-----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, SkVUOsf7EuZofK9Kz0FsM+qrarBjFKs9BcpRbFZUCiX8AjmvFCQmjBDHBw0+D5VG gCNdPIaMkwKwGTmU6kg4YA== 0001005477-96-000320.txt : 19961018 0001005477-96-000320.hdr.sgml : 19961018 ACCESSION NUMBER: 0001005477-96-000320 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961017 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08801 FILM NUMBER: 96644834 BUSINESS ADDRESS: STREET 1: 400 RABRO DR E CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5165825800 FORMER COMPANY: FORMER CONFORMED NAME: PATIENT TECHNOLOGY INC DATE OF NAME CHANGE: 19880811 10-Q/A 1 FORM 10-Q/A-2 FORM 10-Q/A-2 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, 1996 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 0-10881 NY 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) (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 --- 14,175,608 shares as of August 7, 1996 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, 1996 (Unaudited) and December 31, 1995 (Audited) 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1996 and 1995 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (Unaudited) 5/6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7/8/9/10/11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12/13/14/15 Part II. Other Information: Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16/17 Item 6. Exhibits and Reports on Form 8-K 17 Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES June 30, 1996 December 31, 1995 ------------- ----------------- (unaudited) (audited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 397,000 $ 214,000 Accounts receivable - net 26,965,000 21,936,000 Inventories 31,549,000 29,819,000 Other current assets 2,162,000 1,789,000 Recoverable and prepaid income taxes 246,000 221,000 ------------- ------------- TOTAL CURRENT ASSETS 61,319,000 53,979,000 PROPERTY, PLANT AND EQUIPMENT - net 7,755,000 8,120,000 EXCESS OF COST OVER NET ASSETS ACQUIRED - net 28,485,000 29,291,000 INVESTMENT IN LEVERAGED LEASE -- 487,000 OTHER ASSETS 5,531,000 4,910,000 DEFERRED TAX ASSET 1,928,000 3,012,000 ------------- ------------- TOTAL ASSETS $ 105,018,000 $ 99,799,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank $ 1,100,000 $ 2,100,000 Current maturities of long-term debt and Guaranteed Senior Notes 2,591,000 1,578,000 Accounts payable 8,382,000 8,750,000 Acceptances payable 11,500,000 5,000,000 Accrued expenses 2,467,000 2,788,000 ------------- ------------- TOTAL CURRENT LIABILITIES 26,040,000 20,216,000 LONG-TERM DEBT 704,000 972,000 GUARANTEED SENIOR NOTES 17,000,000 19,000,000 ------------- ------------- TOTAL LIABILITIES 43,744,000 40,188,000 STOCKHOLDERS' EQUITY: Preferred Stock -- -- Common Stock 354,000 352,000 Additional paid-in capital 67,317,000 66,887,000 (Deficit) (6,303,000) (7,628,000) ------------- ------------- Sub-total 61,368,000 59,611,000 Notes receivable from sale of shares (94,000) -- ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 61,274,000 59,611,000 COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,018,000 $ 99,799,000 ============= ============= See notes to condensed consolidated financial statements. Page 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 -------------- ------------- 1996 1995 1996 1995 ------------ ------------ ---------- ------------ REVENUES: Operations $29,582,000 $24,327,000 $56,511,000 $48,818,000 Interest and other income 46,000 8,000 465,000 16,000 ------------ ------------ ---------- ------------ 29,628,000 24,335,000 56,976,000 48,834,000 COST AND EXPENSES: Cost of revenues 19,881,000 16,763,000 38,383,000 33,535,000 Selling, general and administrative 7,614,000 6,818,000 14,943,000 13,690,000 Interest expense 652,000 690,000 1,241,000 1,435,000 ------------ ----------- ----------- ----------- 28,147,000 24,271,000 54,567,000 48,660,000 INCOME BEFORE INCOME TAXES 1,481,000 64,000 2,409,000 174,000 INCOME TAXES 666,000 25,000 1,084,000 69,000 ------------ ------------ ----------- ------------ NET INCOME $ 815,000 $ 39,000 $ 1,325,000 $ 105,000 ============ ============ =========== =========== PER SHARE DATA: NET INCOME PER SHARE $ .06 $ .00 $ .09 $ .01 ============ ============ =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 14,547,000 13,021,000 14,364,000 13,007,000 ============ ============ =========== ===========
See notes to condensed consolidated financial statements. Page 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) Six Months Ended June 30 --------------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES Net Income $ 1,325,000 $ 105,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,602,000 1,681,000 Provision for losses on accounts receivable 274,000 195,000 Deferred income taxes 1,084,000 69,000 Gain on sale of product line (360,000) Changes in operating assets and liabilities: Accounts receivable (5,303,000) (302,000) Inventories, other current assets and recoverable and prepaid income taxes (2,072,000) 5,115,000 Accounts and acceptances payable and accrued expenses 5,584,000 (4,962,000) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,134,000 1,901,000 ----------- ----------- INVESTING ACTIVITIES Purchases of property, plant and equipment (406,000) (295,000) Notes receivable from officers (94,000) Initial payment in connection with acquisition (500,000) Proceeds from sale of product line 500,000 Proceeds from sale of assets under leveraged lease 487,000 Net (increase) decrease in other assets (115,000) 42,000 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES $ (128,000) $ (253,000) ----------- ----------- See notes to condensed consolidated financial statements. Page 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) Six Months Ended June 30 ---------------- 1996 1995 ----------- ----------- FINANCING ACTIVITIES Proceeds from note payable to bank $ 1,500,000 $ 1,000,000 Payments on note payable to bank (2,500,000) (1,673,000) Principal payments on long term debt (1,255,000) (280,000) Proceeds on exercise of stock options 432,000 172,000 ----------- ---------- NET CASH (USED IN) FINANCING ACTIVITIES (1,823,000) (781,000) ----------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 183,000 867,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 214,000 121,000 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 397,000 $ 988,000 =========== ========== See notes to condensed consolidated financial statements. Page 6 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, 1996 (unaudited), the results of operations for the three and six months ended June 30, 1996 and 1995 (unaudited) and the statements of cash flows for the six months ended June 30, 1996 and 1995 (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, 1995. Inventories at June 30, 1996 have been valued at average cost based on perpetual records or the gross profit method. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard establishes the accounting for the impairment of long-lived assets, certain identifiable intangibles and the excess of cost over net assets acquired, related to those assets to be held and used in operations, whereby impairment losses are required to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets and certain identifiable intangibles that are expected to be disposed of. The adoption of SFAS No. 121 did not have a material effect on the results of operations or financial condition of the Company. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than the fourth quarter of 1996. The new standard defines a fair value method of accounting for the issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the 1996 financial statements proforma net income and per share amounts as if the Company had applied the new method of accounting. SFAS No. 123 also requires increased disclosures for stock-based compensation arrangements. The Company has decided not to adopt the fair value method but will provide the necessary proforma information. Page 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) The results of operations for the three and six months ended June 30, 1996 and 1995 are not necessarily indicative of results for the full year. 2. NET INCOME PER SHARE Net income per common share for the three and six months ended June 30, 1996 and 1995 was computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during the period. 3. INVENTORIES Inventories consist of the following: June 30 December 31 1996 1995 ----------- ----------- Raw materials $ 2,527,000 $ 2,871,000 Work-in-process 1,136,000 1,620,000 Finished goods 27,886,000 25,328,000 ----------- ----------- $31,549,000 $29,819,000 =========== =========== 4. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"). Under Statement No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. As of June 30, 1996, the Company has recorded net deferred tax assets of $1,928,000. These tax assets are primarily comprised of net operating loss carryforwards and investment, research and development, jobs tax and alternate minimum tax credits. Based upon the Company's expectation that future taxable income will be sufficient to utilize the carryforward prior to December 31, 2009, the Company has not recorded a valuation allowance on these deferred tax assets, except for an allowance of $55,000 related to tax assets recorded for acquired carryforwards. Future taxable income is expected to be derived from the Company's existing operations. The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Page 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) 5. OTHER MATTERS During the first quarter of 1996, the Company's inventory buy-back program was introduced to provide an outlet for its customers to eliminate their excess inventory. Under the program, the Company purchases certain excess inventory from its customers, who in turn place additional purchase orders with the Company exceeding the value of the excess inventory purchased. The Company is able to utilize its vast customer base and distribution network to market and distribute the excess inventory through its division, National Medical Excess Corp. ("NME"). Substantially all of the medical products purchased by the Company as part of the inventory buy-back program are items not generally offered for sale by the Company. Items repurchased by the Company which are identified as items previously sold by the Company to a customer have been deminimus based on the Company's experience, and have been recorded in accordance with the Company's normal revenue recognition policy. On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump product line for $1,000,000 of which $500,000 was paid in cash with the balance in a secured subordinated promissory note, and recorded a gain of $360,000, which is included in other revenue on the accompanying condensed consolidated statements of operations. In March 1996, the Company introduced a new regional operation under the name "GF Express" to provide "next-day" and "same-day" service to home healthcare dealers of certain strategic home healthcare products. In connection with the introduction of "GF Express," the Company made an initial payment of $500,000 on March 16, 1996 to acquire certain assets at a future date of Jeffco Express Medical Supply, Inc. ("JEM"), including a customer list, certain contracts and other assets. As part of the transaction, the Company entered into a Management and Administrative Agreement pursuant to which JEM managed and administered "GF Express" for a management fee. The Company acquired the assets of JEM on May 14, 1996, and delivered a non-negotiable promissory note in the amount of $500,000 for the balance of the purchase price, which is payable within one year to JEM, subject to the attainment of certain financial criteria. In May 1996, the Company liquidated its investment in the leveraged lease agreement entered into in December 1983. The cash proceeds from the sale of the leased helicopters approximated the recorded investment in the leveraged lease. On June 17, 1996, the Company reached an agreement in principle with Everest & Jennings International, Ltd. ("Everest & Jennings) and BIL (Far East Holdings) Limited ("BIL"), the majority stockholder of Everest & Jennings, to acquire Everest & Jennings in a merger transaction. The terms of the proposed transaction announced on June 17, 1996 provided that the stockholders of Everest & Jennings would receive one share of common stock of the Company in exchange for each four shares of the common stock of Everest & Jennings, and $2.00 for each share of common stock of Everest & Jennings, or a total of approximately 1.8 million shares of the Company's common stock and $14.4 million. On August 13, 1996, the Company and Everest & Jennings announced revised terms pursuant to which the stockholders Page 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) of Everest & Jennings will receive one share of common stock of the Company in exchange for each 2.857 shares of the common stock of Everest & Jennings, but no cash payment, or a total of approximately 2.519 million shares of the Company's common stock. Notwithstanding the foregoing, the exchange ratio will be reduced to the extent necessary so that the value of each fraction of a share of common stock of the Company issued in exchange for a share of common stock of Everest & Jennings does not exceed $5.50. BIL will purchase up to an additional 1.923 million shares of common stock of the Company to be valued at the greater of $13.00 per share or the average market price of the common stock of the Company for the ten (10) consecutive trading days prior to the closing date, the proceeds of which will be used by the Company to repay all debt of Everest & Jennings in the approximate amount of $25 million to the Hong Kong and Shanghai Banking Corporation Limited. As part of the transaction, all debt of Everest & Jennings to BIL and all Convertible Preferred Stock of Everest & Jennings held by BIL will be exchanged for an equal amount of the Company Series B Convertible Preferred Stock in an amount not to exceed $61 million. The Series B Convertible Preferred Stock will yield a dividend at the rate of 1.5% per year, which will be paid at the option of the Company either in cash or common stock. During the five (5) year period commencing on the closing date, and subject to a $20 per share conversion rate limitation, the Series B Convertible Preferred Stock will be convertible into common stock by BIL at a conversion rate of $20 per share, or by the Company at a conversion rate equal to the Company's average stock price during any ten (10) consecutive trading days, provided the common stock trades at an average stock price of $15.50 per share or greater during the applicable period. In the event the Series B Convertible Preferred Stock has not been converted during the applicable five (5) year period, the Series B Convertible Preferred Stock will automatically convert on the fifth anniversary date of the closing at a conversion rate of $15.50. As part of the revised transaction, BIL will purchase $10 million of the Company Series C Convertible Preferred Stock, with a dividend yield at the rate of 1.5% per year, which will be paid at the option of the Company either in cash or common stock. At the Company's option, the Series C Convertible Preferred Stock will either be converted into 500,000 shares of common stock on the fifth anniversary date of the closing, or redeemed by the Company at its stated value on such date. Immediately after the transaction and after giving effect to the conversion of the Series B and Series C Convertible Preferred Stock, BIL will own approximately 34% of the common stock of the Company on a fully-diluted basis. During July 1996, BIL loaned $4 million to the Company, which will be converted at closing into a subordinated loan maturing in 2001 with interest payable quarterly at an effective rate of 7.7% per year. Upon the closing of the Everest & Jennings transaction, the Company will issue approximately 4.442 million shares of common stock, consisting of (i) approximately 2.519 million shares to the stockholders of Everest & Jennings and (ii) up to an additional 1.923 million shares of common stock to BIL, to be valued at the greater of $13 per share or the average market price of the common stock of the Company for the ten consecutive trading days prior to the closing date, the proceeds of which will be used by the Company to repay all debt of Everest & Jennings in the approximate amount of $25 million to the Hong Kong and Shanghai Banking Corporation Limited. In the event the Series B Convertible Preferred Stock has not converted during the applicable five (5) year period, the Series B Convertible Preferred Stock will automatically convert on the fifth anniversary date of the closing into approximately 3.935 million shares Page 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (Unaudited) of the common stock of the Company at a conversion price of $15.50. In addition, at the Company's option, the Series C Convertible Preferred Stock will either be converted into 500,000 shares of common stock on the fifth anniversary date of the closing, or redeemed by the Company at its stated value on such date. In the event the Series B Convertible Preferred Stock automatically converts at a conversion rate of $15.50 and the Series C Convertible Preferred Stock converts into 500,000 shares on the fifth anniversary date of the closing, the Company will issue an aggregate of approximately 8.877 million shares (not including any shares that might be issued as a dividend on the Series B or Series C Convertible Preferred Stock) of common stock in connection with the Everest & Jennings transaction. The Company plans to enter into definitive documentation by the end of August 1996, with a closing planned for November 1996. The transaction is subject to, among other things, the execution of definitive documentation, the approval by the stockholders of Graham-Field and Everest & Jennings, the receipt of certain corporate and regulatory approvals, and the satisfaction of other customary terms and conditions. BIL, which owns approximately 80% of the outstanding common stock of Everest & Jennings, has agreed to vote in favor of the transaction. In June 1996, the Company entered into a letter of intent to acquire V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of medical products in Puerto Rico, for a purchase price of approximately $1.5 million, consisting of cash in the amount of approximately $1,250,000, with the balance payable in shares of common stock of the Company. As additional consideration, the Company will pay $500,000 to V.C. Medical in the event the business achieves certain earnings levels during the one year period following the closing. This transaction is anticipated to be completed in August 1996. 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 is to be used to fund the acquisition of V.C. Medical and for general corporate purposes. Under the terms of the loan, all principal and interest are payable upon the earlier to occur of 45 days after the closing of the Everest & Jennings merger transaction or 45 days after the termination of the transaction. The modified terms of the Everest & Jennings merger transaction provide that the loan will be converted upon closing of the transaction into a subordinated loan maturing in 2001 with interest payable quarterly at an effective rate of 7.7% per year. In July 1996, the Company entered into a sales representative and consulting agreement with CustomerCare Corporation, which has enabled the Company to expand its product offering to include a complete line of wound care, urologicals and ostomy supplies, including the Hollister line of ostomy and colostomy products. The agreement provides for, among other things, a consulting fee in the amount of $100,000, and a minimum commission amount of $7,000 a month for a two year period. 6. LEGAL PROCEEDINGS SEE PART II, ITEM 1 ON PAGE 16 Page 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Operating Revenues Operating revenues for the three months ended June 30, 1996 increased approximately $5,255,000 or 22%, as compared to the same period last year. Operating revenues for the six months ended June 30, 1996, increased approximately $7,693,000 or 16% as compared to the same period last year. The increase in operating revenues was primarily attributable to the Company's expansion of its Consolidation Advantage Program ("CAP") and the introduction of a new regional operation in the metropolitan New York area under the name "GF Express". During the first quarter of 1996, the Company's inventory buy-back program was introduced to provide an outlet for its customers to eliminate their excess inventory. Under the program, the Company purchases certain excess inventory from its customers, who in turn place additional purchase orders with the Company exceeding the value of the excess inventory purchased. The Company is able to utilize its vast customer base and distribution network to market and distribute the excess inventory through its division, National Medical Excess Corp. ("NME"). During the first six months of 1996, the Company test marketed the program with seven major customers. In view of the preliminary results of the program, the Company anticipates the roll-out of the program in the fourth quarter of 1996. Revenues attributable to NME, which was acquired as of July 1, 1995, were approximately $681,000 and $1,247,000 for the quarter and six month period ended June 30, 1996, respectively. In March 1996, "GF Express" was introduced to offer "next day" and "same day" service to home healthcare dealers of certain strategic home healthcare products, including Temco patient aids, adult incontinence products, wheelchairs, and nutritional supplements. Revenues attributable to GF Express were approximately $3,869,000 and $4,602,000 for the quarter and six month period ended June 30, 1996, respectively. Based on the results of the operations of "GF Express," the Company plans on expanding the program throughout the United States. The revenue increase was achieved despite the decline in sales to Apria Healthcare Group, Inc. ("Apria") of approximately $1,592,000 as compared to the second quarter of 1995. The Company's supply agreement with Apria expired on December 31, 1995. Interest and Other Income Interest and other income for the three month period ended June 30, 1996 increased $38,000 as compared to the same period last year. The increase is primarily due to finance charges incurred by customers with extended payment terms, interest income on certain notes receivable, and royalties related to the sale of the Gentle Expressions(R) breast pump product line. Interest and other income for the six month period ended June 30, 1996 increased by $449,000 as compared to the same period last year, primarily due to the gain of $360,000 recorded on the sale of the Gentle Expressions(R) breast pump product line. Page 12 Cost of Revenues Cost of revenues as a percentage of operating revenues for the three months ended June 30, 1996 decreased to 67.2% from 68.9% in the same period last year. Cost of revenues as a percentage of operating revenues for the six month period ended June 30, 1996 decreased to 67.9% from 68.7% in the same period last year. The decrease in cost of revenues is primarily related to the Company's emphasis on maintaining selling prices and improved purchasing and manufacturing efficiencies. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of operating revenues for the three months and six months ended June 30, 1996 were 26% as compared to 28% in the same periods last year. The decrease in both periods is primarily due to cost reduction programs and the continuing efficiencies generated by the Company's investment in new business systems. Interest Expense Interest expense for the three months ended June 30, 1996 decreased by $38,000 or 6% as compared to the same period last year. For the six months ended June 30, 1996, interest expense decreased by $194,000 or 14% as compared to the same period last year. The decrease in interest expense in both periods is primarily due to lower interest rates and reduced average borrowings as compared to the same periods last year. Net Income Income before income taxes for the three months ended June 30, 1996 was $1,481,000 as compared to $64,000 in the same period last year. Income before income taxes for the six months ended June 30, 1996 was $2,409,000 as compared to $174,000 in the same period last year. The increase in income before income taxes is primarily due to the increase in revenues, an increased gross profit margin, the decrease in selling, general and administrative expenses as a percentage of operating revenues, the decrease in interest expense and the gain realized in the first quarter from the sale of the Gentle Expressions(R) breast pump product line. Net income for the three months ended June 30, 1996 was $815,000 as compared to $39,000 for the same period last year. Net income for the six months ended June 30, 1996 was $1,325,000 as compared to $105,000 for the same period last year. The Company recorded income tax expense of $666,000 and $1,084,000 for the three and six month periods ended June 30, 1996, respectively, as compared to income tax expense of $25,000 and $69,000 recorded during the same periods last year. As of June 30, 1996, the Company has recorded net deferred tax assets of $1,928,000, primarily comprised of net operating loss carryforwards and investment, research and development, jobs tax and alternative minimum tax credits. Page 13 Based upon the Company's expectation that future taxable income will be sufficient to utilize the carryforwards prior to December 31, 2009, the Company has not recorded a valuation allowance on these deferred tax assets, except for an allowance of $55,000 related to tax assets recorded for acquired carryforwards. Future taxable income is expected to be derived from the Company's existing operations. The total 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 term if estimates of future taxable income during the carryforward period are reduced. Uncertainties which would impact the future realizability, but are not expected to occur include declines 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. Liquidity and Capital Resources The Company had working capital of $35,279,000 at June 30, 1996, as compared to $33,763,000 at December 31, 1995. The increase in working capital is primarily attributable to the cash provided by the Company's net income of $1,325,000, which reflects $1,602,000 of amortization and depreciation expense, partially offset by the reclassification of an additional $1,000,000 of principal related to the John Hancock Guaranteed Senior Notes to reflect the scheduled principal payment of $2,000,000 due in February 1997, and the initial payment of $500,000 in connection with an acquisition. Cash provided by operations for the six months ended June 30, 1996 was $2,134,000 as compared to $1,901,000 in the same period last year. The principal reasons for the increase in cash provided by operations were the Company's operating profit and increased inventory turns as a result of the Company's improved purchasing activities. The Company anticipates that its current cash balance together with expected cash flow from operations, and its bank line of credit will be sufficient to meet its working capital requirements. Financing As of June 30, 1996, the Company had a $15,000,000 unsecured line-of-credit with its bank, which expires on September 30, 1996. In July 1996, the line was increased to $16,000,000. The line is available for direct borrowings in the amount of up to $5,000,000, and provides for commercial letters of credit and bankers' acceptances. Credit availability under this line is subject to the bank's continuing satisfaction with current financial information. The line is guaranteed by the Company's wholly-owned subsidiaries. Interest on direct borrowings is payable at 1% above the bank's prime rate, acceptances are created for a fee of 1-1/2% above the bank's acceptance rate and commercial letters of credit have a commission rate of 3/8% per drawing. The Company is presently in discussions with its bank and other banks to increase its credit line. The Company anticipates that this line will either be renewed or replaced with a new credit facility. Page 14 At June 30, 1996, the Company had direct borrowings of $1,100,000 and $11,500,000 had been utilized under acceptances payable. Open letters of credit relating to vendor purchases approximated $1,600,000 at June 30, 1996. 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 is to be used to fund the acquisition of V.C. Medical and for general corporate purposes. Under the terms of the loan, all principal and interest are payable upon the earlier to occur of 45 days after the closing of the Everest & Jennings merger transaction or 45 days after the termination of the transaction. The modified terms of the Everest & Jennings merger transaction provide that the loan will be converted upon closing of the transaction into a subordinated loan maturing in 2001 with interest payable quarterly at an effective rate of 7.7% per year. Page 15 Part II. Other Information Item 1. Legal Proceedings On May 21, 1996, the Company was sued by Minnesota Mining & Manufacturing Company ("3M") in a claim purportedly arising under Federal, state and common law trademark, false advertising and unfair competition laws, as well as for breach of, and interference with, contracts. 3M alleges that the Company is selling 3M products in violation of Federal and state law, and seeks monetary damages in an unspecified amount, as well as injunctive relief against the Company's continued sale of 3M products. The claim was filed in the Southern District of New York. The Company vigorously denies the allegations of 3M's complaint, and has filed an answer denying the allegations of wrongdoing and asserting affirmative defenses. In addition, the Company has asserted counterclaims against 3M under Federal antitrust laws, as well as an unfair competition claim. In June 1996, the Company was sued in a purported class action captioned "Kauffman v. Hogg" in Delaware Chancery Court arising out of the Company's announced acquisition of Everest & Jennings. The complaint alleges that the Company aided and abetted breaches of fiduciary duty on the part of Everest & Jennings' controlling stockholder and its directors in connection with their negotiation of the proposed transaction. Plaintiff, a stockholder at Everest & Jennings, purports to seek to enjoin the transaction, or alternatively, rescission, or an award of compensatory or rescissory damages. The Company believes that it has valid defenses to the complaint's allegations of wrongdoing, and intends to vigorously defend the lawsuit. The Company is a defendant in certain other legal actions which arose in the normal course of business, the outcome of which, in the opinion of management, will not have a material adverse effect on the Company's financial position. Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of stockholders was held on June 18, 1996. (a) Proposal No. 1: To elect three Class III Directors: Louis A. Lubrano Dr. Harold Lazarus Steven D. Levkoff (b) Proposal No. 2: Whether to ratify the appointment of Ernst & Young LLP as independent accountants for the fiscal year ended December 31, 1996. Page 16 Tabulations for the proposals voted at the annual meeting follow: For Against/Withheld Abstain --- ---------------- ------- Directors: Louis A. Lubrano 11,948,386 89,056 -0- Dr. Harold Lazarus 11,944,386 93,056 -0- Steven D. Levkoff 11,948,386 89,056 -0- Proposal No. 2 11,953,168 56,400 27,874 Item 6. Exhibits and Reports on Form 8-K None Page 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: October 17, 1996 s/Irwin Selinger -------------------------------------- Irwin Selinger Chairman of the Board and Chief Executive Officer Date: October 17, 1996 s/Gary M. Jacobs -------------------------------------- Gary M. Jacobs Vice President - Finance Chief Financial and Accounting Officer Page 18 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AS INCLUDED IN THE FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS Dec-31-1996 Jun-30-1996 397 0 26,965 0 31,549 61,319 7,755 0 105,018 26,040 17,704 0 0 354 60,920 105,018 29,582 29,628 19,881 19,881 7,614 0 652 1,481 666 815 0 0 0 815 .06 .06
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