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GRAHAM-FIELD HEALTH PRODUCTS, INC. ANNUAL REPORT 1996
The Symbol of
Distribution Efficiency
[LOGO]
The Symbol of
Product Quality
[Graham-Field Logo]
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TABLE OF CONTENTS
2 Letter to Stockholders
4
4 Promotional Section Everest & Jennings and [Graphic]
other key acquisitions.
9 Selected Financial Data
10 Management's Discussion and
Analysis of Financial Condition
and Results of Operations
13 Consolidated Balance Sheets 5
Same day and next [Graphic]
day service.
14 Consolidated Statements
of Operations
15 Consolidated Statements
of Stockholders' Equity
16 Consolidated Statements
of Cash Flows
17 Notes to Consolidated 6
Financial Statements C.A.P. [Graphic]
One Order.
28 Report of Independent Auditors One Shipment.
One Supplier.
IBC Market for the Company's
Common Stock and Related
Stockholders' Matters
8 [Graphic]
Moving product
more efficiently
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ABOUT THE COMPANY
With a growing base of over 18,500 customers and a continually expanding product
line that now exceeds 23,000 items, Graham-Field is one of the world's leading
manufacturers and distributors in the healthcare industry. The Company's
innovative distribution programs and "single source" marketing strategy have
made Graham-Field the supplier of choice for dealers in several different market
segments.
Graham-Field has consistently grown its business over the years by carefully
targeting two primary markets: medical/surgical and home healthcare. Customers
in the medical/surgical market include dealers who distribute Graham-Field
products to hospitals, doctors, nursing facilities, surgi-centers and specialty
clinics. Customers in the home healthcare market include dealers who resell the
Company's products to patients recovering at home. In addition to these two
markets, Graham-Field also services customers in the consumer market, including
retail drug store chains, department stores, mass merchandisers, home shopping
related business and mail order catalogs.
Graham-Field offers the most comprehensive line of healthcare products available
from a single supplier. Self-manufactured products include Temco(R) Patient Care
Products, John Bunn(R) Respiratory Equipment, Labtron(R) Diagnostic Products,
Aquatherm Pressure Relief Products, Graham-Field brand Rubber Elastic Bandages,
and Grafco(R) Medical Sundries. Proprietary products include Diamond Quality
Incontinence Products, Feather Surgical Blades and Scalpels, Ishihara Test Chart
Books for Color Blindness, and Suzuken-Kenz EKG Machines. National brand-name
products distributed on a wholesale basis include Baxter General Healthcare
Products, Convatec and Hollister Ostomy Products, Boehringer Mannheim Home
Diagnostic Products, Ross Nutritional Products, Concord Portex Anesthesia
Products, Mentor Urologicals, and Proctor & Gamble Adult Incontinence Products.
The acquisition of Everest & Jennings has positioned the company as one of the
leading manufacturers of durable medical equipment in North America. With the
acquisition, the company has added the complete line of Everest & Jennings(R)
Wheelchairs and Smith & Davis(R) Homecare Beds to Graham-Field's line of self-
manufactured products - further enhancing Graham-Field's "single source"
marketing advantage.
[GRAPHIC OF WHEELCHAIR]
[CAPTION: The acquisition of Everest & Jennings has positioned the company as
one of the leading manufacturers of durable medical equipment in North America.]
[GRAPHIC OF DIAGNOSTIC EQUIPMENT]
[CAPTION: Labtron is one of the most well-recognized brands of diagnostic
products in the industry.]
{GRAPHIC OF SURGICAL GLOVES]
[CAPTION: The Company markets a line of medical sundries under the Grafco brand
name.]
[GRAPHIC OF WALKER]
[CAPTION: Through the Everest & Jennings acquisition, the Temco Patient Care
product line has increased exposure in the rehabilitation market.]
[GRAPHIC OF RUBBER ELASTIC BANDAGES]
[CAPTION: High quality rubber elastic bandages are produced at the Company's
Rhode Island facility.]
[GRAPHIC OF WHEELCHAIR]
[CAPTION: Kuschall of America provides the Company with a high-performance
pediatric wheelchair line.]
[GRAPHIC OF PRODUCT OFFERING CENTER]
[CAPTION: The Cane & Able acquisition in July, 1996 expanded the Company's
consumer division product offering.]
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[REVENUES GRAPH-PLOT POINTS TO COME]
[EARNINGS PER SHARE GRAPH-PLOT POINTS TO COME]
[NUMBER OF PRODUCTS GRAPH-PLOT POINTS TO COME]
LETTER TO STOCKHOLDERS
1996 was an exciting year for Graham-Field. We took major steps to secure our
long-term future as the leading, cost-effective supplier of medical products in
the healthcare industry. Over the past year, your Company made several strategic
acquisitions, including Everest & Jennings International Ltd. on November 27,
1996. We continued the expansion of our Graham-Field Express program and entered
into significant alliances with suppliers and customers.
During 1996, Graham-Field reported record revenues of $127,245,000, representing
a 27% increase from 1995. Our technology and product breadth has enabled us to
enter into new significant alliances with major national and regional accounts
over the past several months. Such alliances include agreements with General
Medical, a division of McKesson and Robbins, Owens & Minor, Sysco Corp., Henry
Schein, Physician Sales and Services, Inc., and a number of national home
healthcare buying groups and regional home healthcare dealers. Our internal rate
of growth, excluding the Everest & Jennings acquisition, was 10%, 22%, 26% and
32% in the four quarters of 1996. We expect this growth to continue in 1997.
Revenues increased in every segment of our business. Excluding the merger
related charges associated with our acquisition of Everest & Jennings, pre-tax
profits were $6,258,000 in 1996, as compared to $1,298,000 in 1995.
The acquisition of Everest & Jennings, combined with our Temco manufacturing
operations, has positioned us as one of the leading manufacturers of durable
medical equipment in North America. Combining Everest & Jennings' manufacturing
operations with Graham- Field's cost-effective delivery and advanced technology
systems has increased the Company's presence in the home healthcare market. The
coordination of the manufacturing and distribution of the wheelchair and
homecare bed product lines, which represent the leading product lines in the
home healthcare market, will enhance Graham-Field's position as the leading
"full-line, cost competitive" supplier in the industry. The Everest & Jennings
name, a symbol of quality for more than 50 years, has enabled the Company to
introduce its Temco home healthcare product line and other proprietary product
lines into the rehabilitation marketplace, a virtually untapped marketplace for
the Company in the past.
To complement Everest & Jennings, we acquired Kuschall of America on March 7,
1997. The Kuschall product line provides the Company with a high-performance,
quality pediatric wheelchair line, additional manufacturing capabilities, and an
expanded presence in the rehabilitation and pediatric wheelchair market. The
Kuschall acquisition has created additional growth opportunities for the Company
by providing an entree for the Company's products into Japan, New Zealand and
Australia through Kuschall's established distributor relationships.
To increase our presence in the Canadian marketplace, we acquired Motion 2000 on
February 28, 1997, one of the largest independent wholesalers of rehabilitation
products in Canada. Motion 2000, which currently operates under the name
"Graham-Field (Canada)", has become the primary sales and marketing arm for the
Company in Canada. We believe that there are significant growth opportunities in
Canada, and that the acquisition of Motion 2000, coupled with our extensive
product offering, has positioned the Company as the premier supplier of the
broadest range of products available from a single source in Canada.
As I reported to you last year, the Company introduced its innovative
Graham-Field Express program in March 1996, which is currently being rolled-out
throughout the United States. Graham- Field Express provides "same-day" and
next-day" service to home healthcare dealers of strategic home healthcare
products, including Temco patient aids, Everest & Jennings wheelchairs, Smith &
Davis homecare beds, adult incontinence products, nutritional supplements and
other freight intensive and time sensitive products. The Graham-Field Express
program supplements the Company's vast distribution network, which enables the
Company to compete more aggressively in the home healthcare marketplace. On
September 5, 1996, the Company opened its second Graham-Field Express facility
through its acquisition of V.C. Medical Distributors Inc., a wholesale
distributor of medical products located in Puerto Rico, which currently operates
as Graham-Field Express (Puerto Rico). On January 29, 1997, we opened our third
facility in Dallas, Texas,
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which operates as Graham-Field Express (Dallas). We plan to open an additional
three (3) to four (4) Graham-Field Express sites in 1997 and eight (8) in 1998.
Additional locations are scheduled to open in Baltimore, Maryland in April 1997
and in Cleveland, Ohio in May 1997. By late 1999, we plan to have a total of
approximately twenty-five (25) Graham-Field Express locations serving all of the
major U.S. markets.
During 1996 and 1997, the Company entered into strategic alliances and
significant distribution agreements with both suppliers and customers. We
introduced the Convatec and Hollister lines of ostomy products, Smith & Nephew
wound care products, Lifescan (a division of Johnson & Johnson) diabetic
products and supplies, and in the fourth quarter of 1996, Bard urological
products . On April 1, 1997, a distribution agreement was entered into with
Baxter Healthcare Corporation and Allegiance Healthcare Corporation, world-wide
leading providers of medical products and cost management services to the
healthcare industry. Under the Baxter and Allegiance agreements, the Company has
become the preferred supplier of Baxter products to customers in the home
healthcare market throughout the United States. We anticipate that the Baxter
and Allegiance agreements will provide significant incremental revenues for the
Company.
The central theme to being successful in the healthcare supply business is to
become the low cost provider. Low cost encompasses more than price. It includes
the total cost of ultimately delivering the products we sell to our customers.
Decisions made years ago have placed Graham-Field in a unique position today to
be the low cost provider to a customer base that exceeds 18,500 in North
America. No other manufacturer/consolidator in our industry has as large a
customer base or breadth of product as Graham-Field. We maintain over 23,000
products in our warehouses.
With consolidation occurring and the growth of managed care, we believe that our
Consolidation Advantage Program ("C.A.P."), which is the cornerstone of our
sales and marketing strategy, provides the means to achieve our Company's
objective - to become the leading provider of medical products to the home
healthcare and medical/surgical markets. Through C.A.P., the Company strives to
become the most efficient, reliable, low-cost provider of medical products by
offering its customers the ability to significantly reduce their operating costs
by consolidating the purchase of multiple product lines through a single source
- - Graham-Field. C.A.P. improves the level of service to the Company's customers
by streamlining the purchasing process, decreasing order turnaround time,
reducing delivery expenses, and providing on-demand inventory.
Our commitment to servicing our customers and providing solutions to ensure our
customers' success remains as strong as ever. We believe that by focusing on the
needs of our customers, we will improve profitability and create long-term
stockholder value. During 1996, our service levels improved to set new industry
standards. We introduced our "seamless distribution program" to respond to the
changing needs of our customers. "Seamless distribution" allows orders to be
drop-shipped from Graham-Field's distribution facilities direct to the patient's
home. Our customers benefit by significantly reducing their operating costs
through the elimination of the receiving and shipping process and inventory
carrying costs, while reducing product delivery time. The program operates
through the Company's technologically advanced distribution center located in
St. Louis, Missouri. We plan to expand this program in 1997.
To provide additional leadership and support, we have added three members to our
Board of Directors: Rodney F. Price, a managing director of Brierley Investments
Limited, a New Zealand investment holding company, and the former Chairman of
the Board of Everest & Jennings; Bevil J. Hogg, the former President and Chief
Executive Officer of Everest & Jennings; and Peter J. Handal, the President of
COWI International Group. Our new Board members provide us with valuable
experience and diversity.
On a sad note, Marcel Newfield, a founder of Graham-Field and a member of the
Board of Directors from 1981 - 1984 and 1991 to the present passed away during
1996. Marcel was more than a member of our Board, he was our "conscience". To
me, he was a life-long friend and closest advisor. I will miss him; we will all
miss his wisdom.
Robert Spiegel, a member of our Board since 1987, has decided to retire from our
Board. Bob has served on this Board working diligently in the long-term
interests of our stockholders. We all wish him well.
Your company is on the threshold of a new era of growth. As I look ahead, there
are many challenges and exciting opportunities for Graham-Field. Our management
team is focused on building relationships and creating long-lasting alliances,
securing our future and enhancing stockholder value. Our task is to accelerate
our growth and expand on the foundation built in 1996 with the commitment and
dedication of our employees, customers, suppliers and stockholders. We
anticipate continued growth and enhanced stockholder value in 1997. We face the
future with the most skilled management team and employee base in the Company's
history, and we expect our momentum to continue.
We greatly appreciate your continued support and look forward to the challenges
and opportunities that lie ahead for all of us.
Irwin Selinger
Chairman of the Board and
Chief Executive Officer
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A STEP AHEAD OF A CHANGING INDUSTRY
Everest & Jennings
[PHOTO OF WHEELCHAIR]
[CAPTION: Metro one of the Company's best selling rehabilitation products.
Wheelchairs are a staple in the healthcare marketplace, accounting for more than
$650 million in sales annually in North America alone. Through our acquisition
of Everest & Jennings, Graham-Field has become a major player in that market --
now supplying superior quality E&J wheelchairs for homecare patients as well as
highly profitable custom-speciality wheelchairs for rehabilitation patients.]
ENHANCING OUR RESOURCES
THROUGH KEY ACQUISITIONS
During 1996, Graham-Field continued its expansion strategy with the acquisition
of Everest & Jennings International Ltd., one of the largest manufacturers of
wheelchairs in North America. Everest & Jennings, a leading brand name in the
medical products industry, markets and distributes its line of high-quality home
care beds through its subsidiary, Smith & Davis. The acquisition of Everest &
Jennings has positioned Graham-Field as one of the leading manufacturers of
durable medical equipment in North America.
The combination of Everest & Jennings' manufacturing operations with the
Company's cost-effective delivery systems and advanced technology systems will
increase Graham-Field's presence in the home healthcare market with a greater
level of service and efficiency, and a broader portfolio of products. The
coordination of the manufacturing and distribution of the wheelchair and
homecare bed product lines, which represent the leading product lines in the
home healthcare market, will enhance Graham-Field's position as the leading
"one-stop-shop" supplier in the medical products industry. The Everest &
Jennings name, a symbol of quality for more than 50 years, has enabled the
Company to introduce its Temco home healthcare product line and other
proprietary product lines into the rehabilitation marketplace, a virtually
untapped marketplace for the Company in the past.
The Company has completed several strategic acquisitions over the past year. In
July 1996, Cane and Able was acquired, which added a line of self-assist
products to expand the Company's consumer product offering. The Company acquired
V.C. Medical Distributors, Inc., a wholesale distributor of medical supplies,
located in San Juan, Puerto Rico in September 1996, and Bobeck Medical
Distributors, Inc., a wholesale distributor of medical supplies, located in
Dallas, Texas in January 1997. These acquisitions enhanced the Company's ability
to provide localized distribution to key strategic areas.
In February 1997, the Company acquired Motion 2000, one of the largest
independent wholesale distributors located in Canada. The Motion 2000
acquisition has enabled Graham-Field to market its products throughout Canada on
a more timely and cost-effective basis. Motion 2000 currently operates under the
name Graham-Field (Canada), which has become the primary sales and marketing
division for the Company in Canada. The acquisition has positioned the Company
as the premier supplier of the broadest range of products available from a
single source in Canada, and a
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leading supplier of rehabilitation products in the Canadian marketplace.
In March 1997, the Company acquired Kuschall of America, a manufacturer of
pediatric and rehabilitation ambulatory products. The Kuschall of America
product line has provided the Company with a high performance quality pediatric
wheelchair line, additional manufacturing capability, an expanded presence in
the rehabilitation and pediatric wheelchair market, and an entree for
Graham-Field's products into Japan, New Zealand and Australia through Kuschall
of America's established distributor relationships.
GRAHAM-FIELD EXPRESS
The Company provides "same-day" and "next-day" service to home healthcare
dealers of strategic home healthcare products, including Everest & Jennings
wheelchairs, Temco patient aids, adult incontinence products, Smith & Davis
homecare beds, nutritional supplements, and other freight intensive and time
sensitive products through its satellite Graham-Field Express facilities. On
March 7, 1996, the Company introduced its innovative Graham-Field Express
program in the metropolitan New York area, which provides one of the most
personalized service alternatives in the healthcare industry.
[Graphic of GF Express Logo on map of U.S.]
[CAPTION: Same Day and New Day Services. GF Express, designed to offer a select
line of time and freight sensitive home healthcare products has become a very
important vehicle for Graham-Field to increase its market share in specific
geographic locations. - Mount Vernon, New York - San Juan, Puerto Rico - Dallas,
Texas - Baltimore, Maryland - Cleveland, Ohio.]
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[Graphic of Graham-Field Equipment and GF Logo]
[CAPTION: One Order, One Shipment, One Supplier. To assist our customers in
taking advantage of Graham-Field's unique "one-stop-shopping" capabilities, we
introduced our Consolidation Advantage Program (CAP) in 1990. Graham-Field
offers more than 23,000 products to choose from, and CAP enables customers to
dramatically reduce their operating costs by consolidating the purchasing of
multiple product lines through a single supplier-Graham-Field.]
Graham-Field Express enables customers to reduce inventory costs and eliminate
warehousing and other costs associated with the purchasing process. In September
1996, the Company opened its second Graham-Field Express facility through its
acquisition of V.C. Medical, which currently operates as Graham-Field Express
(Puerto Rico). In January 1997, the Company opened its third Graham-Field
Express facility in Dallas, Texas, which currently operates as Graham-Field
Express (Dallas). Graham-Field Express supplements the Company's vast
distribution network, enabling the Company to compete more aggressively in the
home healthcare market. The Company plans to open an additional three (3) to
four (4) Graham-Field Express sites in 1997 and eight (8) in 1998. New
Graham-Field Express locations are scheduled to open in Baltimore, Maryland in
April 1997, and Cleveland, Ohio in May 1997. By late 1999, the Company plans to
have a total of approximately twenty-five (25) Graham-Field Express locations
serving all of the major U.S. markets.
To assist the Company's customers in taking advantage of Graham-Field's unique
"one-stop-shop" capabilities, Graham-Field introduced its Consolidation
Advantage Program ("C.A.P.") in 1990. Graham-Field offers more than 23,000
products to choose from, and C.A.P. enables customers to dramatically reduce
their operating costs by consolidating the purchase of multiple product lines
through a single supplier - Graham-Field. The C.A.P. program furthers the
Company's long-term strategic objective to become the leading provider of
medical products to the growing home healthcare and medical/surgical markets by
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offering the broadest product line in the industry, single-source purchasing and
technologically advanced, cost-effective delivery systems. The cornerstone of
the Company's sales and marketing strategy is the C.A.P. program. C.A.P.
significantly improves the level of service to the Company's customers by
streamlining the purchasing process, decreasing order turnaround time, reducing
delivery expenses, and providing on-demand inventory.
With the growth of managed care and downward pressure to reimbursement rates
continuing, the C.A.P. program positions Graham-Field for future growth and
provides the Company with significant competitive advantages.
GRAHAM-FIELD'S NEW "SEAMLESS
DISTRIBUTION PROGRAM"
Introduced in 1996, the Company's "seamless distribution program" enables
dealers to ship products directly to its customers from a Graham-Field
distribution facility. The program reduces dealer operating costs by eliminating
the shipping/receiving process, eliminating inventory carrying costs, and
reducing delivery time. The program will operate from Graham-Field's
technologically advanced distribution center located in St. Louis, Missouri, and
will be expanded to the Company's additional distribution facilities located
throughout North America.
"Value-added programs such as C.A.P. and the Company's seamless distribution
program have enhanced Graham-Field's market position in the healthcare
industry."
STRATEGIC TARGET MARKETING
In order to identify and position Graham-Field in the marketplace, the Company
recently launched several high-visibility marketing programs. During the past
year, a new logo, packaging design and a new advertising campaign have all
worked together to reinforce Graham-Field as an industry leader.
The Company has developed an extensive private label catalog for use by
Graham-Field customers. A new homecare products catalog is currently being
developed, designed to reach the specific needs of the Company's growing base of
homecare dealers. Each of the Company's catalogs can be customized for
Graham-Field dealers. The custom catalog program provides identity for
individual customers and increases Graham-Field's product exposure in the
marketplace.
Quality is a common thread through the entire Graham-Field organization - from
the Company's manufacturing operations to its state-of-the-art distribution
facilities. The Company's commitment to unparalleled quality has built long-term
loyalty among customers and their customers.
[Two Graphics of people demonstrating products.]
[CAPTION: Quality is a common thread through the entire Graham-Field
organization - from the Company's manufacturing operations to its state-of-the-
art distribution facilities. The Company's commitment to unparalleled quality
has built long-term loyalty among customers and their customers.]
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[GRAPHIC OF TWO PEOPLE READING COMPUTER PRINTOUT.]
[CAPTION: Moving Product More Efficiently. Graham-Field is in the process of
implementing advanced data management and telecommunications systems ... all
designed to work together in enhancing the flow of information.]
MANAGING INFORMATION BETTER,
FASTER, MORE EFFICIENTLY.
In our commitment to setting the industry standard for on-time delivery and
responsive customer and product support, Graham-Field has made substantial
investments in upgrading its information and data systems to improve
communications between the Company and its customers.
Graham-Field has implemented an advanced information management infrastructure,
utilizing common software which utilizes the very latest technology as an
integral part of each of the Company's corporate environments. The Company has
successfully integrated the Everest & Jennings' operations into the Company's
recently upgraded telecommunications system. The Everest & Jennings and
Graham-Field call and customer service centers are now seamlessly linked with
direct tie-ins that enable both voice and data to be exchanged. The Company has
maximized its customer service response levels through its advanced information
management infrastructure.
The Company has implemented its new "call path" telephone system, which is
interfaced with a data base to reflect current order status. Upon receipt of an
incoming call, the database is automatically activated and provides the
Graham-Field representative with a current, up-to-date history of a customer's
account, including its credit limit, open order status, special pricing and
Company contact names. Another way that the information systems are helping the
Company deliver products more efficiently is through the Company's Graham-Field
Express "same-day" - "next-day" service. The Company's databases are directly
linked to each Graham-Field Express location, enabling the Company to provide
more efficient and timely delivery to customers in close proximity to each
Graham-Field Express location. Graham-Field is directly linked with United
Parcel Service through the U.P.S. "HUB-Link" system, which is an additional
service the Company provides to respond to and meet its customers' delivery
needs. This new service complements the Company's new seamless distribution
program, which enables the Company to obtain complete status reports for orders
that are shipped direct to the customer's customer.
By managing the flow of information more efficiently, the Company is positioned
to respond to customer needs at all times, and most importantly, meet those
needs now and in the future.
[GRAPHIC OF COMPUTER PRINTOUT]
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues $127,245,000 $100,403,000 $94,501,000 $92,552,000 $84,103,000
=============================================================================================================================
(Loss) Income before
extraordinary item and cumulative effect
of change in accounting principle $(12,215,000) $ 738,000 $(2,356,000) $(3,398,000) $ 1,244,000
Extraordinary item (736,000) -- -- -- --
Cumulative effect of change
in accounting principle -- -- -- 530,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(12,951,000) $ 738,000 $(2,356,000) $(2,868,000) $ 1,244,000
=============================================================================================================================
Net (loss) income per common share:
Before extraordinary item
and cumulative effect of
change in accounting principle $ (.84) $ .06 $ (.18) $ (.26) $ .10
Extraordinary item (.05) -- -- -- --
Cumulative effect of change
in accounting principle -- -- -- .04 --
Net (loss) income per
common share $ (.89) $ .06 $ (.18) $ (.22) $ .10
=============================================================================================================================
Weighted average number of
common and equivalent
shares outstanding 14,574,000 13,332,000 12,879,000 12,796,000 12,719,000
=============================================================================================================================
BALANCE SHEET DATA:
Current Assets $ 94,270,000 $ 53,979,000 $51,078,000 $47,866,000 $50,887,000
- -----------------------------------------------------------------------------------------------------------------------------
Current Liabilities $ 81,865,000 $ 20,216,000 $22,796,000 $18,601,000 $17,309,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $202,476,000 $ 99,799,000 $99,494,000 $97,995,000 $97,994,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt (including
capital leases due after one year) $ 6,057,000 $ 972,000 $ 1,596,000 $ 2,170,000 $ 1,272,000
- -----------------------------------------------------------------------------------------------------------------------------
Guaranteed Senior Notes
(net of current maturities) $ -- $ 19,000,000 $20,000,000 $20,000,000 $20,000,000
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $112,802,000 $ 59,611,000 $55,102,000 $57,224,000 $59,324,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OPERATING REVENUES
1996 COMPARED TO 1995. Operating revenues were $126,715,000 for the year
ended December 31, 1996, or 27% higher than the year ended December 31, 1995.
The increase in operating revenues was primarily attributable to the Company's
expansion of its C.A.P. program, the introduction of the Graham-Field Express
program, the addition of new product lines and the acquisition of Everest &
Jennings on November 27, 1996.
In March 1996, Graham-Field Express was introduced to offer "same-day" and
"next-day" service to home healthcare dealers of certain strategic home
healthcare products, including Temco patient aids, adult incontinence products,
Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional
supplements and other freight and time sensitive products. Revenues attributable
to Graham-Field Express were approximately $14,431,000 for the year ended
December 31, 1996. The Company plans to open an additional three (3) to four (4)
Graham-Field Express sites in 1997 and eight (8) in 1998. A new Graham-Field
Express location is scheduled to open in Baltimore, Maryland in April 1997. By
late 1999, the Company plans to have a total of approximately twenty-five (25)
Graham-Field Express locations serving all of the major U.S. markets.
On September 4, 1996, the Company acquired V.C. Medical, a regional home
healthcare wholesaler located in Puerto Rico. V.C. Medical currently operates as
Graham-Field Express (Puerto Rico). Revenues attributable to Graham-Field
Express (Puerto Rico) were approximately $1,766,000 for the year ended December
31, 1996.
On November 27, 1996, the Company completed its acquisition of Everest &
Jennings. The Company believes that the combination of Everest & Jennings'
manufacturing operations with the Company's cost-effective delivery systems and
advanced technology systems will increase the Company's presence in the home
healthcare market with a greater level of service and efficiency, and a broader
portfolio of products. The coordination of the manufacturing and distribution of
the wheelchair and homecare bed product lines, which represent the leading
product lines in the home healthcare market, will enhance the Company's position
as the leading "one-stop-shop" distributor in the medical products industry. The
Everest & Jennings name, a symbol of quality for more than fifty years, has
enabled the Company to introduce its Temco home healthcare product line and
other proprietary product lines into the rehabilitation marketplace, a virtually
untapped marketplace for the Company in the past. Revenues attributable to
Everest & Jennings for the period from the date of acquisition to December 31,
1996 were approximately $3,634,000.
The increase in operating revenues was achieved despite the decline in sales
of approximately $5,905,000 to Apria Healthcare Group, Inc. ("Apria") for the
year ended December 31, 1996 as compared to the prior year. The Company's supply
agreement with Apria expired on December 31, 1995.
1995 COMPARED TO 1994. Operating revenues were $100,113,000 for the year
ended December 31, 1995, or 6% higher than the year ended December 31, 1994. The
increase in operating revenues was primarily attributable to improved service
levels, improvements in the Company's distribution network, the development of
new sales and marketing programs and the expansion of the Company's product
lines. During 1995, the Company introduced over 100 new products, including the
Temco deluxe four-wheel walkabout, the John Bunn Nebulite II medication
compressor and the Labtron automatic wrist blood pressure monitor. In addition,
1995 revenues included approximately $935,000, net of elimination of
intercompany sales, attributable to the acquisition of National Medical Excess
Corp., effective as of July 1, 1995.
The revenue increase was achieved despite the decline in sales to Apria of
21% for the year ended December 31, 1995 as compared to the prior year. The
Company's supply agreement with Apria terminated on December 31, 1995. During
1995 and 1994, the Company's product sales to Apria were approximately $8.1
million and $10.3 million, respectively, which represented approximately 8% and
11%, respectively, of the Company's product sales. The Company's sales to Apria
generated gross profit margins of approximately 20%, which is significantly
lower than the Company's sales to its other customers, which generate gross
profit margins of approximately 33%.
INTEREST AND OTHER INCOME
1996 COMPARED TO 1995. Interest and other income increased from $290,000 in
1995 to $530,000 in 1996. The increase is primarily due to the gain recognized
by the Company and royalties received by the Company in connection with the sale
of the Gentle Expressions(R) breast pump product line, and interest income on
certain notes receivable.
1995 COMPARED TO 1994. Interest and other income increased from $72,000 in
1994 to $290,000 in 1995. The increase is primarily due to the receipt of
approximately $200,000 relating to an insurance recovery and a favorable
settlement of a contractual dispute.
COST OF REVENUES
1996 COMPARED TO 1995. Cost of revenues as a percentage of operating revenue
for 1996 decreased to 68% from 69% in 1995. The decrease is primarily related to
the Company's ability to maintain selling prices while benefiting from improved
purchasing and manufacturing efficiencies.
1995 COMPARED TO 1994. Cost of revenues as a percentage of operating revenue
remained relatively unchanged from the prior year, at 69%. Due to manufacturing
efficiencies and improved purchasing activities, the Company maintained its
gross profit margin despite increased competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1996 COMPARED TO 1995. Selling, general and administrative expenses as a
percentage of operating revenues decreased to 25% in 1996 from 28% in 1995. The
decrease is attributable to a number of factors, including the expansion of the
Graham-Field Express program in 1996, which contributes revenue with a lower
percentage of selling, general and administrative expenses, as well as continued
efficiencies generated by the Company's distribution network.
1995 COMPARED TO 1994. Selling, general and administrative expenses decreased
$2,576,000 or 9% in 1995. As a percentage of operating revenues, selling,
general and administrative expenses decreased to 28% from 32%. The decrease was
primarily due to cost reduction programs, the continued efficiencies generated
by the Company's distribution network, investments in new business systems, and
the non-recurring cost of approximately $1,321,000 recorded in the fourth
quarter of 1994.
INTEREST EXPENSE
1996 COMPARED TO 1995. Interest expense for 1996 decreased by $164,000 or 6%
as compared to 1995. The decrease is primarily due to lower interest rates on
reduced average borrowings.
1995 COMPARED TO 1994. Interest expense increased $26,000 or 1%, principally
due to an increase in interest rates from the prior year. Interest expense for
the last six months of 1995 decreased compared to the same period in the prior
year due to a decrease in borrowings during the period. The Company reduced its
borrowings as a result of increased earnings, and the net proceeds of $3,471,000
realized from an offshore private placement of 1,071,655 shares of common stock
completed in September 1995.
10
<PAGE> 13
MERGER AND OTHER RELATED CHARGES
1996 COMPARED TO 1995. During the fourth quarter of 1996, the Company
recorded charges of $15.8 million related to the acquisition of Everest &
Jennings. The charges included $12.8 million associated with the write-off of
purchased in-process research and development costs and $3.0 million of merger
expenses related to severance payments, the write-off of certain unamortized
catalog and software costs with no future value, the accrual of costs to vacate
certain of the Company's facilities, and the cost of certain insurance policies.
NET (LOSS) INCOME
1996 COMPARED TO 1995. Loss before income taxes and extraordinary item was
$9,542,000, as compared to income before income taxes of $1,298,000 for the
prior year. The loss before income taxes and extraordinary item for 1996
includes certain charges of $15.8 million relating to the acquisition of Everest
& Jennings. The charges include $12.8 million associated with the write-off of
purchased in-process research and development costs and $3.0 million related to
merger expenses.
Net loss after the charge for extraordinary item related to the early
retirement of the indebtedness underlying the John Hancock Note and Warrant
Agreement (the "John Hancock Indebtedness") was $12,951,000 in 1996, as compared
to net income of $738,000 for 1995. The extraordinary item of $736,000 (net of
tax benefit of $383,000) relates to the "make-whole" payment and write-off of
unamortized deferred financing costs associated with the early retirement of the
John Hancock Indebtedness.
Net income, without giving effect to the charges and extraordinary item, was
$3,585,000 as compared to $738,000 in 1995. The increase in net income is due to
increased revenues, an increase in the gross profit margin and the decrease as a
percentage of revenues in selling, general and administrative expenses.
The Company recorded income tax expense of $2,673,000 for the year ended
December 31, 1996, as compared to $560,000 for the prior year. As of December
31, 1996, the Company had a deferred tax asset of $911,000, primarily comprised
of net operating loss carryforwards (including those acquired in connection with
an acquisition) and investment, research and development, jobs tax and
alternative minimum tax credits. The Company has provided a valuation allowance
of approximately $400,000 in the fourth quarter of 1996 because certain tax
credits are available only through their expiration dates, and only after the
utilization of available net operating loss carryforwards. A full valuation
allowance has been recognized to offset the deferred assets related to the
acquired tax attributes. If realized, the tax benefit for those items will be
recorded as a reduction of goodwill. In addition, the Company has provided an
additional valuation allowance of $600,000 in the fourth quarter of 1996 as a
charge to income tax expense against a portion of the remaining net deferred tax
asset at December 31, 1996 due to the recent acquisition of Everest & Jennings.
The balance of the 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 future if
estimates of future taxable income during the carryforward period are reduced.
Uncertainties which may impact the future realizability, but are not expected to
occur, include a decline in sales and margins resulting from a possible loss of
market share and increased competition.
1995 COMPARED TO 1994. Income before income taxes was $1,298,000 as
compared to a loss before income taxes of $3,303,000 for the prior year. The
increase in income before income taxes is primarily due to the increase in
revenues and the decrease in selling, general and administrative expenses.
Net income was $738,000 as compared to a net loss of $2,356,000 for the prior
year. The Company recorded income tax expense of $560,000 for the year ended
December 31, 1995, as compared to an income tax benefit of $947,000 for the
prior year. As of December 31, 1995, the Company had recorded a deferred tax
asset of $3,012,000, primarily comprised of net operating loss carryforwards and
investment, research and development, jobs tax and alternative minimum tax
credits. At December 31, 1995, based upon the Company's expectation that future
taxable income will be sufficient to utilize the carryforwards prior to December
31, 2009, the Company did not record a valuation allowance on the deferred tax
assets, except for an allowance of $55,000 related to tax assets recorded for
acquired carryforwards.
The Company's business has not been materially affected by inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $12,405,000, $33,763,000 and $28,282,000
at December 31, 1996, 1995 and 1994, respectively. The decrease in working
capital for the period ended December 31, 1996 is primarily attributable to the
early retirement of the John Hancock Indebtedness and certain accrued expenses
related to the Everest & Jennings acquisition. The Company retired the John
Hancock Indebtedness with a portion of the proceeds from the syndicated
three-year senior secured revolving credit facility (the "Credit Facility")
with IBJ Schroder Bank & Trust Company ("IBJ Schroder"), as agent, which
borrowings are classified as current liabilities.
The increase in working capital for the period ended December 31, 1995 is
primarily attributable to the cash provided by the Company's net income of
$738,000, which reflects $3,260,000 of depreciation and amortization expense. In
addition, the Company raised $3,471,000 of additional capital, net of expenses,
through an offshore private placement of 1,071,655 shares of its common stock
completed in September 1995.
Cash provided by operations for the year ended December 31, 1996 was
$3,981,000. The principal reason for the cash provided by operations was the
Company's operating income after adjustments for non-cash charges, partially
offset by the aggregate increase in accounts receivable and inventory in excess
of related payables.
FINANCING
On December 10, 1996, the Company entered into a Credit Facility for up to
$55 million of borrowings, including letters of credit and banker's acceptances,
arranged by IBJ Schroder, as agent. The proceeds from the Credit Facility were
used to (i) refinance certain existing indebtedness of the Company, including
the indebtedness (a) under the John Hancock Note and Warrant Agreement and (b)
to The Chase Manhattan Bank and (ii) to provide for working capital needs of the
Company. Under the terms of the Credit Facility, borrowings bear interest, at
the option of the Company at the bank's prime rate (8.25% at December 31, 1996)
or 2.25% above LIBOR, or 1.5% above the bank's bankers' acceptance rate. The
Credit Facility is secured by the Company's receivables, inventory and proceeds
thereof.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the incurrence of additional debt, liens,
transactions with affiliates, consolidations, mergers and acquisitions, sales of
assets, dividends and other distributions (other than the payment of dividends
to BIL in accordance with the terms of the Company's Series B and Series C
Cumulative Convertible Preferred Stock). In addition, the Credit Facility
contains certain financial covenants, which become effective as of the end of
the fiscal quarter ending June 30, 1997, including a cash flow coverage and
leverage ratio, and an earnings before interest and taxes covenant.
Under the terms of the Credit Facility, the Company is prohibited from
declaring, paying or making any dividend or distribution on any shares of the
common stock or preferred stock of the Company (other than dividends or
distributions payable in its stock, or split-ups or reclassifications of its
11
<PAGE> 14
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
stock) or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any common or preferred stock, or of any options to
purchase or acquire any such shares of common or preferred stock of the Company.
Notwithstanding the foregoing restrictions, the Company is permitted to pay cash
dividends in any fiscal year in an amount not to exceed the greater of (i) the
amount of dividends due BIL under the terms of the Series B and Series C
Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of the
Company on a consolidated basis, provided that no event of default shall have
occurred and be continuing, or would exist after giving effect to the payment of
the dividends.
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. On
December 10, 1996, the loan was converted into an unsecured subordinated
indebtedness of the Company maturing on April 1, 2001 and bearing interest at
the effective rate of 7.7% per annum (the BIL Note"). Under the terms of the BIL
Note, the Company has the right to reduce the principal amount of the BIL Note
in the event punitive damages are awarded against the Company or any of its
subsidiaries which relate to any existing product liability claims of Everest &
Jennings and/or its subsidiaries involving a death prior to September 3, 1996.
On November 27, 1996, the Company acquired Everest & Jennings in a merger
transaction. In the merger, each share of the common stock of Everest &
Jennings, other than shares of the common stock of Everest & Jennings cancelled
pursuant to the merger, was converted into the right to receive .35 shares of
the common stock of the Company. In connection with the merger, 2,522,691 shares
of common stock of the Company were issued in exchange for the common stock of
Everest & Jennings. The Company's common stock was valued at $7.64 per share,
which represented the average closing market price of the Company's common stock
for the period three business days immediately prior to and three business days
immediately after the announcement of the execution of the merger agreement.
In addition, in connection with, and at the effective time of the merger:
(i) BIL purchased for cash 1,922,242 shares of common stock of the Company
(valued at $7.64 per share) for $24,989,151, representing an amount equal to the
outstanding principal and interest on Everest & Jennings' indebtedness to Hong
Kong and Shanghai Banking Corporation Limited, which indebtedness ( the "HSBC
Indebtedness") was guaranteed by BIL. The proceeds of such stock purchase were
contributed by the Company to Everest & Jennings immediately following the
merger and used to discharge the HSBC Indebtedness.
(ii) The Company issued $61 million stated value of the Series B Preferred
Stock to BIL in exchange for certain indebtedness of Everest & Jennings owing to
BIL and shares of Everest & Jennings International, Ltd. ("E&J") preferred stock
owned by BIL. The Series B Preferred Stock is entitled to a dividend of 1.5% per
annum payable quarterly, votes on an as-converted basis as a single class with
the common stock of the Company and the Series C Preferred Stock (as defined
below), is not subject to redemption and is convertible into shares of the
common stock of the Company (x) at the option of the holder thereof, at a
conversion price of $20 per share (or, in the case of certain dividend payment
defaults, at a conversion price of $15.50 per share), (y) at the option of the
Company, at a conversion price equal to current trading price (subject to a
minimum conversion price of $15.50 and a maximum conversion price of $20 per
share) and (z) automatically on the fifth anniversary of the date of issuance at
a conversion price of $15.50 per share. Such conversion prices are subject to
customary antidilution adjustments. Based on an independent valuation, the fair
value ascribed to the Series B Preferred Stock was $28,200,000.
(iii) BIL purchased for cash $10 million stated value of the Series C
Preferred Stock, the proceeds of which are available to the Company for general
corporate purposes. The Series C Preferred Stock is entitled to a dividend of
1.5% per annum payable quarterly, votes on an as-converted basis as a single
class with the common stock of the Company and the Series B Preferred Stock, is
subject to redemption as a whole at the option of the Company on the fifth
anniversary of the date of issuance at stated value and, if not so redeemed,
will be convertible into shares of the common stock of the Company automatically
on the fifth anniversary of the date of issuance at a conversion price of $20
per share, subject to customary antidilution adjustments. Based on an
independent valuation, the fair value ascribed to the Series C Preferred Stock
was $3,400,000.
(iv) Certain indebtedness in the amount of $4 million owing by the Company to
BIL was exchanged for an equal amount of unsecured subordinated indebtedness of
the Company maturing on April 1, 2001 and bearing interest at the effective rate
of 7.7% per annum, which was evidenced by the BIL Note.
On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump
product line to The Lumiscope Company, Inc. for a purchase price of $1,000,000,
of which $500,000 was paid in cash with the balance in a secured subordinated
promissory note in the aggregate principal amount of $500,000, payable over 48
months plus interest at the prime rate of interest plus 1%.
On September 4, 1996, the Company acquired substantially all of the assets of
V.C. Medical for a purchase price consisting of $1,703,829 in cash and the
issuance of 32,787 shares of common stock valued at $7.625 per share.
On February 28, 1997, Everest & Jennings Canada acquired substantially all of
the assets of Motion 2000 and Motion 2000 Quebec, in consideration of the
issuance of 187,733 shares of common stock valued at $11.437 per share.
On March 7, 1997, E&J acquired all of the capital stock of Kuschall of
America, Inc. ("Kuschall"), in consideration of the issuance of 116,154 shares
of common stock valued at $13.00 per share.
The Company anticipates that the cash flow from operations, together with the
current cash balance, and the proceeds from the Credit Facility will be
sufficient to meet its working capital requirements.
12
<PAGE> 15
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,552,000 $ 214,000
Accounts receivable, less allowance for doubtful accounts of $7,207,000
and $1,740,000, respectively 43,651,000 21,936,000
Inventories 45,810,000 29,819,000
Other current assets 3,001,000 1,789,000
Recoverable and prepaid income taxes 256,000 221,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 94,270,000 53,979,000
Property, plant and equipment, net 10,771,000 8,120,000
Excess of cost over net assets acquired, net of accumulated amortization
of $8,185,000 and $7,212,000, respectively 91,412,000 29,291,000
Investment in leveraged lease -- 487,000
Deferred tax assets 911,000 3,012,000
Other assets 5,112,000 4,910,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $202,476,000 $99,799,000
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable to bank $ 13,985,000 $ 2,100,000
Current maturities of long-term debt and Guaranteed Senior Notes 2,016,000 1,578,000
Accounts payable 20,781,000 8,750,000
Acceptances payable 19,800,000 5,000,000
Accrued expenses 25,283,000 2,788,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 81,865,000 20,216,000
Long-term debt 6,057,000 972,000
Other long-term liabilities 1,752,000 --
Guaranteed Senior Notes -- 19,000,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 89,674,000 40,188,000
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.01 per share:
authorized shares 1,000,000, none issued
Series B preferred stock, par value $.01 per share:
authorized shares 6,100, issued and outstanding 6,100 28,200,000 --
Series C preferred stock, par value $.01 per share:
authorized shares 1,000, issued and outstanding 1,000 3,400,000 --
Common stock, par value $.025 per share:
authorized shares 60,000,000, issued and outstanding
18,667,588 and 14,082,130, respectively 467,000 352,000
Additional paid-in capital 101,569,000 66,887,000
(Deficit) (20,667,000) (7,628,000)
Cumulative translation adjustment (12,000) --
- ----------------------------------------------------------------------------------------------------------------
Subtotal 112,957,000 59,611,000
Notes receivable from sale of shares (155,000) --
TOTAL STOCKHOLDERS' EQUITY 112,802,000 59,611,000
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $202,476,000 $99,799,000
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 16
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Medical equipment and supplies $126,715,000 $100,113,000 $ 94,429,000
Interest and other income 530,000 290,000 72,000
- ---------------------------------------------------------------------------------------------------------------------------------
127,245,000 100,403,000 94,501,000
Costs and expenses:
Cost of revenues 86,315,000 68,883,000 65,032,000
Selling, general and administrative 32,180,000 27,566,000 30,142,000
Interest expense 2,492,000 2,656,000 2,630,000
Purchased in-process research & development costs 12,800,000 -- --
Merger related charges 3,000,000 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
136,787,000 99,105,000 97,804,000
- ---------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (benefit) and extraordinary item (9,542,000) 1,298,000 (3,303,000)
Income taxes (benefit) 2,673,000 560,000 (947,000)
- ---------------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item (12,215,000) 738,000 (2,356,000)
Extraordinary loss on early retirement of debt (net of tax benefit of $383,000) (736,000) -- --
NET (LOSS) INCOME $(12,951,000) $ 738,000 $ (2,356,000)
=================================================================================================================================
Net (loss) income per common share:
(Loss) income before extraordinary item $ (.84) $ .06 $ (.18)
Extraordinary loss on early retirement of debt (.05) -- --
Net (loss) income per common share $ (.89) $ .06 $ (.18)
=================================================================================================================================
Weighted average number of common and common equivalent shares 14,574,000 13,332,000 12,879,000
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 17
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Series C
Preferred Preferred Common Stock
Total Stock Stock Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 57,224,000 12,818,186 $320,000
Issuance of common stock on
exercise of stock options 192,000 149,250 4,000
Tax benefit from exercise of
stock options 42,000 -- --
Retirement of Treasury Stock -- (28,943) (1,000)
Net loss (2,356,000) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 55,102,000 12,938,493 323,000
Issuance of common stock
on exercise of stock options 172,000 86,500 2,000
Regulation S offering, net 3,471,000 1,071,655 27,000
Tax benefit from exercise of
stock options 38,000 -- --
Retirement of Treasury Stock -- (14,518) --
Warrants issued in connection
with debt 90,000 -- --
Net income 738,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 59,611,000 14,082,130 352,000
Issuance of common stock
on exercise of stock options 550,000 153,255 4,000
Issuance of stock in connection
with acquisitions 65,809,000 $28,200,000 $3,400,000 4,477,720 112,000
Tax benefit from exercise of
stock options 38,000 -- -- -- --
Retirement of Treasury Stock -- -- -- (45,517) (1,000)
Dividend accrued on Preferred Stock (88,000) -- -- -- --
Translation adjustment (12,000) -- -- -- --
Notes receivable from officers
for sale of shares (155,000) -- -- -- --
Net loss (12,951,000) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 112,802,000 $28,200,000 $3,400,000 18,667,588 $467,000
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Treasury Stock
Capital (Deficit) Shares Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 62,914,000 $(6,010,000) 0 $ 0
Issuance of common stock on
exercise of stock options 314,000 -- (28,943) (126,000)
Tax benefit from exercise of
stock options 42,000 -- -- --
Retirement of Treasury Stock (125,000) -- 28,943 126,000
Net loss -- (2,356,000) -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 63,145,000 (8,366,000) 0 0
Issuance of common stock
on exercise of stock options 220,000 -- (14,518) (50,000)
Regulation S offering, net 3,444,000 -- -- --
Tax benefit from exercise of
stock options 38,000 -- -- --
Retirement of Treasury Stock (50,000) -- 14,518 50,000
Warrants issued in connection
with debt 90,000 -- -- --
Net income -- 738,000 -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 66,887,000 (7,628,000) 0 0
Issuance of common stock
on exercise of stock options 711,000 -- (45,517) (165,000)
Issuance of stock in connection
with acquisitions 34,097,000 -- -- --
Tax benefit from exercise of
stock options 38,000 -- -- --
Retirement of Treasury Stock (164,000) -- 45,517 165,000
Dividend accrued on Preferred Stock -- (88,000) -- --
Translation adjustment -- -- -- --
Notes receivable from officers
for sale of shares -- -- -- --
Net loss -- (12,951,000) -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 101,569,000 $(20,667,000) 0 $ 0
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Cumulative Receivable
Translation From Sale
Adjustment of Shares
- ----------------------------------------------------------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1993
Issuance of common stock on
exercise of stock options
Tax benefit from exercise of
stock options
Retirement of Treasury Stock
Net loss
- ----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994
Issuance of common stock
on exercise of stock options
Regulation S offering, net
Tax benefit from exercise of
stock options
Retirement of Treasury Stock
Warrants issued in connection
with debt
Net income
- ----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995
Issuance of common stock
on exercise of stock options
Issuance of stock in connection
with acquisitions
Tax benefit from exercise of
stock options
Retirement of Treasury Stock
Dividend accrued on Preferred Stock
Translation adjustment $(12,000)
Notes receivable from officers
for sale of shares -- $(155,000)
Net loss -- --
- ----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $(12,000) $(155,000)
======================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 18
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(12,951,000) $ 738,000 $(2,356,000)
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 3,443,000 3,260,000 3,448,000
Leveraged lease valuation adjustment -- -- 500,000
Deferred income taxes 2,139,000 519,000 (947,000)
Provisions for losses on accounts receivable 621,000 448,000 586,000
Gain on sale of product line (360,000) -- --
Loss on disposal of property, plant and equipment -- 3,000 --
Purchased in-process research and development cost 12,800,000 -- --
Non-cash amounts included in merger related charges 1,191,000 -- --
Non-cash amounts included in extraordinary loss 476,000 -- --
Other -- -- 7,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (10,467,000) (3,034,000) (3,639,000)
Inventories, other current assets and recoverable and prepaid income taxes (4,793,000) 44,000 (2,601,000)
Accounts and acceptances payable and accrued expense 11,882,000 (5,228,000) 3,485,000
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,981,000 (3,250,000) (1,517,000)
INVESTING ACTIVITIES
Purchase of short-term investments -- -- 1,998,000
Purchase of property, plant and equipment (1,017,000) (610,000) (1,094,000)
Acquisitions, net of cash acquired (4,558,000) (668,000) --
Proceeds from the sale of property, plant, and equipment -- 19,000 --
Proceeds from sale of product line 500,000 -- --
Proceeds from sale of assets under leveraged lease 487,000 -- --
Start up cost related to the St. Louis Distribution Center -- -- (171,000)
Notes receivable from officers (155,000) -- --
Net (increase) decrease in other assets (228,000) 116,000 (30,000)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $ (4,971,000) $(1,143,000) $ 703,000
FINANCING ACTIVITIES
Proceeds from notes payable to bank and long-term debt $ 27,310,000 $ 2,100,000 $ 1,673,000
Principal payments on long-term debt and notes payable (35,532,000) (1,257,000) (1,495,000)
Proceeds on exercise of stock options 550,000 172,000 192,000
Proceeds from issuance of common stock, net -- 3,471,000 --
Proceeds from issuance of preferred stock
in connection with an acquisition 10,000,000 -- --
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,328,000 4,486,000 370,000
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,338,000 93,000 (444,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 214,000 121,000 565,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,552,000 $ 214,000 $ 121,000
=================================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 2,889,000 $ 2,458,000 $ 2,701,000
=================================================================================================================================
Income taxes paid $ 87,000 $ 74,000 $ 23,000
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 19
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Graham-Field Health Products, Inc. and its wholly-owned
subsidiaries (the "Company") manufacture, market and distribute medical,
surgical and a broad range of other healthcare products into the home healthcare
and medical/surgical markets through a vast dealer network, consisting of
approximately 18,500 customers, principally hospital, nursing home, physician
and home health care dealers, health care product wholesalers and retailers,
including drug stores, catalog companies, pharmacies, and home-shopping related
businesses in North America. In addition, the Company has increased its presence
in Central and South America, Canada, Mexico, Europe and Asia. The Company
markets and distributes approximately 23,000 products under its own brand names
and under suppliers' names. For the year ended December 31, 1996, approximately
28% of the Company's revenues were derived from products manufactured by the
Company, approximately 18% of the Company's revenues were derived from imported
products and approximately 54% were derived from products purchased from
domestic sources, which includes products purchased from Everest & Jennings
prior to the acquisition.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries, each of which is wholly-owned. All
material intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market value. Cost
is determined principally on the standard cost method for manufactured goods and
on the average cost method for other inventories, each of which approximates
actual cost on the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the lesser of the
estimated useful lives of the related assets or the lease term, where
appropriate.
EXCESS OF COST OVER NET ASSETS ACQUIRED: Excess of cost over net assets acquired
is generally amortized on a straight-line basis over 30 to 40 years. The
carrying value of such costs are reviewed by management as to whether the facts
and circumstances indicate that an impairment may have occurred. If this review
indicates that such costs or a portion thereof will not be recoverable, as
determined based on the undiscounted cash flows of the entities acquired over
the remaining amortization period, the carrying value of these costs will be
reduced by the estimated shortfall of cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS: 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.
REVENUE RECOGNITION POLICY: The Company recognizes revenue when products are
shipped, with appropriate provisions for uncollectible accounts and credits for
returns.
BUY-BACK PROGRAM: 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. 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.
INCOME TAXES: The Company and its subsidiaries file a consolidated Federal
income tax return. The Company uses the liability method in accounting for
income taxes in accordance with SFAS No. 109. 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.
NET LOSS/INCOME PER COMMON SHARE INFORMATION: Net loss per common share for 1996
was computed using the weighted average number of common shares outstanding and
by assuming the accrual of a dividend of 1.5% on both the Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") and Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") in the
aggregate amount of $88,000. Conversion of the preferred stock and common
equivalent shares was not assumed since the result would have been antidilutive.
Net income per common share for 1995 was computed using the weighted average
number of common shares and dilutive common equivalent shares outstanding during
the period. Net loss per common share for 1994 was computed using the weighted
average number of common shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This standard changes the method of calculating
earnings per share and will be effective for periods ending after December 15,
1997. Earlier application is not permitted; however, when adopted all prior
period earnings per share data presented will be required to be restated to
conform with the new standard.
EMPLOYEE STOCK OPTIONS: The Company has a stock option program which is more
fully described in Note 9. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's stock option program, options are granted with an exercise
price equal to the market price of the underlying common stock of the Company on
the date of grant. Accordingly, no compensation expense is recognized in
connection with the grant of stock options.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The new standard defines a fair
value method of accounting for the issuance of stock options
17
<PAGE> 20
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
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 are required to disclose in the financial statement footnotes,
proforma net income and per share amounts as if the Company had applied the new
method of accounting for all grants made during 1995 and 1996. SFAS No. 123 also
requires increased disclosures for stock-based compensation arrangements.
Effective January 1, 1996, the Company adopted the disclosure requirements of
SFAS No. 123.
CONCENTRATION OF CREDIT RISK: The Company manufactures, markets and distributes
medical, surgical and a broad range of other healthcare products into the home
healthcare and medical/surgical markets through a vast dealer network consisting
of approximately 18,500 customers, principally hospital, nursing home, physician
and home healthcare dealers, healthcare product wholesaler and retailers,
including drug stores, catalog companies, pharmacies and home-shopping related
business in North America. As a result of the acquisition of Everest & Jennings
International Ltd. ("Everest & Jennings") (see Note 2), third party
reimbursement through private or governmental insurance programs and managed
care programs impacts the Company's customers, which affects a portion of the
Company's business. Such impact is not material for 1996. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Receivables generally are due within 30 to 120
days. Credit losses relating to customers have been consistently within
management's expectations.
CONCENTRATION OF SOURCES OF SUPPLY: Everest & Jennings' business is heavily
dependent on its maintenance of two key supply contracts. Everest & Jennings
obtains the majority of its homecare wheelchairs and wheelchair components
pursuant to an exclusive supply agreement (the "Exclusive Wheelchair Supply
Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"). The term of this
agreement extends until December 31, 1999, and on each January 1 thereafter
shall be automatically extended for one additional year unless Everest &
Jennings elects not to extend or Everest & Jennings has failed to order at least
50% of the contractually specified minimums and the manufacturer elects to
terminate. If the Exclusive Wheelchair Supply Agreement with P.T. Dharma is
terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable supply agreement with another manufacturer. In addition,
Everest & Jennings obtains homecare beds for distribution pursuant to a supply
agreement with Healthtech Products, Inc., a wholly-owned subsidiary of Invacare
Corporation (which is a major competitor of Everest & Jennings), which is
scheduled to expire on October 15, 1997. Although the Company is in the process
of securing alternative sources of supply with other manufacturers, there can be
no assurance that arrangements as favorable as the current supply contract will
be obtainable.
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's foreign
subsidiaries are translated into U.S. dollars in accordance with the provisions
of SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at year-end exchange rates. Revenues and expenses are translated at
the average exchange rate for each year. The resulting translation adjustments
for each year are recorded as a separate component of stockholders' equity. All
foreign currency transaction gains and losses are included in the determination
of income and are not significant.
2. ACQUISITIONS OF BUSINESSES AND DISPOSAL OF PRODUCT LINE
On November 27, 1996, the Company acquired Everest & Jennings, pursuant to the
terms and provisions 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, Everest & Jennings, Everest & Jennings
Acquisition Corp., a wholly-owned subsidiary of the Company ("Sub"), and BIL
(Far East Holdings) Limited, a Hong Kong corporation and the majority
stockholder of Everest & Jennings ("BIL"). Under the terms of the Merger
Agreement, Sub was merged with and into Everest & Jennings, with Everest &
Jennings continuing as the surviving corporation wholly-owned by the Company
(the "Merger").
In the Merger, each share of Everest & Jennings' common stock, par value $.10
per share (the "Everest & Jennings Common Stock"), other than shares of Everest
& Jennings Common Stock cancelled pursuant to the Merger Agreement, was
converted into the right to receive .35 shares of common stock, par value $.025
per share, of the Company. The Company's common stock was valued at $7.64 per
share, which represents the average closing market price of the Company's common
stock for the period three business days immediately prior to and three business
days immediately after the announcement of the execution of the Merger
Agreement. There were 7,207,689 shares of Everest & Jennings common stock
outstanding on November 26, 1996, which converted into 2,522,691 shares of the
Company's common stock.
In addition, in connection with, and at the effective time of the Merger:
(i) BIL purchased 1,922,242 shares of common stock of the Company for
$24,989,151, representing an amount equal to the outstanding principal and
interest on Everest & Jennings' indebtedness to Hong Kong and Shanghai Banking
Corporation Limited, which indebtedness (the "HSBC Indebtedness") was guaranteed
by BIL. The proceeds of such stock purchase were contributed by the Company to
Everest & Jennings immediately following the Merger and used to discharge the
HSBC Indebtedness. The Company's common stock was valued at $7.64 per share,
which represents the average closing market price of the Company's common stock
for the period three business days immediately prior to and three business days
immediately after the announcement of the execution of the Merger Agreement.
(ii) The Company issued $61 million stated value of the Series B Preferred
Stock to BIL in exchange for certain indebtedness of Everest & Jennings owing to
BIL and shares of Everest & Jennings preferred stock owned by BIL. The Series B
Preferred Stock is entitled to a dividend of 1.5% per annum payable quarterly,
votes on an as-converted basis as a single class with the Company's common stock
and the Series C Preferred Stock (as defined below), is not subject to
redemption and is convertible into shares of the common stock of the Company (x)
at the option of the holder thereof, at a conversion price of $20 per share (or,
in the case of certain dividend payment defaults, at a conversion price of
$15.50 per share), (y) at the option of the Company, at a conversion price equal
to current trading price (subject to a minimum conversion price of $15.50 and a
maximum conversion price of $20 per share) and (z) automatically on the fifth
anniversary of the date of issuance at a conversion price of $15.50 per share.
Such conversion prices are subject to customary antidilution adjustments. Based
on an independent valuation, the fair value ascribed to the Series B Preferred
Stock is $28,200,000.
(iii) BIL purchased for cash $10 million stated value the Series C Preferred
Stock, the proceeds of which are available to the Company for general corporate
purposes. The Series C Preferred Stock is entitled to a dividend of 1.5% per
annum payable quarterly, votes on an as-converted basis as a single class with
the common stock of the Company and the Series B Preferred Stock, is subject to
redemption as a whole at the option of the
18
<PAGE> 21
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
Company on the fifth anniversary of the date of issuance at stated value and, if
not so redeemed, will be convertible into shares of the common stock of the
Company automatically on the fifth anniversary of the date of issuance at a
conversion price of $20 per share, subject to customary antidilution
adjustments. Based on an independent valuation, the fair value ascribed to the
Series C Preferred Stock is $3,400,000.
(iv) Certain indebtedness in the amount of $4 million owing by the Company to
BIL was exchanged for an equal amount of unsecured subordinated indebtedness of
the Company maturing on April 1, 2001 and bearing interest at the effective rate
of 7.7% per annum (the "BIL Note").
The acquisition of Everest & Jennings has been accounted for under the
purchase method of accounting and, accordingly, the operating results of Everest
& Jennings have been included in the Company's consolidated financial statements
since the date of acquisition. Based on an independent valuation, $12,800,000 of
the purchase price was allocated to purchased in-process research and
development projects which have not reached technological feasibility and have
no probable alternative future uses. The Company expensed the purchased
in-process and research development projects at the date of acquisition. As a
result of the acquisition, the Company incurred $3.0 million of merger related
expenses, principally for severance payments, the write-off of certain
unamortized catalog and software costs with no future value, the accrual of
costs to vacate certain of the Company's facilities, and certain insurance
policies. The excess of the aggregate purchase price over the estimated fair
market value of the net assets acquired was approximately $62.2 million, which
is being amortized on a straight line basis over 30 years. The purchase price
allocations have been completed on a preliminary basis, subject to adjustment
should new or additional facts about the business become known. From the date of
the acquisition, Everest & Jennings contributed approximately $3,634,000 of
revenue for the quarter and year ended December 31, 1996.
On September 4, 1996, the Company acquired substantially all of the assets of
V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of
medical products in Puerto Rico, for a purchase price consisting of $1,703,829
in cash, and the issuance of 32,787 shares of common stock of the Company,
valued at $7.625 per share representing the closing market price of the common
stock of the Company on the last trading day immediately prior to the closing.
In addition, the Company assumed certain liabilities of V.C. Medical in the
amount of $296,721. Under the terms of the transaction, in the event the pre-tax
income of the acquired business equals or exceeds $1,000,000 during the twelve
(12) months following the closing date, an additional $500,000 will be paid to
V.C. Medical. The shares were delivered into escrow, and will be held in escrow
until February 4, 1998, subject to any claims for indemnification for purchase
price adjustments in favor 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 $988,000.
The following summary presents unaudited proforma consolidated results of
operations for the years ended December 31, 1996 and 1995 as if the acquisitions
described above occurred at the beginning of each of 1996 and 1995. 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. Both the 1996 and 1995 pro forma
information includes the write-off of certain purchased in-process research and
development costs of $12,800,000, merger related expenses of $3,000,000, and the
extraordinary item relating to the early retirement of indebtedness applicable
to the Guaranteed Senior Notes. The pro forma net loss per common share has been
calculated by assuming the payment of a dividend of 1.5% on both the Series B
Preferred Stock and Series C Preferred Stock in the aggregate amount of
$1,065,000 for each of the years ended December 31, 1996 and 1995. Conversion of
the preferred stock was not assumed since the result would have been
antidilutive.
<TABLE>
<CAPTION>
Pro-forma
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Net Revenues $187,522,000 $172,353,000
========================================================================
Loss Before Extraordinary Item $(17,565,000) $(19,001,000)
========================================================================
Net loss $(18,301,000) $(19,737,000)
========================================================================
Common Per Share Data:
Loss Before Extraordinary Item $ (1.00) $ (1.13)
========================================================================
Net Loss $ (1.04) $ (1.17)
========================================================================
Weighted Average Number of Common
Shares Outstanding 18,649,000 17,772,000
========================================================================
</TABLE>
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 in the aggregate principal amount of
$500,000, payable over 48 months with interest at the prime rate plus one
percent. The Company recorded a gain of $360,000, which is included in other
revenue in the accompanying condensed consolidated statements of operations.
Effective July 1, 1995, the Company acquired substantially all of the assets
and liabilities of National Medical Excess Corp. ("NME"), a distributor of used
and refurbished medical products, including respiratory and durable medical
equipment. The NME acquisition was accounted for under the purchase method of
accounting and accordingly, assets and liabilities were recorded at fair values
at the date of acquisition. Results of operations of NME are included in the
consolidated financial statements of the Company subsequent to that date. The
purchase price, including acquisition expenses, was approximately $723,000 in
cash, plus the assumption of certain liabilities. The excess of cost over the
net assets acquired amounted to approximately $677,000.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Raw materials $ 8,423,000 $ 2,871,000
Work-in-process 4,430,000 1,620,000
Finished goods 32,957,000 25,328,000
$45,810,000 $29,819,000
===========================================================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Land and buildings $ 1,129,000 $ --
Equipment 17,030,000 14,399,000
Furniture and fixtures 1,629,000 1,600,000
Leasehold improvements 2,222,000 1,958,000
- ----------------------------------------------------------
22,010,000 17,957,000
Accumulated depreciation
and amortization (11,239,000) (9,837,000)
- ----------------------------------------------------------
$ 10,771,000 $ 8,120,000
==========================================================
</TABLE>
19
<PAGE> 22
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $1,682,000, $1,617,000 and
$1,679,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
5. INVESTMENT IN LEVERAGED LEASE
The Company was the lessor in a leveraged lease agreement entered into in
December 1983, under which helicopters, having an estimated economic life of at
least 22 years, were leased for a term of 16 years. The Company's equity
investment represented 9% of the purchase price; the remaining 91% was furnished
by third-party financing in the form of long-term debt that provided for no
recourse against the Company and was secured by a first lien on the property. At
the end of the lease term, the equipment was to be returned to the Company. The
residual value was estimated to be 57% of the cost. As a result of certain
market conditions and technological advancements, the Company recorded a charge
in the fourth quarter of 1994 of approximately $500,000, which was included in
selling, general and administrative expenses, to reflect the estimated
impairment of the residual value of the helicopters.
In May 1996, the Company liquidated its investment in the leveraged lease
agreement. The cash proceeds of $487,000 approximated the recorded net
investment in the lease at December 31, 1995.
6. NOTES AND ACCEPTANCES PAYABLE
On December 10, 1996, the Company entered into a syndicated three-year senior
secured revolving credit facility (the "Credit Facility") for up to $55 million
of borrowings, including letters of credit and banker's acceptances, arranged by
IBJ Schroder Bank & Trust Company ("IBJ Schroder"), as agent. The proceeds from
the Credit Facility were used to (i) refinance certain existing indebtedness of
the Company, including the indebtedness (a) under the terms of the Note and
Warrant Agreement dated March as of 12, 1992, as amended (the "John Hancock Note
and Warrant Agreement"), with John Hancock Mutual Life Insurance Company ("John
Hancock") (see Note 8), and (b) to The Chase Manhattan Bank, under the line of
credit (see below); and (ii) to provide for the working capital needs of the
Company. Under the terms of the Credit Facility, borrowings bear interest, at
the option of the Company, at IBJ Schroder's prime rate (8.25% at December 31,
1996) or 2.25% above LIBOR, or 1.5% above IBJ Schroder's bankers' acceptance
rate. The Credit Facility is secured by the Company's inventory and proceeds
thereof.
The Credit Agreement contains certain customary terms and provisions,
including limitations with respect to the incurrence of additional debt, liens,
transactions with affiliates, consolidations, mergers and acquisitions, sales of
assets, dividends and other distributions (other than the payment of dividends
to BIL in accordance with the terms of the Series B and Series C Preferred
Stock). In addition, the Credit Facility contains certain financial covenants,
which become effective as of the end of the fiscal quarter ending June 30, 1997,
include a cash flow coverage and leverage ratio, and require specified levels of
earnings before interest and taxes.
Pursuant to the terms of the Credit Facility, the Company is prohibited from
declaring, paying or making any dividend or distribution on any shares of the
common stock or preferred stock of the Company (other than dividends or
distributions payable in its stock, or split-ups or reclassifications of its
stock) or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any common or preferred stock, or of any options to
purchase or acquire any such shares of common or preferred stock of the Company.
Notwithstanding the foregoing restrictions, the Company is permitted to pay cash
dividends in any fiscal year in an amount not to exceed the greater of (i) the
amount of dividends due BIL under the terms of the Series B and Series C
Preferred Stock in any fiscal year, or (ii) 12.5% of net income of the Company
on a consolidated basis, provided that no event of default or default shall have
occurred and be continuing or would exist after giving effect to the payment of
the dividends.
At December 31, 1995, the Company had an unsecured line of credit with The
Chase Manhattan Bank available for letters of credit, acceptances and direct
borrowings. The total amount available under the line of credit was $15,000,000.
The line was available for direct borrowings in the amount of up to $5,000,000
and provided for commercial letters of credit and bankers acceptances. This line
of credit expired on December 31, 1996; however, amounts outstanding at that
date for bankers acceptances and letters of credit mature through March 31,
1997.
At December 31, 1996, the Company had aggregate direct borrowings under both
banks' facilities of $13,985,000 and acceptances payable of $19,800,000. The
weighted average interest rate on the amounts outstanding as of December 31,
1996 was 7.65%. Open letters of credit at December 31, 1996 were $1,568,000
relating to trade credit and $6.0 million for other requirements.
At December 31, 1995, the Company had direct borrowings of $2,100,000 and
$5,000,000 utilized under acceptances payable. The weighted average interest
rate on the amounts outstanding as of December 31, 1995 was 8.6%.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Note payable to BIL (a) $4,000,000 --
Notes payable to International Business
Machines Corp. ("IBM") (b) 1,019,000 $1,550,000
Capital lease obligations (c) 1,344,000 --
Other (d) 1,710,000 --
- --------------------------------------------------------------------------------
8,073,000 1,550,000
Less current maturities 2,016,000 578,000
- --------------------------------------------------------------------------------
$6,057,000 $ 972,000
================================================================================
</TABLE>
(a) 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.
In connection with the acquisition of Everest & Jennings, the indebtedness owing
by the Company to BIL was exchanged for the BIL Note. Under the terms of the BIL
Note, the Company has the right to reduce the principal amount of the BIL Note
in the event punitive damages are awarded against the Company or any of its
subsidiaries which relate to any existing product liability claims of Everest &
Jennings and/or its subsidiaries involving a death prior to September 3, 1996.
(b) In connection with the development of the Company's St. Louis
Distribution Center, the Company entered into an agreement with IBM to provide
the computer hardware and software, and all necessary warehousing machinery and
equipment including installation thereof. This project was primarily financed
through IBM by the issuance of the Company's unsecured notes, which corresponded
to various components of the project. The unsecured notes mature through October
2000, with interest rates ranging from
20
<PAGE> 23
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
7.68% to 11.53%.
(c) At December 31, 1996, the Company is obligated under certain lease
agreements for equipment which have been accounted for as capital leases. The
capital leases were acquired in connection with the acquisition of Everest &
Jennings. Future minimum payments in the aggregate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 Amount
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 954,000
1998 476,000
1999 13,000
- --------------------------------------------------------------------------------
Total 1,443,000
Less amounts representing interest 99,000
- --------------------------------------------------------------------------------
Present value of future minimum lease payments $1,344,000
================================================================================
</TABLE>
The net book value of assets held under capital lease obligations amounted to
$424,000 at December 31, 1996.
(d) Other long-term debt consists primarily of a mortgage payable in the
amount of $1,100,000 due in monthly installments of $22,906 through November
1998, with a final payment of approximately $570,000 due on November 30, 1998,
and bearing interest at prime plus one-half percent. In addition, the Company
has a credit facility for its Mexican subsidiary, of which $500,000 was
outstanding as of December 31, 1996. Borrowings under the credit facility bear
interest at approximately 13%. The Mexican borrowings are secured by the assets
of the Mexican subsidiary. The borrowings are payable in semi-annual
installments of $100,000 through 1999.
The scheduled maturities of the long-term debt obligations, excluding the
present value of minimum payments on capital lease obligations, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 Amount
- --------------------------------------------------------------------------------
<S> <C>
1997 $1,148,000
1998 1,427,000
1999 132,000
2000 22,000
2001 4,000,000
- --------------------------------------------------------------------------------
$6,729,000
================================================================================
</TABLE>
8. GUARANTEED SENIOR NOTES
On March 12, 1992, under the John Hancock Note and Warrant Agreement, the
Company privately sold at par to John Hancock its 8.28% Guaranteed Senior Notes
due February 29, 2000 (the "Guaranteed Senior Notes"), in the aggregate
principal amount of $20,000,000 (the "John Hancock Indebtedness"), and five-year
warrants to purchase 125,000 shares of the common stock of the Company at an
exercise price of $12 per share. During 1993, the John Hancock Note and Warrant
Agreement was amended to modify the terms of certain financial covenants and the
terms of the warrants issued to John Hancock. The amendment to the John Hancock
Note and Warrant Agreement provided for, among other things, an increase in the
number of shares available for issuance under the warrants from 125,000 shares
to 250,000 shares of the common stock of the Company (the "Initial Warrants"), a
reduction in the exercise price of the warrants from $12.00 to $5.50 per share,
and an extension of the expiration date of the warrants to February 29, 2000.
The Initial Warrants, which were revalued as of the date of amendment, have been
valued at $365,000, and are being amortized as additional interest over the
remaining term of the debt. At December 30, 1994, the John Hancock Note and
Warrant Agreement was amended to modify the terms of certain financial
covenants. In connection with the amendment, the Company issued to John Hancock
additional warrants to purchase 90,000 shares of the common stock of the Company
(the "Additional Warrants") at an exercise price of $5.25 per share, with an
expiration date of February 29, 2000. The Additional Warrants were valued at
$90,000 and were amortized as additional interest over the remaining term of the
debt. As a result of the Company's offshore private placement of 1,071,655
shares of common stock completed in September 1995, additional warrants to
purchase 5,336 shares of the common stock of the Company were issued to John
Hancock. In connection with the Company's offshore private placement, the
exercise prices of the warrants were adjusted from $5.50 per share to $5.42 per
share with respect to the Initial Warrants and from $5.25 per share to $5.17 per
share with respect to the Additional Warrants.
In connection with the issuance and amendments to the Guaranteed Senior
Notes, issuance costs of approximately $506,000, net of accumulated amortization
of $331,000, were included in other assets at December 31, 1995. Such costs were
amortized over the term of the Guaranteed Senior Notes.
During December 1996, the Company retired the John Hancock Indebtedness with
proceeds from the Company's Credit Facility with IBJ Schroder. In connection
with the early retirement of the John Hancock Indebtedness, the Company incurred
charges relating to the "make-whole" payment and the write-off of all
unamortized financing costs associated with the John Hancock Note and Warrant
Agreement. The charges amounted to $736,000 (net of a tax benefit of $383,000),
and are reported as an extraordinary item in the accompanying consolidated
statements of operations.
9. STOCKHOLDERS' EQUITY
On March 23, 1989, the Company declared, and on July 21, 1989 the stockholders
approved, a dividend distribution to stockholders of record on July 21, 1989 of
one right for each outstanding share of the Company's common stock pursuant to a
Rights Agreement dated as of July 21, 1989, between the Company and American
Stock Transfer & Trust Company, as Rights Agent (the "1989 Rights Agreement").
On September 3, 1996, immediately prior to the execution of the Merger
Agreement, the Company entered into an amendment to the 1989 Rights Agreement,
with the effect of exempting the events and transactions contemplated by the
Merger Agreement and the Amended and Restated Stockholder Agreement dated as of
September 3, 1996, as amended on September 19, 1996, by and among the Company
and Irwin Selinger (the "Stockholder Agreement"), from the 1989 Rights
Agreement. In addition, on that date the rights previously issued under the 1989
Rights Agreement were called for redemption on September 17, 1996.
On September 3, 1996, the Company also entered into a new Rights Agreement
with American Stock Transfer & Trust Company, as Rights Agent (the "1996 Rights
Agreement"). As contemplated by the 1996 Rights Agreement, the Company's Board
of Directors declared a dividend of one new preferred share purchase right (a
"Right") for each outstanding share of the common stock of the Company
outstanding on September 17, 1996. Each Right entitles the holder thereof to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Shares") at a price of $35.00 per one one-hundredth of a Preferred
Share, subject to adjustment as provided in the 1996 Rights Agreement.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have acquired (an
"Acquiring Person") beneficial ownership of 15% or more of the outstanding
shares of capital stock of the Company entitled generally to vote in the elec-
21
<PAGE> 24
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
tion of directors ("Voting Shares") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors prior to such time
as any person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in a person or
group becoming an Acquiring Person (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
common stock certificates outstanding as of the record date, by such common
stock certificate. Notwithstanding the foregoing, BIL will not be an Acquiring
Person by virtue of its ownership of any Voting Shares acquired in accordance
with the Merger Agreement or the Stockholder Agreement (the "BIL Voting
Shares"), but BIL will become an Acquiring Person if it acquires any Voting
Shares other than BIL Voting Shares or shares distributed generally to the
holders of any series or class of capital stock of the Company. In addition, the
1996 Rights Agreement contains provisions exempting the Merger and the other
events and transactions contemplated by the Merger Agreement and the Stockholder
Agreement from the 1996 Rights Agreement.
The 1996 Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the common stock of the Company. The Rights are not
exercisable until the Distribution Date. The Rights will expire on September 3,
2006.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1 per share but will be entitled to an aggregate
dividend of 100 times the dividend declared per share of common stock of the
Company. In the event of liquidation, the holders of the Preferred Shares will
be entitled to a minimum preferential liquidation payment of $100 per share but
will be entitled to an aggregate payment of 100 times the payment made per share
of common stock. Each Preferred Share will have 100 votes, voting together with
the shares of common stock of the Company. In the event of any merger,
consolidation or other transaction in which the common stock of the Company is
exchanged, each Preferred Share will be entitled to receive 100 times the amount
received per share of common stock of the Company. The Rights are protected by
customary antidilution provisions. Because of the nature of the Preferred
Shares' dividend, liquidation and voting rights, the value of the one
one-hundredth interest in a Preferred Share purchasable upon exercise of each
Right should approximate the value of one share of common stock of the Company.
In the event the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, the 1996 Rights Agreement provides that proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive (subject to adjustment) upon exercise that
number of shares of common stock of the Company having a market value of two
times the exercise price of the Right. At any time after any person or group
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding Voting Shares, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group, which will have become void), in whole or in part, at an exchange ratio
of one share of common stock, or one one-hundredth of a Preferred Share (or of a
share of a class or series of the Company's preferred stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
At any time prior to a person or group of affiliated or associated persons
becoming an Acquiring Person, the Board of Directors of the Company may redeem
the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time on such basis with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights in
accordance with this paragraph, the right to exercise the Rights will terminate
and the only right of the holder of the Rights will be to receive the Redemption
Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to (a) lower certain thresholds described above to not less than the greater of
(i) any percentage greater than the largest percentage of the outstanding Voting
Shares then known to the Company to be beneficially owned by any person or group
of affiliated or associated persons and (ii) 10%, (b) fix a Final Expiration
Date later than September 3, 2006, or (c) reduce the Redemption Price, (d)
increase the Purchase Price, except that from and after such time as any person
or group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights (other
than the Acquiring Person and its affiliates and associates).
As long as the Rights are attached to the common stock of the Company, the
Company will issue one Right with each new share of common stock so that all
such shares will have Rights attached. The Company's Board of Directors has
reserved for issuance 300,000 Preferred Shares upon exercise of the Rights.
On November 27, 1996, in connection with the acquisition of Everest &
Jennings (see Note 2), the Company issued $61 million stated value of Series B
Preferred Stock and $10 million stated value of Series C Preferred Stock to BIL,
and issued an aggregate of 4,444,933 shares of the Company's common stock. The
Series B Preferred Stock is entitled to a dividend of 1.5% per annum payable
quarterly, votes on an as-converted basis as a single class with the common
stock of the Company and the Series C Preferred Stock, is not subject to
redemption and is convertible into shares of the common stock of the Company (x)
at the option of the holder thereof, at a conversion price of $20 per share (or,
in the case of certain dividend payment defaults, at a conversion price of
$15.50 per share), (y) at the option of the Company, at a conversion price equal
to current trading prices (subject to a minimum conversion price of $15.50 and a
maximum conversion price of $20 per share) and (z) automatically on the fifth
anniversary of the date of issuance at a conversion price of $15.50 per share.
Such conversion prices are subject to customary antidilution adjustments.
The Series C Preferred Stock is entitled to a dividend of 1.5% per annum
payable quarterly, votes on an as-converted basis as a single class with the
common stock of Company and the Series B Preferred Stock, is subject to
redemption as a whole at the option of the Company on the fifth anniversary of
the date of issuance at stated value and, if not so redeemed, will be con-
22
<PAGE> 25
vertible into shares of the common stock of the Company automatically on the
fifth anniversary of the date of issuance at a conversion price of $20 per
share, subject to customary antidilution adjustments.
In September 1995, the Company completed an offshore private placement of
1,071,655 shares of the common stock of the Company with various European
institutional investors. The net proceeds of $3,471,000 realized from the
offering were used for general corporate purposes.
On November 27, 1996, the Company amended its certificate of incorporation to
provide for, among other things, an increase in the number of authorized shares
of common stock from 40,000,000 to 60,000,000 shares.
On September 4, 1996, the Company acquired substantially all of the assets of
V.C. Medical, in consideration of the issuance of 32,787 shares of the common
stock.
Under the Company's stock option program, the Company is authorized to grant
incentive stock options, non-qualified stock options, stock appreciation rights,
restricted stock grants and restored options. Incentive stock options may be
granted at not less than 100% (110% for owners of more than 10% of the Company's
outstanding common stock) of the fair market value of the Company's common stock
at the date of grant. Stock options outstanding under the program generally vest
and are exercisable at a rate of 50% per annum. Effective as of December 21,
1995, directors' options to purchase 10,000 shares of the common stock of the
Company are granted to eligible directors each January 2, at an exercise price
equal to the fair market value of the common stock at the date of grant.
Directors' options are exercisable one-third each year for three years, and have
a term of ten years. Incentive and non-qualified options expire five years from
the date of grant.
In 1992, the Company amended its stock option program to increase the maximum
number of shares available under the program from 900,000 to 1,500,000. In 1995,
the Company amended its stock option program to increase the maximum number of
shares available under the program from 1,500,000 to 2,100,000. In 1996, the
plan was further amended to increase the maximum number of shares available from
2,100,000 to 3,000,000.
During 1996, 1995 and 1994, officers of the Company surrendered 45,517,
14,518 and 28,943 shares, respectively, of the Company's common stock with a
fair market value of $165,000, $50,000 and $126,000, respectively, in
satisfaction of the exercise price of stock options to purchase 50,000, 25,000
and 58,187 shares, respectively, of common stock of the Company. The shares
received in satisfaction of the exercise price of stock options were recorded as
treasury stock and were retired on a quarterly basis as authorized by the Board
of Directors. Accordingly, all such shares have been restored as authorized and
unissued shares of common stock.
The Company has elected to comply with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternate fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models which were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized in connection with the grant of
stock options under the Company's stock option program.
In accordance with FASB Statement No. 123, pro-forma information regarding
net loss and loss per common share has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rate of 6.5%;
dividend yields on the preferred stock of 1.5%, volatility factors of the
expected market price of the Company's common stock of .41 and .42; and a
weighted-average expected life of the option of 3.2 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility. In
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options due to changes in
subjective input assumptions which may materially affect the fair value
estimate, and because the Company's employee stock options have characteristics
significantly different from those of traded options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net (loss) income $ (13,440,000) $ 644,000
Pro forma net (loss) income per share: $ (.93) $ .05
</TABLE>
FASB Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994. Accordingly, the pro forma effect will not be fully reflected
until 1997.
Information with respect to options during the years ended December 31, 1996
and 1995 under FASB Statement No. 123 and for the year ended December 31, 1994
under APB 25 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average Options
Options Exercise Price Options Exercise Price Option Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -
beginning
of year 912,645 $ 5.49 818,379 $ 6.10 824,886 $ 2.00 - $11.75
Options granted:
Incentive
options 699,121 6.45 257,432 3.47 144,278 4.125 - 5.913
Directors'
options 90,000 3.25 91,852 3.65 50,000 4.75 - 5.375
Non-qualified
options 91,764 6.02 -- 29,165 4.125 - 5.913
Options
exercised (103,255) (3.83) (86,500) (2.58) (149,250) 2.00 - 3.00
Options
cancelled and
expired (47,100) (4.87) (168,518) (5.79) (80,700) 2.00 - 11.75
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding -
end of year 1,643,175 $ 5.77 912,645 $ 5.49 818,379 $ 2.00 - $11.75
====================================================================================================================================
Options exercisable
at end of year 582,244 $ 5.45 483,929 $ 4.95 507,686
====================================================================================================================================
Weighted average
fair value of
options granted
during the year $ 2.10 $ 1.20
====================================================================================================================================
</TABLE>
23
<PAGE> 26
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
Exercise prices for options outstanding as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Options Range of Exercise Prices
- --------------------------------------------------------------------
<S> <C> <C>
20,000 $2.00 - $2.99
409,535 3.00 - 3.99
198,922 4.00 - 4.99
194,400 5.00 - 5.99
44,000 6.00 - 6.99
725,050 7.00 - 7.99
51,268 Over 8.00
- --------------------------------------------------------------------
1,643,175
- --------------------------------------------------------------------
</TABLE>
The weighted average remaining contractual life of those options is 5 years.
Shares of common stock reserved for future issuance as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Number of Shares
- -----------------------------------------------------------
<S> <C>
Stock options 2,240,163
Warrants issued to John Hancock 345,336
Series B Preferred Stock 3,935,483
Series C Preferred Stock 500,000
- -----------------------------------------------------------
7,020,982
- -----------------------------------------------------------
</TABLE>
The exercise of non-qualified stock options and disqualifying dispositions of
incentive stock options resulted in Federal and state income tax benefits to the
Company equal to the difference between the market price at the date of exercise
or sale of stock and the exercise price of the option. Accordingly, during 1996,
1995 and 1994, approximately $38,000, $38,000 and $42,000, respectively, was
credited to additional paid in capital.
10. INCOME TAXES
At December 31, 1996, the Company had aggregate net operating loss carryforwards
of approximately $22,745,000 for income tax purposes which expire at various
dates from 2008 to 2010, of which approximately $20,480,000 were acquired in
connection with the Everest & Jennings acquisition and expire primarily in 2010
and are limited as to use in any particular year. In addition, at December 31,
1996, the Company had approximately $890,000 (net of a 35% reduction of
investment tax credits as a result of the Tax Reform Act of 1986) of investment,
research and development, jobs tax and AMT credits, for income tax purposes
which expire primarily in 1999, and which includes alternative minimum tax
credits of $500,000 which have no expiration date. The Company has provided a
valuation allowance in the fourth quarter of 1996 amounting to approximately
$400,000, since the credits are available only through the expiration dates, and
only after the utilization of available net operating loss carryforwards. In
1995, the Company recorded deferred state tax benefits previously not recognized
as a component of the net operating loss carryforwards.
For financial reporting purposes, due to prior years losses of Everest &
Jennings, and SRLY limitations, a full valuation allowance of approximately
$14,494,000 has been recognized in the purchase of Everest & Jennings to offset
the net deferred tax assets related to the acquired tax attributes. If realized,
the tax benefit for those items will be recorded as a reduction to the excess
cost over net assets acquired. In addition, the Company has provided an
additional valuation allowance of $600,000 against a portion of its remaining
net deferred tax asset at December 31, 1996 due to the recent acquisition of
Everest & Jennings. The amount of the remaining deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 7,893,000 $3,043,000
Tax credits 890,000 744,000
Accounts receivable allowances 2,600,000 723,000
Inventory related 2,575,000 1,226,000
Deferred rent 382,000 403,000
Other reserves and accrued items 4,738,000 5,000
- -----------------------------------------------------------------------------------------------------
19,078,000 6,144,000
Valuation allowance for deferred assets (15,549,000) (55,000)
- -----------------------------------------------------------------------------------------------------
Total deferred tax assets 3,529,000 6,089,000
- -----------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Tax in excess of book depreciation 1,696,000 1,713,000
Leveraged lease -- 506,000
Prepaid expenses 254,000 250,000
Amortization of intangibles 668,000 477,000
Other -- 131,000
- -----------------------------------------------------------------------------------------------------
Total deferred tax liabilities 2,618,000 3,077,000
- -----------------------------------------------------------------------------------------------------
Net deferred tax assets $ 911,000 $3,012,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 166,000 $36,000 $ --
State and local 48,000 5000 --
Foreign 9,000 -- --
- -----------------------------------------------------------------------------------------------------------------
223,000 41,000 --
Deferred Federal and state 2,450,000 519,000 (947,000)
- -----------------------------------------------------------------------------------------------------------------
$2,673,000 $560,000 $(947,000)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)
computed
at statutory
rate $(3,244,000) (34%) $441,000 34% $(1,123,000) (34%)
Expenses not
deductible
for income
tax purposes:
Amortization of
excess of cost
over net assets
acquired 276,000 3% 286,000 22% 239,000 7%
In-process
R&D costs 4,352,000 46% -- -- -- --
Other 11,000 - 54,000 4% 46,000 1%
State tax expense
(benefit), net of
Federal benefit 278,000 3% 91,000 7% (109,000) (3%)
Previously
unrecognized
State tax benefits - - (312,000) (24%) -- --
Valuation allowance
on net deferred
tax assets 1,000,000 10% -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$ 2,673,000 28% $560,000 43% $(947,000) (29%)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
11. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
employees of its subsidiary, Everest & Jennings, Inc. and two non-contributory
defined benefit pension plans for the non-bargaining unit salaried employees
("Salaried Plan") and employees subject to collective bargaining agreements
("Hourly Plan") at its Smith & Davis subsidiary. Effective May 1, 1991, benefits
accruing under the Everest & Jennings, Inc. Pension Plan were frozen. During
1991, Everest & Jennings froze the Hourly Plan and purchased participating
annuity contracts to provide for accumulated and projected benefit obligations.
Everest & Jennings also froze the Salaried Plan effective as of January 1, 1993.
Accordingly, no pension cost has been reflected in the accompanying statement of
operations.
The following table sets forth the status of these plans and the amounts
recognized in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
1996
- -----------------------------------------------------------------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $17,567,000
- -----------------------------------------------------------------------
Accumulated benefit obligation $17,567,000
- -----------------------------------------------------------------------
Projected benefit obligation for services rendered to date $17,567,000
Plan assets at fair value, primarily listed stocks, bonds,
investment funds and annuity contracts 14,746,000
- -----------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 2,821,000
Unrecognized transition amount
Unrecognized loss from change in discount rate
Pension liability (current portion of $1,069,000) $ 2,821,000
- -----------------------------------------------------------------------
</TABLE>
The following assumptions were used to determine the projected benefit
obligations and plan assets:
<TABLE>
<CAPTION>
Everest & Jennings, Inc. Smith & Davis
Plan Plans
---------------------------------------
1996 1996
<S> <C> <C>
Weighted-average discount rate 7.5% 7.5%
Expected long-term rate of return on assets 9.0% 9.0%
</TABLE>
No long-term rate for compensation increases were assumed as all participants
are inactive and the plans are frozen.
The Company also sponsors two 401(k) Savings and Investment Plans. One plan
covers all full-time employees of the Company's wholly-owned subsidiary, Everest
& Jennings, and the other plan covers the remaining employees of the Company.
The Company does not contribute to the plans.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments as of December 31, 1996 and 1995, for which
it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the accompanying
balance sheets approximate fair value.
NOTES AND ACCEPTANCES PAYABLE: The carrying amounts of the Company's borrowings
under its Credit Facility approximate their fair value.
LONG-TERM DEBT: The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses, based on the Company's incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1996 and 1995, the carrying amount reported approximates fair value.
INVESTMENT IN LEVERAGED LEASE: The carrying amounts reported in the accompanying
balance sheet for 1995 approximate fair value. Fair value is determined based on
the current value of the underlying assets.
GUARANTEED SENIOR NOTES: The fair value of the Company's Guaranteed Senior Notes
is estimated using a discounted cash flow analysis based on current rates
offered to the Company for debt of the same remaining maturity. At December 31,
1995, the fair value of such debt was approximately $19,200,000.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is a party to a number of noncancellable lease agreements for
warehouse space, office space and machinery and equipment rental. As of December
31, 1996, the agreements extend for various periods ranging from 1 to 11 years
and certain leases contain renewal options. Certain leases provide for payment
of real estate taxes and include escalation clauses.
For those leases which have escalation clauses, the Company has recorded rent
expense on a straight-line basis. At December 31, 1996 and 1995, $933,000 and
$984,000, respectively, of rent expense was accrued in excess of rental payments
made by the Company.
As of December 31, 1996, minimal annual rental payments under all
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended December 31:
- -----------------------------------------------------------
<S> <C>
1997 $ 3,174,000
1998 3,132,000
1999 3,007,000
2000 2,806,000
2001 2,788,000
Thereafter 11,230,000
- -----------------------------------------------------------
$26,137,000
- -----------------------------------------------------------
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994
approximated $2,769,000, $2,363,000, and $2,527,000, respectively.
LEGAL PROCEEDINGS
On June 19, 1996, a class action lawsuit was filed on behalf of all
stockholders of Everest & Jennings (other than the named defendants) in the
Delaware Court of Chancery, following announcement on June 17, 1996 of the
original agreement in principle between Everest & Jennings and the Company. The
class action names as defendants the Company, Everest & Jennings, Everest &
Jennings' directors, and BIL. The class action challenges the transactions
contemplated by the original agreement in principle, alleging, among other
things, that (i) such transactions were an attempt to eliminate the public
stockholders of Everest & Jennings at an unfair price, (ii) BIL will receive
more value for its holdings in Everest & Jennings than its minority
stockholders, (iii) the public stockholders will not be adequately compensated
for the potential earnings of Everest & Jennings, (iv) BIL and the directors of
Everest & Jennings breached or aided and abetted the breach of fiduciary duties
owed to the stockholders (other than the defendants) by not exercising
independent business judgment and having conflicts of interest, and (v) the
Company aided and abetted and induced breaches of fiduciary duties by other
defendants by offering incentives to members of management, either in the form
of continued employment or monetary compensation and perquisites, in exchange
for their approval of the merger. The class action seeks to rescind the merger
or an award of rescissionary damages if it cannot be set aside, and also prays
for an award of compensatory damages. The Company believes that it has valid
defenses to the complaint's allegations of wrongdoing, and intends to vigorously
defend the lawsuit.
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
25
<PAGE> 28
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
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. On October 16, 1996, 3M moved to dismiss
the Company's antitrust counterclaims. Briefing of the motion has been completed
and the parties are awaiting a decision. 3M has proposed a settlement of all
claims pursuant to which the Company would, among other things, agree to
restrict its purchases of 3M products to certain authorized 3M dealers, and make
a payment of no more than $400,000. Although settlement discussions are ongoing,
it is not possible to predict the outcome of such discussions.
Everest & Jennings and its subsidiaries are parties to certain lawsuits and
proceedings as described below (the "Everest & Jennings Proceedings"). Under the
terms of the Stockholder Agreement, BIL has agreed to indemnify the Company and
its subsidiaries against the Everest & Jennings Proceedings in the event the
amount of losses, claims, demands, liabilities, damages and all related costs
and expenses (including attorney's fees and disbursements) in respect of the
Everest & Jennings Proceedings exceeds in the aggregate the applicable amounts
reserved for such proceedings on the books and records of Everest & Jennings as
of September 3, 1996. In view of BIL's obligation to indemnify the Company and
its subsidiaries with respect to such proceedings, management does not expect
that the ultimate liabilities, if any, with respect to such proceedings, will
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
On July 17, 1990, a class action suit was filed in the United States District
Court for the Central District of California by a stockholder of Everest &
Jennings against Everest & Jennings and certain of its present and former
directors and officers. The suit seeks unspecified damages for alleged
non-disclosure and misrepresentation concerning Everest & Jennings in violation
of federal securities laws. The district court dismissed the complaint on March
26, 1991, and plaintiff filed his first amended complaint on May 8, 1991. The
district court again granted a motion to dismiss the entire action on November
26, 1991. Plaintiff then took an appeal to the Ninth Circuit, which reversed the
district court's dismissal of the first amended complaint and remanded the case
to the district court for further proceedings. On March 25, 1996, the district
court granted Plaintiff's motion to certify a class composed of purchasers of
the Everest & Jennings' common stock during the period from March 31, 1989 to
June 12, 1990. Plaintiff's counsel has not as yet submitted to the court any
proposed notice of class certification and, consequently, the members of the
class have not been notified that the court has certified the case to proceed as
a class action. Everest & Jennings has received and filed responses and
objections to a document request, but further action has been deferred to allow
the parties to discuss possible settlement. Everest & Jennings has ordered the
parties to file and plaintiff's counsel has filed monthly reports on the status
of settlement discussions since September 1996. There are numerous defenses
which Everest & Jennings intends to assert to the allegations in the first
amended complaint if settlement cannot be reached on acceptable terms. Under
Everest & Jennings' directors and officers insurance policy, Everest & Jennings
has coverage against liabilities incurred by its directors and officers, subject
to a self-insured retention of $150,000 (which has been exceeded by defense
costs incurred to date). The carrier has contended that fifty percent of the
liability and expenses in the case must be allocated to Everest & Jennings,
which is not an insured defendant, and fifty percent to the insured former
director and officer defendants. This proceeding constitutes an Everest &
Jennings Proceeding, which is covered under BIL's indemnification obligations
pursuant to the terms and provisions of the Stockholder Agreement.
Die Cast Products, Inc., a former subsidiary of Everest & Jennings, was 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.Sections 9601 et seq. Everest & Jennings was originally notified of
this action on December 10, 1992. A settlement was reached at an October 5, 1995
Mandatory Settlement Conference before Judge Rea in the Federal District Court
of the Central District of California. The state of California has agreed to
accept the sum of $2.6 million as settlement for all past costs and future
remedial work. Everest & Jennings' share of the settlement with the state of
California has amounted to $41,292.30, which sum was paid on January 3, 1997. No
further claims or assessments with respect to this matter are anticipated at
this time. This proceeding constitutes an Everest & Jennings Proceeding, which
is covered under BIL's indemnification obligations pursuant to the terms and
provisions of the Stockholder Agreement.
In March, 1993, Everest & Jennings, Inc. ( "E&J" ) 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 alleges that the
Casmalia Site is an inactive hazardous waste treatment, storage and disposal
facility which accepted large volumes of commercial and industrial wastes from
1973 until 1989. In late 1991, the Casmalia Site owner/operator abandoned
efforts to actively pursue site permitting and closure and is currently
conducting only minimal maintenance activities. An agreement in principle now
has been reached between the Casmalia Steering Committee ("CSC") and the EPA for
a settlement of the majority of the Casmalia site liability. The Steering
Committee represents approximately 50 of the largest volume generators at the
Casmalia site. It is anticipated that the agreement will be formalized and
embodied in a Consent Decree in the summer and fall of 1997. Pursuant to the
settlement, the CSC members are committing to perform and fund Phase I work at
the site. It is estimated that the Phase I work being committed to will cost
approximately $30 to $35 million and will take three to five years to complete.
This cost will be allocated to Steering Committee members based upon their
volume of waste sent to the site. Everest & Jennings accounts for 0.8% of the
waste. Thus, by participating in the Phase I settlement, Everest & Jennings has
committed to payments of approximately $280,000 to be spread over a three to
five year period. Pursuant to the settlement, Everest & Jennings will be
released from further obligation for thirty (30) years. In addition, the
Steering Committee companies are seeking to recover from the owner and operator
of the site. Any such recovery will diminish E&J's payout pursuant to the
settlement. This proceeding constitutes an Everest & Jennings Proceeding, which
is covered under BIL's indemnification obligations pursuant to the terms and
provisions of the Stockholder Agreement.
In 1989, a patent infringement case was initiated against E&J and other
defendants in the U.S. District Court, Central District of California. E&J
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 E&J 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. E&J presented a Motion for Summary Judgment of
Non-infringement 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 U.S. District Court, Central
District of California, for further consideration. E&J believes that this case
is without merit and intends to contest it vigorously. The ultimate liability of
E&J, if any, cannot be determined at this time. This proceeding constitutes an
Everest & Jennings Proceeding, which
26
<PAGE> 29
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996
is covered under BIL's indemnification obligations pursuant to the terms and
provisions of the Stockholder Agreement.
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 & Davis
Manufacturing Company, Inc., No. SF95-354) against Smith & Davis Manufacturing
Company, a wholly-owned subsidiary of Everest & Jennings ("Smith & Davis"), in
the amount of $635,698.12 actual damages, prejudgment interest and costs, plus
$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 decedent's injuries and
death. The nursing home reached a settlement with Plaintiffs prior to trial.
Judgment was entered on the jury verdict, which bears interest at the rate of
15% from August 30, 1996 until paid. On October 15, 1996, Plaintiffs filed a
related case in the Circuit Court of the County of St. Louis, Missouri (Chris
Trew, et. al. v. Everest & Jennings, et al., Cause No. 96CC-000456, Division
39), which seeks a declaratory judgment against Everest & Jennings and BIL to
pierce their respective corporate veils and holding them jointly and severally
liable for the full amount of the New Mexico judgment. On February 26, 1997, the
parties agreed in principle to a proposed settlement in which the Plaintiffs
would receive $3 million, of which Everest & Jennings estimates that
approximately $1.5 million will be paid by Everest & Jennings' insurance
carriers, however, Everest & Jennings may seek additional recovery from the
insurance carriers. The amounts required to be paid in the proposed settlement
in excess of any insurance recoveries will be borne, in whole or in part, by BIL
under the indemnification terms and provisions contained in the Stockholder
Agreement and/or through the Company's right of offset under the BIL Note.
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.
COLLECTIVE BARGAINING AGREEMENTS
The Company is a party to five (5) collective bargaining agreements covering
the Company's facilities located in Hauppauge, New York; Passaic, New Jersey;
Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective
bargaining agreements cover approximately 620 employees. The collective
bargaining agreements for Hauppauge, New York; Passaic, New Jersey; Earth City,
Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to expire on
September 30, 1997, July 27, 1999, September 13, 1999, July 24, 1998 and
December 31, 1997, respectively.
The Company has never experienced an interruption or curtailment of
operations due to labor controversy, except for a three-day period during the
summer of 1993 in which the Company experienced a strike at its Passaic, New
Jersey facility, which did not have a material adverse effect on the Company's
operations. The Company considers its employee relations to be satisfactory.
14. OTHER MATTERS
During the fourth quarter of 1996, the Company recorded charges of $15,800,000
related to the acquisition of Everest & Jennings. The charges included
$12,800,000 related to the write-off of purchased in-process research and
development costs (see Note 2) and $3,000,000 for other merger related charges
(see Note 2).
In addition, the Company recorded an extraordinary item of $736,000 (net of
tax benefit of $383,000) related to the early extinguishment of the John Hancock
Indebtedness in the fourth quarter of 1996 (see Note 8).
During the fourth quarter of 1994, the Company recorded non-recurring
expenses of approximately $1,321,000 which were included in selling, general and
administrative expenses at December 31, 1994, of which approximately $612,000
was included in accrued expenses. These non-recurring expenses were related to
the estimated impairment of the residual value related to the Company's
investment in leveraged lease (see Note 5), an accrual for severance and other
employee costs related to employees terminated during the fourth quarter of 1994
and first quarter of 1995, an accrual for sales and franchise taxes related to
in-process audits being conducted by multiple states for the periods of 1988
through 1992, and costs related to a terminated acquisition attempt and a lease
arbitration proceeding with respect to the Company's principal manufacturing
facility.
15. MAJOR CUSTOMERS
In 1994, the Company derived 11% of its revenues from Apria Healthcare Group,
Inc. (formerly Abbey Home Healthcare, which merged with Homedco in June 1995).
On September 1, 1995, the Company announced that its current supply agreement
with Apria would not be renewed in 1996, and would expire by its terms on
December 31, 1995. During fiscal year 1995 and 1994, the Company's product sales
to Apria were approximately $8.1 million and $10.3 million, respectively, which
represented approximately 8% and 11%, respectively, of the Company's product
sales. The Company's sales to Apria generate gross profit margins of
approximately 20%, which is significantly lower than the Company's sales to its
other customers which generate gross profit margins of approximately 33%. During
1996, no single customer or buying group accounted for more than 10% of the
Company's revenues.
16. SUBSEQUENT EVENTS
On February 28, 1997, Everest & Jennings Canada acquired substantially all of
the assets and certain liabilities of Motion 2000 Inc. and its wholly-owned
subsidiary, Motion 2000 Quebec Inc., for a purchase price equal to Cdn. $2.9
million (Canadian Dollars) (approximately $2.15 million). The purchase price was
paid by the issuance of 187,733 shares of the common stock of the Company valued
at $11.437 per share, of which 28,095 shares were delivered into escrow. The
purchase price is subject to adjustment if the final determination of the
closing date net book value of the assets acquired by Everest & Jennings Canada
is equal to or less than Cdn. $450,000 (Canadian Dollars) (approximately
$333,000). All of the escrowed shares will be held in escrow until the earlier
to occur (the "Initial Release Date") of June 28, 1997, or the final resolution
of the purchase price. On the Initial Release Date, a portion of the escrowed
shares will be released in an amount equal to the difference between (i) 28,095
shares and (ii) the sum of the number of (x) any escrowed shares subject to any
indemnification claims, (y) any escrowed shares used to satisfy any adjustment
to the purchase price, and (z) 18,729 shares. The balance of the escrowed shares
will be released on December 31, 1997, subject to any claims for
indemnification.
On March 7, 1997, E&J acquired Kuschall of America, Inc., a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1,510,000, representing the
net book value of Kuschall. The purchase price was paid by the issuance of
116,154 shares of the common stock of the Company valued at $13.00 per share, of
which 23,230 shares were delivered into escrow. The escrow shares will be
released on March 7, 1999, subject to any purchase price adjustments in favor of
the Company and claims for indemnification.
27
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Graham-Field Health Products, Inc.
We have audited the accompanying consolidated balance sheets of Graham-Field
Health Products, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Graham-Field Health Products, Inc. and subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Melville, New York
March 10, 1997
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDERS' MATTERS
(a) The Common Stock of the Company is traded on the New York Stock Exchange
(Symbol: GFI). The following provides the high and low sales prices for the
period from January 1, 1995 through March 20, 1997 as reported on the New York
Stock Exchange.
<TABLE>
<CAPTION>
High Sales Low Sales
Price Price
- ------------------------------------------------------------
<S> <C> <C>
1995
First Quarter $ 4 1/2 $3 1/4
Second Quarter 4 1/4 3
Third Quarter 4 5/8 3
Fourth Quarter 4 5/8 3 1/4
1996
First Quarter $ 5 $3 1/8
Second Quarter 9 7/8 4 1/4
Third Quarter 9 1/8 6 1/2
Fourth Quarter 9 1/2 6 5/8
1997
First Quarter, through
March 20, 1997 $13 3/4 $8 1/2
- ------------------------------------------------------------
</TABLE>
b) As of the close of business on March 20, 1997, the number of holders of
record of Common Stock of the Company was 595.
c) On December 10, 1996, the Company entered into a syndicated three-year
senior secured revolving credit facility (the "Credit Facility") for up to $55
million of borrowings, including letters of credit and banker's acceptances,
arranged by IBJ Schroder Bank & Trust Company, as agent. The proceeds from the
Credit Facility were used to (i) refinance certain existing indebtedness of the
Company, including the indebtedness (a) under the terms of the Note and Warrant
Agreement dated as of March 12, 1992, as amended, with John Hancock Mutual Life
Insurance Company, and (b) to The Chase Manhattan Bank, and (ii) provide for the
nationwide roll-out of the Graham-Field Express program and for the ongoing
working capital needs of the Company. The Credit Facility is secured by the
Company's receivables, inventory and proceeds thereof.
Under the terms of the Credit Facility, the Company is prohibited from
declaring, paying or making any dividend or distribution on any shares of the
common stock or preferred stock of the Company (other than dividends or
distributions payable in its stock, or split-ups or reclassifications of its
stock) or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any common or preferred stock, or of any options to
purchase or acquire any such shares of common or preferred stock of the Company.
Notwithstanding the foregoing restrictions, the Company is permitted to pay cash
dividends in any fiscal year in an amount not to exceed the greater of (i) the
amount of dividends due BIL under the terms of the Series B and Series C
Preferred Stock in any fiscal year, or (ii) 12.5% of net income of the Company
on a consolidated basis, provided, that no event of default shall have occurred
and be continuing or would exist after giving effect to the payment of the
dividends.
The Company anticipates that for the foreseeable future any earnings will be
retained for use in its business and accordingly, does not anticipate the
payment of cash dividends, other than to BIL in accordance with the terms and
provisions of the Series B and Series C Preferred Stock.
28
<PAGE> 31
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Corporate Information
BOARD OF DIRECTORS
(1) Irwin Selinger
Chairman of the Board and
Chief Executive Officer
(1,2) Andrew A. Giordano
Principal of the Giordano Group, Limited
(1) Rodney F. Price
Director,
Brierley Investments Limited
(3) Louis A. Lubrano
Managing Director
Stires and Company, Inc.
(4) Dr. Harold Lazarus
The Mel Weitz
Distinguished Professor of Business of
Hofstra University School of Business
(3) Robert Spiegel
Chairman of the Board
RJR Drug Distributors
Bevil J. Hogg
Consultant
Everest & Jennings
(4,3) Steven D. Levkoff
Chairman and Chief Executive Officer
Standard Folding Cartons, Inc.
Peter Handal
President
COWI International Group
(2,4) David P. Delaney
Chairman and Chief Executive Officer
Lancer Financial Group, Inc.
(2) Donald Press
Attorney, Donald Press, P.C.
(1) Executive Committee
(2) Compensation Committee
(3) Audit Committee
(4) Nominating Committee
(5) Office of the Chairman
CORPORATE OFFICERS
(5) Irwin Selinger
Chairman of the Board and
Chief Executive Officer
(5) Richard S. Kolodny
Vice President, General Counsel &
Secretary
(5) Gary M. Jacobs
Vice President, Finance and
Chief Financial Officer
(5) Peter Winocur
Executive Vice President, Sales &
Marketing
(5) Ralph Liguori
Executive Vice President, Operations
Beatrice Scherer
Vice President, Administration
Donald D. Cantwell
Vice President, Information Systems
PRINCIPAL OPERATING EXECUTIVES
Fred Leonard
President, Graham-Field Temco, Inc.
John Wittenberg
President, National Medical Excess
Jeffrey Schwartz
President, GF Express
Wim Van Voorst
President, Everest & Jennings
Canadian Limited
Tony Gaitan, Sr.
President, Everest & Jennings
Mexico, SA. de C. J.
Vicente Guzman, Jr.
President, GF Express, Puerto Rico
Robert Crabtree
President, GF Express, Dallas
Marco Ferrara
President, Graham-Field (Canada)
Robert Greco
President, Graham-Field Bandage, Inc.
Kenneth T. Coviello
Vice President, Homecare Business Unit
Michael Atkinson
Vice President, Med/Surg.
Business Unit
Raymond Ganz
Vice President, Everest & Jennings
Matt Gruskin
Vice President, International Sales
Lorelei DePalo
Controller
Edward J. Link
Vice President, Marketing Services
Carol Bergh
Vice President, Regulatory Affairs
AUDITORS
Ernst & Young llp
Melville, New York
COUNSEL
Milbank, Tweed, Hadley &
McCloy
REGISTRAR AND TRANSFER AGENT
American Stock Transfer &
Trust Company
40 Wall Street-46th Floor
New York, New York 10005
COMMON STOCK
Common Stock is traded on the
New York Stock Exchange under
the symbol, GFI.
10-K
A copy of the Company's 1996 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is available to Stockholders upon request in
writing to:
SANDRA JOHNSON
Stockholder Relations
Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
In memory of Marcel Newfield
<PAGE> 32
[Graham-Field Logo]
Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
Phone: 516-582-5900
Fax: 516-582-5608
The design and logo appearing on the cover is a trademark of Graham-Field Health
Products, Inc.
