liability and no point within the range is more likely than another, the lower end of the range has been used. The Lumex Division has not assumed that any such costs would be recoverable from third 18 Page 18 parties nor has the Lumex Division discounted any of its estimated costs, although a portion of the remediation work plan will be performed over a period of years. The amount of environmental liabilities are difficult to estimate due to such factors as the extent to which remedial actions may be required, laws and regulations change or the actual costs of remediation differ when the final work plan is performed. On April 3, 1996, Fuqua acquired certain assets of the Lumex Division from Cybex International, Inc. (formerly, Lumex, Inc.). The purchase price for the Lumex Division was $40.7 million, subject to a final purchase price adjustment in the asset sale agreement. The final purchase price adjustment was disputed and, pursuant to the asset sale agreement, was to be resolved through arbitration. On April 18, 1997, the seller obtained an interim stay of the arbitration proceedings pending a hearing on May 9, 1997. On May 9, 1997, the New York County Supreme Court vacated its stay of the arbitration proceedings and directed Fuqua and the seller to proceed to arbitration. On June 10, 1997, the seller filed a motion for a stay of arbitration pending the hearing and determination of the seller's appeal with the Appellate Division of the New York County Supreme Court. On June 24, 1997, the Appellate Division denied the seller's motion to stay the arbitration proceedings pending appeal. Accordingly, Fuqua and the seller continued the arbitration proceedings. The Appellate Division subsequently affirmed the Supreme Court's denial of the stay, and seller's motion for reconsideration has been denied. On February 13, 1998, the arbitrator accepted $3,179,685 in claims by Fuqua, with interest of $350,690, yielding a net award to Fuqua of $2,384,606, which has been included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Such amount was recorded as a reduction of the excess of cost over net assets acquired at June 30, 1998. On July 30, 1998, the Company received a payment of $2,468,358 from Cybex. The Company believes, however, that this payment does not adequately or completely satisfy the New York judgment and intends to file a motion to resettle the New York judgment. In March 1997, Fuqua gave notice to the seller to preserve Fuqua's indemnification rights provided in the asset sale agreement. In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit against the seller and certain former officers and it states claims for fraud, breach of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees. Defendants filed an answer and counterclaim on April 7, 1998, denying liability and asserting fifteen defenses. Defendant Cybex has asserted four counterclaims, seeking $1,284,288 in damages, plus attorneys' fees and costs. Fuqua believes that the counterclaims lack merit for several reasons, including, among others, that the putative claim for $1,284,288, was decided adversely to Cybex in the arbitration. On July 31, 1998, Cybex and the defendants filed a motion to dismiss. The individual defendants have moved to dismiss based on an alleged lack of personal jurisdiction, and Cybex has moved to dismiss on substantive grounds as to certain counts. The Company believes the motion to dismiss lacks merit and intends to oppose it vigorously. On August 3, 1998, the Company and another defendant were served with a lawsuit initiated by JOFRA Enterprises, Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The complaint seeking damages of $25,000,000 alleges that the Company's hiring of a certain officer and employees of JOFRA constituted, among other 19 Page 19 things, unfair competition and wrongful appropriation of business opportunities. The Company considers the plaintiff's allegations to be without merit and intends to defend this lawsuit vigorously. The Company and its subsidiaries are parties to 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. 9. SELINGER SEPARATION AGREEMENT On July 29, 1998, Irwin Selinger resigned as Chairman of the Board, Chief Executive Officer and President of the Company, and entered into a separation agreement (the "Separation Agreement") with the Company. The Separation Agreement provides for (i) the continuation of Mr. Selinger's (a) base salary of $550,000 through July 31, 1999, (b) healthcare and insurance benefits through July 8, 2001, and (c) automobile lease payments and associated automobile expenses through July 8, 2001, (ii) the forgiveness of Mr. Selinger's $2.2 million loan in consideration of Mr. Selinger's repayment of $500,000 on June 30, 1999, (iii) a three (3) year non-competition agreement, (iv) the continuation of Mr. Selinger's split dollar life insurance policy in accordance with the terms of Mr. Selinger's divorce judgment, (v) a non-disparagement agreement, (vi) mutual releases, and (vii) the continuation of the Company's indemnification provisions for Mr. Selinger. The Company will record the financial effects of the Separation Agreement in the third quarter ending September 30, 1998. Simultaneously with Mr. Selinger's resignation, Rodney F. Price, the Chairman of Thistle Hotels PLC and a consultant to Brierley Investments Ltd., ("Brierley") a New Zealand investment holding company, was appointed Chairman of the Board and Chief Executive Officer of Graham-Field. Mr. Price was formerly the Chairman of Everest & Jennings and an executive director of Brierley. Brierley currently holds approximately 24% of the voting power of the capital stock of the Company. Paul Bellamy, the Chief Financial Officer of the Company was named President and Chief Operating Officer. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements 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, (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, the Company's ability to effectively integrate acquired companies, the termination of the Company's Exclusive Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T. Dharma"), an Indonesian company, 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, 1997, and the section entitled "Risk Factors" in the 20 Page 20 Company's Registration Statement on Form S-4 dated as of December 19, 1997. 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. Operating Revenues Operating revenues for the quarter and six month period ended June 30, 1998 were $96,936,000 and $194,663,000, respectively, representing an increase of approximately 55% and 64%, respectively over the same periods in the prior year. Revenues for the quarter and six month period ended June 30, 1998 included revenues of approximately $25.7 million and $50.3 million, respectively attributable to the results for the Fuqua entities acquired on December 30, 1997, as well as the revenues of five additional companies acquired in 1997 (see Note 6 to the Condensed Consolidated Financial Statements). The Company's revenues for the quarter and six month period ended June 30, 1998 increased approximately 4% and 7%, respectively, as compared to the same periods in the prior year on a pro forma basis (as if all acquisitions completed in 1997 were recorded as of January 1, 1997). The increase in overall operating revenues was primarily attributable to the six acquisitions completed in 1997, the growth of the Company's "Graham-Field Express" program and expansion of the Company's Consolidation Advantage Program ("CAP"). Management believes that intense competition within the healthcare industry will continue in 1998. 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 Lumex and Temco patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements and other freight and time sensitive products. As of June 30, 1998, the Company had opened seven (7) Graham-Field Express facilities operating in the Bronx, New York; San Juan, Puerto Rico; Dallas, Texas; Baltimore, Maryland; Cleveland, Ohio; Louisville, Kentucky; and Boston, Massachusetts. The Graham-Field Express facility in Baltimore, Maryland began operations in the second quarter of 1997; the Cleveland, Ohio; and Bowling Green, Kentucky facilities were opened in the third quarter of 1997. The Louisville, Kentucky facility (replacing the Bowling Green location) and the Boston, Massachusetts facility began operations in the second quarter of 1998. Management intends to moderate the growth of the Graham-Field Express program in 1998. Interest and Other Income Interest and other income for the three and six month periods ended June 30, 1998 was $520,000, and $935,000, respectively as compared to $252,000 and $396,000 for the same periods in the prior year. The increase is primarily due to interest of approximately 21 Page 21 $90,000 and $130,000, respectively, earned on an advance to P.T. Dharma (see Liquidity and Capital Resources), dividends of $44,000 and $125,000, respectively, earned on preferred stock acquired in connection with the sale of the Leather Operations, and net sublease income of approximately $98,000 and $145,000, respectively, attributable to certain Fuqua properties. Cost of Revenues Cost of revenues as a percentage of operating revenues was 69.1% and 68.9% respectively for the three and six month periods ended June 30, 1998, as compared to 67.9% and 68.1% recorded in the prior year. The Fuqua entities and LaBac contributed higher gross profit margins, offset in large part, by a higher mix of redistributed product primarily through the expansion of the GF Express program, which historically earns lower gross profit margins and by operating inefficiencies incurred at the Company's Temco manufacturing facility due to the close-down of that facility which is expected to be completed in 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of operating revenues for the three and six month periods ended June 30, 1998 were 31.2% and 30.0% as compared to 23.6% and 23.5% recorded in the same periods in the prior year. The increase is primarily attributable to higher corporate office and administrative overhead to integrate the acquisitions completed in 1997, and the contribution of revenue by the Fuqua entities and LaBac at a higher percentage of selling, general and administrative expenses. Interest Expense Interest expense for the three and six month periods ended June 30, 1998 increased to $3,015,000 and $5,758,000, respectively, as compared to $1,169,000 and $2,163,000 for the same periods in the prior year. The increase is primarily due to increased borrowings attributable to the Company's growth, expansion of the Graham-Field Express Program, and the sale of the Company's $100 million Senior Subordinated Notes (the "Senior Subordinated Notes") in August 1997. Net Income The Company had a loss before income taxes of $2,828,000 and $2,741,000, respectively for the three and six month periods ended June 30, 1998 as compared to income before income taxes of $4,394,000 and $8,104,000 for the same periods in the prior year. The decrease is primarily due to reduced margins, increased selling, general and administrative expenses as a percentage of operating revenue, and the increase in interest expense. The Company had a net loss for the three and six month periods ended June 30, 1998 of $2,028,000 and $2,741,000, respectively as compared to net income of $2,713,000 and $4,896,000, for the same periods last year. The Company has not provided any income 22 Page 22 taxes or benefit for the six month period ended June 30, 1998 reflecting the impact of nondeductible goodwill amortization expense on the statutory Federal rate for 1998. The Company recorded income tax provisions of $1,681,000 and $3,208,000 for the same period last year. Deferred taxes have not been provided on the undistributed earnings of the foreign entities as it is management's intention to invest such earnings in the entities indefinitely. The Company's business has not been materially affected by inflation. Liquidity and Capital Resources The Company had net working capital of $101,398,000 at June 30, 1998, as compared to $97,618,000 at December 31, 1997. The increase in working capital is primarily attributable to working capital generated from operations of $4,729,000, comprised of the net loss of $2,741,000, adjusted for $7,470,000 of depreciation and amortization expense, plus proceeds of $4,687,000 from the exercise of stock options and the recording of a receivable for a $2,385,000 settlement from Cybex (see Note 8 to the Condensed Consolidated Financial Statements), offset by payments of $5,168,000 for the purchase of property, plant and equipment, the receipt of preferred stock (a long-term asset) valued at $1,539,000 as a component of the proceeds from the sale of the Leather Operations and goodwill and acquisition adjustments totalling approximately $765,000. Cash used in operations for the six months ended June 30, 1998 was $28,043,000, as compared to $17,793,000 in the same period in the prior year. The principal reason for the increase in cash used in operations was a $2,829,000 decrease in net income (adjusted for the change in depreciation and amortization expense), a decrease in accrued expenses primarily relating to payments against restructuring reserves (See Note 7 to the Condensed, Consolidated Financial Statements) and acquisition related accruals and an increase in other assets. Management anticipates utilizing approximately $3,000,000 in cash during the remainder of 1998 related to the restructuring and merger accruals recorded in 1997. The increase in other assets includes an advance in February 1998 of $3.5 million to P.T. Dharma, the Company's supplier of commodity wheelchairs, in consideration of the grant of an option to purchase the wheelchair assets of P.T. Dharma for a price to be determined. During the option period which expires on January 31, 1999, the Company is paid interest on the advance at an annual interest rate of 10.3 percent. The advance is collateralized by shares of the capital stock of P.T. Dharma, and is to be applied against the purchase price if a purchase transaction is ultimately consummated. In the event the Company and P.T. Dharma are unable to agree upon the terms of the transaction, the advance is to be returned to the Company. As at December 31, 1997, the allowance for doubtful accounts receivable was increased $5,000,000 to reflect increased credit risk due to the anticipated impact of state medicare reimbursement and procurement policies for certain product lines and the extended payment terms being taken by the Company's customers. During the six months ended June 30, 1998, $5,598,000 of fully reserved accounts receivable was written off against the related reserve for doubtful accounts. 23 Page 23 The Company periodically evaluates recoverability of its tangible and intangible assets in accordance with SFAS No. 121. In addition, based on projected results for the remainder of 1998, the Company believes that it will be in compliance with the financial covenants contained in its Senior Secured Revolving Credit Facility, as amended (the "Credit Facility"), arranged by IBJ Schroder Business Credit Corporation ("IBJ Schroder"). 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. However, actual results and performance could differ. The Credit Facility. As of June 30, 1998, the Company was not in compliance with certain financial covenants contained in the Credit Facility. On August 18, 1998, the Credit Facility was amended (the "August 1998 Amendment") to provide for, among other things, the waiver of the financial covenant defaults effective as of June 30, 1998 and the amendment of the financial covenants for the balance of the term of the Credit Facility. In connection with the August 1998 Amendment, the Company's line of credit, which provides for borrowings on a revolving credit basis, subject to availability formulas, including letters of credit and other terms and conditions, was reduced from $100 million to $80 million. At June 30, 1998, the Company had availability to borrow up to approximately $55 million under the Credit Facility, of which approximately $35 million was utilized. Effective as of August 18, 1998, borrowings bear interest at IBJ Schroder's prime rate (8.50% at June 30, 1998) plus 1%. Prior to August 18, 1998, borrowings bore interest at Graham-Field's option, at IBJ Schroder's prime rate or 2.25% above LIBOR, or 1.5% above IBJ Schroder's banker's acceptance rate. The Credit Facility is secured by all of the assets of Graham-Field and the capital stock of certain of its subsidiaries. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the repayment or prepayment of principal on subordinated debt, including the Senior Subordinated Notes, the incurrence of additional debt, liens, transactions with affiliates and certain consolidations, mergers and acquisitions and sales of assets. In addition, Graham-Field is prohibited from declaring or paying any dividend or making any distribution on any shares of common stock or preferred stock of Graham-Field (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or applying any of its funds, property or assets to the purchase, redemption or other retirement of any such shares, or of any options to purchase or acquire any such shares. Notwithstanding the foregoing restrictions, Graham-Field 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 Graham-Field on a consolidated basis, provided that no event of default under the Credit Facility shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. The Credit Facility contains certain financial covenants, including a cash flow coverage and leverage ratio, and an earnings before interest, taxes, depreciation and amortization covenant, as well as the requirement that Graham-Field reduce outstanding borrowings with the net cash proceeds of certain asset sales. The Senior Subordinated Notes. On August 4, 1997, Graham-Field issued the Senior Subordinated Notes under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On February 9, 1998, Graham-Field completed its exchange offer to exchange the outstanding Senior Subordinated Notes for an equal amount of the new Senior 24 Page 24 Subordinated Notes, which have been registered under the Securities Act. The new Senior Subordinated Notes are identical in all material respects to the previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The Senior Subordinated Notes are general unsecured obligations of Graham-Field, subordinated in right of payment to all existing and future senior debt of Graham-Field, including indebtedness under the Credit Facility. The Senior Subordinated Notes are guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis by all existing and future restricted subsidiaries of Graham-Field (the "Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment to all existing and future senior debt of the Guaranteeing Subsidiaries, including any guarantees by the Guaranteeing Subsidiaries of Graham-Field's obligations under the Credit Facility. The net proceeds from the offering of the Senior Subordinated Notes were used to repay $60.3 million of indebtedness under the Credit Facility and $5 million of indebtedness due to BIL. The balance of the proceeds were used for general corporate purposes. Under the terms of the Indenture, the Senior Subordinated Notes are not redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the Senior Subordinated Notes are redeemable, in whole or in part, at the option of Graham-Field, at certain redemption prices plus accrued and unpaid interest to the date of redemption. In addition, prior to August 15, 2000, Graham-Field may, at its option, redeem up to 25% of the aggregate principal amount of Senior Subordinated Notes originally issued with the net proceeds from one or more public offerings of common stock at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest to the date of redemption; provided that at least 75% of the aggregate principal amount of Senior Subordinated Notes originally issued remain outstanding after giving effect to any such redemption. The Indenture contains customary covenants including, but not limited to, covenants relating to limitations on the incurrence of additional indebtedness, the creation of liens, restricted payments, the sales of assets, mergers and consolidations, payment restrictions affecting subsidiaries and transactions with affiliates. In addition, in the event of a change of control of Graham-Field as defined in the Indenture, each holder of the Senior Subordinated Notes will have the right to require Graham-Field to repurchase such holder's Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Graham-Field will be required in certain circumstances to make an offer to purchase Senior Subordinated Notes at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, with the net cash proceeds of certain asset sales. The Credit Facility, however, prohibits Graham-Field from purchasing the Senior Subordinated Notes without the consent of the lenders thereunder. In addition, the Indenture prohibits the Company from declaring or paying any dividend or making any distribution or restricted payment as defined in the Indenture (collectively, the "Restricted Payments") (other than dividends or distributions payable in capital stock of the Company), unless, at the time of such payment (i) no default or event of default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company would be able to incur at least $1.00 of additional indebtedness under the fixed 25 Page 25 charge coverage ratio contained in the Indenture; and (iii) such Restricted Payment, together with the aggregate of all Restricted Payments made by the Company after the date of the Indenture is less than the sum of (a) 50% of the consolidated net income of the Company for the period (taken as one accounting period) beginning on April 1, 1997 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such consolidated net income for such period is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company from contributions of capital or the issue or sale since the date of the Indenture of capital stock of the Company or of debt securities of the Company that have been converted into capital stock of the Company. 26 Page 26 Part II. Other Information Item 1. Legal Proceedings See Note 8 to the Condensed Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Matters On July 29, 1998, Irwin Selinger resigned as Chairman of the Board, Chief Executive Officer and President of the Company, and entered into a separation agreement (the "Separation Agreement") with the Company. For a description of the terms and provisions of the Separation Agreement, see the Company's Current Report on Form 8-K dated as of August 11, 1998. Simultaneously with Mr. Selinger's resignation, Rodney F. Price, the Chairman of Thistle Hotels PLC and a consultant to Brierley Investments Ltd. ("Brierley"), a New Zealand investment holding company, was appointed Chairman of the Board and Chief Executive Officer of the Company. Mr. Price was formerly the Chairman of Everest & Jennings International Ltd. and an executive director of Brierley. Brierley currently holds approximately 24% of the voting power of the capital stock of the Company. Paul Bellamy, the Chief Financial Officer of the Company was named President and Chief Operating Officer. Item 6. Exhibits and Reports on Form 8-K Exhibits: Exhibit No. 10. Waiver and Amendment No. 6 to Revolving Credit and Security Agreement dated as of August 18, 1998. Reports on Form 8-K: The Company's Current Report on Form 8-K dated as of August 11, 1998 (Date of Event: July 29, 1998). 27 Page 27 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) /s/Rodney F. Price ----------------------------------- Rodney F. Price Chairman of the Board and Chief Executive Officer Date: August 18, 1998 /s/Paul Bellamy ----------------------------------- Paul Bellamy Vice President - Finance Principal Financial Officer EX-10 2 WAIVER AND AMEND. NO. 6 TO REV. CREDIT & SEC. AGRM 1 Exhibit No. 10 WAIVER AND AMENDMENT NO. 6 TO REVOLVING CREDIT AND SECURITY AGREEMENT THIS WAIVER AND AMENDMENT NO. 6 ("Amendment") is entered into as of August 18, 1998, by and among GRAHAM-FIELD HEALTH PRODUCTS, INC., a corporation organized under the laws of the State of Delaware ("Holdings"), GRAHAM-FIELD, INC., a corporation organized under the laws of the State of New York ("Field"), GRAHAM-FIELD EXPRESS, INC., a corporation organized under the laws of the State of Delaware ("Express"), GRAHAM-FIELD TEMCO, INC., a corporation organized under the laws of the State of New Jersey ("Temco"), GRAHAM-FIELD DISTRIBUTION, INC., a corporation organized under the laws of the State of Missouri ("Distribution"), GRAHAM-FIELD BANDAGE, INC., a corporation organized under the laws of the State of Rhode Island ("Bandage"), GRAHAM-FIELD EXPRESS (PUERTO RICO), INC., a corporation organized under the laws of the State of Delaware ("GFPR"), EVEREST & JENNINGS, INC., a corporation organized under the laws of the State of California ("E & J"), LABAC SYSTEMS, INC., a corporation organized under the laws of the State of Colorado ("LaBac"), MEDICAL SUPPLIES OF AMERICA, INC., a corporation organized under the laws of the State of Florida ("Medapex"), HEALTH CARE WHOLESALERS, INC., a corporation organized under the laws of the State of Georgia ("Health Care"), H C WHOLESALERS, INC., a corporation organized under the laws of the State of Georgia ("HCW"), CRITICAL CARE ASSOCIATES, INC., a corporation organized under the laws of the State of Georgia ("Critical"), LUMEX/BASIC AMERICAN HOLDINGS, INC., a corporation organized under the laws of the State of Delaware ("Lumex"), BASIC AMERICAN MEDICAL PRODUCTS, INC., a corporation organized under the laws of the State of Georgia ("Basic American"), LUMEX MEDICAL PRODUCTS, INC., a corporation organized under the laws of the State of Delaware ("Lumex Medical"), PRISM ENTERPRISES, INC., a corporation organized under the laws of the State of Delaware ("Prism"), BASIC AMERICAN SALES AND DISTRIBUTION CO., INC., a corporation organized under the laws of the State of Delaware ("Basic Distribution"), PRISTECH, INC., a corporation organized under the laws of the State of Delaware ("Pristech"), LUMEX SALES AND DISTRIBUTION CO., INC., a corporation organized under the laws of the State of Delaware ("Lumex Distribution") and MUL ACQUISITION CORP. II, a corporation organized under the laws of the State of Delaware ("Mul Acquisition") (each a "Borrower" and collectively "Borrowers"), the financial institutions which are now or which hereafter become a party to (collectively, the "Lenders" and individually a "Lender") the Loan Agreement (as defined below) and IBJ SCHRODER BUSINESS CREDIT CORPORATION, a New York corporation ("IBJS"), as agent for Lenders (IBJS, in such capacity, the "Agent"). BACKGROUND Borrowers, Lenders and Agent are parties to a Revolving Credit and Security Agreement dated as of December 10, 1996, as amended by an Amendment Letter dated May 15, 1997, Amendment No. 1 dated June 25, 1997, Amendment No. 2 dated July 9, 1997, Amendment No. 2 3 dated July 9, 1997, a Letter Amendment dated September 18, 1997, Amendment No. 4 and Joinder Agreement dated December 30, 1997 and an Amendment No. 5 dated as of April 13, 1998 (as further amended, supplemented or otherwise modified from time to time, the "Loan Agreement") pursuant to which Lenders provide Borrowers with certain financial accommodations. Borrowers have requested that Agent and Lenders waive various Events of Default that have occurred and to make certain amendments to the Loan Agreement, and Agent and Lenders are willing to do so on the terms and conditions set forth below. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrowers by Agent and/or Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Waiver. Subject to the satisfaction of the conditions precedent set forth in Section 4 below, Agent and Lenders hereby waive the Events of Default that have occurred as a result of (i) Borrowers' non-compliance with Section 6.6 of the Loan Agreement due to Borrowers' failure to be in compliance with such section for the period ending June 30, 1998 and (ii) the execution of that certain Separation Agreement dated as of July 29, 1998 by and between Holdings and Irwin Selinger relating to Mr. Selinger's termination of employment as an officer and director of the Borrowers and severance arrangements for Mr. Selinger. Agent and Required Lenders shall determine, in their sole discretion, whether any future restructuring or other charges recorded by Borrowers during the quarter ending September 30, 1998 or December 31,1998, which charges are identified and segregated in the financial statements as non-recurring charges, shall be excluded for purposes of calculating compliance with the financial covenants contained in the Loan Agreement. 3. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Loan Agreement is amended as follows: (a) The following definitions are added to Section 1.2: "Amendment No. 6" shall mean Waiver and Amendment No. 6 to Revolving Credit and Security Agreement dated as of August 18, 1998. "Amendment No. 6 Effective Date" shall mean the date all of the conditions set forth in Section 4 of Amendment No. 6 have been satisfied. "Net Cash Flow" shall mean for any period Cash Flow during such period minus Total Debt Payments during such period. "Selinger Separation Agreement" shall mean that certain Separation 2 3 Agreement dated as of July 29, 1998 by and between Holdings and Irwin Selinger. (b) The following definitions in Section 1.2 are hereby amended as follows: "Maximum Revolving Advance Amount" shall mean $80,000,000. "Restructuring Charge Reserve" shall mean $12,000,000. "Revolving Interest Rate" shall mean an interest rate per annum equal to the Alternate Base Rate plus one percent (1.0%). (c) The penultimate sentence in Section 2.9 of the Loan Agreement is amended in its entirety to provide as follows: "The maximum amount of outstanding Acceptances shall not exceed $0 in the aggregate at any time." (d) Section 6.6 of the Loan Agreement is amended in its entirety to provide as follows: "6.6 Net Cash Flow. (a) Cause Net Cash Flow to be equal to or greater than ($4,500,000) at the end of the fiscal quarter ending September 30, 1998 for the immediately preceding three (3) month period; (b) Cause Net Cash Flow to be equal to or greater than ($8,500,000) at the end of the fiscal quarter ending December 31, 1998 for the immediately preceding six (6) month period; (c) Cause Net Cash Flow to be equal to or greater than ($10,000,000) at the end of the fiscal quarter ending March 31, 1999 for the immediately preceding nine (9) month period; (d) Cause Net Cash Flow to be equal to or greater than ($10,000,000) at the end of the fiscal quarter ending June 30, 1999 for the immediately preceding twelve (12) month period; (e) Cause Net Cash Flow to be equal to or greater than ($6,000,000) at the end of the fiscal quarter ending September 30, 1999 for the immediately preceding twelve (12) month period; (f) Cause Net Cash Flow to be equal to or greater than ($3,000,000) at the end of the fiscal quarter ending December 31, 1999 for the immediately preceding twelve (12) month period; (g) Cause Net Cash Flow to be equal to or greater than $0 at 3 4 the end of the fiscal quarter ending March 31, 2000 and at the end of each fiscal quarter thereafter, in each case with respect to the four (4) fiscal quarters then ended. For purposes of calculating Net Cash Flow pursuant to this Section 6.6, the financial impact of the Selinger Separation Agreement shall be excluded." (e) Sections 6.7(d) and 6.7(e) are amended in their entirety and Sections 6.7(f)-(i) are added to the Loan Agreement to provide as follows: "(d) Cause EBITDA to be equal to or greater than $3,000,000 at the end of the fiscal quarter ending September 30, 1998 for such fiscal quarter (excluding the financial impact of the Selinger Separation Agreement); (e) Cause EBITDA to be equal to or greater than $4,000,000 at the end of the fiscal quarter ending December 31, 1998 with respect to the fiscal quarter then ended; (f) Cause EBITDA to be equal to or greater than $5,000,000 at the end of the fiscal quarter ending March 31, 1999 with respect to the fiscal quarter then ended; (g) Cause EBITDA to be equal to or greater than $6,000,000 at the end of the fiscal quarter ending June 30,1999 with respect to the fiscal quarter then ended; (h) Cause EBITDA to be equal to or greater than $7,000,000 at the end of the fiscal quarter ending September 30,1999 with respect to the fiscal quarter then ended; and (i) Cause EBITDA to be equal to or greater than $8,000,000 at the end of the fiscal quarter ending December 31,1999, and at the end of each fiscal quarter thereafter, in each case with respect to the fiscal quarter then ended." (f) Sections 16.2(b) is hereby amended by amending clause (iii) in its entirety to provide as follows: "(iii) alter the definition of the terms Required Lenders or Availability Reserve or Restructuring Charge Reserve or alter, amend or modify this Section 16.2(b)." 4. Conditions of Effectiveness. This Amendment shall become effective upon satisfaction of the following conditions precedent: Agent shall have received (i) eight (8) copies of this Amendment executed by Borrowers and Required Lenders and consented and agreed to 4 5 by Guarantor, (ii) a $100,000 Amendment Fee for the ratable benefit of Lenders which execute this Amendment, (iii) payment of all amounts due under the fee letter of even date herewith between Agent and Borrowers, and (iv) such other certificates, instruments, documents, agreements and opinions of counsel as may be required by Agent, Lenders or their counsel, each of which shall be in form and substance satisfactory to Agent, Lenders and their counsel. 5. Covenants. (a) On or before September 2, 1998, Holders shall, and shall cause each of its Subsidiaries to, pledge (i) all of the stock of each Borrower (other than Holdings) and of AquaTherm Corp. and Everest & Jennings International Ltd., (ii) sixty-five percent (65%) of the stock of Guarantor and of Everest & Jennings de Mexico S.A. de C.V., and (iii) all of the stock of each Subsidiary of each Borrower which exists after giving effect to the mergers described on Schedule 1 to this Amendment (which mergers shall occur as soon as reasonably practicable after the Amendment No. 6 Effective Date but no later than October 1, 1998) to Agent pursuant to a Pledge Agreement in form of and substance satisfactory to Agent, so that Agent shall have a first priority perfected pledge of such stock. (b) On or before September 2, 1998, Borrowers shall provide Agent and Lenders with details regarding material litigation against any Borrower as of the Amendment No. 6 Effective Date. (c) Each Borrower shall deliver all notes received by such Borrower in connection with any Receivable due to such Borrower, endorsed to the order of IBJ Schroder Business Credit Corporation, as Agent, as part of the Collateral in which Agent has an interest, within five (5) days of receipt of all such notes by such Borrower; provided, however, with respect to notes received prior to August 12, 1998, such notes shall be delivered to Agent on or before August 26, 1998. 6. Eurodollar Rate Loans. Notwithstanding any provision of the Loan Agreement, Borrowers acknowledge that (i) as of Amendment No. 6 Effective Date, no Eurodollar Rate Loans shall be available to Borrowers under the Loan Agreement and (ii) any Eurodollar Rate Loans outstanding on the Amendment No. 6 Effective Date shall be automatically converted without penalty into Domestic Rate Loans. 7. Representations and Warranties. Each Borrower hereby represents and warrants as follows: (a) This Amendment and the Loan Agreement, as amended hereby, constitute legal, valid and binding obligations of Borrowers and are enforceable against Borrowers in accordance with their respective terms. (b) Upon the effectiveness of this Amendment, each Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement to the extent the same are not amended hereby and agree that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (c) No Event of Default or Default has occurred and is continuing or would 5 6 exist after giving effect to this Amendment. (d) Borrowers have no defense, counterclaim or offset with respect to the Loan Agreement. 8. Effect on the Loan Agreement. (a) Upon the effectiveness of Section 3 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended herein, the Loan Agreement, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in Section 2, operate as a waiver of any right, power or remedy of Agent or Lenders, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. (d) The Obligations under the Loan Agreement as amended pursuant to this Amendment benefit fully from all collateral security and guaranties with respect thereto. 9. Governing Law. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 10. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 11. Counterparts. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. 6 7 IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first written above. GRAHAM-FIELD HEALTH PRODUCTS, INC. GRAHAM-FIELD, INC. GRAHAM-FIELD EXPRESS, INC. GRAHAM-FIELD TEMCO, INC. GRAHAM-FIELD DISTRIBUTION, INC. GRAHAM-FIELD BANDAGE, INC. GRAHAM-FIELD EXPRESS (PUERTO RICO), INC. EVEREST & JENNINGS, INC. LABAC SYSTEMS, INC. MEDICAL SUPPLIES OF AMERICA, INC. HEALTH CARE WHOLESALERS, INC. H C WHOLESALERS, INC. CRITICAL CARE ASSOCIATES, INC. LUMEX/BASIC AMERICAN HOLDINGS, INC. BASIC AMERICAN MEDICAL PRODUCTS, INC LUMEX MEDICAL PRODUCTS, INC. PRISM ENTERPRISES, INC BASIC AMERICAN SALES AND DISTRIBUTION CO., INC. PRISTECH, INC. LUMEX SALES AND DISTRIBUTION CO., INC. MUL ACQUISITION CORP. II By: /s/ Rodney F. Price ----------------------------------------- Chairman of the Board and Chief Executive Officer ATTEST: /s/ Richard S. Kolodny - ---------------------------- Vice-President 7 8 CONSENTED AND AGREED TO: EVEREST & JENNINGS CANADIAN LIMITED By: Rodney F. Price ---------------------------- Chairman of the Board and Chief Executive Officer IBJ SCHRODER BUSINESS CREDIT CORPORATION, as Lender and as Agent By: /s/ James M. Steffy ------------------------------------- James M. Steffy, Vice President One State Street New York, New York 10004 Commitment Percentage: 25.00% NATIONAL CITY COMMERCIAL FINANCE, INC. By: /s/ Kathryn Ellero ----------------------------------- Name: Kathryn Ellero Title: Vice President 1965 East Sixth Street, Suite 400 Cleveland, Ohio 44114 Commitment Percentage: 25.00% PNC BANK, NATIONAL ASSOCIATION By: /s/ William Gennario ------------------------------ Name: William Gennario Title: Vice President Two Tower Center East Brunswick, New Jersey 08816 Commitment Percentage: 25.00% 8 9 DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/ David Mintert ------------------------------- Name: David Mintert Title:Vice President 1633 Des Peres Road Suite 305 P.O. Box 31626 St. Louis, MO 63131 Commitment Percentage: 25.00% 9 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AS INCLUDED IN THE FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JUN-30-1998 3,426 0 102,069 0 76,365 214,153 37,664 0 505,244 112,755 106,933 0 31,600 799 283,013 505,244 96,936 97,456 67,030 67,030 30,239 0 3,015 (2,828) (800) (2,028) 0 0 0 (2,028) (.07) (.07)
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