FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to
Commission file number 0-10881 NY
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2578230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Rabro Drive East, Hauppauge, New York 11788
(Address of principal executive offices)
(516) 582-5900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by the court. Yes No
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.025 Par Value --- 14,175,608 shares as of August 7, 1996
<PAGE>
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Part I. Financial Information: Page
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995
(Audited) ...........................................................................3
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1996 and 1995
(Unaudited) .........................................................................4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and 1995 (Unaudited) .............................5/6
Notes to Condensed Consolidated Financial Statements
(Unaudited) .................................................................7/8/9/10/11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................................12/13/14/15
Part II. Other Information:
Item 1. Legal Proceedings .............................................................................16
Item 4. Submission of Matters to a Vote of Security Holders ........................................16/17
Item 6. Exhibits and Reports on Form 8-K ..............................................................17
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 397,000 $ 214,000
Accounts receivable - net 26,965,000 21,936,000
Inventories 31,549,000 29,819,000
Other current assets 2,162,000 1,789,000
Recoverable and prepaid income taxes 246,000 221,000
------------ ------------
TOTAL CURRENT ASSETS 61,319,000 53,979,000
PROPERTY, PLANT AND EQUIPMENT - net 7,755,000 8,120,000
EXCESS OF COST OVER NET ASSETS
ACQUIRED - net 28,485,000 29,291,000
INVESTMENT IN LEVERAGED LEASE - 487,000
OTHER ASSETS 5,531,000 4,910,000
DEFERRED TAX ASSET 1,928,000 3,012,000
------------ -----------
TOTAL ASSETS $105,018,000 $ 99,799,000
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 1,100,000 $ 2,100,000
Current maturities of long-term debt and
Guaranteed Senior Notes 2,591,000 1,578,000
Accounts payable 8,382,000 8,750,000
Acceptances payable 11,500,000 5,000,000
Accrued expenses 2,467,000 2,788,000
------------ ------------
TOTAL CURRENT LIABILITIES 26,040,000 20,216,000
LONG-TERM DEBT 704,000 972,000
GUARANTEED SENIOR NOTES 17,000,000 19,000,000
----------- ------------
TOTAL LIABILITIES 43,744,000 40,188,000
STOCKHOLDERS' EQUITY:
Preferred Stock - -
Common Stock 354,000 352,000
Additional paid-in capital 67,317,000 66,887,000
(Deficit) (6,303,000) (7,628,000)
----------- -----------
Sub-total 61,368,000 59,611,000
Notes receivable from sale of shares (94,000) -
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 61,274,000 59,611,000
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $105,018,000 $ 99,799,000
============ ============
</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 Six Months Ended
June 30 June 30
--------- --------
1996 1995 1996 1995
-------- -------- -------- ------
REVENUES:
<S> <C> <C> <C> <C>
Operations $ 29,582,000 $24,327,000 $56,511,000 $48,818,000
Interest and other income 46,000 8,000 465,000 16,000
------------ ------------ ---------- ------------
29,628,000 24,335,000 56,976,000 48,834,000
COST AND EXPENSES:
Cost of revenues 19,881,000 16,763,000 38,383,000 33,535,000
Selling, general and administrative 7,614,000 6,818,000 14,943,000 13,690,000
Interest expense 652,000 690,000 1,241,000 1,435,000
------------ ----------- ----------- -----------
28,147,000 24,271,000 54,567,000 48,660,000
INCOME BEFORE INCOME TAXES 1,481,000 64,000 2,409,000 174,000
INCOME TAXES 666,000 25,000 1,084,000 69,000
------------ ------------ ----------- ------------
NET INCOME $ 815,000 $ 39,000 $ 1,325,000 $ 105,000
============ ============ =========== ===========
PER SHARE DATA:
NET INCOME PER SHARE $ .06 $ .00 $ .09 $ .01
============== ============== ============== =============
WEIGHTED AVERAGE
NUMBER OF COMMON AND
COMMON EQUIVALENT
SHARES OUTSTANDING 14,547,000 13,021,000 14,364,000 13,007,000
============ ============ =========== ===========
</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>
Six Months Ended
June 30
------------------------------------
1996 1995
-------- ------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 1,325,000 $ 105,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,602,000 1,681,000
Provision for losses on accounts receivable 274,000 195,000
Deferred income taxes 1,084,000 69,000
Gain on sale of product line (360,000)
Changes in operating assets and
liabilities:
Accounts receivable (5,303,000) (302,000)
Inventories, other current assets and
recoverable and prepaid income taxes (2,072,000) 5,115,000
Accounts and acceptances payable and
accrued expenses 5,584,000 (4,962,000)
------------ -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,134,000 1,901,000
------------ -----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (406,000) (295,000)
Notes receivable from officers (94,000)
Initial payment in connection with acquisition (500,000)
Proceeds from sale of product line 500,000
Proceeds from sale of assets under leveraged lease 487,000
Net (increase) decrease in other assets (115,000) 42,000
------------ ------------
NET CASH (USED IN) INVESTING
ACTIVITIES $ (128,000) $ (253,000)
------------ ------------
</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>
Six Months Ended
June 30
------------------------------
1996 1995
-------- ------
FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from note payable to bank $ 1,500,000 $1,000,000
Payments on note payable to bank (2,500,000) (1,673,000)
Principal payments on long term debt (1,255,000) (280,000)
Proceeds on exercise of stock options 432,000 172,000
------------ ----------
NET CASH (USED IN) FINANCING ACTIVITIES (1,823,000) (781,000)
------------ ----------
INCREASE IN CASH AND CASH EQUIVALENTS 183,000 867,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 214,000 121,000
----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 397,000 $ 988,000
=========== ==========
</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
June 30, 1996 (unaudited), the results of operations for the three and six
months ended June 30, 1996 and 1995 (unaudited) and the statements of cash flows
for the six months ended June 30, 1996 and 1995 (unaudited).
Additionally, it should be noted that the accompanying financial statements and
notes thereto do not purport to be complete disclosures in conformity with
generally accepted accounting principles. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Inventories at June 30, 1996 have been valued at average cost based on perpetual
records or the gross profit method.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This standard establishes the
accounting for the impairment of long-lived assets, certain identifiable
intangibles and the excess of cost over net assets acquired, related to those
assets to be held and used in operations, whereby impairment losses are required
to be recorded when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets and certain identifiable intangibles that are expected to be disposed of.
The adoption of SFAS No. 121 did not have a material effect on the results of
operations or financial condition of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than the fourth quarter of 1996. The new standard defines a fair value method of
accounting for the issuance of stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period, which is
usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged,
but are not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but would be required to disclose in
a note to the 1996 financial statements proforma net income and per share
amounts as if the Company had applied the new method of accounting. SFAS No. 123
also requires increased disclosures for stock-based compensation arrangements.
The Company has decided not to adopt the fair value method but will provide the
necessary proforma information.
Page 7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
The results of operations for the three and six months ended June 30, 1996 and
1995 are not necessarily indicative of results for the full year.
2. NET INCOME PER SHARE
Net income per common share for the three and six months ended June 30, 1996 and
1995 was computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding during the period.
3. INVENTORIES
Inventories consist of the following:
June 30 December 31
1996 1995
----------- -----------
Raw materials $ 2,527,000 $ 2,871,000
Work-in-process 1,136,000 1,620,000
Finished goods 27,886,000 25,328,000
----------- -----------
$31,549,000 $29,819,000
=========== ===========
4. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"). Under
Statement No. 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. As of June 30, 1996, the Company
has recorded net deferred tax assets of $1,928,000. These tax assets are
primarily comprised of net operating loss carryforwards and investment, research
and development, jobs tax and alternate minimum tax credits. Based upon the
Company's expectation that future taxable income will be sufficient to utilize
the carryforward prior to December 31, 2009, the Company has not recorded a
valuation allowance on these deferred tax assets, except for an allowance of
$55,000 related to tax assets recorded for acquired carryforwards. Future
taxable income is expected to be derived from the Company's existing operations.
The amount of the deferred tax asset considered realizable could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
5. OTHER MATTERS
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
Page 8
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
recorded a gain of $360,000, which is included in other revenue on the
accompanying condensed consolidated statements of operations.
In March 1996, the Company introduced a new regional operation under the name
"GF Express" to provide "next-day" and "same-day" service to home healthcare
dealers of certain strategic home healthcare products. In connection with the
introduction of "GF Express," the Company made an initial payment of $500,000 on
March 16, 1996 to acquire certain assets at a future date of Jeffco Express
Medical Supply, Inc. ("JEM"), including a customer list, certain contracts and
other assets. As part of the transaction, the Company entered into a Management
and Administrative Agreement pursuant to which JEM managed and administered "GF
Express" for a management fee. The Company acquired the assets of JEM on May 14,
1996, and delivered a non-negotiable promissory note in the amount of $500,000
for the balance of the purchase price, which is payable within one year to JEM,
subject to the attainment of certain financial criteria.
In May 1996, the Company liquidated its investment in the leveraged lease
agreement entered into in December 1983. The cash proceeds from the sale of the
leased helicopters approximated the recorded investment in the leveraged lease.
On June 17, 1996, the Company reached an agreement in principle with Everest &
Jennings International, Ltd. ("Everest & Jennings) and BIL (Far East Holdings)
Limited ("BIL"), the majority stockholder of Everest & Jennings, to acquire
Everest & Jennings in a merger transaction. The terms of the proposed
transaction announced on June 17, 1996 provided that the stockholders of Everest
& Jennings would receive one share of common stock of the Company in exchange
for each four shares of the common stock of Everest & Jennings, and $2.00 for
each share of common stock of Everest & Jennings, or a total of approximately
1.8 million shares of the Company's common stock and $14.4 million. On August
13, 1996, the Company and Everest & Jennings announced revised terms pursuant to
which the stockholders of Everest & Jennings will receive one share of common
stock of the Company but no cash payment, or a total of approximately 2.5
million shares of the Company's common stock. The exchange ratio will be reduced
if the value of the Company's common stock to be issued in exchange for each
share of common stock of Everest & Jennings exceeds $5.50.
BIL will purchase up to an additional 1.9 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
Page 9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
during any ten (10) consecutive trading days, provided the common stock trades
at an average stock price of $15.50 per share or greater during the applicable
period. In the event the Series B Convertible Preferred Stock has not been
converted during the applicable five (5) year period, the Series B Convertible
Preferred Stock will automatically convert on the fifth anniversary date of the
closing at a conversion rate of $15.50. As part of the revised transaction, BIL
will purchase $10 million of the Company Series C Convertible Preferred Stock,
with a dividend yield at the rate of 1.5% per year, which will be paid at the
option of the Company either in cash or common stock. At the Company's option,
the Series C Convertible Preferred Stock will either be converted into 500,000
shares of common stock on the fifth anniversary date of the closing, or redeemed
by the Company at its stated value on such date. Immediately after the
transaction and after giving effect to the conversion of the Series B and Series
C Convertible Preferred Stock, BIL will own approximately 34% of the common
stock of the Company on a fully-diluted basis. During July 1996, BIL loaned $4
million to the Company, which will be converted at closing into a subordinated
loan maturing in 2001 with interest payable quarterly at an effective rate of
7.7% per year.
The Company plans to enter into definitive documentation by the end of August
1996, with a closing planned for November 1996. The transaction is subject to,
among other things, the execution of definitive documentation, the approval by
the stockholders of Graham-Field and Everest & Jennings, the receipt of certain
corporate and regulatory approvals, and the satisfaction of other customary
terms and conditions. BIL, which owns approximately 80% of the outstanding
common stock of Everest & Jennings, has agreed to vote in favor of the
transaction.
In June 1996, the Company entered into a letter of intent to acquire V.C.
Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of medical
products in Puerto Rico, for a purchase price of approximately $1.5 million,
consisting of cash in the amount of approximately $1,250,000, with the balance
payable in shares of common stock of the Company. As additional consideration,
the Company will pay $500,000 to V.C. Medical in the event the business achieves
certain earnings levels during the one year period following the closing. This
transaction is anticipated to be completed in August 1996.
On July 18, 1996, an affiliate of BIL provided the Company with a loan in the
amount of $4,000,000, at an effective interest rate of 8.8%. The loan is to be
used to fund the acquisition of V.C. Medical and for general corporate purposes.
Under the terms of the loan, all principal and interest are payable upon the
earlier to occur of 45 days after the closing of the Everest & Jennings merger
transaction or 45 days after the termination of the transaction. The modified
terms of the Everest & Jennings merger transaction provide that the loan will be
converted upon closing of the transaction into a subordinated loan maturing in
2001 with interest payable quarterly at an effective rate of 7.7% per year.
In July 1996, the Company entered into a sales representative and consulting
agreement with CustomerCare Corporation, which has enabled the Company to expand
its product offering to include a complete line of wound care, urologicals and
ostomy supplies, including the Hollister line of ostomy and colostomy products.
The agreement provides for, among other things, a consulting fee in the amount
of $100,000, and a minimum commission amount of $7,000 a month for a two year
period.
Page 10
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
6. LEGAL PROCEEDINGS
SEE PART II, ITEM 1 ON PAGE 15
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Operating Revenues
Operating revenues for the three months ended June 30, 1996 increased
approximately $5,255,000 or 22%, as compared to the same period last year.
Operating revenues for the six months ended June 30, 1996, increased
approximately $7,693,000 or 16% as compared to the same period last year. The
increase in operating revenues was primarily attributable to the Company's
expansion of its Consolidation Advantage Program ("CAP") and the introduction of
a new regional operation in the metropolitan New York area under the name "GF
Express".
During the first quarter of 1996, the Company's inventory buy-back program was
introduced to provide an outlet for its customers to eliminate their excess
inventory. Under the program, the Company purchases certain excess inventory
from its customers, who in turn place additional purchase orders with the
Company exceeding the value of the excess inventory purchased. The Company is
able to utilize its vast customer base and distribution network to market and
distribute the excess inventory through its division, National Medical Excess
Corp. ("NME"). During the first six months of 1996, the Company test marketed
the program with seven major customers. In view of the preliminary results of
the program, the Company anticipates the roll-out of the program in the fourth
quarter of 1996. Revenues attributable to NME, which was acquired as of July 1,
1995, were approximately $681,000 and $1,247,000 for the quarter and six month
period ended June 30, 1996, respectively.
In March 1996, "GF Express" was introduced to offer "next day" and "same day"
service to home healthcare dealers of certain strategic home healthcare
products, including Temco patient aids, adult incontinence products,
wheelchairs, and nutritional supplements. Revenues attributable to GF Express
were approximately $3,869,000 and $4,602,000 for the quarter and six month
period ended June 30, 1996, respectively. Based on the results of the operations
of "GF Express," the Company plans on expanding the program throughout the
United States.
The revenue increase was achieved despite the decline in sales to Apria
Healthcare Group, Inc. ("Apria") of approximately $1,592,000 as compared to the
second quarter of 1995. The Company's supply agreement with Apria expired on
December 31, 1995.
Interest and Other Income
Interest and other income for the three month period ended June 30, 1996
increased $38,000 as compared to the same period last year. The increase is
primarily due to finance charges incurred by customers with extended payment
terms, interest income on certain notes receivable, and royalties related to the
sale of the Gentle Expressions(R) breast pump product line. Interest and other
income for the six month period ended June 30, 1996 increased by $449,000 as
compared to the same period last year, primarily due to the gain of $360,000
recorded on the sale of the Gentle Expressions(R) breast pump product line.
Page 12
<PAGE>
Cost of Revenues
Cost of revenues as a percentage of operating revenues for the three months
ended June 30, 1996 decreased to 67.2% from 68.9% in the same period last year.
Cost of revenues as a percentage of operating revenues for the six month period
ended June 30, 1996 decreased to 67.9% from 68.7% in the same period last year.
The decrease in cost of revenues is primarily related to the Company's emphasis
on maintaining selling prices and improved purchasing and manufacturing
efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of operating
revenues for the three months and six months ended June 30, 1996 were 26% as
compared to 28% in the same periods last year. The decrease in both periods is
primarily due to cost reduction programs and the continuing efficiencies
generated by the Company's investment in new business systems.
Interest Expense
Interest expense for the three months ended June 30, 1996 decreased by $38,000
or 6% as compared to the same period last year. For the six months ended June
30, 1996, interest expense decreased by $194,000 or 14% as compared to the same
period last year. The decrease in interest expense in both periods is primarily
due to lower interest rates and reduced average borrowings as compared to the
same periods last year.
Net Income
Income before income taxes for the three months ended June 30, 1996 was
$1,481,000 as compared to $64,000 in the same period last year. Income before
income taxes for the six months ended June 30, 1996 was $2,409,000 as compared
to $174,000 in the same period last year. The increase in income before income
taxes is primarily due to the increase in revenues, an increased gross profit
margin, the decrease in selling, general and administrative expenses as a
percentage of operating revenues, the decrease in interest expense and the gain
realized in the first quarter from the sale of the Gentle Expressions(R) breast
pump product line.
Net income for the three months ended June 30, 1996 was $815,000 as compared to
$39,000 for the same period last year. Net income for the six months ended June
30, 1996 was $1,325,000 as compared to $105,000 for the same period last year.
The Company recorded income tax expense of $666,000 and $1,084,000 for the three
and six month periods ended June 30, 1996, respectively, as compared to income
tax expense of $25,000 and $69,000 recorded during the same periods last year.
As of June 30, 1996, the Company has recorded net deferred tax assets of
$1,928,000, primarily comprised of net operating loss carryforwards and
investment, research and development, jobs tax and alternative minimum tax
Page 13
<PAGE>
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 $35,279,000 at June 30, 1996, as compared to
$33,763,000 at December 31, 1995. The increase in working capital is primarily
attributable to the cash provided by the Company's net income of $1,325,000,
which reflects $1,602,000 of amortization and depreciation expense, partially
offset by the reclassification of an additional $1,000,000 of principal related
to the John Hancock Guaranteed Senior Notes to reflect the scheduled principal
payment of $2,000,000 due in February 1997, and the initial payment of $500,000
in connection with an acquisition.
Cash provided by operations for the six months ended June 30, 1996 was
$2,134,000 as compared to $1,901,000 in the same period last year. The principal
reasons for the increase in cash provided by operations were the Company's
operating profit and increased inventory turns as a result of the Company's
improved purchasing activities.
The Company anticipates that its current cash balance together with expected
cash flow from operations, and its bank line of credit will be sufficient to
meet its working capital requirements.
Financing
As of June 30, 1996, the Company had a $15,000,000 unsecured line-of-credit with
its bank, which expires on September 30, 1996. In July 1996, the line was
increased to $16,000,000. The line is available for direct borrowings in the
amount of up to $5,000,000, and provides for commercial letters of credit and
bankers' acceptances. Credit availability under this line is subject to the
bank's continuing satisfaction with current financial information. The line is
guaranteed by the Company's wholly-owned subsidiaries. Interest on direct
borrowings is payable at 1% above the bank's prime rate, acceptances are created
for a fee of 1-1/2% above the bank's acceptance rate and commercial letters of
credit have a commission rate of 3/8% per drawing. The Company is presently in
discussions with its bank and other banks to increase its credit line. The
Company anticipates that this line will either be renewed or replaced with a new
credit facility.
Page 14
<PAGE>
At June 30, 1996, the Company had direct borrowings of $1,100,000 and
$11,500,000 had been utilized under acceptances payable. Open letters of credit
relating to vendor purchases approximated $1,600,000 at June 30, 1996.
On July 18, 1996, an affiliate of BIL provided the Company with a loan in the
amount of $4,000,000, at an effective interest rate of 8.8%. The loan is to be
used to fund the acquisition of V.C. Medical and for general corporate purposes.
Under the terms of the loan, all principal and interest are payable upon the
earlier to occur of 45 days after the closing of the Everest & Jennings merger
transaction or 45 days after the termination of the transaction. The modified
terms of the Everest & Jennings merger transaction provide that the loan will be
converted upon closing of the transaction into a subordinated loan maturing in
2001 with interest payable quarterly at an effective rate of 7.7% per year.
Part II. Other Information
Item 1. Legal Proceedings
On May 21, 1996, the Company was sued by Minnesota Mining & Manufacturing
Company ("3M") in a claim purportedly arising under federal, state and common
law trademark, false advertising and unfair competition laws, as well as for
breach of, and interference with, contracts. 3M alleges that the Company is
selling 3M products in violation of federal and state law, and seeks monetary
damages in an unspecified amount, as well as injunctive relief against the
Company's continued sale of 3M products. The claim was filed in the Southern
District of New York. The Company vigorously denies the allegations of 3M's
complaint, and has filed an answer denying the allegations of wrongdoing and
asserting affirmative defenses. In addition, the Company has asserted
counterclaims against 3M under federal antitrust laws, as well as an unfair
competition claim.
In June 1996, the Company was sued in a purported class action captioned
"Kauffman v. Hogg" in Delaware Chancery Court arising out of the Company's
announced acquisition of Everest & Jennings. The complaint alleges that the
Company aided and abetted breaches of fiduciary duty on the part of Everest &
Jennings' controlling stockholder and its directors in connection with their
negotiation of the proposed transaction. Plaintiff, a stockholder at Everest &
Jennings, purports to seek to enjoin the transaction, or alternatively,
rescission, or an award of compensatory or rescissory damages. The Company
believes that it has valid defenses to the complaint's allegations of
wrongdoing, and intends to vigorously defend the lawsuit.
The Company is a defendant in certain other legal actions which arose in the
normal course of business, the outcome of which, in the opinion of management,
will not have a material adverse effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of stockholders was held on June 18, 1996.
(a) Proposal No. 1: To elect three Class III Directors:
Louis A. Lubrano
Dr. Harold Lazarus
Steven D. Levkoff
(b) Proposal No. 2: Whether to ratify the appointment of Ernst & Young as
independent accountants for the fiscal year ended December 31, 1996.
Tabulations for the proposals voted at the annual meeting follow:
For Against/Withheld Abstain
--- ---------------- -------
Directors:
Louis A. Lubrano ................ 11,948,386 89,056 -0-
Dr. Harold Lazarus .............. 11,944,386 93,056 -0-
Steven D. Levkoff ............... 11,948,386 89,056 -0-
Proposal No. 2 .................. 11,953,168 56,400 27,874
Item 6. Exhibits and Reports on Form 8-K
None
Page 15
<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)
/s/ Irwin Selinger
Date: August 14, 1996 ---------------------------
Irwin Selinger
Chairman of the Board and
Chief Executive Officer
/s/ Gary M. Jacobs
Date: August 14, 1996 ---------------------------
Gary M. Jacobs
Vice President - Finance
Chief Financial and Accounting Officer
Page 16
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
1996 AS INCLUDED IN THE FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000709136
<NAME> GRAHAM-FIELD HEALTH PRODUCTS, INC.
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Jun-30-1996
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