<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A Amendment 1
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1993
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: 0-3585
EVEREST & JENNINGS INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2536185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 CORPORATE SQUARE DRIVE, ST. LOUIS, MISSOURI 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-995-7000
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
the management of Everest & Jennings International Ltd. (the "Company") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary to state fairly the data included herein
in accordance with generally accepted accounting principles for interim
financial information have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Management believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per-share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
1993 1992
---- ----
(Unaudited)
<S> <C> <C>
Revenues $ 23,458 $ 22,742
Cost of sales 17,746 17,449
---------- ----------
Gross profit 5,712 5,293
Selling expenses 7,280 6,556
General and administrative expenses 1,986 2,209
Restructuring expenses (Note 1) --- 2,500
---------- ----------
Total operating expenses 9,266 11,265
---------- ----------
Loss from operations (3,554) (5,972)
Interest expense, BIL (Note 5) 761 200
Interest expense, other 904 494
---------- ----------
Loss before income taxes (5,219) (6,666)
Income tax provisions (benefits) 17 (1,205)
---------- ----------
Net loss $ (5,236) $ (5,461)
---------- ----------
---------- ----------
Loss per share (Note 6) $(.57) $(.60)
------ ------
------ ------
Weighted average number of Common
Shares outstanding 9,194,000 9,146,000
</TABLE>
The accompanying Notes are an integral part of these
Consolidated Financial Statements
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per-share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1993 1992
---- ----
(Unaudited)
<S> <C> <C>
Revenues $ 71,734 $ 82,947
Cost of sales 53,826 60,020
---------- ----------
Gross profit 17,908 22,927
Selling expenses 19,317 20,248
General and administrative expenses 9,917 7,683
Restructuring expenses (Note 1) --- 2,500
---------- ----------
Total operating expenses 29,234 30,431
---------- ----------
Loss from operations (11,326) (7,504)
Interest expense, BIL (Note 5) 2,175 313
Interest expense, other 2,341 2,175
---------- ----------
Loss before income taxes (15,842) (9,992)
Income tax provisions (benefits) 208 (1,815)
---------- ----------
Net loss $ (16,050) $ (8,177)
---------- ----------
---------- ----------
Loss per share (Note 6) $(1.75) $(.89)
------- ------
------- ------
Weighted average number of Common
Shares outstanding 9,162,000 9,146,000
</TABLE>
The accompanying Notes are an integral part of these
Consolidated Financial Statements
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1993 1992
-------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 180 $ 145
Accounts receivable, less allowance for doubtful
accounts of $3,685 in 1993 and $3,505 in 1992 21,471 20,000
Inventories (Note 8) 26,948 24,631
Other current assets 5,436 4,196
---------- ----------
Total current assets 54,035 48,972
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 470 442
Buildings and improvements 6,765 6,677
Machinery and equipment 19,014 16,112
---------- ----------
26,249 23,231
Less accumulated depreciation and amortization 13,007 11,848
---------- ----------
Property, plant and equipment, net 13,242 11,383
INTANGIBLE ASSETS, NET (Note 10) 6,522 6,696
OTHER ASSETS 1,638 2,408
---------- ----------
TOTAL ASSETS $ 75,437 $ 69,459
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes are an integral part of these
Consolidated Financial Statements
5
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per-share data)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1993 1992
-------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings from BIL (Note 5) $ 67,300 $ 29,292
Short-term borrowings, and current installments of long-term
debt of $1,952 in 1993 and $1,637 in 1992 (Note 5) 18,381 25,912
Accounts payable 7,260 16,782
Accrued payroll costs 8,143 7,624
Accrued interest, BIL (Note 5) 4,453 2,278
Accrued expenses and income taxes (Note 7) 7,802 8,361
Accrued restructuring expenses (Note 1) 1,656 6,047
---------- ----------
Total current liabilities 114,995 96,296
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 5) 7,808 3,351
OTHER LONG-TERM LIABILITIES 552 610
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock (Note 5) 10,174 10,174
Series B Convertible Preferred Stock (Note 5) 1,317 1,317
Class A Common Stock, par value: $.01;
authorized 10,000,000 shares; (Note 9) 68 68
Class B Common Stock, convertible, par value: $.01;
authorized 10,000,000 shares; (Note 9) 24 24
Additional paid-in capital 43,708 43,708
Accumulated deficit (102,550) (85,585)
Cumulative translation adjustments (659) (504)
---------- ----------
Total stockholders' deficit (47,918) (30,798)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 75,437 $ 69,459
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes are an integral part of these
Consolidated Financial Statements
6
<PAGE> 7
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock
----------------------- ---------------------
Shares Amount Shares Amount
------ ------- ------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 6,075,419 $10,174 786,357 $1,317
Common Stock issued -- -- -- --
Pay-in-kind dividends
on Series A Convertible
Preferred Stock -- -- -- --
Net loss -- -- -- --
Translation adjustments -- -- -- --
-------- ------ ------- -----
Balance at September 30, 1993 6,075,419 $10,174 786,357 $1,317
--------- ------- ------- ------
--------- ------- ------- ------
<CAPTION>
Class A Class B
Common Stock Common Stock
------------ ------------
Shares Amount Shares Amount
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 6,792,852 $68 2,353,427 $24
Common Stock issued 53,333 -- -- --
Pay-in-kind dividends
on Series A Convertible
Preferred Stock -- -- -- --
Net loss -- -- -- --
Translation adjustments -- -- -- --
--------- ------- ---------- ----
Balance at September 30, 1993 6,846,185 $68 2,353,427 $24
--------- ------- ---------- ----
--------- ------- ---------- ----
<CAPTION>
Additional Cumulative
Paid-in Accumulated Translation
Capital Deficit Adjustments Total
------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $43,708 $(85,585) $(504) $(30,798)
Common Stock issued -- -- -- --
Pay-in-kind dividends
on Series A Convertible
Preferred Stock -- (915) -- (915)
Net loss -- (16,050) -- (16,050)
Translation adjustments -- -- (155) (155)
-------- ---------- -------- ---------
Balance at September 30, 1993 $43,708 $(102,550) $(659) $(47,918)
-------- ---------- -------- ---------
-------- ---------- -------- ---------
</TABLE>
The accompanying Notes are an integral part of these
Consolidated Financial Statements
7
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1993 1992
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,050) $ (8,177)
Adjustment to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 1,296 2,209
Gain on disposal of real estate and fixed assets --- (47)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (1,471) 4,588
Inventories (2,317) (849)
Accounts payable (9,522) (190)
Accrued interest, BIL 2,175 (1,734)
Accrued payroll costs, expenses and income taxes (955) (680)
Accrued restructuring expenses (4,391) (7,182)
Other, net (470) (1,198)
---------- ----------
Cash used in operating activities (31,705) (13,260)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,960) (2,028)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from BIL 37,795 17,000
Increase in short-term and long-term borrowings, net (2,861) (2,486)
Changes in other long-term liabilities (58) (236)
---------- ----------
Cash provided by financing activities 34,876 14,278
---------- ----------
Effect of exchange rate changes on cash flow (176) (88)
---------- ----------
Increase/(decrease) in cash balance 35 (1,098)
Cash balance at beginning of year 145 1,132
---------- ----------
Cash balance at end of the nine-month period $ 180 $ 34
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,078 $ 1,329
Cash paid for income taxes 303 28
</TABLE>
SUPPLEMENTAL INFORMATION FOR NONCASH FINANCING ACTIVITIES:
On March 17, 1992, $9,797 of debt and accrued interest payable to BIL (Far
East Holdings) Limited was converted into 5,850,380 shares of Series A
Convertible Preferred Stock.
The accompanying Notes are an integral part of these
Consolidated Financial Statements
8
<PAGE> 9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per-share data)
NOTE 1 -- CORPORATE RESTRUCTURING
Since 1989 the Company has incurred substantial financial losses in a
continuing effort to restructure its operations with the objective of becoming
a stronger long-term competitor in the durable medical equipment industry.
Restructuring activities to date have included asset sales, significant
reductions in headcount, salaries and fringe benefits, plant closures and
consolidations, product line rationalization, debt to equity conversion and
outsourcing of manufacturing operations. Additionally, in 1992 the Company
relocated its corporate headquarters and principal wheelchair manufacturing
operations from Camarillo, California to St. Louis, Missouri. The relocation
facilitated the consolidation of corporate offices and other key
administrative, sales/marketing, and technical functions with existing Company
operations in the St. Louis area. In October, 1993, the Company transferred
its data operations from California to Missouri, which signified the final step
in the Company's relocation from California to Missouri.
The accompanying financial statements have been prepared under the going
concern concept. The going concern concept anticipates an entity will continue
in its present form and, accordingly, uses the historical cost basis to prepare
financial statements. The Company has incurred substantial restructuring and
recurring losses and has a substantial net capital deficiency at September 30,
1993. As described more fully in Note 5 below, the Company also has a current
obligation to repay $67.3 million to BIL, excluding accrued unpaid interest due
BIL of $4.5 million. As described in Note 4 below, the Company and BIL have
agreed, subject to approval by the Company's stockholders, to the conversion of
a substantial amount of the indebtedness owed BIL to equity in the Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed for the three-month and nine-month
periods ended September 30, 1993 are the same as those disclosed in the Notes
to the Company's December 31, 1992 Consolidated Financial Statements, which
were included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, except that effective January 1993, the Company
adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes". Details of this change in accounting are
disclosed in Note 7 to the Consolidated Financial Statements. All dollar
amounts in these Notes to Unaudited Consolidated Financial Statements are in
thousands except per-share data or as otherwise specified. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of (a) the consolidated results of operations
for the three-month and nine-month periods ended September 30, 1993 and 1992;
(b) the consolidated financial position at September 30, 1993 and December 31,
1992; and (c) the consolidated cash flows for the nine month periods ended
September 30, 1993 and 1992 have been made. Certain reclassifications have
been made to prior period financial statements to conform with current period
presentation.
NOTE 3 -- PROPOSED ACQUISITION OF MEDICAL COMPOSITE TECHNOLOGY, INC.
The Company and BIL have entered into an Exchange Agreement and Plan of
Merger, dated as of October 22, 1993 (the "Merger Agreement"), with Medical
Composite Technology, Inc. ("MCT") and certain stockholders of MCT. The Merger
Agreement sets forth the terms and conditions under which MCT will merge (the
"Merger") with and into a wholly-owned subsidiary of the Company. The Merger
Agreement provides for a tax-free stock for stock exchange between the
stockholders of MCT and the Company, which will be accounted for using the
purchase method. The outstanding shares of common stock and preferred stock of
MCT will be converted into
9
<PAGE> 10
8,000,000 Common shares of the Company, assuming that the Company does not have
more than 104,000,000 Common shares outstanding after consummation of the Debt
Conversion Transaction (as described in Note 4 below). There is an
anti-dilution adjustment to maintain the number of Common shares issued in the
exchange equal to 7.7% of the Company's outstanding Common shares after
consummation of the Debt Conversion Transaction. The closing of the
transaction is subject to the satisfaction or waiver of numerous conditions,
including, but not limited to, the approval by the Company's stockholders of
the Debt Conversion Transaction and the Recapitalization Proposals (as
described in Note 4 below).
MCT, a company still in the development stage, had sales of approximately
$0.5 million and a net loss of $2.4 million for the fiscal year ended December
31, 1992. Sales for the nine months ended September 30, 1993 approximated $0.7
million with net losses of approximately $2.0 million.
NOTE 4 -- DEBT RESTRUCTURING
As of September 30, 1993, the Company, Everest & Jennings, Inc. ("E&J Inc."),
Jennings Investment Co. and BIL entered into a Debt Conversion Agreement to
provide for the conversion (the "Debt Conversion Transaction") of approximately
$75 million in principal and accrued, unpaid interest (the "Converted BIL
Debt"), owed by the Company and E&J Inc. to BIL pursuant to the Agreement (as
defined in Note 5), the Amended 10.5% Note (as defined in Note 5), and the
Interim Loans (as defined in Note 5). Pursuant to the Debt Conversion
Agreement, (a) the Company and E&J Inc. issued to BIL a Convertible Promissory
Note -- Common Stock (the "Common Stock Note") in the initial principal amount
of $45 million and a Convertible Promissory Note -- Preferred Stock (the
"Preferred Stock Note") in the original principal amount of $20 million; (b)
BIL agreed to lend to E&J Inc. $5.7 million to allow E&J Inc. the ability to
repay the outstanding balance of cash advances owed by E&J Inc. to HSBC under
the terms of a Revolving Credit Agreement dated as of September 30, 1992, as
amended (the "Revolving Credit Agreement"), between E&J Inc. and HSBC; (c)
Brierley Investments Limited, an affiliate of BIL, agreed to guarantee a letter
of credit facility ("Letter of Credit Facility") between E&J Inc. and HSBC (or
an alternative commercial lending institution) in an amount not exceeding $6
million through and including June 30, 1995; (d) BIL, as guarantor of the
obligations of E&J Inc. under the Revolving Credit Agreement, agreed to an
amendment of the Revolving Credit Agreement whereby cash advances of up to $10
million were made available for E&J Inc.'s working capital needs; (e) the
Company and E&J Inc. agreed to indemnify (the "Indemnification Obligation") BIL
from and against any and all losses arising out of BIL's guarantee of the
Letter of Credit Facility and the Revolving Credit Agreement; (f) BIL agreed to
lend to the Company and E&J Inc. up to $12.5 million pursuant to the terms of
the Revolving Promissory Note; (g) BIL and the Company and E&J Inc. entered
into a Security Agreement (the "Security Agreement") pursuant to which the
Company and E&J Inc. granted a security interest in all of their assets to BIL
to secure on a pari passu basis the obligations of the Company and E&J Inc. to
BIL under the Common Stock Note, the Preferred Stock Note, the Revolving
Promissory Note and the Indemnification Obligation; and (h) the Company and BIL
entered into a Registration Rights Agreement pursuant to which the Company
granted to BIL registration rights with respect to shares of Common Stock held
as of the date of the Registration Rights Agreement and shares of Common Stock
obtained by BIL as a result of the conversion of the Common Stock Note and
Series C Preferred Stock issuable upon conversion of the Promissory Stock Note.
E&J Inc. used $10 million under the Revolving Credit Agreement to repay a $10
million loan from Mercantile Bank on October 8, 1993. This loan was
collateralized by a $10 million letter of credit issued by HSBC under the
Revolving Credit Agreement. Due to such loan repayment, E&J Inc. has no
further cash availability under the Revolving Credit Agreement.
The Company anticipates holding a Special Meeting of Stockholders prior to
March 31, 1994, to ratify and approve the Debt Conversion Transaction.
Concurrent with ratification and approval of the Debt Conversion Transaction,
the Company's stockholders will be asked to approve and adopt amendments to the
Company's Certificate of Incorporation to increase the number of authorized
shares of Common stock from 25,000,000 to 120,000,000 and to increase the
number of authorized shares of Preferred Stock from 11,000,000 to 31,000,000
(the "Recapitalization Proposals").
10
<PAGE> 11
BIL has agreed, upon stockholder approval of the Debt Conversion Transaction
and the Recapitalization Proposals, to advance to E&J Inc. $10 million to pay
HSBC the cash advance made by it to E&J Inc. under the Revolving Credit
Agreement. Such advance by BIL to E&J Inc. would result in an increase in the
principal amount of the Common Stock Note from $45 million to $55 million.
The Common Stock Note matures on March 31, 1994, bears interest at the rate
of 8% per annum from and after March 31, 1994, and is secured by a lien on and
security interest in all assets of the Company and E&J Inc. on a pari passu
basis with the repayment and other obligations of the Company and E&J Inc.
under the Preferred Stock Note, the Revolving Promissory Note and the
Indemnification Obligation. The Common Stock Note is subordinated to all debt
borrowed by the Company or E&J Inc. from, or the payment of which has been
guaranteed by the Company or E&J Inc. to, HSBC, the Pension Benefit Guaranty
Corporation, Congress Financial Corporation and any other financial institution
constituting a principal lender to the Company and/or E&J Inc.
The Common Stock Note is convertible into a number of shares of Common stock
equal to the outstanding principal balance of that Note at conversion divided
by a stated conversion price ($1.00 per share, subject to antidilution
adjustment). The Common Stock Note automatically will convert in full upon
satisfaction of all of the following conditions: (a) ratification of the Debt
Conversion Transaction by the stockholders of the Company; (b) approval and
adoption of the Common Stock Amendment and the Preferred Stock Amendment by the
stockholders of the Company; (c) the filing and effectiveness of an amendment
to the Company's Certificate of Incorporation to effect the Common Stock
Amendment and the Preferred Stock Amendment; (d) adoption by the Board of
Directors of resolutions to designate the Series C Preferred Stock and the
filing and effectiveness of a Certificate of Designations of the Series C
Preferred Stock (the "Series C Certificate of Designations"); (e) reservation
of a sufficient number of shares of Series C Preferred Stock for issuance on
conversion of the Preferred Stock Note; (f) reservation of a sufficient number
of Common shares for issuance on conversion of the Common Stock Note and the
Series C Preferred Stock issued on conversion of the Preferred Stock Note; and
(g) approval for listing on the American Stock Exchange of the Common shares
issuable on conversion of the Common Stock Note and the Series C Preferred
Stock issued on conversion of the Preferred Stock Note. The Common Stock Note
is not convertible until each of the foregoing conditions has been satisfied.
The Preferred Stock Note matures on March 31, 1994, bears interest at the
rate of 8% per annum from and after March 31, 1994, and is secured by a lien on
and security interest in all assets of the Company and E&J Inc. on a pari passu
basis with the repayment and other obligations of the Company and E&J Inc.
under the Common Stock Note, the Revolving Promissory Note and the
Indemnification Obligation. The Preferred Stock Note is subordinated to all
debt borrowed by the Company or E&J Inc. from, or the payment of which has been
guaranteed by the Company or E&J Inc. to, HSBC, the Pension Benefit Guaranty
Corporation, Congress Financial Corporation and any other financial institution
constituting a principal lender to the Company and/or E&J Inc.
The Preferred Stock Note is convertible into a number of shares of Series C
Preferred Stock equal to the outstanding principal balance of that Note at
conversion divided by a stated conversion price ($1.00 per share, subject to
antidilution adjustment). The Series C Preferred Stock is convertible into
shares of Common stock on a one-for-one basis. The Preferred Stock Note
automatically will convert in full upon satisfaction of all of the following
conditions: (a) ratification of the Debt Conversion Transaction by the
stockholders of the Company; (b) approval and adoption of the Common Stock
Amendment and the Preferred Stock Amendment by the stockholders of the company;
(c) the filing and effectiveness of an amendment to the Company's Certificate
of Incorporation to effect the Common Stock Amendment and the Preferred Stock
Amendment; (d) adoption by the Board of Directors of resolutions to designate
the Series C Preferred Stock and the filing and effectiveness of a Certificate
of Designations of the Series C Preferred Stock (the "Series C Certificate of
Designations"); (e) reservation of a sufficient number of shares of Series C
Preferred Stock for issuance on conversion of the Preferred Stock Note; (f)
reservation of a sufficient number of Common shares for issuance on conversion
of the Common Stock Note and the Series C Preferred Stock issued on conversion
of the Preferred Stock Note; and
11
<PAGE> 12
(g) approval for listing on the American Stock Exchange of the Common
shares issuable on conversion of the Common Stock Note and the Series C
Preferred Stock issued on conversion of the Preferred Stock Note. The Preferred
Stock Note is not convertible until each of the foregoing conditions has been
satisfied.
NOTE 5 -- DEBT
The Company's debt as of September 30, 1993 and December 31, 1992 is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1993 1992
---- ----
<S> <C> <C>
Notes payable to BIL (1992 amount net of FASB 15 adjustment) (1) (2) $ 67,300 $ 29,292
Loan payable to Mercantile Bank 10,000 10,000
Loan payable to HSBC --- 5,093
Other domestic debt 11,101 10,258
Foreign debt 5,088 3,912
------- ------
Total debt 93,489 58,555
Less short-term debt and current installments of long-term debt 85,681 55,204
------- ------
Long-term debt, net of current installments $ 7,808 $ 3,351
---------- ----------
---------- ----------
</TABLE>
(1) Excludes accrued, unpaid interest of $4.5 million and $2.3 million,
respectively, due BIL.
(2) On September 30, 1993, the outstanding debt payable to BIL of $67.3
million and $4.5 million of accrued, unpaid interest was restructured by the
issuance of the Common Stock Note for $45.0 million, the Preferred Stock
Note for $20.0 million and the Revolving Promissory Note for $6.8 million.
On August 30, 1991, the Company executed a First Amended and Restated Credit
Agreement (the "Agreement") concerning the restructuring of its debt ("the Bank
Loan") with Security Pacific National Bank (the "Bank"). Under the provisions
of the Agreement the payment of cash dividends to common stockholders is
prohibited. The Bank Loan is secured by essentially all tangible and
intangible assets of the Company, its principal subsidiary, Everest & Jennings,
Inc., and the stock of the Company's other subsidiaries. On October 4, 1991,
the Company sold Ortopedia GmbH and repaid the Bank $8.3 million of its
indebtedness. In November, 1991, certain provisions of the Agreement with the
Bank were amended. The amended Agreement obligated the Company to repay its
indebtedness to the Bank by March 31, 1993. Additionally, if this indebtedness
was reduced to $13 million or less by March 31, 1993, the payment of interest
at the rate of 2.25% over prime would be waived from April 1, 1992 through
March 31, 1993. The Company agreed to issue a new class of voting convertible
preferred stock to the Bank representing approximately 5% of the voting stock
of the Company. In order to facilitate the relocation process by the Company
from California to Missouri, on February 21, 1992, BIL acquired all of the
Bank's rights (the "Bank Interest") in the Agreement. In connection with the
acquisition by BIL of the Bank Interest, BIL agreed to (a) permit the Company
to consolidate its U.S. manufacturing facilities, corporate headquarters and
administrative functions in St. Louis, Missouri; (b) permit the Company to
borrow additional funds and to obtain letters of credit from a lender other
than BIL as necessary for consolidation and for working capital; and (c)
release or subordinate its security interests under the Agreement to allow the
Company to obtain financing from a third party lender for working capital and
to effect and facilitate the consolidation of operations and corporate
headquarters in St. Louis, Missouri. The acquisition of the Bank Loan by BIL
resulted in BIL acquiring the new class of voting Series B Convertible
Preferred Stock (786,000 shares). As a condition of the HSBC Revolving Credit
Agreement, BIL has subordinated the repayment of the Bank Loan and the Amended
10.5% Note as defined below to the repayment of the HSBC debt. As of March 31,
1993, BIL extended the March 31, 1993 Bank Loan due date to June 30, 1993. As
of June 30, 1993, BIL agreed to extend the due date of the Bank Loan to
September 30, 1993. As of September 30, 1993, the Bank Loan was restructured
as part of the Debt Conversion Transaction.
12
<PAGE> 13
In 1990 the Company borrowed $14.1 million from BIL for working capital
purposes and to complete the acquisition of five wholly-owned subsidiaries
(collectively, "Smith & Davis") of HUNTCO Manufacturing, Inc. On August 30,
1991, the Company entered into an agreement with BIL (the "Debt Restructure
Agreement") to restructure this indebtedness. The restructuring combined the
principal, accrued unpaid interest and certain expenses into two new notes, the
first (which was unsecured) in the principal amount of $9.2 million at 9%
interest (the "Amended 9% Note"), and the second (which was secured) in the
principal amount of $6.9 million at 10.5% interest (the "Amended 10.5% Note").
In accordance with the Debt Restructure Agreement, on October 4, 1991 the
Company sold Ortopedia GmbH and repaid BIL $3.0 million of the Amended 10.5%
Note, reducing the balance to $3.9 million. On March 17, 1992, the Company's
stockholders approved the conversion of the Amended 9% Note, including accrued
interest, into approximately 5.9 million shares of 9% Series A Voting
Convertible Preferred Stock, thereby repaying the Amended 9% Note in its
entirety. The remaining $3.9 million balance of the Amended 10.5% Note, plus
accrued interest, was required by the terms of the Debt Restructure Agreement
to be repaid by the earlier of April 1, 1993 or the date on which the Camarillo
property was sold.
On October 9, 1992 the Company sold its facility in Camarillo, California.
Under the terms of the Debt Restructure Agreement, the Company was obligated to
utilize the proceeds from this sale to repay $3 million of the Amended 10.5%
Note with the balance to be applied against the Bank Loan. Accordingly, $3.0
million and $8.1 million, respectively, were repaid, leaving a balance of $0.9
million on the Amended 10.5% Note and a balance of $14.6 million on the Bank
Loan. The due date of the Amended 10.5% Note was previously extended by BIL to
June 30, 1993, and then subsequently to September 30, 1993. As of September
30, 1993, the Amended 10.5% Note was restructured as part of the Debt
Conversion Transaction.
During 1992 BIL advanced the Company $25 million, of which $11 million was
repaid from the proceeds of the HSBC loan, leaving a net balance of $14 million
as of December 31, 1992. An additional $31.1 million was advanced on various
dates through September 30, 1993, with a maturity date of one year after the
date of each respective advance. The indebtedness to BIL carries an interest
rate of 6.5% and is evidenced by various Promissory Notes. The first $15
million of these Promissory Notes provided for repayment upon the Company
obtaining new financing. However, as noted earlier, only $11 million of this
amount was repaid and BIL has amended the terms of the $4 million balance to
provide for a September 30, 1993 repayment date. The due date had previously
been extended to June 30, 1993. The remaining $41.1 million of Promissory
Notes outstanding at September 30, 1993 generally have a one year term and
mature on various dates through September 30, 1994. The advances described
above in this paragraph are hereinafter referred to as "Interim Loans". As of
September 30, 1993, the Interim Loans were restructured as part of the Debt
Conversion Transaction.
During September, 1993, the Company borrowed $6.8 million, which, as of
September 30, 1993, was an advance under the Revolving Promissory Note. On
November 8, 1993, the Company additionally borrowed $2.0 million under the
Revolving Promissory Note, bringing the total borrowings under such Note to
$8.8 million.
During 1992 and the first nine months of 1993, the Company accrued interest
in the amount of $1.3 million and $0.8 million, respectively, on the Bank Loan
in anticipation of not being able to reduce the balance of the Bank Loan below
$13 million by the original and extended due dates. Additionally, $0.4 million
was accrued on the Amended 10.5% Note through September 30, 1993, and $2.0
million was accrued on the Interim Loans, for total accrued interest due BIL as
of September 30, 1993 of $4.5 million.
On September 30, 1992, E&J Inc. entered into the $20 million unsecured
Revolving Credit Agreement with HSBC. Advances under the Revolving Credit
Agreement bear interest at the prime rate announced by Marine Midland Bank,
N.A. from time to time. Repayment of existing debt with BIL is subordinated to
the HSBC debt, and Brierley Investments Limited, an affiliate of BIL, has
guaranteed its repayment. Ten million dollars of the agreement was designated
as a letter of credit to secure a 3.5% loan from Mercantile Bank under the
State of Missouri MoBucks program, which loan was due in October, 1993
("MoBucks Loan"). The proceeds from the MoBucks Loan were used to reduce debt
to BIL. Additionally, the HSBC facility was used to replace then existing
letters of credit, fund restructuring expenses and for working capital
purposes.
13
<PAGE> 14
In September, 1993, the outstanding HSBC loan balance of $5.7 million was
paid off utilizing a cash advance provided by BIL under the Revolving
Promissory Note. Furthermore, as of September 30, 1993, HSBC and E&J Inc.
agreed to amend the Revolving Credit Agreement and extend its term for
approximately one year. The HSBC facility, as amended, provides up to $6
million letter of credit availability and, additionally, cash advances of up to
$10 million to E&J Inc. E&J Inc., on October 8, 1993, repaid the $10 million
loan from Mercantile Bank by utilizing $10 million of cash advances from the
HSBC facility.
BIL has agreed, upon stockholder approval of the Debt Conversion Transaction
and the Recapitalization Proposals, to advance to E&J Inc. $10 million to pay
HSBC the cash advance made by it under the Revolving Credit Agreement. Such
advance by BIL to E&J Inc. would result in an increase in the principal amount
of the Common Stock Note from $45 million to $55 million.
In connection with the proposed MCT acquisition, a total of $1.0 million was
advanced by the Company to MCT during the month of September. The first of two
installments of $500,000 was a nonrefundable cash advance. The second is
evidenced by a term loan of $500,000 which matures on September 30, 1994.
Subsequent to the execution of the Merger Agreement, during November, 1993, the
Company advanced another $500,000 to MCT. All of the above advances were
funded to the Company by BIL and constituted borrowings under the Revolving
Promissory Note.
As of September 30, 1993, the Company entered into the Debt Conversion
Agreement (see Note 4 above) with BIL whereby $65 million of the indebtedness
represented by the Bank Loan, the Amended 10.5% Note and the Interim Loans
(collectively, the "Converted BIL Debt") was restructured by the issuance of
the Common Stock Note and the Preferred Stock Note (see Note 4 above). The
balance of the indebtedness owed BIL ($6.8 million) which was not converted
into the Common Stock Note and the Preferred Stock Note was treated as advances
under the Revolving Promissory Note.
As part of the Debt Conversion Transaction, BIL agreed to provide to the
Company and E&J Inc. a revolving credit facility of up to $12.5 million, as
evidenced by the Revolving Promissory Note. As of September 30, 1993, $6.8
million had been advanced to the Company and E&J Inc. by BIL under the
Revolving Promissory Note. The Revolving Promissory Note matures on June 30,
1995, bears interest at the rate of 8% per annum, and is secured by a lien on
and security interest in all assets of the Company and E&J Inc. on a pari passu
basis with the repayment and other obligations of the Company and E&J Inc.
under the Common Stock Note, the Preferred Stock Note and the Indemnification
Obligation. The Revolving Promissory Note is subordinated to all debt borrowed
by the Company or E&J Inc. from, or the payment of which has been guaranteed by
the Company or E&J Inc. to, HSBC, the Pension Benefit Guaranty Corporation,
Congress Financial Corporation and any other financial institution constituting
a principal lender to the Company and/or E&J Inc.
In July, 1991, the Company obtained a three-year $13 million secured credit
facility at an interest rate of prime plus 3% for its Smith & Davis subsidiary.
The facility is secured by substantially all of the assets of Smith & Davis.
At September 30, 1993, the Company had borrowed $4.4 million under this line.
In February, 1993 this credit line was amended to increase the availability of
funding to the Company and reduce the borrowing cost to prime plus 2%.
Additionally, Smith & Davis had other borrowings primarily consisting of
amounts owed under certain industrial revenue bonds totaling $1.7 million at
September 30, 1993, with interest rates ranging from 8% to prime plus 3%.
These amounts are due at various semi-annual intervals through 1996.
On May 12, 1992, the Company's Canadian operations renewed existing credit
facilities in the aggregate of $4.9 million, on which $4.1 million was borrowed
as of September 30, 1993 at interest rates ranging from prime plus 1/2% to
prime plus 3/4%. The loans are secured by the net assets of the Canadian
subsidiary.
At September 30, 1993, the Company was contingently liable under existing
letters of credit in the aggregate amount of approximately $3.7 million.
14
<PAGE> 15
NOTE 6 -- LOSS PER SHARE
Loss per share for the three-month and nine-month periods ended September 30,
1993 and 1992 is calculated based on the weighted average number of the
combined shares of both Class A and Class B Common Stock during the periods.
NOTE 7 -- TAXES ON INCOME
In January 1993, the Company adopted SFAS 109, "Accounting for Income Taxes".
SFAS 109 utilizes an asset and liability approach in accounting for income
taxes and requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. Since it is
unlikely that the Company will realize the future tax benefits of the deferred
tax asset related to its substantial net operating losses, a valuation
allowance has been established for the full amount and thus the adoption of
SFAS 109 has no impact on the consolidated financial statements of the Company.
The Company's foreign source income is not material.
NOTE 8 -- INVENTORIES
Inventories at September 30, 1993 and December 31, 1992 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1993 1992
------------ -----------
<S> <C> <C>
Raw materials $11,835 $12,691
Work-in-process 8,662 6,682
Finished goods 6,451 5,258
------- -------
$26,948 $24,631
------- -------
------- -------
</TABLE>
NOTE 9 -- COMMON STOCK
On March 17, 1992, the stockholders of the Company approved a Plan of
Reclassification. Under the Plan of Reclassification, the Certificate of
Incorporation of the Company will be amended to replace the Company's
authorized Class A Common Stock and Class B Common Stock with a new single
class of Common Stock (the "Single Class Common Stock") having 25,000,000
authorized shares, and will reclassify each outstanding Class A Common share
and each outstanding Class B Common share into one share of Single Class Common
Stock. As all conditions precedent to the effectiveness of the Plan of
Reclassification have occurred, the Company anticipates that the Plan will be
effective by the end of November, 1993. Upon the effectiveness of the Plan,
the Company will have an unclassified Board of Directors and each Class A
Director and Class B Director elected at the most recent Annual Meeting will
become an unclassified member of the Board of Directors for the balance of his
or her term.
NOTE 10 -- INTANGIBLE ASSETS, NET
Management of the Company is in the process of reviewing the recoverability
and useful life of the Goodwill recorded pursuant to the Smith & Davis
acquisition. Such goodwill is valued at approximately $6.5 million at
September 30, 1993. This review may result in a partial or full impairment of
the asset.
15
<PAGE> 16
NOTE 11 -- CONTINGENT LIABILITIES
In July 1989, a class action suit was filed against a subsidiary of the
Company by six plaintiffs in the Superior Court for Alameda County, California.
The plaintiffs assert claims based on strict liability, negligence,
misrepresentations, fraud, breach of warranty and violation of various consumer
statutes in connection with the subsidiary's manufacture of a certain
wheelchair model. On June 27, 1991, the Superior Court certified the class
action. On August 30, 1991 and as subsequently amended, the Company reached an
agreement in principle to settle the litigation on terms considered not
material to the Company's consolidated financial statements. The Company has
recorded the expected costs of approximately $0.5 million relating to the
settlement. Final settlement documentation in the form of a Judgment and Order
of Dismissal was entered by the Superior Court on November 2, 1992, approving
the agreed settlement. The Company is in the process of taking actions
necessary to execute the agreed settlement.
In July, 1990, a class action suit was filed by a stockholder of the Company
in the United States District Court for the Central District of California.
The suit is against the Company and certain of its present and former directors
and officers and seeks unspecified damages for alleged non-disclosure and
misrepresentation concerning the Company in violation of federal securities
laws. The Company twice moved to dismiss the complaint on various grounds.
After the first such motion was granted, plaintiff filed a first amended
complaint, which subsequently was dismissed by order filed on September 20,
1991. Plaintiff then notified the court that it did not intend to further
amend the complaint, and an order dismissing the complaint was entered in
November 1991. Plaintiff filed a notice of appeal to the Court of Appeals for
the Ninth Circuit on December 23, 1991. The case has been briefed and oral
argument was heard in June, 1993. A decision is expected shortly. The Company
continues to believe the case is without merit and intends to contest the
asserted complaints vigorously. The ultimate liability, if any, cannot be
determined at this time.
In December, 1992 ICF Kaiser Engineers, Inc. ("ICF Kaiser") filed a Demand
for Arbitration (the "Demand") against the Company before the American
Arbitration Association in Los Angeles, California. ICF Kaiser in its demand
claims breach of contract between the parties for consulting and clean up work
by ICF Kaiser at the Company's former facilities located at 3233 East Mission
Oaks Boulevard, Camarillo, California. The Arbitration Demand is in the sum of
$1.1 million. In January, 1993 an answer and counter-claim were filed on
behalf of the Company. The answer denies breach of the contract and disputes
the monetary claim asserted in the Demand. In the counterclaim, the Company
asserts that ICF Kaiser breached the contract, above referenced, by inter alia
failing to perform the services required under the Agreement in a reasonably
cost effective manner and in accordance with the terms and conditions of the
Agreement. In February, 1993 the Company made a payment without prejudice to
ICF Kaiser in the sum of approximately $0.6 million. This payment, together
with prior payments, brings the total paid to date by the Company to ICF Kaiser
to approximately $0.7 million. The entirety of the charges by ICF Kaiser are
disputed as unreasonable under the circumstances and the Company intends to
vigorously defend its position. The Company has recorded an appropriate
reserve to reflect this matter and does not consider the amount to be material
to the Company's consolidated financial statements. The arbitration hearing
commenced in July, 1993 and is currently ongoing.
Die Cast Products, Inc. ("Die Cast Products"), a former subsidiary of the
Company, has been named as a defendant in a lawsuit filed by the State of
California pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act 42 U.S.C. Section Section 9601 et sec ("CERCLA"). The
Company was originally notified of this action on December 10, 1992. The
lawsuit seeks to recover response and remediation costs in connection with the
release or threatened release of hazardous substances at 5619-21 Randolph
Street, in the City of Commerce, California ("Randolph Street Site"). It is
alleged that the Randolph Street Site was used for the treatment, storage and
disposal of hazardous substances. The Company anticipates being named as a
defendant as a result of its former ownership of Die Cast Products, which
allegedly disposed of hazardous waste materials at the Randolph Street Site.
Investigation with respect to potential liability of the Company is in the
early stages. Issues to be addressed include whether the Company will be
responsible for the disposals made by Die Cast Products; whether Die Cast
Products actually sent hazardous waste materials to the Randolph Street Site;
the
16
<PAGE> 17
nature, extent and costs of the ultimate cleanup required by the State of
California; the share of that cleanup which may ultimately be allocated to Die
Cast and/or the Company; and the extent to which insurance coverage may be
available for any costs which may eventually be assigned to the Company.
Remedial investigations performed on behalf of the State of California at the
Randolph Street Site have disclosed soil and groundwater contamination.
Through October, 1992, the State had incurred response and oversight costs of
approximately $2.2 million. Until the Company has seen and reviewed the
Remedial Investigation and Feasibility Study, which is being prepared, and
until additional investigation and factual and legal analysis is completed, the
Company cannot quantify either the potential cleanup costs for the Randolph
Street Site or the share of that cleanup which may ultimately be borne by the
Company.
In March, 1993, Everest & Jennings, Inc. ("EJI") received a notice from the
United States Environmental Protection Agency ("EPA") regarding an
organizational meeting of generators with respect to the Casmalia Resources
Hazardous Waste Management Facility ("Casmalia Site") in Santa Barbara County,
California. The EPA alleges that the Casmalia Site is an inactive hazardous
waste treatment, storage and disposal facility which accepted large volumes of
commercial and industrial wastes from 1973 until 1989. In late 1991, the
Casmalia Site owner/operator abandoned efforts to actively pursue site
permitting and closure and is currently conducting only minimal maintenance
activities. The EPA estimates that the Casmalia Site's closure trust fund,
approximately $10 million, is substantially insufficient to cover cleanup and
closure of the site. Since August, 1992, the EPA has undertaken certain
interim stabilization actions to control actual or threatened releases of
hazardous substances at the Casmalia Site. The EPA is seeking cooperation from
generators to assist in the cleaning up, and closing of, the Casmalia Site.
EJI and 64 other entities were invited to the organizational meeting. The EPA
has identified EJI as one of the larger generators of hazardous wastes
transported to the Casmalia Site. Investigation with respect to potential
liability of EJI is in the early stages. Issues to be addressed include
whether EJI actually sent the volume of hazardous wastes to the Casmalia Site
as alleged by the EPA; the nature, extent and costs of the ultimate cleanup and
closure required by the EPA; the share of such costs which may ultimately be
allocated to EJI; and the extent to which insurance coverage may be available
for any costs allocated or assigned to EJI. Until additional investigation and
factual and legal analysis are completed, EJI cannot quantify either the
potential cleanup and closure costs for the Casmalia Site or the share of the
cleanup and closure costs which may ultimately be borne by EJI.
The Company and its subsidiaries are parties to other lawsuits and other
proceedings arising out of the conduct of its ordinary course of business,
including those relating to product liability and the sale and distribution of
its products. While the results of such lawsuits and other proceedings cannot
be predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1993
The following table summarizes operating results of the Company for the three
months ended September 30, 1993 and 1992 (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------
1993 1992
----------------- ----------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
Revenues $23.4 100 $22.7 100
Cost of sales 17.7 76 17.4 77
------- ---- ------- ----
Gross profit 5.7 24 5.3 23
Operating expenses 9.3 40 11.3 50
------- ---- ------- ----
Operating loss (3.6) (16) (6.0) (27)
Interest expense 1.6 6 0.7 3
------- ---- ------- ----
Loss before income taxes (5.2) (22) (6.7) (30)
Income tax provisions (benefits) -- -- (1.2) (5)
------- ---- ------- ----
Net loss $ (5.2) (22) $ (5.5) (25)
------- ---- ------- ----
------- ---- ------- ----
</TABLE>
Third quarter, 1993 revenues of $23.4 million increased $0.7 million or 3%
from 1992. Wheelchair sales of $16.8 million in the third quarter, 1993
increased $2.0 million or 14% from the third quarter, 1992. Domestic delivery
problems related to the relocation of the Company's primary domestic
manufacturing facility from Camarillo, California to St. Louis, Missouri had a
negative impact on third quarter, 1992 sales.
Sales of Smith & Davis homecare beds in the third quarter of 1993 decreased
$0.6 million or 17% from the third quarter of 1992; sales of institutional beds
in the third quarter of 1993 decreased $0.4 million or 10% from the third
quarter of 1992, for an aggregate decrease in bed sales for the third quarter
of 1993 of 15% from the comparable period in the prior year. This decrease is
a result of competitive pressures and uncertainty in the durable medical
equipment market related to the potential impact of health care reform programs
to be enacted by the Clinton administration. In management's opinion, the
decrease in Smith & Davis' institutional bed sales in the third quarter of 1993
was representative of conditions in the institutional durable medical equipment
market as a whole. Sales of Smith & Davis oxygen concentrator products in the
third quarter of 1993 decreased $0.3 million or 34% from the comparable period
of the prior year due to a reduction in purchases by the largest oxygen
concentrator customer.
Total Company gross profit increased $0.4 million from $5.3 million in the
third quarter of 1992 to $5.7 million in the third quarter of 1993. As a
percentage of sales, gross profit increased from 23% in the third quarter of
1992 to 24% in the third quarter of 1993. The increase in gross profit and in
gross profit as a percentage of sales reflects improvement in the Company's
manufacturing efficiency, offset by continued price competition in the markets
for the Company's wheelchair, bed and oxygen concentrator products.
Operating expenses decreased $2.0 million or 18% from $11.3 million in the
third quarter of 1992 to $9.3 million in the third quarter of 1993. The
decrease is due primarily to $2.5 million of restructuring expense which was
recorded in the third quarter of 1992. Third quarter, 1993 operating expenses
also reflect a one time $0.3 million charge for writing off the Company's
investment in a foreign joint venture.
18
<PAGE> 19
Interest expense of $1.6 million in the third quarter of 1993 increased from
the comparable period in the prior year due to increased debt levels and as a
result of the accrual of interest recorded in anticipation of not being able to
reduce the balance of the Bank Loan below $13 million by September 30, 1993, as
extended (see Note 5 to the Unaudited Consolidated Financial Statements in Item
1).
In January 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 did not
have an impact on the consolidated financial statements (see Note 7 to the
Unaudited Consolidated Financial Statements in Item 1).
The income tax benefits of $1.2 million in the third quarter of 1992 reflect
the settlement of certain disputed items with the California Franchise Tax
Board.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
The following table summarizes operating results of the Company for the nine
months ended September 30, 1993 and 1992 (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------
1993 1992
---------------- ---------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
Revenues $71.7 100 $82.9 100
Cost of sales 53.8 75 60.0 72
------ --- ------ ---
Gross profit 17.9 25 22.9 28
Operating expenses 29.2 41 30.4 37
------ --- ------ ---
Operating loss (11.3) (16) (7.5) (9)
Interest expense 4.5 6 2.5 3
------ --- ------ ---
Loss before income taxes (15.8) (22) (10.0) (12)
Income tax provisions (benefits) 0.2 -- (1.8) (2)
------ --- ------ ---
Net loss $(16.0) (22) $ (8.2) (10)
------ --- ------ ---
------ --- ------ ---
</TABLE>
Revenues for the nine months ended September 30, 1993 decreased $11.2 million
or 14% to $71.7 million from the comparable period in the prior year.
Wheelchair sales of $50.6 million in the first nine months of 1993 decreased
$5.2 million or 9% from the comparable period in the prior year. The
relocation of the Company's primary domestic manufacturing facility from
Camarillo, California to St. Louis, Missouri and the related production and
delivery problems and declining orders negatively impacted sales in the first
and second quarters of 1993. However, the domestic wheelchair order rate has
gradually increased throughout the first three quarters of 1993, and on-time
deliveries have improved throughout 1993 to the point where the Company had
fewer than a dozen past due wheelchair orders at the end of October, 1993.
Sales of Smith & Davis homecare beds in the first nine months of 1993
decreased $1.5 million or 14% from the first nine months of 1992; sales of
institutional beds in the first nine months of 1993 decreased $2.6 million or
21% from the first nine months of 1992, for an aggregate decrease in bed sales
for the first nine months of 1993 of 18% from the comparable period in the
prior year. This decrease is primarily a result of ongoing price competition
and uncertainty in the durable medical equipment market related to the
potential impact of health care reform programs to be enacted by the Clinton
administration. In management's opinion, the decrease in Smith & Davis'
institutional bed sales through the third quarter of 1993 was representative of
conditions in the institutional durable medical equipment market as a whole.
Sales of Smith & Davis oxygen concentrator products through the third quarter
of 1993 decreased $1.9 million or 51% through the comparable period of the
prior year due to a reduction in purchases by the largest oxygen concentrator
customer.
19
<PAGE> 20
Total Company gross profit decreased $5.0 million or 22% from $22.9 million
in the first nine months of 1992 to $17.9 million in the first nine months of
1993. The decrease in gross profit reflects the decrease in sales,
manufacturing inefficiency experienced in the wheelchair operations, and
continued price competition in the markets for the Company's wheelchairs, bed
and oxygen concentrator products. Gross profit was also adversely affected by
a $1.0 million charge to reserve for excess and obsolete inventory, which arose
due to the Company discontinuing certain wheelchair models.
As a percentage of sales, gross profit decreased from 28% for the first nine
months of 1992 to 25% in the first nine months of 1993. This decrease reflects
increased price competition and production problems experienced during 1992.
Operating expenses decreased $1.2 million from $30.4 million in the first
nine months of 1992 to $29.2 million in the first nine months of 1993. This
decrease is primarily due to $2.5 million of restructuring expense which was
recorded in the third quarter of 1992, offset by a $0.3 million charge for
writing off a foreign joint venture during the third quarter of 1993 and an
additional $0.7 million charge for the closure of the Camarillo facility
recorded in the second quarter of 1993. The closure of this facility was
delayed by the slower-than- anticipated implementation of the computer system
in St. Louis.
Interest expense of $4.5 million in the first nine months of 1993 increased
from the comparable period in the prior year due to increased debt levels and
as a result of the accrual of interest recorded in anticipation of not being
able to reduce the balance of the Bank Loan below $13 million by September 30,
1993, as extended (see Note 5 to the Unaudited Consolidated Financial
Statements in Item 1).
In January 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 did not
have an impact on the consolidated financial statements (see Note 7 to the
Unaudited Consolidated Financial Statements in Item 1).
The income tax benefits of $1.8 million in the first nine months of 1992
reflect the settlement of certain disputed items with the California Franchise
Tax Board.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided from operations,
borrowings and cash on hand. At September 30, 1993 and December 31, 1992, the
Company had $0.2 million and $0.1 million in cash, respectively. At September
30, 1993, total debt of $93.5 million was $34.9 million higher than the $58.6
million in debt at December 31, 1992. The increase was primarily due to
Interim Loans from BIL during the first nine months of 1993 to fund the
restructuring and relocation expenses accrued in prior periods and for
operating needs.
On September 30, 1992 the Company entered into the $20 million Revolving
Credit Agreement with HSBC. Proceeds from this credit facility were used to
repay $11 million of existing Interim Loans, to fund restructuring expenses, to
replace existing letters of credit and for working capital purposes. The
repayment of this facility was guaranteed by Brierley Investments Limited, an
affiliate of BIL. The facility would not have been made available to the
Company without such guaranty. Prior to September 30, 1993, the Company had
borrowed close to the maximum available under the HSBC credit facility.
According to its original terms, the total amount available under the facility
was to reduce from $20 million to $15 million on March 31, 1993. Pursuant to
an amendment dated as of March 30, 1993, HSBC agreed to maintain the total
amount available under the facility at $20 million through the expiration date
of the facility, September 30, 1993. In September, 1993, the outstanding HSBC
loan balance of $5.7 million was paid off utilizing a cash advance provided by
BIL under the Revolving Promissory Note. Furthermore, as of September 30,
1993, HSBC and E&J Inc. agreed to amend the Revolving Credit Agreement and
extend its term for approximately one year. The HSBC facility, as amended,
provides to E&J Inc. up to $6 million letter of credit availability and up to
$10 million of cash advances. On
20
<PAGE> 21
October 8, 1993, E&J Inc. repaid the $10 million loan from Mercantile
Bank by utilizing $10 million of cash advances from the HSBC facility.
On October 9, 1992, the Company repaid $8.1 million of the Bank Loan and $3.0
million of the Amended 10.5% Note indebtedness with the proceeds from the sale
of the Camarillo property. Additionally, on October 14, 1992, the Company
repaid $11 million of the 1992 Interim Loans with a portion of the proceeds
from the $20 million HSBC credit facility. However, the Company was unable to
repay $4.0 million of the 1992 Interim Loans. Such Promissory Notes were due
and payable on the date that the Company closed the HSBC credit facility.
Also, the Company was unable to repay the remaining $14.6 million balance on
the Bank Loan as required by March 31, 1993 or reduce the balance below $13
million to obtain interest forgiveness. Accordingly, during 1992 and the first
nine months of 1993, the Company accrued interest in the aggregate amount of
approximately $1.3 million and $0.8 million, respectively, on the Bank Loan.
As of September 30, 1993, under the debt agreements with BIL and HSBC, the
Company was obligated to repay approximately $67.3 million and $10.0 million,
respectively, at various dates as described below.
<TABLE>
<CAPTION>
As of 9/30/93 As of 12/31/92
Balance Balance
Debt Agreement $ millions $ millions Repayment Date
-------------- ---------- ---------- --------------
<S> <C> <C> <C>
Bank Loan $14.6 $14.6 September 30, 1993
FASB 15 Adjustment -- (0.2)
----- -----
Subtotal 14.6 14.4
Amended 10.5% Note 0.9 0.9 September 30, 1993
Interim Loans (1992 Advances 4.0 4.0 September 30, 1993
through 9/11/92)
Interim Loans (1992 Advances 10.0 10.0 Various dates in the fourth quarter, 1993;
9/12/92 through 12/31/92) generally one year maturities
Interim Loans (1993 Advances 37.8 -- Various dates in the first,
through 9/30/93) second and third through quarters, 1994; generally
----- ----- one year maturities
Subtotal Due BIL 67.3 (1) 29.3
HSBC Revolving Credit Agreement (2) --- 5.1 September 30, 1994
Mercantile Bank 10.0 10.0 October 8, 1993
Accrued, unpaid interest due BIL 4.5 (1) 2.3 Same date as the corresponding debt
agreement
----- -----
TOTAL $81.8 $46.7
----- -----
----- -----
</TABLE>
(1) Effective September 30, 1993, the date of the Debt Conversion Transaction,
the debt to BIL was restructured by the Company issuing the following:
<TABLE>
<CAPTION>
9/30/93 Balance
$ millions
----------
<S> <C>
Common Stock Note 45.0
Preferred Stock Note 20.0
Revolving Promissory Note 6.8
----
TOTAL $71.8
-----
-----
</TABLE>
(2) Excludes approximately $3.7 million and $4.9 million committed with respect
to outstanding letters of credit at September 30, 1993 and December 31,
1992, respectively.
21
<PAGE> 22
As of September 30, 1993, the Company entered into the Debt Conversion
Agreement with BIL whereby $65 million of the indebtedness represented by the
Converted BIL Debt (i.e., the Bank Loan, the Amended 10.5% Note and the Interim
Loans) was restructured by the issuance of the Common Stock Note and the
Preferred Stock Note. The balance of the BIL indebtedness ($6.8 million) which
was not converted into the Common Stock Note and the Preferred Stock Note was
treated as advances under the Revolving Promissory Note. See Note 4 to the
Unaudited Consolidated Financial Statements in Item 1 for a detailed discussion
of the Debt Conversion Transaction.
As part of the Debt Conversion Transaction, BIL agreed to provide to the
Company and E&J Inc. a revolving credit facility of up to $12.5 million, as
evidenced by the Revolving Promissory Note. As of September 30, 1993, $6.8
million had been advanced to the Company and E&J Inc. by BIL under such Note.
BIL has agreed, upon stockholder approval of the Debt Conversion Transaction
and the Recapitalization Proposals, to advance to E&J Inc. $10 million to pay
HSBC the cash advances made by it to E&J Inc. under the Revolving Credit
Agreement. Such advance by BIL to E&J Inc. would result in an increase in the
principal amount of the Common Stock Note from $45 million to $55 million.
In July, 1991, the Company obtained a three-year $13 million secured credit
line for its Smith & Davis subsidiary which is secured by substantially all of
the subsidiary's assets. In February, 1993 this credit line was amended to
increase the availability of funding to the Company and reduce the borrowing
costs thereunder. At September 30, 1993 Smith & Davis had borrowed $4.4
million under this line. The Company's Canadian operation has existing credit
facilities in the aggregate of $4.9 million, on which $4.1 million was borrowed
as of September 30, 1993.
Accordingly, at September 30, 1993 the Company owed $22.4 million to banks
and other commercial lenders, $3.8 million under capitalized lease obligations,
and $67.3 million to BIL.
During November, 1993, the Company required $2.0 million of additional
financing to fund its operating requirements, advances to MCT, and previously
accrued restructuring expenses. This additional funding has been provided to
the Company by BIL, bringing the total advances under the Revolving Promissory
Note to $8.8 million as of November 8, 1993, out of an available line of credit
of $12.5 million. The Company expects to need additional financing at least
through the end of the fourth quarter 1993.
The proposed acquisition of MCT (see Note 3 to the Unaudited Consolidated
Financial Statements in Item 1) is reflective of the Company's commitment to
new product development. MCT develops, designs, manufactures and markets
state-of-the-art durable medical equipment, including wheelchairs and other
medical mobility products and assistive devices. MCT has developed proprietary
products with significant competitive advantages in the areas of performance,
aesthetics, durability and cost. MCT's products utilize advanced composite
materials to achieve differentiated, aesthetically pleasing shapes while
providing mechanical properties that are superior to those of most current
mobility and assistive products, almost all of which are constructed of metal.
The Company believes that the acquisition of MCT will enable it to expand its
product line into the ultra-lightweight wheelchair and related products
markets.
As of September 30, 1993, the Company has advanced $1.0 million to MCT for
use in the ordinary course of its business in two installments of $500,000
each, the first of which is nonrefundable and the second of which is evidenced
by a term loan maturing on September 30, 1994. The Company has also committed
in the Merger Agreement to advance additional funds for working capital needs
as necessary to MCT, which amounts shall not exceed $2.5 million for the period
commencing October 22, 1993 and ending March 31, 1994. $500,000 was advanced
in November, 1993, pursuant to the foregoing sentence. If the Merger does not
occur, the Merger Agreement sets out the circumstances and the terms under
which the advances described in the preceding two sentences are to be repaid.
To meet its obligations to MCT as described herein, the Company will be relying
on cash provided from operations, borrowings and cash on hand.
22
<PAGE> 23
The Company's 1993 year to date revenues and operating results have been
adversely impacted by ongoing price competition, liquidity constraints and the
relocation in 1992 of the Company's primary domestic wheelchair manufacturing
facility from California to Missouri. The loss of customer confidence stemming
from long lead times and shipping delays due to start-up inefficiencies and
inventory imbalances in St. Louis manufacturing operations is expected to
adversely impact revenues, operating income and cash flow at least through the
end of 1993. Management has developed and implemented a plan it believes will
correct the Company's problems with manufacturing and shipment delays.
However, order rates, margins and market share must increase, production and
operating costs must be reduced and customer confidence must be restored in the
very near term if the Company is to generate the cash flow necessary to fund
its operations on a continuing basis and to achieve profitability. With
respect to its bed products, the Company anticipates, for the remainder of the
year, severe price and product competition; however, the market demand for
these products may improve once a national health care reform plan is enacted.
The Company will attempt to fulfill its cash requirements through additional
financing from BIL or other external sources. Although no assurances can be
given that the Company will be able to obtain additional financing, if
additional funding is obtained, management believes that the Company will be
able to meet its cash operating requirements at its existing Missouri, Canadian
and Mexican operations.
Management believes that the Company's domestic and international
manufacturing capacity is sufficient to meet anticipated demand for the
foreseeable future.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
EVEREST & JENNINGS INTERNATIONAL LTD.
(Registrant)
Date: February 14, 1994 By /s/ Joseph A. Newcomb
-------------------------------
Joseph A. Newcomb
Executive Vice President
