SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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: 0-3585
________________________
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.)
4203 EARTH CITY EXPRESSWAY, EARTH CITY, MISSOURI 63045
(Address of principal executive offices)
Registrant's telephone number, including area code: 314-512-7000
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
the filing requirements for the past 90 days: Yes X No
Shares of Common Stock outstanding as of November 6, 1996: 7,207,689
<PAGE>
SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ..................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 23
Item 2. Changes in Securities .................................... 23
Item 3. Defaults upon Senior Securities .......................... 23
Item 4. Submission of Matters to a Vote of Security Holders ...... 23
Item 5. Other Information ........................................ 23
Item 6. Exhibits and Reports on Form 8-K ......................... 23
SIGNATURE .............................................................. 24
<PAGE>
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 results for the interim periods presented herein in
accordance with generally accepted accounting principles for interim
financial information have been made (however, the consolidated financial
statements included herewith do not include any adjustments that might
result from the Company's inability to emerge from or complete its ongoing
restructuring activities and continue as a going concern -- see Note 1 to
these Unaudited Consolidated Financial Statements). 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 consolidated 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, 1995 and the
Company's Joint Proxy Statement/Prospectus dated October 22, 1996 with
respect to the proposed merger of a wholly-owned subsidiary of Graham-Field
Health Products, Inc. into the Company.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per-share data)
Three Months Ended Sept. 30
---------------------------
1996 1995
-------- --------
(Unaudited)
Revenues $15,268 $19,346
Cost of sales 13,753 15,220
------ ------
Gross profit 1,515 4,126
Selling expenses 2,722 2,755
General and administrative expenses 1,639 1,318
------ ------
Total operating expenses 4,361 4,073
------ ------
Income (loss) from operations (2,846) 53
Interest expense, BIL (Note 6) 426 431
Interest expense, other 790 485
------ ------
Loss before income taxes (4,062) (863)
Income tax (benefit) provision (15) 61
------ ------
Net loss $(4,047) $ (924)
Loss per share (Note 7) $(0.56) $(0.13)
Weighted average number of Common
Shares outstanding 7,196,565 7,226,619
The accompanying Notes are an integral part of these
Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per-share data)
Nine Months Ended Sept. 30
--------------------------
1996 1995
-------- --------
(Unaudited)
Revenues $49,561 $56,308
Cost of sales 40,861 43,571
------ ------
Gross profit 8,700 12,737
Selling expenses 8,667 8,936
General and administrative expenses 5,047 3,964
------ ------
Total operating expenses 13,714 12,900
------ ------
Loss from operations (5,014) (163)
Interest expense, BIL (Note 6) 1,280 1,179
Interest expense, other 2,160 1,539
------ ------
Loss before income taxes (8,454) (2,881)
Income tax provision 6 73
------ ------
Net loss $(8,460) $(2,954)
Loss per share (Note 7) $(1.17) $(0.41)
Weighted average number of Common
Shares outstanding 7,214,565 7,226,556
The accompanying Notes are an integral part of these
Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Sept. 30 December 31
1996 1995
--------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 12 $ 117
Accounts receivable, less allowance
for doubtful accounts of $1,376
in 1996 and $1,847 in 1995 14,448 16,952
Notes receivable (Note 9) 2,559 252
Inventories (Note 8) 17,858 19,570
Other current assets 629 1,047
------ ------
Total current assets 35,506 37,938
PROPERTY, PLANT AND EQUIPMENT:
Land 370 261
Buildings and improvements 4,574 4,500
Machinery and equipment 16,093 15,380
------ ------
21,037 20,141
Less accumulated depreciation
and amortization (14,066) (12,992)
------ ------
Property, plant and equipment, net 6,971 7,149
NOTES RECEIVABLE (Note 9) 1,297 2,524
INTANGIBLE ASSETS, NET 171 402
OTHER ASSETS 345 217
------ ------
TOTAL ASSETS $43,290 $48,230
The accompanying Notes are an integral part of these
Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Sept. 30 Dec. 31
1996 1995
-------- -------
(Unaudited)
CURRENT LIABILITIES:
Short-term borrowings and current install-
ments of long-term debt of $1,552
in 1996 and $1,089 in 1995 (Note 6) $ 4,782 $ 4,473
Accounts payable 7,109 8,361
Accrued payroll costs 5,032 6,327
Accrued interest, BIL (Note 6) 3,909 2,629
Accrued expenses 5,681 5,310
Accrued restructuring expenses (Note 1) 339 659
------ ------
Total current liabilities 26,852 27,759
LONG-TERM DEBT, NET OF CURRENT PORTION
(Note 6) 27,516 22,370
LONG-TERM BORROWINGS FROM BIL (Note 6) 21,103 21,103
OTHER LONG-TERM LIABILITIES 79 130
COMMITMENTS AND CONTINGENCIES (Notes 1 and 10)
STOCKHOLDERS' DEFICIT: (Note 1)
Series A Convertible Preferred Stock 13,175 13,175
Series B Convertible Preferred Stock 1,317 1,317
Series C Convertible Preferred Stock 20,000 20,000
Common Stock, par value: $.10;
authorized 12,000,000 shares 719 722
Additional paid-in capital 105,608 105,608
Accumulated deficit (169,143) (159,793)
Minimum pension liability adjustment (3,264) (3,264)
Cumulative translation adjustments (672) (897)
------ ------
Total stockholders' deficit (32,260) (23,132)
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $43,290 $48,230
The accompanying Notes are an integral part of these
Consolidated Financial Statements
<PAGE>
<TABLE>
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Dollars in thousands)
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
Shares Amt Shares Amt Shares Amt Shares Amt
------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at December 31, 1995 7,867,842 $13,175 786,357 $1,317 20,000,000 $20,000 72,280,646 $722
Accrued Dividends on Series A
Convertible Preferred Stock -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
Adjustment For one-for-ten
Stock Split -- -- -- -- -- -- (65,084,081) (3)
Translation adjustments -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------- ---------- ---
Balance at Sept. 30, 1996 7,867,842 $13,175 786,357 $1,317 20,000,000 $20,000 7,196,565 $719
The accompanying Notes are an integral part of these Consolidated Financial
Statements
</TABLE>
<PAGE>
<TABLE>
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Dollars in thousands)
(continued)
<CAPTION>
Minimum
Additional Accumu- Pension Cumulative
Paid-in lated Liability Translation
Capital Deficit Adjustments Adjustments Total
---------- ------- ----------- ----------- -----
<S> <C> <C> <C>
<C> <C>
Balance at December 31, 1995 $105,608 $(159,793) $(3,264) $(897) $(23,132)
Accrued Dividends on Series A
Convertible Preferred Stock -- (890) -- -- (890)
Net loss -- (8,460) -- -- (8,460)
Translation adjustments -- -- -- 225 225
------ -------- ------- ----- -----
Balance at Sept. 30, 1996 $105,608 $(169,143) $(3,264) $(672) $(32,260)
The accompanying Notes are an integral part of these Consolidated Financial Statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended Sept. 30
--------------------------
1996 1995
-------- --------
(Unaudited)
Cash flows from operating activities:
Net loss $(8,460) $(2,954)
Adjustment to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 1,305 1,812
Changes in operating assets and liabilities:
Accounts receivable 2,183 1,991
Trade notes receivable (2,307) --
Inventories 1,712 2,247
Accounts payable (1,252) (3,321)
Accrued interest, BIL 1,280 1,179
Accrued payroll costs, expenses and
income taxes (1,295) (2,916)
Accrued restructuring expenses (320) (3,727)
Other, net 90 (126)
------ ------
Cash used in operating activities (7,064) (5,815)
------ ------
Cash flows from investing activities:
Capital expenditures (896) (1,003)
Proceeds from disposition of assets
held for sale -- 4,518
Proceeds from Notes Receivable 2,227 --
------ ------
Cash provided by investing activities 1,331 3,515
------ ------
Cash flows from financing activities:
Advances from BIL -- 5,100
Increase (Decrease) in short-term and
long-term borrowings, net 5,455 (3,157)
Proceeds from exercise of stock options 3 3
Changes in other long-term liabilities (51) (73)
------ ------
Cash provided by financing activities 5,401 1,873
(continued)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(continued)
Nine Months Ended Sept. 30
--------------------------
1996 1995
-------- --------
(Unaudited)
Effect of exchange rate changes on cash flow 227 150
------ ------
Decrease in cash balance (105) (277)
Cash and cash equivalents balance at
beginning of year 117 513
------ ------
Cash and cash equivalents balance
at end of period $ 12 $ 236
Supplemental disclosures of cash flow
information:
Cash paid for interest $1,857 $1,584
Cash paid for income taxes $ 203 $ 159
The accompanying Notes are an integral part of these
Consolidated Financial Statements
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per-share data)
NOTE 1 -- CORPORATE RESTRUCTURING
The Company has incurred substantial financial losses in a continuing
effort to restructure its operations with the objective of improving its
competitive position within the durable medical equipment industry.
Restructuring activities have included asset sales, significant reductions
in headcount, plant closures and consolidations, product line
rationalization, debt to equity conversion and outsourcing of manufacturing
operations.
The Company's 1996 revenues and operating results have been negatively
impacted by ongoing price competition. Additionally, the Company continues
to address the rationalization of its production facilities in the US,
Canada and Mexico and the increased outsourcing of products and product
components, the effects of which are expected to lower the Company's
production costs. On May 26, 1996 the Company issued a WARN Act Notice and
announced a substantial workforce reduction at its primary domestic
wheelchair manufacturing facility. Such reduction was substantially
completed during the third quarter of 1996. US operations are now limited
to administration, distribution, certain custom manufacturing and light
assembly. A severance reserve of approximately $391 has been included in
the Company's results of operations for the three months ended June 30,
1996 and an additional severance reserve of approximately $132 has been
included in the Company's results of operations for the three months ended
September 30, 1996 resulting in approximately $523 of severance expense
being included in the Company's results of operations for the nine months
ended September 30, 1996. The Company anticipates incurring additional
restructuring expenses during the fourth quarter 1996 as workload transfers
are substantially completed.
The accompanying consolidated financial statements have been prepared
under the going concern concept, which 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 expenses and recurring operating losses and has a net capital
deficiency at September 30, 1996. No assurance can be made that the
Company will successfully emerge from or complete its restructuring
activities.
See Note 4 to these Unaudited Consolidated Financial Statements
regarding the proposed merger with Graham-Field Health Products, Inc.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed for the three month and nine
month periods ended September 30, 1996 are the same as those disclosed in
the Notes to the Company's December 31, 1995 Consolidated Financial
Statements, which were included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995. 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,
1996 and 1995; (b) the consolidated financial position at September 30,
1996 and December 31, 1995; and (c) the consolidated cash flows for the
nine month periods ended September 30, 1996 and 1995 have been made.
However, the consolidated financial statements included herewith do not
include any adjustments that might result from the Company's inability to
emerge from or complete its ongoing restructuring activities and continue
as a going concern -- See Note 1 to the Unaudited Consolidated Financial
Statements.
NOTE 3 -- OWNERSHIP
80% of the Company's common shares and all of the Company's Series A, B
and C Preferred shares are owned by a wholly-owned subsidiary of Brierley
Investments Ltd ("BIL"), a New Zealand investment firm.
NOTE 4 -- PROPOSED MERGER WITH GRAHAM-FIELD HEALTH PRODUCTS, INC.
On September 3, 1996, the Company announced it had entered into a
definitive Agreement and Plan of Merger with Graham-Field Health Products,
Inc. providing for the previously announced acquisition of the Company by
Graham-Field. The Board of Directors of the Company received a fairness
opinion from Vector Securities International, Inc. to the effect that the
consideration to be received by the holders of the Company's Common Stock
pursuant to the Merger Agreement is fair to such stockholders from a
financial point of view. The terms of the acquisition are the same as
those reflected in the parties' previous announcement on August 14, 1996.
As a result of the merger, the Company will become a wholly-owned
subsidiary of Graham-Field. In the merger, the stockholders of the Company
will receive one share of Graham-Field common stock for each 2.857 shares
of the common stock of the Company. The merger ratio is subject to
reduction so that the value of the Graham-Field common stock to be received
will not exceed $5.50 per share of the Company's common stock. There are
currently 7,207,689 shares of the Company's common stock outstanding.
In connection with the merger, BIL will purchase for cash up to 1.9
million additional shares of Graham-Field common stock, valued at the
greater of $13 per share or the average market price of the common stock of
Graham-Field for the 10 consecutive trading days prior to the merger
closing date. Graham-Field will use the proceeds to repay all debt of the
Company in the approximate amount of $25 million to The Hongkong and
Shanghai Banking Corporation Limited (see Note 6--Debt). In addition,
Graham-Field will issue to BIL up to $61 million of a new Series B
Cumulative Convertible Preferred Stock in exchange for the indebtedness of
the Company owing to BIL (see Note 6--Debt) and shares of the Company's
preferred stock owned by BIL. Also as part of the transaction, BIL will
purchase for cash $10 million of a new Series C Cumulative Convertible
Preferred Stock of Graham-Field, the proceeds of which will be available to
Graham-Field for general corporate purposes. Finally, certain indebtedness
in the amount of $4 million owing by Graham-Field to BIL will be exchanged
for a $4 million unsecured subordinated promissory note of Graham-Field
which will mature on April 1, 2001 and will bear interest at an effective
rate of 7.7% per annum.
The Series B and Series C Preferred Stock to be issued by Graham-Field
to BIL will be entitled to a dividend at the rate of 1.5% per year, payable
at the option of Graham-Field either in cash or in shares of its common
stock. In addition, the shares of Graham-Field Series B and Series C
Preferred Stock will vote on an as-converted basis, as a single class
together with the Graham-Field common stock, on all matters submitted to a
vote of the stockholders of Graham-Field. The Series B Preferred Stock
will not be redeemable and will be convertible into shares of Graham-Field
common stock (x) at the option of the holder, at a conversion price of $20
per share, (y) at the option of Graham-Field, at a conversion price equal
to the then current trading price (but not less than $15.50 or more than
$20 per share), and (z) automatically on the fifth anniversary of the date
of issuance at a conversion price of $15.50 per share, in each case subject
to certain antidilution adjustments. The Series C Preferred Stock will be
subject to redemption as a whole at Graham-Field's option on the fifth
anniversary of the date of issuance at stated value and, if not redeemed,
will automatically convert on the fifth anniversary of the date of issuance
at a conversion price of $20 per share, subject to certain antidilution
adjustments.
As a result of the merger, BIL will own shares of common and preferred
stock of Graham-Field representing approximately 34% of the voting power of
all outstanding shares of Graham-Field stock. Simultaneous with the
signing of the Merger Agreement, Graham-Field and BIL entered into a
Stockholder Agreement pursuant to which BIL has agreed to vote all of its
shares of the Company's stock in favor of the merger. In the Stockholder
Agreement, BIL also has agreed to grant Graham-Field a right of first
refusal with respect to certain sales of its Graham-Field stock, to
indemnify Graham-Field against certain existing actions and proceedings to
which the Company is a party and, so long as BIL owns Graham-Field stock
representing at least 5% of the voting power of the outstanding shares, not
to acquire additional shares without the consent of Graham-Field's Board of
Directors (which consent will not be unreasonably withheld), seek to
acquire ownership of Graham-Field, engage in any solicitation of proxies
with respect to Graham-Field or otherwise seek to propose to acquire
control of the Graham-Field Board of Directors. Pursuant to the
Stockholder Agreement, BIL will have the right to designate two members of
Graham-Field's Board of Directors, subject to reduction if BIL reduces its
ownership of Graham-Field stock. BIL also will have the right to
participate on a pro rata basis in certain future stock issuances by Graham-
Field. The Stockholder Agreement will automatically terminate upon a
change of control of Graham-Field or its Board of Directors. In addition,
Graham-Field has granted certain registration rights to BIL with respect to
its Graham-Field shares.
The closing of the transaction is subject to customary conditions,
including approval by the stockholders of both Graham-Field and Everest &
Jennings. The closing is currently scheduled for November 27, 1996.
See Note 10 for a description of a class action complaint filed in
Delaware with respect to the proposed acquisition of the Company by Graham-
Field.
NOTE 5 -- COMMON STOCK
On June 4, 1996 the Company's shareholders approved a one-for-ten reverse
stock split, effective June 6, 1996. The stated par value of one share of
common stock was changed from $.01 to $.10 as a result of the stock split.
All references in the consolidated financial statements to average number
of shares outstanding and related prices, per share amounts and stock
option plan data have been restated to reflect the reverse stock split.
NOTE 6 -- DEBT
The Company's debt as of September 30, 1996 and December 31, 1995 is as
follows:
September 30 December 31
1996 1995
------------ -----------
Loans payable to HSBC $25,000 $18,700
Other domestic debt 1,770 2,622
Foreign debt 5,528 5,521
Long-term loan payable to BIL 21,103 21,103
------ ------
Total debt 53,401 47,946
Less short-term borrowings and current
installments of long-term debt 4,782 4,473
------ ------
Long-term debt, net of current portion,
including BIL Credit Facility $48,619 $43,473
On September 30, 1992, Everest & Jennings Inc., a wholly-owned
subsidiary of the Company, entered into a Revolving Credit Agreement with
The Hongkong and Shanghai Banking Corporation Limited ("HSBC"). This
Agreement has been revised and extended several times and currently expires
September 30, 1997. Advances under the Revolving Credit Agreement, as
amended, bear interest at the prime rate as announced by Marine Midland
Bank, N.A. from time to time plus 0.25% per annum. The HSBC facility, as
amended, provides up to $6 million for letter of credit availability and,
additionally, cash advances of up to $25 million to Everest & Jennings Inc.
Repayment of existing debt with BIL is subordinated to the HSBC debt, and
an affiliate of BIL has guaranteed repayment of the HSBC debt. As of
September 30, 1996 this facility was fully utilized.
BIL has provided the Company a credit facility which allows advances up
to $21.1 million. At September 30, 1996 and December 31, 1995 this
facility has been fully utilized. The BIL credit facility has been
extended to September 30, 1997, 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 Everest & Jennings Inc. As of September 30, 1996, $3.9 million
of accrued, unpaid interest was due BIL under the BIL credit facility .
The Company's Canadian subsidiary has credit facilities in the
aggregate of $5.5 million, of which $4.9 million was borrowed as of
September 30, 1996 at interest rates ranging from prime plus 1% to prime
plus 1.25%. The loans are secured by the assets of the Canadian subsidiary
and certain Letters of Credit supplied by HSBC and BIL.
The Company's Mexican subsidiary has a credit facility in the aggregate
of $1.0 million, of which $0.6 million was borrowed as of September 30,
1996 at interest rates approximating 13%. The loan is secured by the
assets of the Mexican subsidiary.
At September 30, 1996, the Company was contingently liable to HSBC
under existing letters of credit in the aggregate amount of approximately
$5.8 million.
NOTE 7 -- LOSS PER SHARE
Loss per share for the three month and nine month periods ended
September 30, 1996 and 1995 is calculated based on the weighted average
number of shares of Common Stock outstanding during the periods, giving
effect to the reverse stock split as discussed in Note 5.
NOTE 8 -- INVENTORIES
Inventories at September 30, 1996 and December 31, 1995 consist of the
following:
September 30 December 31
1996 1995
------------ --------
Raw materials $9,789 $10,365
Work-in-process 3,005 4,593
Finished goods 5,064 4,612
------ ------
$17,858 $19,570
NOTE 9 -- NOTES RECEIVABLE (LONG TERM)
The Company received notes of $2.1 million and $0.6 million upon the
sale of its institutional business and oxygen concentrator business,
respectively, in 1995. The $2.1 million note was paid in full on April 2,
1996. The $0.6 million note has been reduced to $0.3 million as of
September 30, 1996 and was substantially paid during October 1996. The
remaining Notes receivable are payable by customers, bear interest at
various rates and mature in one to three years. During October 1996
approximately $2.4 million of the outstanding Notes Receivable were sold to
BIL.
NOTE 10 -- CONTINGENT LIABILITIES
In July, 1990 a class action suit was filed in the United States
District Court for the Central District of California by a stockholder of
the Company against the Company and certain of its present and former
directors and officers. The suit 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 was briefed and oral argument heard in June, 1993. Because of the
precedent set by a Ninth Circuit decision in another case which was decided
after the district court's order of dismissal but before the Ninth Circuit
decided plaintiff's appeal, the Ninth Circuit reversed the district court's
dismissal of the case and remanded the case to the district court for
further proceedings in an opinion handed down by the Ninth Circuit on
August 24, 1995. On March 25, 1996, the district court granted plaintiff's
motion to certify a class composed of purchasers of the Company's Common
Stock during the period from March 31, 1989 to June 12, 1990. The ultimate
liability, if any, cannot be determined at this time.
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. para 9601 et sec. The Company was
originally notified of this action on December 10, 1992. The lawsuit
sought 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
alleged that the Randolph Street Site was used for the treatment, storage
and disposal of hazardous substances. A settlement in principle between
the State of California and the various potentially responsible parties was
reached in October 1995. A consent decree was signed in July 1996. The
Company's portion of the settlement was less than originally anticipated.
Accordingly, the previously recorded reserve for this matter was reduced in
1995 to the settlement amount.
In March, 1993 Everest & Jennings Inc. received a notice from the U.S.
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, CA. The EPA
alleged that the Casmalia Site was 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 estimated that the Casmalia Site's closure trust fund,
approximately $10 million, was 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 sought
cooperation from generators to assist in the cleaning up, and closing of,
the Casmalia Site. Everest & Jennings Inc. is a member of a manufacturers'
group of potentially responsible parties which has investigated the site
and proposed a remediation plan to the EPA. To reflect Everest & Jennings
Inc.'s estimated allocation of costs thereunder, a reserve of $1.0 million
was recorded, which was included in the Consolidated Statements of
Operations for 1993. During 1995 an agreement in principle was reached
with the EPA for a settlement of the majority of the Casmalia site
liability. A consent decree was signed during July 1996. The settlement
provides for the work to be completed in three phases. Phase I work, which
is estimated to take three to five years to complete, will require the
Company, along with other responsible parties, to participate in funding
the water management, certain construction projects and completion of the
site investigation. Phase II work, consisting of the remaining remedial
construction activities and the first five years of operation and
maintenance, will be funded by other parties and is estimated to take ten
years. Subsequent to Phase II, additional operation and maintenance will
be required for approximately 30 years. The estimated exposure of the
Company under this agreement is less than originally anticipated and the
previously recorded reserve has been reduced to the expected settlement
amount.
In 1989 a patent infringement case was initiated against Everest &
Jennings Inc. and other defendants in the U.S. District Court, Central
District of California. Everest & Jennings Inc. prevailed at trial with a
directed verdict of patent invalidity and non-infringement. The plaintiff
filed an appeal with the U.S. Court of Appeals for the Federal Circuit. On
March 31, 1993, the Court of Appeals vacated the District Court's decision
and remanded the case for trial. Impacting the retrial of this litigation
was a re-examination proceeding before the Board of Patent Appeals with
respect to the subject patent. A ruling was rendered November 23, 1993
sustaining the claim of the patent which Everest & Jennings Inc. has been
charged with infringing. Upon the issuance of a patent re-examination
certificate by the U.S. Patent Office, the plaintiff presented a motion to
the District Court requesting a retrial of the case. The Company presented
a Motion for Summary Judgment of Noninfringement based in part upon the
November 23, 1993 decision of the Board of Patent Appeals. The Motion was
granted in follow-up conferences and an official Judgment was entered
November 17, 1994. Following the appeal by the plaintiffs, the case has
been remanded to the US District Court, Central District of California, for
further consideration. Everest & Jennings Inc. believes that this case is
without merit and intends to contest it vigorously. The ultimate liability
of Everest & Jennings Inc., if any, cannot be determined at this time.
Following a jury trial on July 15, 1996, a verdict was rendered in the
District Court of the First Judicial District of the State of New Mexico in
a civil product liability law suit (Chris Trew et al. vs. Smith and Davis
Manufacturing Company, Inc., No. SF95-354) against Smith & Davis
Manufacturing Company, a wholly-owned subsidiary of the Company ("Smith &
Davis"), in the amount of $550 actual damages and $4 million punitive
damages. The suit was instituted on February 25, 1995 by the children and
surviving heirs and personal representatives of a nursing home patient in
Carlsbad, New Mexico who died on September 28, 1993 after her head became
pinned between a bed rail allegedly manufactured by Smith & Davis and her
bed. The suit alleged that the bed rail in question was defective and
unsafe for its intended purpose, that Smith & Davis was negligent in
designing, manufacturing, testing and marketing such bed rails and that the
negligence of the nursing home in question was the proximate cause of the
decedent's injuries and death. The nursing home reached a settlement with
plaintiffs prior to trial. Judgment has been entered on the jury verdict
and Smith & Davis plans to appeal the judgment.
On June 18, 1996 a Class Action Complaint captioned Ron Kauffman v. Rodney
F. Hogg, et al. was filed in the Court of Chancery in New Castle County,
Delaware with respect to the proposed acquisition of the Company by Graham-
Field (see Note 4), naming as defendants the Company, its directors, BIL
and Graham-Field. The suit alleges that, as a result of the proposed
acquisition of the Company by Graham-Field, minority shareholders will not
receive their proportionate share of the value of the Company's assets and
will be prevented from obtaining a fair price for their stock. Plaintiff
alleges that the acquisition offers minority shareholders value which is
less than the Company's trading price prior to the announcement of the
acquisition, and that BIL will receive more value for its holdings than
minority shareholders. The plaintiff alleges that the directors breached
their fiduciary duties to minority shareholders by not exercising
independent business judgment and by acting for their own personal benefit.
The plaintiff seeks certification of a class consisting of minority
shareholders of the Company. Plaintiff requests that the acquisition be
enjoined or, alternatively, that damages be awarded to the class. To date,
no responsive pleading has been filed by any of the defendants and no
discovery has been taken.
The Company and its subsidiaries are parties to other lawsuits and
other proceedings arising out of the conduct of its ordinary course of
business, including those relating to product liability and the sale and
distribution of its products. While the results of such lawsuits and other
proceedings cannot be predicted with certainty, management does not expect
that the ultimate liabilities, if any, will have a material adverse effect
on the consolidated financial position or results of operations of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
The following table summarizes operating results of the Company for the
three months ended September 30, 1996 and 1995 (dollars in millions):
Three Months Ended September 30
-------------------------------
1996 1995
------------ ------------
Amount % Amount %
------ --- ------ ---
Revenue $15.3 100 $19.3 100
Cost of sales 13.8 90 15.2 79
------ --- ------ ---
Gross profit 1.5 10 4.1 21
Operating expenses 4.4 29 4.1 21
----- ---- ----- ----
Operating loss (2.9) 19 -- --
Interest expense 1.2 8 0.9 5
----- ---- ----- ----
Loss before income taxes (4.1) (27) (0.9) (5)
Income tax provisions -- -- -- --
----- ---- ----- ----
Net loss $(4.1) (27) $(0.9) (5)
Third quarter 1996 revenues of $15.3 million decreased $4.0 million, or
21%, from 1995. Third quarter revenues during 1996 for the Company's
domestic operations decreased $3.9 million from 1995's revenue levels due
to shipping delays resulting from the scale back of domestic manufacturing
operations and a reduction in distributor sales.
Third quarter 1996 revenues in the Everest & Jennings' Canadian and
Mexican subsidiaries were comparable to the prior year's results.
Total Company third quarter gross profit decreased $2.6 million from
$4.1 million in 1995 to $1.5 million in 1996. As a percentage of sales,
margins decreased from 21% during 1995 to 10% during 1996, due primarily to
costs incurred as a result of the scale back of domestic manufacturing
operations including severance costs and costs associated with the
relocation of manufacturing operations to Canada and Mexico. Additional
production relocation and facility rationalizations are planned during 1996
and beyond with a view to improving the Company's operating efficiencies
and reducig its cost structure.
Total Company third quarter operating expenses increased $0.3 million
from $4.1 million in 1995 to $4.4 million in 1996 due primarily to
increased bad debt expense and insurance reserve increases. Spending
reductions included a reduction in research and development spending of
$0.1 million from $0.3 million during 1995 to $0.2 million during 1996.
Interest expense of $1.2 million in the third quarter of 1996 increased
from the comparable period in the prior year due to increases in the
average outstanding debt during the period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
The following table summarizes operating results of the Company for the
nine months ended September 30, 1996 and 1995 (dollars in millions):
Nine Months Ended September 30
------------------------------
1996 1995
------------ ------------
Amount % Amount %
------ --- ------ ---
Revenue 49.6 100 $56.3 100
Cost of sales 40.9 82 43.6 77
----- ---- ----- ----
Gross profit 8.7 18 12.7 23
Operating expenses 13.7 28 12.9 23
----- ---- ----- ----
Operating loss (5.0) (10) (0.2) --
Interest expense 3.4 7 2.7 5
----- ---- ----- ----
Loss before income taxes (8.4) (17) (2.9) (5)
Income tax provisions -- -- (0.1) --
----- ---- ----- ----
Net loss $(8.4) (17) $(3.0) (5)
Revenues for the first nine months of 1996 of $49.6 million decreased
$6.7 million, or 12%, from 1995, due primarily to shipping delays resulting
from the scale back of domestic manufacturing operations and a reduction in
distributor sales. Additionally, oxygen concentrator sales decreased $1.18
million from 1995 to 1996. In total, domestic sales decreased by $6.0
million from 1995 to 1996.
1995 revenues in the Everest & Jennings' Canadian and Mexican
subsidiaries were down $0.7 million or 7%, due primarily to unfavorable
Canadian and Mexican exchange rates and a substantial slowdown in the
Mexican economy.
Total Company gross profit for the period decreased $4.0 million from
$12.7 million in 1995 to $8.7 million in 1996. As a percentage of sales,
margins decreased from 23% during 1995 to 18% during 1996, due primarily to
costs incurred as a result of the scale back of domestic manufacturing
operations.
Total Company operating expenses for the period increased $0.8 million
from $12.9 million in 1995 to $13.7 million in 1996 due primarily to
increased bad debt expense and insurance reserve increases. Spending
reductions included a reduction in research and development spending of
$0.3 million from $0.9 million during 1995 to $0.6 million during 1996.
Interest expense of $3.4 million for the nine month period of 1996
increased from the comparable period in the prior year due to increased
levels of borrowing throughout 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided from
operations, borrowings from BIL and affiliates, proceeds from notes
received in the 1995 sales of the Company's Institutional and Oxycon
businesses, and cash on hand. At September 30, 1996 the Company had $12
thousand in cash, and at December 31, 1995 the Company had $117 thousand in
cash. At September 30, 1996, total debt of $53.4 million was $5.5 million
higher than the $47.9 million in debt at December 31, 1995. The increase
was due to increased borrowings from HSBC of approximately $6.3 million,
offset by repayments of foreign borrowings and other domestic debt. The
Company received $1.8 million in April 1996 from the payment of a note
receivable, which was used to reduce debt. See Note 6--Debt of the Notes
to the Unaudited Consolidated Financial Statements included in Item 1 of
this Form 10-Q. The $6.3 million borrowed from HSBC during 1996 was used
to fund the Company's operations. This facility was fully utilized at
September 30, 1996.
The Company's 1996 revenues and operating results have been negatively
impacted by ongoing price competition, liquidity constraints and loss of
market share due to the relocation of the Company's primary domestic
wheelchair manufacturing facility from California to Missouri. As
described above, management is implementing plans to address the
rationalization of the Company's production facilities and the increased
outsourcing of products and product components, the effects of which are
intended to lower the Company's production costs.
The accompanying consolidated 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 expenses and recurring operating losses
and has a net capital deficiency at September 30, 1996. No assurance can
be made that the Company will successfully emerge from or complete its
restructuring activities.
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10--Contingent Liabilities to the Notes to the Unaudited
Consolidated Financial Statements in Item 1 of this Form 10-Q for a
description of certain pending lawsuits and proceedings.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
3(a)(vii) Corrected Certificate of Amendment of
Certificate of Incorporation filed August 31, 1996.
REPORTS ON FORM 8-K:
Financial
Date of Report Item(s) Reported Statements Filed
-------------- ---------------- ----------------
1. August 14, 1996 5, 7 (relating to None
merger transaction)
2. September 3, 1996 5, 7 (relating to None
merger transaction)
<PAGE>
SIGNATURE
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.
Date: November 18, 1996 EVEREST & JENNINGS INTERNATIONAL LTD.
(Registrant)
By /s/ Timothy W. Evans
Timothy W. Evans
Senior Vice President and
Chief Financial Officer
By /s/ Bevil J. Hogg
Bevil J. Hogg
President and
Chief Executive Officer
INDEX TO EXHIBITS
Page
- ----
26 3(a)(vii)* Corrected Certificate of Amendment of
Certificate of Incorporation filed August 31, 1996.
* Filed herewith in this Quarterly Report on Form 10-Q
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 17,007
<ALLOWANCES> 1,376
<INVENTORY> 17,858
<CURRENT-ASSETS> 35,506
<PP&E> 21,037
<DEPRECIATION> 14,066
<TOTAL-ASSETS> 43,290
<CURRENT-LIABILITIES> 27,889
<BONDS> 26,852
0
34,492
<COMMON> 719
<OTHER-SE> (67,471)
<TOTAL-LIABILITY-AND-EQUITY> 43,290
<SALES> 49,561
<TOTAL-REVENUES> 49,561
<CGS> 40,861
<TOTAL-COSTS> 40,861
<OTHER-EXPENSES> 13,714
<LOSS-PROVISION> 1,376
<INTEREST-EXPENSE> 3,440
<INCOME-PRETAX> (8,454)
<INCOME-TAX> 6
<INCOME-CONTINUING> (8,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,460)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
EXHIBIT 3(a)(vii)
CORRECTED
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EVEREST & JENNINGS INTERNATIONAL LTD.
A Certificate of Amendment of Everest & Jennings International
Ltd. was filed with the Secretary of State of the State of Delaware on June
5, 1996 at 9:00 a.m. which requires correction as permitted by subsection
(f) of Section 103 of the General Corporation Law of the State of Delaware.
The inaccuracy in said Certificate of Amendment to be corrected is that
certain language implementing a reverse split of the capital stock of the
corporation effective upon the filing of said amendment was inadvertently
omitted from said Certificate of Amendment. The corrected document is set
forth as follows:
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EVEREST & JENNINGS INTERNATIONAL LTD.
Everest & Jennings International Ltd., a corporation organized
and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY:
FIRST: That each member of the Board of Directors of Everest &
Jennings International Ltd. has given written consent to the adoption of a
resolution setting forth a proposed amendment to the Corporation's
Certificate of Incorporation and declaring said amendment advisable and
calling for the presentation of said amendment to the voting stockholders
of the Corporation for consideration thereof. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that the Board declares it advisable to amend
Paragraph A of Article IV of the Certificate of Incorporation of the
Company to read as follows:
"A. The Corporation is authorized to issue one
class of Common Stock. The number of shares of Common Stock
which the Corporation is authorized to issue is 12,000,000,
par value ten cents ($0.10) each.";
and
FURTHER RESOLVED, that the Board declares it advisable to
effect a 1 for 10 reverse stock split of the Company's issued and
outstanding Common Stock (the "Reverse Split"), subject to stockholder
approval, to be effective upon the filing of the certificate of amendment
of the Company's Certificate of Incorporation with the Secretary of State
of Delaware (the "Effective Time"); and
FURTHER RESOLVED, that at the Effective Time every 10 shares
of Common Stock, $0.01 par value per share, then outstanding (the"Old
Stock") will be converted into 1 share of Common Stock, $0.10 par value per
share, (the "New Stock"), subject to the following: no fractional shares
will be issued in connection with the Reverse Split, but holders of Old
Stock who would otherwise be entitled to receive a fractional share of New
Stock will be entitled to receive in lieu thereof a cash payment from the
Company in an amount equal to the average daily closing sale stock price
for the Old Stock for the 10 trading days immediately preceding the date of
the Effective Time multiplied by the number of shares of Old Stock that
comprises such fractional interest of New Stock.
SECOND: That thereafter at a meeting of stockholders,
stockholders holding a majority of the outstanding shares of the
Corporation's Common Stock, Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, voting together as a single class and
voting separately as a class, gave their approval to the adoption of the
amendment in accordance with the provisions of Section 216(2) of the
General Corporation Law of the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State
of Delaware, and that the capital or the Corporation will not be reduced
under or by reason of the amendment.
IN WITNESS WHEREOF, said Everest & Jennings International Ltd.
has caused this Certificate to be signed by Timothy W. Evans, its Senior
Vice President and Secretary, this 31st day of August, 1996.
EVEREST & JENNINGS INTERNATIONAL LTD.
By: /s/ Timothy W. Evans
Senior Vice President and Secretary
