FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the 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 1-8801 NY
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2578230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Rabro Drive East, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(516) 582-5900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes___ No ___
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.025 Par Value --- 14,209,895 shares as of November 11, 1996
<PAGE>
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
----------------------------------------------------
I N D E X
----------
Part I. Financial Information: Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1996 (Unaudited) and December 31, 1995
(Audited) 3
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1996
and 1995
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 (Unaudited) 5/6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7/8/9/10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11/12/13
Part II. Other Information:
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
- ------- ------------- -------------
(unaudited) (audited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 596,000 $ 214,000
Accounts receivable - net 30,377,000 21,936,000
Inventories 33,735,000 29,819,000
Other current assets 4,332,000 1,789,000
Recoverable and prepaid income taxes 246,000 221,000
------------- -------------
TOTAL CURRENT ASSETS 69,286,000 53,979,000
PROPERTY, PLANT AND EQUIPMENT - net 7,672,000 8,120,000
EXCESS OF COST OVER NET ASSETS ACQUIRED - net 29,204,000 29,291,000
INVESTMENT IN LEVERAGED LEASE -- 487,000
OTHER ASSETS 5,381,000 4,910,000
DEFERRED TAX ASSET 1,151,000 3,012,000
------------- -------------
TOTAL ASSETS $ 112,694,000 $ 99,799,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to BIL $ 4,000,000
Note Payable to bank 2,100,000
Current maturities of long-term debt and
Guaranteed Senior Notes 2,581,000 1,578,000
Accounts payable 9,219,000 8,750,000
Acceptances payable 12,500,000 5,000,000
Accrued expenses 4,386,000 2,788,000
------------- -------------
TOTAL CURRENT LIABILITIES 32,686,000 20,216,000
LONG-TERM DEBT 577,000 972,000
GUARANTEED SENIOR NOTES 17,000,000 19,000,000
------------- -------------
TOTAL LIABILITIES 50,263,000 40,188,000
STOCKHOLDERS' EQUITY:
Preferred Stock -- --
Common Stock 355,000 352,000
Additional paid-in capital 67,613,000 66,887,000
(Deficit) (5,338,000) (7,628,000)
------------- -------------
Sub-total 62,630,000 59,611,000
Notes receivable from sale of shares (199,000) --
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 62,431,000 59,611,000
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 112,694,000 $ 99,799,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Operations $32,366,000 $25,642,000 $88,877,000 $74,460,000
Interest and other income 18,000 37,000 483,000 53,000
----------- ----------- ----------- -----------
32,384,000 25,679,000 89,360,000 74,513,000
COST AND EXPENSES:
Cost of revenues 21,858,000 17,661,000 60,241,000 51,196,000
Selling, general and administrative 8,139,000 6,926,000 23,082,000 20,616,000
Interest expense 645,000 629,000 1,886,000 2,064,000
----------- ----------- ----------- -----------
30,642,000 25,216,000 85,209,000 73,876,000
INCOME BEFORE INCOME TAXES 1,742,000 463,000 4,151,000 637,000
INCOME TAXES 777,000 189,000 1,861,000 258,000
----------- ----------- ----------- -----------
NET INCOME $ 965,000 $ 274,000 $ 2,290,000 $ 379,000
=========== =========== =========== ===========
PER SHARE DATA:
NET INCOME PER SHARE $ .07 $ .02 $ .16 $ .03
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 14,691,000 13,145,000 14,483,000 13,052,000
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
----------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,290,000 $ 379,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,415,000 2,533,000
Provision for losses on accounts receivable 441,000 321,000
Deferred income taxes 1,861,000 258,000
Gain on sale of product line (360,000) --
Other -- 1,000
Changes in operating assets and
liabilities, net of effects of acquisitions
Accounts receivable (8,031,000) (1,270,000)
Inventories, other current assets and
recoverable and prepaid income taxes (6,017,000) 4,112,000
Accounts and acceptances payable
and accrued expenses 9,051,000 (5,154,000)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,650,000 1,180,000
----------- -----------
INVESTING ACTIVITIES
Purchase of short term investments -- (1,995,000)
Purchases of property, plant and equipment (694,000) (475,000)
Acquisitions, net of cash acquired (2,191,000) (637,000)
Notes receivable from officers (199,000) --
Proceeds from sale of product line 500,000 --
Proceeds from sale of assets under leveraged lease 487,000 --
Net (increase) decrease in other assets (158,000) 250,000
----------- -----------
NET CASH (USED IN) INVESTING
ACTIVITIES $(2,255,000) $(2,857,000)
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from notes payable $ 6,590,000 $ 1,000,000
Payments on notes payable (4,690,000) (1,673,000)
Principal payments on long-term debt (1,392,000) (443,000)
Proceeds on exercise of stock options 479,000 172,000
Issuance of common stock,
net of expenses -- 3,574,000
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 987,000 2,630,000
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 382,000 953,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 214,000 121,000
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 596,000 $ 1,074,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
1. GENERAL
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
as of September 30, 1996 (unaudited), the results of operations for the three
and nine months ended September 30, 1996 and 1995 (unaudited) and the statements
of cash flows for the nine months ended September 30, 1996 and 1995 (unaudited).
Additionally, it should be noted that the accompanying financial statements
and notes thereto do not purport to be complete disclosures in conformity with
generally accepted accounting principles. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Inventories at September 30, 1996 have been valued at average cost based on
perpetual records or gross profit method.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and the excess of cost over net assets acquired,
related to those assets to be held and used in operations, whereby impairment
losses are required to be recorded when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets and certain identifiable intangibles that are expected to be
disposed of. The adoption of SFAS No. 121 did not have a material effect on the
results of operations or financial condition of the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than the fourth quarter of 1996. The new standard
defines a fair value method of accounting for the issuance of stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the 1996 financial
statements proforma net income and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements. The Company has decided
not to adopt the fair value method but will provide the necessary proforma
information.
The results of operations for the three and nine months ended September 30,
1996 and 1995 are not necessarily indicative of results for the full year.
2. NET INCOME PER SHARE
Net income per common share for the three and nine months ended September
30, 1996 and for 1995 was computed using the weighted average number of common
shares and dilutive common equivalent shares outstanding during the period.
Page 7
<PAGE>
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1996 1995
----------- -----------
Raw materials $ 2,355,000 $ 2,871,000
Work-in-process 898,000 1,620,000
Finished goods 30,482,000 25,328,000
----------- -----------
$33,735,000 $29,819,000
=========== ===========
4. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No.
109"). Under Statement No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As of
September 30, 1996, the Company has recorded net deferred tax assets of
$1,151,000. These tax assets are primarily comprised of net operating loss
carryforwards and investment, research and development, jobs tax and alternate
minimum tax credits. Based upon the Company's expectation that future taxable
income will be sufficient to utilize the carryforward prior to December 31,
2009, the Company has not recorded a valuation allowance on these deferred tax
assets, except for an allowance of $55,000 related to tax assets recorded for
acquired carryforwards. Future taxable income is expected to be derived from the
Company's existing operations. The amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
5. OTHER MATTERS
During the first quarter of 1996, the Company's inventory buy-back program
was introduced to provide an outlet for its customers to eliminate their excess
inventory. Under the program, the Company purchases certain excess inventory
from its customers, who in turn place additional purchase orders with the
Company exceeding the value of the excess inventory purchased. The Company is
able to utilize its vast customer base and distribution network to market and
distribute the excess inventory through its division, National Medical Excess
Corp. ("NME"). Substantially all of the medical products purchased by the
Company as part of the inventory buy-back program are items not generally
offered for sale by the Company. Items repurchased by the Company which are
identified as items previously sold by the Company to a customer have been
deminimus based on the Company's experience, and have been recorded in
accordance with the Company's normal revenue recognition policy.
On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump
product line for $1,000,000 of which $500,000 was paid in cash with the balance
in a secured subordinated promissory note, and recorded a gain of $360,000,
which is included in other revenue on the accompanying condensed consolidated
statements of operations.
In March 1996, the Company introduced a new regional operation under the
name "GF Express" to provide "next-day" and "same-day" service to home
healthcare dealers of certain strategic home healthcare products. In connection
with the introduction of "GF Express," the Company made an initial payment of
$500,000 on March 16, 1996 to acquire certain assets at a future date of Jeffco
Express Medical Supply, Inc. ("JEM"), including a customer list, certain
contracts and other assets. As part of the transaction, the Company entered into
a Management and Administrative Agreement pursuant to which JEM managed and
administered "GF Express" for a management fee. The Company acquired the assets
of JEM on May 14, 1996, and delivered a non-negotiable promissory note in the
amount of $500,000 for the balance of the purchase price, which is payable
within one year to JEM, subject to the attainment of certain financial criteria.
Page 8
<PAGE>
In May 1996, the Company liquidated its investment in the leveraged lease
agreement entered into in December 1983. The cash proceeds from the sale of the
leased helicopters approximated the recorded investment in the leveraged lease.
The terms of the Amended and Restated Agreement and Plan of Merger dated as
of September 3, 1996, and amended as of October 1, 1996 (the "Merger
Agreement"), by and among the Company, E&J Acquisition Corp., a wholly owned
subsidiary of the Company, Everest & Jennings International Ltd. ("Everest &
Jennings") and BIL (Far East Holdings) Limited ("BIL"), the majority stockholder
of Everest & Jennings, provide that the Company will acquire Everest & Jennings
in a merger transaction. Pursuant to which the stockholders of Everest &
Jennings will receive one share of common stock of the Company in exchange for
each 2.857 shares of the common stock of Everest & Jennings, or a total of
approximately 2.519 million shares of the Company's common stock.
Notwithstanding the foregoing, the exchange ratio will be reduced to the extent
necessary so that the value of each fraction of a share of common stock of the
Company issued in exchange for a share of common stock of Everest & Jennings
does not exceed $5.50.
The Merger Agreement provides that BIL will purchase up to an additional
1.923 million shares of common stock of the Company to be valued at the greater
of $13.00 per share or the average market price of the common stock of the
Company for the ten (10) consecutive trading days prior to the closing date, the
proceeds of which will be used by the Company to repay all debt of Everest &
Jennings in the approximate amount of $25 million to the Hong Kong and Shanghai
Banking Corporation Limited. As part of the transaction, all debt of Everest &
Jennings to BIL and all Convertible Preferred Stock of Everest & Jennings held
by BIL will be exchanged for an equal amount of the Company Series B Convertible
Preferred Stock in an amount not to exceed $61 million. The Series B Convertible
Preferred Stock will yield a dividend at the rate of 1.5% per year, which will
be paid at the option of the Company either in cash or common stock. During the
five (5) year period commencing on the closing date, and subject to a $20 per
share conversion rate limitation, the Series B Convertible Preferred Stock will
be convertible into common stock by BIL at a conversion rate of $20 per share,
or by the Company at a conversion rate equal to the Company's average stock
price during any ten (10) consecutive trading days, provided the common stock
trades at an average stock price of $15.50 per share or greater during the
applicable period. In the event the Series B Convertible Preferred Stock has not
been converted during the applicable five (5) year period, the Series B
Convertible Preferred Stock will automatically convert on the fifth anniversary
date of the closing at a conversion rate of $15.50. As part of the transaction,
BIL will purchase $10 million of the Company Series C Convertible Preferred
Stock, with a dividend yield at the rate of 1.5% per year, which will be paid at
the option of the Company either in cash or common stock. At the Company's
option, the Series C Convertible Preferred Stock will either be converted into
500,000 shares of common stock on the fifth anniversary date of the closing, or
redeemed by the Company at its stated value on such date. Immediately after the
transaction and after giving effect to the conversion of the Series B and Series
C Convertible Preferred Stock, BIL will own approximately 34% of the common
stock of the Company on a fully-diluted basis. During July 1996, BIL loaned $4
million to the Company, which will be converted at closing into a subordinated
loan maturing in 2001 with interest payable quarterly at an effective rate of
7.7% per year.
Upon the closing of the Everest & Jennings transaction, the Company will
issue approximately 4.442 million shares of common stock, consisting of (i)
approximately 2.519 million shares to the stockholders of Everest & Jennings and
(ii) up to an additional 1.923 million shares of common stock to BIL, to be
valued at the greater of $13 per share or the average market price of the common
stock of the Company for the ten consecutive trading days prior to the closing
date, the proceeds of which will be used by the Company to repay all debt of
Everest & Jennings in the approximate amount of $25 million to the Hong Kong and
Shanghai Banking Corporation Limited. In the event the Series B Convertible
Preferred Stock has not converted during the applicable five (5) year period,
the Series B Convertible Preferred Stock will automatically convert on the fifth
anniversary date of the closing into approximately 3.935 million shares of the
common stock of the Company at a conversion price of $15.50. In addition, at the
Company's option, the Series C Convertible Preferred Stock will either be
converted into 500,000 shares of common stock on the fifth anniversary date of
the closing, or redeemed by the Company at its stated value on such date. In the
event the Series B Convertible Preferred Stock automatically converts at a
conversion rate of $15.50 and the Series C Convertible Preferred Stock converts
into 500,000 shares on the fifth anniversary date of the closing, the Company
will issue an aggregate of approximately 8.877 million shares (not including any
shares that might be issued as a dividend on the Series B or Series C
Convertible Preferred Stock) of common stock in connection with the Everest &
Jennings transaction.
The Everest & Jennings transaction is currently scheduled to be completed
on November 27, 1996. The transaction is subject to, among other things, the
approval by the stockholders of Graham-Field and Everest & Jennings, the receipt
of certain corporate approvals, and the satisfaction of other customary terms
and
Page 9
<PAGE>
conditions. BIL, which owns approximately 80% of the outstanding common stock of
Everest & Jennings, has agreed to vote in favor of the transaction.
On July 18, 1996, an affiliate of BIL provided the Company with a loan in
the amount of $4,000,000, at an effective interest rate of 8.8%. The loan was
used to fund the acquisition of V.C. Medical and for general corporate purposes.
Under the terms of the loan, all principal and interest are payable upon the
earlier to occur of 45 days after the closing of the Everest & Jennings merger
transaction or 45 days after the termination of the transaction. The terms of
the Everest & Jennings merger transaction provide that the loan will be
converted upon closing of the transaction into a subordinated loan maturing in
2001 with interest payable quarterly at an effective rate of 7.7% per year.
In July 1996, the Company entered into a sales representative and
consulting agreement with CustomerCare Corporation, which has enabled the
Company to expand its product offering to include a complete line of wound care,
urologicals and ostomy supplies, including the Hollister line of ostomy and
colostomy products. The agreement provides for, among other things, a consulting
fee in the amount of $100,000, and a minimum commission of $7,000 a month for a
two year period.
On September 4, 1996, the Company acquired certain assets of V.C. Medical
Distributors Inc. ("V.C. Medical"), a wholesale distributor of medical products
in Puerto Rico, for a purchase price of approximately $1.950 million, consisting
of cash in the amount of approximately $1,700,000, with the balance payable in
shares of common stock of the Company. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date. The excess of cost over the net assets acquired amounted to
approximately $950,000. As additional consideration, the Company will pay
$500,000 to V.C. Medical in the event the business achieves certain earnings
levels during the one year period following the closing. The acquisition of V.C.
Medical contributed approximately $425,000 of revenue for the quarter and nine
month period ended September 30, 1996.
Consolidated unaudited pro forma results of operations of the Company for
the three and nine months ended September 30, 1996 and 1995 as if the V.C.
Medical acquisition had taken place as of January 1, 1995, appear below. This
information gives effect to the adjustment of interest expense, income tax
provisions, and to the assumed amortization of fair value adjustments, including
the excess of cost over net assets acquired.
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $33,083,000 $26,556,000 $92,550,000 $77,144,000
=========== =========== =========== ===========
Income Before Income Taxes $ 1,877,000 $ 537,000 $ 4,567,000 $ 858,000
Income Taxes $ 838,000 $ 222,000 $ 2,048,000 $ 357,000
----------- ----------- ----------- -----------
Net Income $ 1,039,000 $ 315,000 $ 2,519,000 $ 501,000
=========== =========== =========== ===========
Net Income per Share $ .07 $ .02 $ .17 $ .04
=========== =========== =========== ===========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 14,714,000 13,178,000 14,513,000 13,085,000
=========== =========== =========== ===========
</TABLE>
In November 1996, the Company entered into a commitment letter for a three
year senior secured revolving credit facility for up to $55 million of
borrowings with IBJ Schroder Bank & Trust Company. Under the terms of the
proposed revolving credit facility, borrowings will bear interest at the bank's
prime rate or 2.25% above LIBOR, whichever is lower. The Company anticipates
entering into the credit facility by the end of November 1996. The credit
facility will refinance certain existing indebtedness of the Company, including
the indebtedness under the John Hancock Guaranteed Senior Notes and provide for
the ongoing working capital needs of the Company.
6. LEGAL PROCEEDINGS
See part II, item 1 on page 13.
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Operating Revenues
Operating revenues for the three months ended September 30, 1996 increased
approximately $6,724,000 or 26% as compared to the same period last year.
Operating revenues for the nine months ended September 30, 1996 increased
approximately $14,417,000 or 19% as compared to the same period last year. The
increase in operating revenues was primarily attributable to the Company's
expansion of its Consolidated Advantage Program ("CAP") and the expansion of the
"GF Express" program.
In March 1996, "GF Express" was introduced to offer "next day" and "same
day" service to home healthcare dealers of certain strategic home healthcare
products, including Temco patient aids, adult incontinence products,
wheelchairs, and nutritional supplements. Revenues attributable to GF Express
were approximately $4,652,000 and $9,254,000 for the quarter and nine month
period ended September 30, 1996, respectively. Based on the results of the
operations of "GF Express," the Company plans on expanding the program
throughout the United States.
On September 4, 1996, the Company acquired V.C. Medical Distributors, Inc.
("V.C. Medical"), a regional home healthcare wholesaler located in Puerto Rico.
V.C. Medical currently operates as "GF Express - Puerto Rico". Revenues
attributable to GF Express - Puerto Rico were approximately $425,000 for the
quarter and nine month period ended September 30, 1996.
During the first quarter of 1996, the Company's inventory buy-back program
was introduced to provide an outlet for its customers to eliminate their excess
inventory. Under the program, the Company purchases certain excess inventory
from its customers, who in turn place additional purchase orders with the
Company exceeding the value of the excess inventory purchased. The Company is
able to utilize its vast customer base and distribution network to market and
distribute the excess inventory through its division, National Medical Excess
Corp. ("NME"). Revenues attributable to NME, which was acquired as of July 1,
1995, were approximately $838,000 and $2,085,000 for the quarter and nine month
period ended September 30, 1996, respectively.
The revenue increase was achieved despite the decline in sales to Apria
Healthcare Group, Inc. ("Apria") of approximately $1,458,000 and $4,544,000
respectively, for the three and nine months ended September 30, 1996. The
Company's supply agreement with Apria expired on December 31, 1995.
Interest and Other Income
Interest and other income for the three month period ended September 30,
1996 decreased $19,000, as compared to the same period last year. The decrease
reflects lower cash balances on hand during this period.
Interest and other income for the nine month period ended September 30,
1996 increased by $430,000 as compared to the same period last year, primarily
due to the gain and royalties related to the sale of the Gentle Expressions(R)
breast pump product line and interest income on certain notes receivable.
Cost of Revenues
Cost of revenues as a percentage of operating revenues decreased for the
three and nine months ended September 30, 1996 to 67.5% and 67.8%, respectively,
as compared to 68.9% and 68.8% for the same periods last year. The decrease in
cost of revenues in both the three and nine month periods is primarily related
to the Company's maintenance of selling prices and improved purchasing and
manufacturing efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of operating
revenues for the three months ended September 30, 1996 was 25% as compared to
27% in the same period last year. Selling, general and administrative expenses
as a percentage of operating revenues for the nine months ended September 30,
1996 was 26% as compared to 28% in the same period last year. The decrease in
both fiscal periods is primarily due to cost reduction programs and the
continued efficiencies generated by the Company's investment in new business
systems.
Page 11
<PAGE>
Interest Expense
Interest expense for the three months ended September 30, 1996 increased
$16,000 or 3% as compared to the same period last year. For the nine months
ended September 30, 1996, interest expense decreased $178,000 or 9% as compared
to the same period last year. The increase for the quarter is primarily the
result of increased borrowings partially offset by lower interest rates. The
decrease for the nine months ended September 30, 1996, is due to lower interest
rates and reduced average borrowings as compared to the same period last year.
Net Income
Income before income taxes for the three and nine months ended September
30, 1996 was $1,742,000 and $4,151,000, respectively, as compared to $463,000
and $637,000 for the same periods last year. The increase in income before
income taxes is primarily due to the increase in revenues, an increased gross
profit margin, a decrease in selling, general and administrative expenses as a
percentage of operating revenues, and the gain realized in the first quarter
from the sale of the Gentle Expressions(R) breast pump product line.
Net income for the three months ended September 30, 1996 was $965,000 as
compared to $274,000 for the same period last year. Net income for the nine
months ended September 30, 1996 was $2,290,000 as compared to $379,000 for the
same period last year. The Company recorded income tax expense of $777,000 and
$1,861,000 for the three and nine month periods ended September 30, 1996,
respectively, as compared to income tax expense of $189,000 and $258,000
recorded during the same periods last year. As of September 30, 1996, the
Company has recorded net deferred tax assets of $1,151,000, primarily comprised
of net operating loss carryforwards and investment, research and development,
jobs tax and alternative minimum tax credits.
Based upon the Company's expectation that future taxable income will be
sufficient to utilize the carryforwards prior to December 31, 2009, the Company
has not recorded a valuation allowance on these deferred tax assets, except for
an allowance of $55,000 related to tax assets recorded for acquired
carryforwards. Future taxable income is expected to be derived from the
Company's existing operations. The total deferred tax asset will continue to be
evaluated by management as to its realizability on a quarterly basis. The amount
of the deferred tax asset considered realizable could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced. Uncertainties which would impact the future realizability, but are not
expected to occur include declines in sales and margins resulting from a
possible loss of market share and increased competition.
The Company's business has not been materially affected by inflation.
Liquidity and Capital Resources
The Company had working capital of $36,600,000 at September 30, 1996, as
compared to $33,763,000 at December 31, 1995. The increase in working capital is
primarily attributable to the cash provided by the Company's net income of
$2,290,000, which reflects $2,415,000 of depreciation and amortization expense,
partially offset by the reclassification of an additional $1,000,000 of
principal related to the John Hancock Guaranteed Senior Notes to reflect the
scheduled principal payment of $2,000,000 due in February 1997, and the goodwill
in the amount of $1,450,000 acquired in connection with certain acquisitions.
Cash provided by operations for the nine months ended September 30, 1996
was $1,650,000 as compared to $1,180,000 in the same period last year. The
principal reason for the increase in cash provided by operations was the
increase in the Company's operating profit.
The Company anticipates that its current cash balance together with
expected cash flow from operations and its new commitment for a credit facility
will be sufficient to meet its working capital requirements.
Financing
At September 30, 1996, the Company had a $16,000,000 unsecured
line-of-credit with its bank, which expires on December 31, 1996. The line is
available for direct borrowings in the amount of up to $5,000,000,
Page 12
<PAGE>
and provides for commercial letters of credit and bankers' acceptances. Credit
availability under this line is subject to the bank's continuing satisfaction
with current financial information. The line is guaranteed by the Company's
wholly-owned subsidiaries. Interest on direct borrowings is payable at 1% above
the bank's prime rate, acceptances are created for a fee of 1-1/2% above the
bank's acceptance rate, and the commercial letters of credit commission rate is
3/8% per drawing.
At September 30, 1996, $12,500,000 had been utilized under the line for
acceptances payable. Open letters of credit relating to supplier purchases
approximated $2,163,000 at September 30, 1996.
In November 1996, the Company entered into a commitment letter for a three
year senior secured revolving credit facility for up to $55 million of
borrowings with IBJ Schroder Bank & Trust Company. Under the terms of the
proposed credit facility, borrowings will bear interest at the bank's prime rate
or 2.25% above LIBOR, whichever is lower. The Company anticipates entering into
the credit facility by the end of November 1996. The credit facility will
refinance certain existing indebtedness of the Company, including the
indebtedness under the John Hancock Guaranteed Senior Notes and provide for the
ongoing working capital needs of the Company.
On July 18, 1996, an affiliate of BIL provided the Company with a loan in
the amount of $4,000,000, at an effective interest rate of 8.8%. The loan was
used to fund the acquisition of V.C. Medical and for general corporate purposes.
Under the terms of the loan, all principal and interest are payable upon the
earlier to occur of 45 days after the closing of the Everest & Jennings merger
transaction or 45 days after the termination of the transaction. The terms of
the Everest & Jennings merger transaction provide that the loan will be
converted upon closing of the transaction into a subordinated loan maturing in
2001 with interest payable quarterly at an effective rate of 7.7% per year.
Part II. Other Information
Item 1. Legal Proceedings
On May 21, 1996, the Company was sued by Minnesota Mining & Manufacturing
Company ("3M") in a claim purportedly arising under Federal, state and common
law trademark, false advertising and unfair competition laws, as well as for
breach of, and interference with, contracts. 3M alleges that the Company is
selling 3M products in violation of Federal and state law, and seeks monetary
damages in an unspecified amount, as well as injunctive relief against the
Company's continued sale of 3M products. The claim was filed in the Southern
District of New York. The Company vigorously denies the allegations of 3M's
complaint, and has filed an answer denying the allegations of wrongdoing and
asserting affirmative defenses. In addition, the Company has asserted
counterclaims against 3M under Federal antitrust laws, as well as an unfair
competition claim.
In June 1996, the Company was sued in a purported class action captioned
"Kauffman v. Hogg" in Delaware Chancery Court arising out of the Company's
announced acquisition of Everest & Jennings. The complaint alleges that the
Company aided and abetted breaches of fiduciary duty on the part of Everest &
Jennings' controlling stockholder and its directors in connection with their
negotiation of the proposed transaction. Plaintiff, a stockholder at Everest &
Jennings, purports to seek to enjoin the transaction, or alternatively,
rescission, or an award of compensatory or rescissory damages. The Company
believes that it has valid defenses to the complaint's allegations of
wrongdoing, and intends to vigorously defend the lawsuit.
The Company is a defendant in certain other legal actions which arose in
the normal course of business, the outcome of which, in the opinion of
management, will not have a material adverse effect on the Company's financial
position.
Page 13
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K filed on September 3, 1996 (Date of Event: September 3, 1996).
Form 8-K filed on September 4, 1996 (Date of Event: September 3, 1996).
Form 8-K filed on September 17, 1996 (Date of Event: September 4,1996).
Page 14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Registrant)
Date: November 14, 1996 /s/ Irwin Selinger
--------------------------------------
Irwin Selinger
Chairman of the Board,
and Chief Executive Officer
Date: November 14, 1996 /s/ Gary M. Jacobs
--------------------------------------
Gary M. Jacobs
Vice President - Finance
Chief Financial and Accounting Officer
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 596
<SECURITIES> 0
<RECEIVABLES> 30,377
<ALLOWANCES> 0
<INVENTORY> 33,735
<CURRENT-ASSETS> 69,286
<PP&E> 7,672
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,694
<CURRENT-LIABILITIES> 32,686
<BONDS> 17,577
0
0
<COMMON> 355
<OTHER-SE> 62,076
<TOTAL-LIABILITY-AND-EQUITY> 112,694
<SALES> 32,366
<TOTAL-REVENUES> 32,384
<CGS> 21,858
<TOTAL-COSTS> 21,858
<OTHER-EXPENSES> 8,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645
<INCOME-PRETAX> 1,742
<INCOME-TAX> 777
<INCOME-CONTINUING> 965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
