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[LOGO] GRAHAM-FIELD HEALTH PRODUCTS, INC.
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Combining People, Products and
Technology To Reduce Costs
In The Health Care Supply Chain
1997 ANNUAL REPORT
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Company
Profile
Graham-Field is one of the world's leading manufacturers and distributors of
medical products in the health care industry.
With a growing base of over 18,500 customers and a continually expanding product
line that now exceeds 5,000 products. Graham-Field is the supplier of choice for
dealers in several different market segments.
The Company's innovative distribution programs and "Single Source' marketing
strategy have made Graham-Field the business partner of customers around the
world.
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Brand Leader
Graham-Field is a Leader in the Development of Health Care Equipment &
Supplies
1. Everest & Jennings developed and patented the first folding wheelchair.
Today, the Everest & Jennings name is recognized worldwide as a leader in the
manufacturing of quality wheelchairs.
2. Lumex introduced the first geriatric chair to the market. Through product
extension and innovation, Lumex has retained its position as the leader in
patient seating.
3. [LOGO] EJ LaBac developed the first wheelchair seating system. Unlike
conventional wheelchair seats, the LaBac System is customized to meet the
individual needs of the patient.
4. Temco was the first U.S. company to purchase patient aids overseas. The
outsourcing of manufacturing has enabled Temco to remain a profitable leader in
the supply of patient aids.
5. Prism Enterprises developed the first hand-operated obstetrical vacuum pump
for use in delivering infants. As a replacement for dangerous and less-effective
forceps, the Mityvac(R) has become the leader in handheld obstetrical pumps.
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One
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Irwin Selinger, Chairman of the Board
and Chief Executive Officer
Dear Fellow Stockholders:
During the past year, we have made major advances in our growth strategy to
become the leading, cost-effective supplier of medical products in the health
care industry. We expanded our presence into new segments of the health care
industry, established new alliances with significant customers in the United
States and Europe, and completed six strategic acquisitions.
The acquisition of Fuqua Enterprises, Inc. has positioned Graham-Field as one of
the leading suppliers of durable medical products in North America with a broad
line of approximately 45,000 products. The strategic combination of
Graham-Field, E&J and Fuqua will enhance our manufacturing capabilities, and
further expand Graham-Field's presence in the home health care, medical/surgical
and rehabilitation markets and allow us to enter the long-term care market.
Within 30 days of the completion of the Fuqua acquisition, we sold Fuqua's
leather operations for approximately $68 million in order to concentrate on our
core business. The cash proceeds from the sale were used to repay the debt
acquired in connection with the acquisition reducing the overall cost of the
acquisition.
During 1997, Graham-Field grew at an unprecedented pace. We reported record
revenue of $263,143,000, an increase of 83% from the $143,642,000 recorded in
1996. This remarkable growth was propelled primarily by the completion of six
acquisitions, the expansion of our innovative "GF Express" and seamless
distribution programs, and the accelerated acceptance of our Consolidation
Advantage Program ("C.A.P."), which enables customers to consolidate the
purchase of multiple product lines through a single source. During each quarter
of 1997, our revenue increased by 82%, 88%, 94% and 72%, respectively. Excluding
the restructuring, merger and other charges relating to our strategic
initiatives, and the write-off of purchased in-process research and development
costs in 1996 and 1997, income before income taxes increased from $6,845,000 in
1996 to $9,274,000 in 1997, primarily due to the increase in revenues and the
improvement in our gross profit margin.
We experienced consistent revenue growth during each quarter of 1997, except for
the fourth quarter. Higher than anticipated costs relating to the integration of
the acquisitions completed in 1997, coupled with an increase in overhead costs
negatively impacted fourth quarter operating results, while intensified
competition led to revenue falling short of targeted levels during the fourth
quarter.
During 1997, we entered into several new multi-year supply contracts with a wide
variety of medical supply dealers, a tribute to the increased efficiency and
cost-savings that customers are experiencing with our GF Express and seamless
distribution programs. We entered into a three-year $65 million contract with
VGM & Associates, the nation's largest home medical equipment buying group.
Although VGM & Associates has been a long-standing Graham-Field customer, we
anticipate that the new agreement will result in incremental revenues of
approximately $15 million a year over the term of the contract.
Another major agreement was reached with Healthcare Partners, Inc. and Homecare
& Hospital Management, the equipment and supply division of one of the leading
home care, nursing services agencies in the United States. In May 1997, we
signed a one-year, $20 million agreement with the Med Group, which is one of the
leading rehabilitation equipment buying groups in the United States. We also
reached a two-year agreement with Equipnet Inc., one of the nation's leading
home care, home medical equipment and infusion therapy managed care networks,
which is anticipated to generate approximately $17 million in revenue over the
term of the agreement. In 1997, we entered into an exclusive licensing agreement
to distribute Scope Shield, a U.S. patented disposable product which protects
patients from infectious diseases spread through stethoscopes.
We expect our revenue base in Europe, a relatively untapped market for
Graham-Field, will grow through our strategic alliance with Thuasne, one of the
leading manufacturers and suppliers of medical products in Western and Eastern
Europe. The distribution agreement provides for Thuasne to purchase a minimum of
$40 million over the term of the five-year agreement. Through Thuasne's highly
automated technology systems and extensive distribution network, Graham-Field
will be able to introduce its broad self-manufactured proprietary product lines
into Europe.
In April 1998, we reached a two-year wholesale distributorship agreement with
Baxter Healthcare Corp. and Allegiance Healthcare to become a primary
distributor for Baxter and
Two
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Allegiance urologicals, respiratory products, gloves and intravenous solutions
to Graham-Field's home care dealer network. Baxter and Allegiance are recognized
worldwide as leading providers of medical products and cost management services
to the health care industry. The agreements with Baxter and Allegiance will
enable Graham-Field to service its customer base more effectively and offer
dealers the benefits of our C.A.P. program.
In 1997, we added four new GF Express facilities. We opened a GF Express in
Dallas in January 1997, through the acquisition of Dallas-based Bobeck Medical,
which provides same-day and next-day service to home care dealers in Texas,
Oklahoma, Arkansas and Louisiana. In May 1997, we opened a GF Express facility
in Baltimore, which services the Baltimore/ Washington, D.C. area. In July 1997,
we opened a GF Express facility in Cleveland and, in October 1997, an additional
GF Express facility opened in Bowling Green, Kentucky, servicing the Nashville,
Tennessee area, which has the largest concentration of home care dealers in that
part of the nation.
The Fuqua merger has positioned Graham-Field as one of the leading suppliers of
durable medical products in the health care industry in North America. With a
long history of providing customers with quality health care products, the Basic
American, Lumex and Prism names are established brand names in the long-term,
home health and acute care markets. Fuqua is among the leading suppliers of many
of its product lines, including long-term care medical beds, specialty seating
products, bathroom safety products, obstetrical vacuum pumps and heat and cold
packs. Basic American is one of the leading single source providers of patient
room furnishings in the United States. Integration and cross-selling of products
between the companies will present significant growth opportunities for
Graham-Field. We will be able to use existing relationships of Basic American to
cross-sell products to nursing home and assisted living care centers, a
virtually untapped marketplace for Graham-Field.
While the merger with Fuqua was our largest acquisition, we completed five other
strategic acquisitions in 1997. In August 1997, we acquired Medical Supplies of
America, a wholesale distributor of home health care products located in
Atlanta, Georgia, which strengthened our distribution capabilities in the
Southeast region of the United States. In June 1997, we acquired LaBac Systems,
the leading manufacturer of custom power wheelchair seating systems in North
America. LaBac is one of the most well-recognized names in the rehabilitation
market and has enhanced our manufacturing operations, research and development
programs, and our design and engineering sophistication. In addition, our
Everest & Jennings subsidiary acquired Kuschall of America and the Motion 2000
companies.
Since the beginning of 1998, we have strengthened our management team. On
February 3, 1998, Andrew A. Giordano, a supply and logistics expert, was named
President and Chief Operating Officer of Graham-Field. A former Rear Admiral and
Chief Executive Officer of the U.S. Navy's Supply System Command, Mr. Giordano's
strong logistics, strategic planning and management skills will help
Graham-Field stay in the forefront of modern-day delivery programs.
On March 2, 1998, Paul Bellamy joined the management team as Vice President and
Chief Financial Officer, succeeding Gary Jacobs, who left the Company to pursue
other interests. Mr. Bellamy was formerly the Chief Financial Officer of Davis
Vision, a national managed eye-care company, and a former Chief Executive
Officer and Chief Financial Officer of Nichols Institute, an international
diagnostic services and products company. Mr. Bellamy brings to Graham-Field a
solid record of financial management in health care and Fortune 500 companies.
On March 16, 1998, Douglas Moseman joined Graham-Field as Corporate Vice
President of Manufacturing. With Graham-Field's extensive manufacturing network,
Mr. Moseman will be responsible for all manufacturing operations in North
America. Mr. Moseman has extensive experience in implementing and developing
manufacturing systems.
Graham-Field has built a strong foundation to become the leading,
cost-effective, one-stop supplier of medical products in the health care
industry. To secure that position, we will focus our attention in 1998 on
rationalizing and integrating the acquisitions completed in 1997. Major
cost-savings and strategic restructuring initiatives are in process and should
be completed by year-end. Among the initiatives, we are consolidating our Temco
manufacturing operations in New Jersey into Fuqua's Lumex Long Island
manufacturing facility and relocating our corporate headquarters to the Lumex
facility. In addition, we will be consolidating our Southeast distribution
operations, resulting in substantial savings on an ongoing basis. As I look
ahead, there are many challenges and exciting opportunities for Graham-Field.
Our management team is focused on securing our future and enhancing stockholder
value. Our task is to integrate the acquisitions completed in 1997, streamline
our manufacturing and distribution network, and obtain the cost savings and
synergies from these acquisitions. These steps, among others, will provide us
with the platform that will enable Graham-Field to resume its growth strategy in
1999 and beyond.
To better serve our shareholders and streamline decision-making at the Board of
Directors level, we have reduced the size of our Board of Directors from ten
members to six. We will miss Bevil Hogg, Peter Handal, Donald Press and Dr.
Harold Lazarus and the contributions they have made to our Company. On a
particular personal note, Dr. Lazarus is a long-time friend and advisor and that
relationship will always remain.
We are grateful for your continued support and look forward to building upon our
foundation.
/s/ Irwin Selinger
Irwin Selinger
Chairman of the Board and
Chief Executive Officer
Three
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Expanding Through Acquisition
to improve industry economies
Graham-Field has made a number of strategic acquisitions since 1981.
This aggressive acquisition strategy has successfully positioned
the Company as a leading supplier of health care equipment and supplies
to distributors worldwide.
Recognized as one of the leading suppliers of health
care products, Graham-Field provides customers
with the ability to reduce their operating costs by
consolidating the purchase of multiple product lines through a single source.
The Company has completed several strategic acquisitions during 1997.
Lumex, Prism and
Basic American
In December 1997, the Company acquired Fuqua Enterprises, Inc., which
positioned the Company as one of the leading suppliers of durable medical
products in the health care industry. The Company's distribution network and
advanced technology systems will provide growth opportunities for Fuqua's proven
manufacturing capabilities and well-established product lines. With a long
history of providing customers with quality health care products, Fuqua's Basic
American, Lumex and Prism names are established brand names in the long-term,
home health and acute care markets.
Lumex is among the leading suppliers of many of its product lines, including
long-term care medical beds, mobility products, specialty seating products and
bathroom safety products. Prism is a leader in the manufacture of obstetrical
vacuum pumps and heat and cold packs. Basic American is one of the leading
single source providers of patient room furnishings to long-term and extended
care facilities in the United States. Integration and cross-selling of products
between the companies will present growth opportunities for Graham-Field.
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In September 1997, Graham-Field acquired Medical Supplies of America, Inc.
("Medapex"), a wholesale distributor of durable medical equipment, medical
supplies and name-brand products to the home health care industry. This
acquisition will strengthen distribution capabilities in the Southeast region of
the United States. Medapex's advanced telemarketing operations will also enable
Graham-Field to provide greater sales and service support to the combined
customer base.
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[LOGO] EJ LaBac
Systems, Inc.
In June 1997, Graham-Field acquired LaBac Systems, Inc., which added a
line of custom power wheelchair seating systems to broaden the Everest &
Jennings and Kuschall product lines. The acquisition has provided additional
support and expertise to Graham-Field in the rehabilitation market. The LaBac
name, a symbol of excellence and quality, will contribute to the growth of the
product design and research and development functions of Graham-Field.
[LOGO] EJ Pediatric Wheelchairs
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In March 1997, Graham-Field's subsidiary, Everest & Jennings, acquired
Kuschall of America, Inc., a manufacturer of pediatric wheelchairs, high
performance adult wheelchairs and other rehabilitation products. This
acquisition broadens the Everest & Jennings rehabilitation product lines and
provides access to markets in Canada, Japan, New Zealand and Australia.
Graham-Field will derive significant benefits from strategic distribution
relationships and additional export opportunities for its products.
Motion 2000 Companies
In February 1997, Graham-Field acquired the Motion 2000 Companies, one of
Canada's largest independent wholesale distributors of rehabilitation medical
products. These companies operate through Graham-Field (Canada), which has
become the primary sales and marketing arm for Graham-Field and its Everest &
Jennings subsidiary in Canada. This significant North American presence will
help transform Graham-Field into the premier supplier of the broadest range of
products available from a single source in Canada.
Medi-Source, Inc.
In July 1997, Graham-Field acquired Medi-Source, Inc., which enhanced
Graham-Field's product offering and market share to customers in the
medical/surgical market segment. Graham-Field is considered a "primary supplier"
to health care distributors and dealers, particularly in the medical/surgical
marketplace where the Company's broad product line and efficient logistics
systems create a successful synergy between the Company and its customers.
Four and Five
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The CAP Partnership
Reducing Costs in the Health Care Supply Chain
The health care industry is focused on reducing overall costs in the health care
supply chain. Introduced in 1990, Graham-Field's innovative Consolidation
Advantage Program ("CAP") is at the core of the Company's partnership marketing
strategy. With over 45,000 products, which reach the entire spectrum of the
health care supply chain, CAP positions Graham-Field as one of the largest,
efficient and most cost effective partners and suppliers.
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Through CAP, Graham-Field strives to become the most efficient and reliable
low-cost provider of medical products. Graham-Field's sales and marketing
representatives consult with customers to identify the purchasing efficiencies
and cost savings that can be derived from consolidating their purchases of
medical products with Graham-Field. By consolidating the purchase of multiple
product lines through a single source, Graham-Field's customers can
significantly reduce their operating costs. Graham-Field believes that CAP
significantly improves the level of service to customers by streamlining the
purchasing process, decreasing order turnaround time, reducing delivery
expenses, and providing inventory on demand. CAP involves people, products,
services and specialists that improve dealers' profits and reduces costs
throughout the health care supply chain. In an industry where constant pressures
from Medicare, Medicaid and private insurers erode gross margins, the dealer's
net profit levels can be maintained and in many cases improved. Graham-Field's
broad product line and vast distribution network provide dealers with choice,
greater distribution efficiency and greater profits.
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The CAP partnership reduces freight, inventory, purchasing and administrative
costs. CAP enables customers to transition from less profitable brand names to
quality off-brands. The customized cost-reduction program includes an array of
value-added services to meet the specific business needs of the customer. The
Company recently introduced the "Seamless Distribution" Program which enables
dealers and distributors to significantly reduce or eliminate inventory carrying
costs by shipping the product to their customers directly from a Graham-Field
distribution center. Through the Seamless Distribution Program, the customer's
physical inventory requirements are reduced, transaction costs associated with
the receiving process are eliminated and the time associated with product
delivery to the patient is significantly enhanced. Financial assistance is also
an integral part of the CAP process. By using "Graham-Field Financial Services,"
customers can design a payment plan which meets the cash flow challenges of
their business.
The Home Care Sales Force
Dealers rely on Graham-Field's highly trained, knowledgeable sales team for
their individual business needs. The dealer sales organization develops and
maintains a relationship with the dealer group to exploit the benefits of
consolidation. This process is reviewed by the sales person and the key decision
makers at the dealer's business to maximize the benefits of the consolidation
process. In addition to the field sales organization, a new telesales team
covers accounts in challenged areas while the customer service group responds to
over 3,000 in-bound calls from dealers and distributors each day.
Six
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The Rehabilitation Sales Force details products to therapists and discharge
planners creating brand loyalty and demand for products. The Rehabilitation
Sales Force coordinates their efforts with the sales group and the dealers to
facilitate the "pull-through" business created by the Rehabilitation Sales
Force.
The Long-Term Care Sales Organization details products and creates demand in the
long-term marketplace such as nursing homes.
The three sales groups provide market penetration with products and services
specific to their market segment. The three sales groups coordinate efforts by
creating brand awareness, product demand for the dealer and distributor base and
complete the selling cycle by reducing overall costs through the CAP program.
This strategy has propelled the Company to record sales in 1997.
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[LOGO] GF Express
The Leader of modern-day delivery programs
In 1996, as part of Graham-Field's commitment to providing superior customer
service, the Company introduced its GF Express Program in the Bronx, New York.
This program enables Graham-Field to provide "same day" and "next day" service
to home health care dealers of strategic home health care products including
Temco and Lumex patient aids, adult incontinence products, Everest & Jennings
wheelchairs, Smith & Davis home care beds, nutritional supplements, and other
freight intensive and time sensitive products through its GF Express satellite
facilities.
The GF Express Program differs from Graham-Field's standard distribution model
in that GF Express focuses on "same day" and "next day" service to home health
care dealers of a limited number of strategic home health care products. As of
December 31, 1997, Graham-Field had opened six GF Express facilities operating
in Bowling Green, Kentucky; Baltimore, Maryland; the Bronx, New York; Cleveland,
Ohio; San Juan, Puerto Rico; and Dallas, Texas.
The GF Express Network includes facilities in:
Santa Fe Springs, California opened 3/1/98
Bowling Green, Kentucky
Baltimore, Maryland
Boston, Massachusetts opened 5/1/98
Bronx, New York
Cleveland, Ohio
San Juan, Puerto Rico
Dallas, Texas
Seven
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Securing A Future
Our Management Team will meet the challenge
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Irwin Selinger, Chairman of the Board and Chief Executive Officer
Right: Andrew A. Giordano,
President and Chief Operating Officer
We face the future with the most skilled management team in the Company's
history. As Graham-Field develops and implements its manufacturing and
distribution strategies, it is imperative that logistics and integration systems
be skillfully managed.
"We will focus our attention on rationalizing
and integrating the acquisitions completed in
1997. Major cost-savings and strategic
restructuring initiatives are in process."
- Irwin Selinger, Chairman & CEO
Andrew A. Giordano, an expert in business logistics was recently appointed
President and Chief Operating Officer. As a former U.S. Navy rear admiral,
Giordano was Chief Executive Officer of the U.S. Navy's Supply System Command.
He is a graduate of the Harvard Business School and has served as an executive
officer and member of the Boards of Directors of several public companies.
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Richard S. Kolodny
Vice President, General Counsel & Secretary
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Peter Winocur
Executive Vice President, Sales & Marketing
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Paul Bellamy,
Vice President, Chief Financial Officer
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Ralph Liguori
Executive Vice President, Operations
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Jeffrey Schwartz
President, GF Express
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Donald D. Cantwell,
Chief Information Officer
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Beatrice Scherer
Vice President, Administration
Eight
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Selected Financial Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,* 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 263,143 $ 143,642 $ 112,414 $ 106,026 $ 101,607
(Loss) income before extraordinary
item and cumulative effect of change
in accounting principle $ (22,893) $ (11,873) $ 1,047 $ (1,979) $ (3,037)
Extraordinary item -- (736) -- -- --
Cumulative effect of change in
accounting principle -- -- -- -- 530
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Net (loss) income $ (22,893) $ (12,609) $ 1,047 $ (1,979) $ (2,507)
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Per Common Share Data:
(Loss) income before extraordinary item
and cumulative effect of change in
accounting principle $ (1.16) $ (.76) $ .07 $ (.14) $ (.22)
Extraordinary item -- (.05) -- -- --
Cumulative effect of change in
accounting principle -- -- -- -- .04
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Net (loss) income $ (1.16) $ (.81) $ .07 $ (.14) $ (.18)
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Weighted average number of common
and dilutive shares outstanding 20,600 15,557 14,315 13,862 13,779
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Balance Sheet Data:
Total assets $ 547,118 $ 207,194 $ 103,011 $ 102,454 $ 99,891
Working capital $ 97,618 $ 14,064 $ 35,061 $ 29,389 $ 29,997
Total long-term liabilities, excluding
current portion and Senior
Subordinated Notes $ 7,733 $ 6,535 $ 20,462 $ 22,107 $ 22,719
Senior Subordinated Notes $ 100,000 -- -- -- --
Stockholders' equity $ 268,848 $ 114,503 $ 60,970 $ 56,152 $ 57,897
</TABLE>
* On August 28, 1997, Graham-Field acquired all of the issued and
outstanding shares of the capital stock of Medical Supplies of America,
Inc. in a transaction accounted for as a pooling of interests. The
selected financial data has been restated to reflect this transaction.
Nine
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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
On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medapex, which was accounted for as a "pooling of
interests." Accordingly, the Company's financial statements for periods prior to
the combination have been restated to include the results of Medapex for all
periods.
Operating Revenues
1997 compared to 1996. Operating revenues were $261,981,000 for the year
ended December 31, 1997, representing an increase of 83% from the prior year.
The increase in operating revenues was primarily attributable to the continued
"roll-out" of Graham-Field's innovative Graham-Field Express program, the
expansion of the C.A.P. program, the "roll-out" of Graham-Field's seamless
distribution program, the acquisition of Everest & Jennings in November 1996 and
the acquisitions completed in 1997, and the incremental revenue growth of
Medapex over the 1996 period. Revenues for the fourth quarter ended December 31,
1997 fell below management's expectations primarily due to intense competition
within the healthcare industry and management's focus on the integration of the
acquisitions completed in 1997 and the merging of diverse manufacturing and
distribution facilities, information and technology systems, sales forces and
product lines. Management believes that intense competition within the
healthcare industry will continue in 1998.
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 patient aids, adult incontinence products,
Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional
supplements and other freight and time sensitive products. As of December 31,
1997, Graham-Field had opened five Graham-Field Express facilities operating in
the Bronx, New York; Puerto Rico; Dallas, Texas; Baltimore, Maryland and
Cleveland, Ohio. Management intends to moderate the growth of the Graham-Field
Express program in 1998. Revenues attributable to Graham-Field Express were
approximately $50,512,000 and $14,431,000 for the years ended December 31, 1997
and 1996, respectively.
1996 compared to 1995. Operating revenues were $143,083,000 for the year
ended December 31, 1996, or 28% higher than the year ended December 31, 1995.
The increase in operating revenues was primarily attributable to Graham-Field'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 in November 1996.
For the year ended December 31, 1996, revenues attributable to the
Graham-Field Express program were approximately $14,431,000. Revenues of 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 to Apria Healthcare Group, Inc. ("Apria") of approximately $5,905,000 for
the year ended December 31, 1996 as compared to the prior year. Graham-Field's
supply agreement with Apria expired on December 31, 1995.
Interest and Other Income
1997 compared to 1996. Interest and other income for the year ended
December 31, 1997 was $1,162,000, as compared to $559,000 for the prior year.
The increase is primarily due to interest earned on the unused proceeds from
Graham-Field's sale of its Senior Subordinated Notes on August 4, 1997 and
interest earned on customer financing programs.
1996 compared to 1995. Interest and other income increased from $301,000
in 1995 to $559,000 in 1996. The increase is primarily due to the gain
recognized by Graham-Field and royalties received by Graham-Field in connection
with the sale of the Gentle Expressions(R) breast pump product line, and
interest income on certain notes receivable.
Cost of Revenues
1997 compared to 1996. Cost of revenues as a percentage of operating
revenues increased for the year ended December 31, 1997 to 72%, as compared to
70% for the prior year. As part of Graham-Field's strategic restructuring
initiatives, a charge of $7,732,000 is included in cost of revenues for 1997
related to inventory write-downs associated with the elimination of certain
non-strategic inventory and product lines. Excluding the charge associated with
the inventory write-downs, cost of revenues as a percentage of operating
revenues for 1997 would have been 69%. Nevertheless, management believes that
cost of revenues as a percentage of operating revenues was adversely effected in
the fourth quarter of 1997 due to intense competition and pricing pressures
within the healthcare industry. Management believes that cost of revenues as a
percentage of operating revenues will continue to be subject to intense
competition and pricing pressures. In addition, the delays associated with the
integration of the acquisitions completed in 1997 negatively impacted
Graham-Field's ability to realize certain manufacturing and operating
efficiencies and cost savings.
1996 compared to 1995. Cost of revenues as a percentage of operating
revenue for 1996 remained relatively unchanged from the prior year, at 70%. Due
to manufacturing efficiencies and improved purchasing activities, Graham-Field
maintained its gross profit margin despite increased competition.
Selling, General and Administrative Expenses
1997 compared to 1996. Selling, general and administrative expenses as a
percentage of operating revenues for the year ended December 31, 1997 increased
to 27%, as compared to 24% in the prior year. In the
Ten
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fourth quarter of 1997, a provision for uncollectible accounts and notes
receivable of $5,000,000 was recorded to reflect increased credit risk due to
the anticipated impact of changes in state Medicare reimbursement and
procurement policies for certain product lines and the extended payment terms
being taken by the Company's customers. The changes in such reimbursement
patterns have resulted in an increased number of days outstanding for
receivables. Excluding the provision for uncollectible accounts receivable,
selling, general and administrative expenses as a percentage of operating
revenues for 1997 would have been 25%. The increase in selling, general and
administrative expenses was primarily due to higher than anticipated integration
costs associated with the acquisitions completed in 1997. The delays associated
with the integration process also negatively impacted the Company's ability to
realize certain anticipated cost savings relating to the consolidation of
corporate offices, manufacturing and distribution facilities, the streamlining
of information and technology systems and the merging of sales forces and
product lines. Management believes that selling, general and administrative
expenses may continue to increase until the cost savings related to the
integration processes are realized, which may not occur until the later part of
1998.
1996 compared to 1995. Selling, general and administrative expenses as a
percentage of operating revenues decreased to 24% in 1996 from 26% 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 Graham-Field's distribution network.
Interest Expense
1997 compared to 1996. Interest expense for the year ended December 31,
1997 increased to $7,260,000, as compared to $2,578,000 for the prior year. The
increase is primarily due to increased borrowings attributable to Graham-Field's
revenue growth, the expansion of the Graham-Field Express program, and the sale
of the Senior Subordinated Notes on August 4, 1997.
1996 compared to 1995. Interest expense for 1996 decreased by $142,000, or
5%, as compared to 1995. The decrease is primarily due to lower interest rates
combined with reduced average borrowings.
Year 2000
Graham-Field is in the process of developing a Year 2000 remediation plan,
which relates to the upgrade and standardization of all business units for Year
2000 application software. Graham-Field has three major application
environments: distribution, manufacturing and warehouse automation. Management
has selected application packages for distribution and manufacturing functions,
and believes that the current warehouse automation system is Year 2000
compliant.
The distribution package includes the corporate general ledger, accounts
payable, accounts receivable, purchasing, inventory control and order entry
functions. General ledger, accounts payable and accounts receivable upgrades
were completed in 1997. Purchasing, inventory control and order entry functions
are anticipated to be upgraded in 1998. The manufacturing system upgrade is in
process, and is anticipated to be completed in 1998.
A Year 2000 project manager has been assigned to manage the computer
system upgrades, and ensure compliance for all external interfaces. The cost of
upgrading or modifying all non-year 2000 information systems is not expected to
have a material effect on the Company. Capital expenditures on all information
system technology amounted to approximately $400,000 during 1997, which was
primarily related to capacity upgrades and changes in software modules. The
Company anticipates completing the Year 2000 compliance project in 1998.
Merger and Restructuring Related Charges
1997 compared to 1996. In connection with the acquisition of Fuqua on
December 30, 1997, the Company adopted a plan to implement certain strategic
restructuring initiatives (the "Restructuring Plan") and recorded $26,619,000 of
restructuring charges (the "Restructuring Charges"). The Restructuring Plan was
initiated to create manufacturing, distribution and operating efficiencies and
enhance the Company's position as a low-cost supplier in the healthcare
industry. These steps will include a broad range of efforts, including the
consolidation of the Company's Temco manufacturing operations in New Jersey into
Fuqua's Lumex manufacturing facility in New York and relocation of the Company's
corporate headquarters to the Lumex facility. In addition, the Company will be
closing several other distribution facilities and consolidating operations in an
effort to achieve additional cost savings.
The Restructuring Charges include exit costs of $16,037,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees, asset write-downs of
$2,200,000 relating to assets to be sold or abandoned, and inventory write-downs
of $7,732,000 associated with the elimination of certain non-strategic inventory
and product lines (which costs are included in costs of revenue). The Company
anticipates recording additional restructuring charges in 1998 as the Company
continues the implementation of its Restructuring Plan.
The Company incurred $4,583,000 of indirect merger charges (the "Merger
Charges") related to the Fuqua acquisition and Medapex combination with respect
to the write-off of certain unamortized catalog costs with no future value,
certain insurance policies, payment of bonuses related to the acquisitions, and
various transaction costs. The Company also incurred $3,300,000 of expenses
related to the write-off of purchased in-process research and development costs
of Fuqua.
1996 compared to 1995. During the fourth quarter of 1996, Graham-Field
recorded charges of $15,800,000 related to the acquisition of Everest &
Jennings. The charges included $12,800,000 associated with the write-off of
purchased in-process research and development costs and $3,000,000 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 Graham-Field's facilities, and the cost of certain insurance
policies.
Net Loss or Income
1997 compared to 1996. Loss before income taxes for the year ended December
31, 1997 was $30,228,000, as compared to a loss before income taxes and
extraordinary item of $8,955,000 for the prior year. The loss before income
taxes for 1997 includes Restructuring Charges
Eleven
<PAGE> 13
of $26,619,000, an accounts receivable provision of $5,000,000, Merger Charges
of $4,583,000, and the charge of $3,300,000 related to the write-off of
purchased in-process research and development costs of Fuqua. The loss before
income taxes and extraordinary item for 1996 includes certain charges of
$15,800,000 relating to the acquisition of Everest & Jennings. Excluding the
restructuring, merger and other charges and the write-off of purchased
in-process research and development costs in 1996 and 1997, income before income
taxes increased from $6,845,000 in 1996 to $9,274,000 in 1997, primarily due to
the increase in revenues and the improvement in gross profit margin.
Net loss for the year ended December 31, 1997 was $22,893,000, as compared
to $11,873,000 for the prior year. Graham-Field recorded an income tax benefit
of $7,335,000 for the year ended December 31, 1997, as compared to income tax
expense of $2,918,000 for the prior year. As of December 31, 1997, Graham-Field
had net deferred tax assets of $13,739,000, primarily comprised of net operating
loss carryforwards acquired in connection with the acquisition of Everest &
Jennings, and restructuring and other accruals and reserves related to the
acquisition of Fuqua. A full valuation allowance has been recorded against
Everest & Jennings' net deferred tax assets. When realized, the tax benefit for
such items will be recorded as a reduction of the Everest & Jennings' goodwill.
A valuation allowance on the remaining deferred tax assets has not been provided
because management believes that there will be sufficient earnings in the
carryforward period to utilize such deferred tax assets.
1996 compared to 1995. Loss before income taxes and extraordinary item was
$8,955,000 for 1996, as compared to income before income taxes of $1,741,000 for
the prior year. The loss before income taxes and extraordinary item for 1996
includes certain charges of $15,800,000 relating to the acquisition of Everest &
Jennings. The charges include $12,800,000 associated with the write-off of
purchased in-process research and development costs and $3,000,000 related to
merger expenses.
Net loss after the charge for the extraordinary item related to the early
retirement of the John Hancock Indebtedness was $12,609,000 in 1996, as compared
to net income of $1,047,000 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.
Graham-Field recorded income tax expense of $2,918,000 for the year ended
December 31, 1996, as compared to $694,000 for the prior year. As of December
31, 1996, Graham-Field had a deferred tax asset of $938,000, 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.
Graham-Field's business has not been materially affected by inflation.
Liquidity and Capital Resources
Graham-Field had working capital of $97,618,000 at December 31, 1997, as
compared to $14,064,000 at December 31, 1996. The increase in working capital is
primarily attributable to the cash provided by Graham-Field's net income
(excluding the Restructuring Charges, Merger Charges, other charges and the
write-off of purchased in-process research and development costs of Fuqua) of
$4,388,000, which reflects $6,745,000 of depreciation and amortization expense,
and the net current assets acquired in connection with Graham-Field's
acquisitions during the year ended December 31, 1997 and from Graham-Field's
sale of the Senior Subordinated Notes on August 4, 1997.
Cash used in operating activities for the year ended December 31, 1997 was
$37,643,000, as compared to cash provided by operating activities of $3,770,000
in the prior year. The principal reasons for the decrease in cash provided by
operations were increases in accounts receivable and inventory levels related to
increased revenues and the reduction in accrued expenses, partially offset by
net income (excluding the Restructuring Charges, Merger Charges, other charges
and the write-off of purchased in-process research and development costs of
Fuqua) of $4,388,000 and depreciation and amortization expense of $6,745,000 for
the period.
On December 30, 1997, Graham-Field acquired Fuqua and assumed $62,076,000
of Fuqua indebtedness (the "Fuqua Indebtedness") under Fuqua's revolving credit
facility with SunTrust Bank. On January 28, 1998, Graham-Field sold the Leather
Operations of Fuqua for $60,167,400 in cash, 5,000 shares of Series A Preferred
Stock of the buying entity with a stated value of $4,250,000 (which has been
valued at $1,539,000), and the assumption of debt of $2,341,250. The cash
proceeds from the sale of the Fuqua leather operations were used to repay the
indebtedness incurred under the Credit Facility, which was used to retire the
Fuqua Indebtedness.
Management anticipates utilizing approximately $6,000,000 in cash in 1998
related to the Restructuring and Merger Charges recorded in 1997.
Graham-Field anticipates that its cash flow from operations, together with
its current cash balance, available borrowings under the Credit Facility and the
proceeds from the Senior Subordinated Notes, will be sufficient to meet its
working capital requirements in the foreseeable future. While the Company does
not expect to make any significant acquisitions in 1998, future acquisitions may
require additional financial resources.
The Credit Facility. The Credit Facility provides for up to $100 million
of borrowings on a revolving credit basis, including letters of credit and
banker's acceptances, arranged by IBJ Schroder, as agent. The credit facility
terminates on December 10, 1999. Under the terms of the Credit Facility,
borrowings bear interest, at Graham-Field's option, at IBJ Schroder's prime rate
(8.50% at December 31, 1998), or 1.625% above LIBOR in 1997 (2.25% above LIBOR
effective as of January 1, 1998), or 1.5% above IBJ Schroder's bankers'
acceptance rate. The Credit Facility is secured by all of Graham-Field's assets.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates and certain consolidations, mergers and
acquisitions and sales of assets. In addition, Graham-Field is prohibited from
declaring or paying any dividend or making any distribution on any shares of
common stock or preferred stock of Graham-Field (other than dividends or
distributions payable in its stock, or split-ups or reclassifications of its
stock) or applying any
Twelve
<PAGE> 14
of its funds, property or assets to the purchase, redemption or other retirement
of any such shares, or of any options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field 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 Graham-Field Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends. The Credit Facility contains
certain financial covenants, including a cash flow coverage and leverage ratio,
and an earnings before interest and taxes covenant, as well as the requirement
that Graham-Field reduce outstanding borrowings with the net cash proceeds of
certain asset sales.
The Company was not in compliance with certain financial covenants
contained in the Credit Facility as of December 31, 1997. On April 13, 1998,
these covenants were waived effective as of December 31, 1997 by IBJ Schroder
and amended for the balance of the term of the Credit Facility.
The Senior Subordinated Notes. On August 4, 1997, Graham-Field issued the
Senior Subordinated Notes under Rule 144A of the Securities Act of 1933, as
amended (the "Securities Act"). On February 9, 1998, Graham-Field completed its
exchange offer to exchange the outstanding Senior Subordinated Notes for an
equal amount of the new Senior Subordinated Notes, which have been registered
under the Securities Act. The new Senior Subordinated Notes are identical in all
material respects to the previously outstanding Senior Subordinated Notes. The
Senior Subordinated Notes bear interest at the rate of 9.75% per annum and
mature on August 15, 2007. The Senior Subordinated Notes are general unsecured
obligations of Graham-Field, subordinated in right of payment to all existing
and future senior debt of Graham-Field, including indebtedness under the Credit
Facility. The Senior Subordinated Notes are guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a senior subordinated basis by all
existing and future restricted subsidiaries of Graham-Field (the "Guaranteeing
Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment
to all existing and future senior debt of the Guaranteeing Subsidiaries,
including any guarantees by the Guaranteeing Subsidiaries of Graham-Field's
obligations under the Credit Facility.
The Company is a holding company with no assets or operations other than
its investments in its subsidiaries. The subsidiary guarantors are wholly-owned
subsidiaries of the Company and comprise all of the direct and indirect
subsidiaries of the Company. Accordingly, the Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because management has determined that such information is not material to
investors.
The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions, the opening
of additional Graham-Field Express facilities and strategic alliances.
Under the terms of the Indenture, the Senior Subordinated Notes are not
redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
Graham-Field, at certain redemption prices plus accrued and unpaid interest to
the date of redemption. In addition, prior to August 15, 2000, Graham-Field may,
at its option, redeem up to 25% of the aggregate principal amount of Senior
Subordinated Notes originally issued with the net proceeds from one or more
public offerings of common stock at a redemption price of 109.75% of the
principal amount, plus accrued and unpaid interest to the date of redemption;
provided that at least 75% of the aggregate principal amount of Senior
Subordinated Notes originally issued remain outstanding after giving effect to
any such redemption.
The Indenture contains customary covenants including, but not limited to,
covenants relating to limitations on the incurrence of additional indebtedness,
the creation of liens, restricted payments, the sales of assets, mergers and
consolidations, payment restrictions affecting subsidiaries and transactions
with affiliates. In addition, in the event of a change of control of
Graham-Field as defined in the Indenture, each holder of the Senior Subordinated
Notes will have the right to require Graham-Field to repurchase such holder's
Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Graham-Field will be required in certain circumstances
to make an offer to purchase Senior Subordinated Notes at a purchase price equal
to 100% of the principal amount thereof plus accrued and unpaid interest to the
date of purchase, with the net cash proceeds of certain asset sales. The Credit
Facility, however, prohibits Graham-Field from purchasing the Senior
Subordinated Notes without the consent of the lenders thereunder.
In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.
Thirteen
<PAGE> 15
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,430,000 $ 1,241,000
Accounts receivable, less allowance for doubtful accounts of
$13,199,000 and $7,243,000, respectively 91,451,000 45,703,000
Inventories 73,532,000 48,245,000
Other current assets 8,103,000 3,023,000
Recoverable and prepaid income taxes 4,422,000 256,000
Deferred tax assets 10,695,000 --
Assets held for sale 61,706,000 --
- ------------------------------------------------------------------------------------------------
Total Current Assets 254,339,000 98,468,000
Property, plant and equipment, net 35,955,000 11,264,000
Excess of cost over net assets acquired, net of accumulated
amortization of $11,512,000 and $8,185,000, respectively 240,071,000 91,412,000
Deferred tax assets 3,044,000 938,000
Other assets 13,709,000 5,112,000
- ------------------------------------------------------------------------------------------------
Total Assets $ 547,118,000 $ 207,194,000
- ------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Credit facility $ 65,883,000 $ 13,985,000
Current maturities of long-term debt 2,619,000 2,016,000
Accounts payable 33,888,000 22,995,000
Acceptances payable -- 19,800,000
Accrued expenses 54,331,000 25,608,000
- ------------------------------------------------------------------------------------------------
Total Current Liabilities 156,721,000 84,404,000
Long-term debt and Senior Subordinated Notes 107,733,000 6,535,000
Other long-term liabilities 13,816,000 1,752,000
- ------------------------------------------------------------------------------------------------
Total Liabilities 278,270,000 92,691,000
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.01 per share:
authorized shares 300,000, none issued -- --
Series B preferred stock, par value $.01 per share:
authorized shares 6,100, issued and outstanding 6,100 28,200,000 28,200,000
Series C preferred stock, par value $.01 per share:
authorized shares 1,000, issued and outstanding 1,000 3,400,000 3,400,000
Common stock, par value $.025 per share:
authorized shares 60,000,000, issued and outstanding
30,574,982 and 19,650,744, respectively 764,000 492,000
Additional paid-in capital 279,341,000 101,573,000
(Deficit) (42,953,000) (18,995,000)
Cumulative translation adjustment 96,000 (12,000)
- ------------------------------------------------------------------------------------------------
268,848,000 114,658,000
Notes receivable from sale of shares -- (155,000)
- ------------------------------------------------------------------------------------------------
Total Stockholders' Equity 268,848,000 114,503,000
Commitments and contingencies
- ------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 547,118,000 $ 207,194,000
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Fourteen
<PAGE> 16
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Medical equipment and supplies $ 261,981,000 $ 143,083,000 $ 112,113,000
Interest and other income 1,162,000 559,000 301,000
- --------------------------------------------------------------------------------------------------------------------
263,143,000 143,642,000 112,414,000
- --------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 188,695,000 99,641,000 78,525,000
Selling, general and administrative 70,646,000 34,578,000 29,428,000
Interest expense 7,260,000 2,578,000 2,720,000
Purchased in-process research and development costs 3,300,000 12,800,000 --
Merger and restructuring related charges 23,470,000 3,000,000 --
- --------------------------------------------------------------------------------------------------------------------
293,371,000 152,597,000 110,673,000
- --------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (benefit) and extraordinary item (30,228,000) (8,955,000) 1,741,000
Income taxes (benefit) (7,335,000) 2,918,000 694,000
- --------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item (22,893,000) (11,873,000) 1,047,000
Extraordinary loss on early retirement of debt
(net of tax benefit of $383,000) -- (736,000) --
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income (22,893,000) (12,609,000) 1,047,000
Preferred stock dividends 1,065,000 -- --
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income available to common stockholders $ (23,958,000) $ (12,609,000) $ 1,047,000
====================================================================================================================
Net (loss) income per common share -- basic and diluted:
(Loss) income before extraordinary item $ (1.16) $ (.76) $ .07
Extraordinary loss on early retirement of debt -- (.05) --
- --------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1.16) $ (.81) $ .07
====================================================================================================================
Weighted average number of common shares outstanding 20,600,000 15,557,000 14,315,000
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
Fifteen
<PAGE> 17
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series B Series C Common Stock Additional
Preferred Preferred -------------------- Paid-in
Total Stock Stock Shares Amount Capital (Deficit)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 56,152,000 13,921,649 $348,000 $ 63,149,000 $ (7,345,000)
Issuance of common stock on
exercise of stock options 172,000 86,500 2,000 220,000 --
Regulation S offering, net 3,471,000 1,071,655 27,000 3,444,000 --
Tax benefit from exercise
of stock options 38,000 -- -- 38,000 --
Retirement of Treasury Stock -- (14,518) -- (50,000) --
Warrants issued in
connection with debt 90,000 -- -- 90,000 --
Net income 1,047,000 -- -- -- 1,047,000
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 60,970,000 15,065,286 377,000 66,891,000 (6,298,000)
Issuance of common stock
on exercise of stock options 550,000 153,255 4,000 711,000 --
Issuance of stock in connection
with acquisitions 65,809,000 $28,200,000 $3,400,000 4,477,720 112,000 34,097,000 --
Tax benefit from exercise
of stock options 38,000 -- -- -- -- 38,000 --
Retirement of Treasury Stock -- -- -- (45,517) (1,000) (164,000) --
Dividend accrued on
Preferred Stock (88,000) -- -- -- -- -- (88,000)
Translation adjustment (12,000) -- -- -- -- -- --
Notes receivable from officers
for sale of shares (155,000) -- -- -- -- -- --
Net loss (12,609,000) -- -- -- -- -- (12,609,000)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 114,503,000 28,200,000 3,400,000 19,650,744 492,000 101,573,000 (18,995,000)
Issuance of common stock
on exercise of stock options 1,212,000 -- -- 527,975 13,000 2,816,000 --
Issuance of stock in connection
with acquisitions 175,944,000 -- -- 10,490,133 262,000 175,682,000 --
Issuance of common stock
for accrued dividends 364,000 -- -- 41,000 1,000 363,000 --
Tax benefit from exercise
of stock options 520,000 -- -- -- -- 520,000 --
Retirement of Treasury Stock -- -- -- (134,870) (4,000) (1,613,000) --
Dividend accrued on
Preferred Stock (1,065,000) -- -- -- -- -- (1,065,000)
Translation adjustment 108,000 -- -- -- -- -- --
Notes receivable from officers 155,000 -- -- -- -- -- --
Net loss (22,893,000) -- -- -- -- -- (22,893,000)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $268,848,000 $28,200,000 $3,400,000 30,574,982 $764,000 $279,341,000 $(42,953,000)
================================================================================================================================
<CAPTION>
Notes
Treasury Stock Cumulative Receivable
---------------------- Translation From Sale
Shares Amount Adjustment of Shares
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 0 $ 0
Issuance of common stock on
exercise of stock options (14,518) (50,000)
Regulation S offering, net -- --
Tax benefit from exercise
of stock options -- --
Retirement of Treasury Stock 14,518 50,000
Warrants issued in
connection with debt -- --
Net income -- --
- ---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 0 0
Issuance of common stock
on exercise of stock options (45,517) (165,000)
Issuance of stock in connection
with acquisitions -- --
Tax benefit from exercise
of stock options -- --
Retirement of Treasury Stock 45,517 165,000
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 0 0 (12,000) (155,000)
Issuance of common stock
on exercise of stock options (134,870) (1,617,000) -- --
Issuance of stock in connection
with acquisitions -- -- -- --
Issuance of common stock
for accrued dividends -- -- -- --
Tax benefit from exercise
of stock options -- -- -- --
Retirement of Treasury Stock 134,870 1,617,000 -- --
Dividend accrued on
Preferred Stock -- -- -- --
Translation adjustment -- -- 108,000 --
Notes receivable from officers -- -- -- 155,000
Net loss -- -- -- --
- ---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 0 $ 0 $ 96,000 $ 0
=================================================================================
</TABLE>
See notes to consolidated financial statements.
Sixteen
<PAGE> 18
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net (loss) income $ (22,893,000) $(12,609,000) $ 1,047,000
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 6,745,000 3,539,000 3,347,000
Deferred income taxes (10,878,000) 2,139,000 475,000
Provisions for losses on accounts receivable 6,749,000 606,000 451,000
Gain on sale of product line -- (360,000) --
Gain on sale of marketable securities (41,000) -- --
Loss on disposal of property, plant and equipment 121,000 -- 3,000
Purchased in-process research and development cost 3,300,000 12,800,000 --
Non-cash amounts included in merger and restructuring related charges 20,754,000 1,191,000 --
Non-cash amounts included in extraordinary loss -- 476,000 --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (30,247,000) (11,279,000) (3,117,000)
Inventories, other current assets and recoverable and prepaid income
taxes (9,685,000) (5,269,000) (1,000)
Accounts and acceptances payable and accrued expenses (1,568,000) 12,536,000 (5,312,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Operating Activities (37,643,000) 3,770,000 (3,107,000)
INVESTING ACTIVITIES
Proceeds from sale of marketable securities 104,198,000 -- --
Purchase of marketable securities (104,157,000) -- --
Purchase of property, plant and equipment (6,555,000) (1,085,000) (709,000)
Acquisitions, net of cash acquired (12,009,000) (4,558,000) (668,000)
Proceeds from the sale of property, plant and equipment 240,000 -- 19,000
Proceeds from sale of product line -- 500,000 --
Proceeds from sale of assets under leveraged lease -- 487,000 --
Notes receivable from officers -- (155,000) --
Net (increase) decrease in other assets (4,194,000) (228,000) 116,000
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Investing Activities (22,477,000) (5,039,000) (1,242,000)
FINANCING ACTIVITIES
Proceeds from issuance of Senior Subordinated Notes 100,000,000 -- --
Proceeds from notes payable to bank and long-term debt 279,619,000 27,310,000 2,054,000
Principal payments on long-term debt and notes payable (292,645,000) (35,576,000) (1,226,000)
Payments on acceptances payable, net (19,800,000) -- --
Proceeds on exercise of stock options 1,212,000 550,000 172,000
Proceeds from issuance of common stock, net -- -- 3,471,000
Payment of preferred stock dividends (435,000) -- --
Proceeds from issuance of preferred stock in connection with an acquisition -- 10,000,000 --
Payments for note issue costs (4,642,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 63,309,000 2,284,000 4,471,000
Increase in Cash and Cash Equivalents 3,189,000 1,015,000 122,000
Cash and Cash Equivalents at Beginning of Year 1,241,000 226,000 104,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,430,000 $ 1,241,000 $ 226,000
- -----------------------------------------------------------------------------------------------------------------------------
Supplementary Cash Flow Information:
Interest paid $ 3,130,000 $ 2,975,000 $ 2,522,000
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 4,094,000 $ 187,000 $ 266,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Seventeen
<PAGE> 19
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Graham-Field Health Products, Inc.
("Graham-Field" or the "Company") is a leading manufacturer and distributor of
healthcare products targeting the home healthcare, medical/surgical,
rehabilitation and long-term care markets in North America, Europe, Central and
South America, and Asia. The Company markets and distributes approximately
45,000 products under its own brand names and under suppliers' names throughout
the world. The Company maintains manufacturing and distribution facilities
throughout North America. The Company continuously seeks to expand its product
lines by increasing the number of distributorship agreements with suppliers, and
forming strategic alliances and acquiring other companies and product lines. The
Company's products are marketed principally to hospital, nursing home,
physician, home healthcare and rehabilitation dealers, healthcare product
wholesalers and retailers, including drug stores, catalog companies, pharmacies
and home-shopping related businesses.
The Company's principal products and product lines include wheelchairs and
power wheelchair seating systems, mobility products and bathroom safety
products, medical beds and patient room furnishings, blood pressure and
diagnostic products, adult incontinence products, specialty seating products,
wound care and urologicals, ostomy products, diabetic products, obstetrical
supplies, nutritional supplements, therapeutic support systems and respiratory
equipment and supplies. By offering a wide range of products from a single
source, the Company enables its customers to reduce purchasing costs, including
transaction, freight and inventory expenses.
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. 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, where appropriate, the lease
term.
Excess of Cost Over Net Assets Acquired: Excess of cost over net assets
acquired is 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
measured by 18 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES Notes to
Consolidated Financial Statements December 31, 1997 18 Eighteen 19 comparing the
fair value of the group of assets acquired to the carrying value. If fair values
are unavailable, the carrying value will be measured by comparing the carrying
values to the discounted cash flows. Based upon present operations and strategic
plans, management believes that no impairment of the excess of cost over net
assets acquired has occurred.
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 purchased
certain excess inventory from its customers, who in turn placed additional
purchase orders with the Company exceeding the value of the excess inventory
purchased. Substantially all of the medical products purchased by the Company as
part of the inventory buy-back program were items not generally offered for sale
by the Company. Items repurchased by the Company which were identified as items
previously sold by the Company to a customer were de minimus based on the
Company's experience, and were recorded in accordance with the Company's normal
revenue recognition policy. This program was discontinued during 1997.
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, "Accounting for Income Taxes."
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Net Loss/Income Per Common Share Information: Net loss per common share
for 1997 and 1996 was computed using the weighted average number of common
shares outstanding and by assuming the accrual of a dividend of 1.5% on 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 $1,065,000. 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, which was the same for basic
and diluted, was computed using the weighted average number of common shares
(14,278,000 shares) and dilutive common equivalent shares outstanding (37,000
shares) during the period.
Eighteen
<PAGE> 20
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the SFAS No. 128 requirements.
Employee Stock Options: The Company has a stock option program which is
more fully described in Note 11. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion ("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 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 APB Opinion No. 25,
but are required to disclose in the financial statement footnotes, pro forma net
(loss) income and per share amounts as if the Company had applied the new method
of accounting for all grants made beginning with 1995. SFAS No. 123 also
requires increased disclosures for stock-based compensation arrangements.
Concentration of Credit Risk: The Company is a leading manufacturer and
distributor of healthcare products targeting the home healthcare,
medical/surgical, rehabilitation and long-term care markets in North America,
Europe, Central and South America, and Asia. The Company's products are marketed
principally to hospital, nursing home, physician, home healthcare and
rehabilitation dealers, healthcare product wholesalers and retailers, including
drug stores, catalog companies, pharmacies and home-shopping related business.
Third party reimbursement through private or governmental insurance programs and
managed care programs have increasingly impacted the Company's customers, which
affects a portion of the Company's business. In the fourth quarter of 1997, a
provision for uncollectible accounts and notes receivable of $5 million (which
provision is included in selling, general and administrative expenses) was
recorded to reflect increased credit risk due to the anticipated impact of
changes in state Medicare reimbursement and procurement policies for certain
product lines and the extended payment terms being taken by the Company's
customers. The changes in such reimbursement patterns have resulted in an
increased number of days outstanding for receivables. The Company performs
periodic credit evaluations of its customers' financial condition and in certain
instances requires collateral. Receivables generally are due within 30 to 120
days, except for notes receivable which have a stated term.
Concentration of Sources of Supply: The business of Everest & Jennings
International Ltd. ("Everest & Jennings") is heavily dependent on its
maintenance of a key supply contract. Everest & Jennings obtains the majority of
its commodity wheelchairs and wheelchair components pursuant to an exclusive
supply agreement (the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal
("P.T. Dharma"), an Indonesian manufacturer. The term of this agreement extends
until June 30, 2000, and on each July 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 P.T. Dharma elects to terminate. If the Wheelchair Supply
Agreement is terminated, there can be no assurance that Everest & Jennings will
be able to enter into a suitable wheelchair supply agreement with another
manufacturer. The failure by Everest & Jennings to secure an alternate source of
supply would result in a material adverse effect on Graham-Field's business and
financial condition. In February 1998, the Company advanced $3.5 million to P.T.
Dharma in consideration of the grant of a six-month option to purchase the
wheelchair assets of P.T. Dharma for a price to be determined. During the option
period, the Company will be paid interest on the advance at an annual interest
rate of 10.3%. The advance is collateralized by shares of the capital stock of
P.T. Dharma, and to be applied against the purchase price. In the event the
Company and P.T. Dharma are unable to agree upon the terms of the purchase of
the wheelchair assets of P.T. Dharma, the advance will be returned to the
Company.
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.
Research and Development: Research and development costs are expensed as
incurred. The amount of such cost for 1997 was $392,000. Research and
development costs for 1996 and 1995 were not material.
2. ACQUISITIONS OF BUSINESSES
On December 30, 1997, the Company acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an
Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of
September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement,
Sub was merged with and into Fuqua with Fuqua continuing as the surviving
corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua
Merger, each share of Fuqua's common stock, par value $2.50 per share (the
"Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant
to the Fuqua Merger Agreement, was converted into the right to receive 2.1
shares of common stock, par value $.025 per share, of the Company (the "Company
Common Stock"). There were 4,482,709 shares of Fuqua Common Stock outstanding on
December 30, 1997, which converted into 9,413,689 shares of the Company Common
Stock.
In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options as adjusted for the exchange ratio of
2.1 is approximately 364,319 shares of the Company Common Stock. For purposes of
calculating the purchase price, the Company Common Stock was valued at $16.69
per share, which represents the average closing market price of the Company
Common Stock for the period three business days immediately prior to and three
business days immediately after the announcement on September 8, 1997 of the
execution of the Fuqua Merger Agreement.
Nineteen
<PAGE> 21
The acquisition of Fuqua has been accounted for under the purchase method
of accounting and, accordingly, the operating results of Fuqua have been
included in the Company's consolidated financial statements from the date of
acquisition. The Company allocated $3,300,000 of the purchase price 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 and development projects
at the date of acquisition. The excess of the aggregate purchase price over the
estimated fair market value of the net assets acquired was approximately
$134,900,000, which is being amortized on a straight-line basis over 30 years.
The purchase price allocations have been made on a preliminary basis, subject to
adjustment. From the date of acquisition, Fuqua contributed approximately
$2,100,000 of revenue for the quarter and year ended December 31, 1997.
In connection with the Fuqua Merger, the Company acquired the leather
operations of Fuqua ("Leather Operations"). It was the Company's intention to
dispose of the Leather Operations as soon as reasonably practicable following
the consummation of the Fuqua Merger. Accordingly, the net assets of the Leather
Operations have been reflected as "Assets held for sale" in the accompanying
consolidated balance sheet as of December 31, 1997. The net asset value of the
Leather Operations includes the value of the proceeds that were realized from
the sale of the Leather Operations. The Company did not record any earnings or
losses for the Leather Operations for the period December 30, 1997 to January
27, 1998 (date of disposal).
On January 27, 1998, Fuqua disposed of the Leather Operations (the
"Leather Sale Transaction") through the sale of all of the capital stock of
Irving Tanning Company ("ITC"), Hancock Ellsworth Tanners, Inc., Kroy Tanning
Company, Incorporated and Seagrave Leather Corporation (collectively, the
"Leather Companies"), to the management of ITC pursuant to a (i) Stock Purchase
Agreement dated as of January 27, 1998, by and among IT Acquisition Corporation
("ITAC"), the Company and Fuqua, and (ii) Stock Purchase Agreement dated as of
January 27, 1998, by and among HEKS Corporation, the Company and Fuqua. The
aggregate selling price for the Leather Companies consisted of (i) $60,167,400
in cash, (ii) an aggregate of 5,000 shares of Series A Preferred Stock of ITAC
with a stated value of $4,250,000 (which has been valued at $1,539,000), and
(iii) the assumption of debt of $2,341,250. In addition, as the holder of the
ITAC Preferred Stock, the Company is entitled to appoint one director to the
Board of Directors of ITAC.
On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medical Supplies of America, Inc., a Florida
corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated August 28, 1997, by and among the
Company, S.E. (Gene) Davis and Vicki Ray (collectively, the "Medapex Selling
Stockholders"). In accordance with the terms of the Reorganization Agreement,
Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling
Stockholders received in the aggregate 960,000 shares of Company Common Stock in
exchange for all of the issued and outstanding shares of the capital stock of
Medapex. Pursuant to a Real Estate Sales Agreement dated as of August 28, 1997
(the "Real Estate Sales Agreement"), by and between the Company and BBD&M, a
Georgia Limited Partnership and an affiliate of Medapex, the Company acquired
Medapex's principal corporate headquarters and distribution facility in Atlanta,
Georgia for a purchase price consisting of (i) $622,335 payable (x) by the
issuance of 23,156 shares of the Company Common Stock and (y) in cash in the
amount of $311,167, and (ii) the assumption of debt in the amount of $477,664.
Each of the Medapex Selling Stockholders entered into a two-year employment
agreement and non-competition agreement with the Company. The Medapex
transaction was accounted for as a pooling of interests and the Company's
historical financial statements have been restated to reflect this transaction.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, ---------------------------
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Graham-Field $109,160,000 $127,245,000 $100,403,000
Medapex 10,006,000 16,397,000 12,011,000
- -------------------------------------------------------------------
Combined $119,166,000 $143,642,000 $112,414,000
===================================================================
Extraordinary loss, net:
Graham-Field $ -- $ (736,000) $ --
Medapex -- -- --
- -------------------------------------------------------------------
Combined $ -- $ (736,000) $ --
===================================================================
Net income (loss):
Graham-Field $ 4,700,000 $(12,951,000) $ 738,000
Medapex 196,000 342,000 309,000
- -------------------------------------------------------------------
Combined $ 4,896,000 $(12,609,000) $ 1,047,000
===================================================================
</TABLE>
On August 17, 1997, the Company acquired substantially all of the assets
and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a privately-owned
distributor of medical supplies, for $4,500,000 in cash. The Company also
entered into a five (5)-year non-competition agreement with the previous owner
in the aggregate amount of $301,000 payable over the five (5)-year period. 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 the
purchase price over net assets acquired was approximately $3.7 million.
On June 25, 1997, the Company acquired all of the capital stock of LaBac
Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction
pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among
the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company,
LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling
Stockholders"). In connection with the acquisition, LaBac became a wholly-owned
subsidiary of the Company, and the LaBac Selling Stockholders received in the
aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in
exchange for all of the issued and outstanding shares of the capital stock of
LaBac. Of this amount, 77,255 of the shares of Company Common Stock were placed
in escrow for a period of one (1) year following the effective date of the
Merger for payment of indemnity claims to the Company or purchase price
adjustments in favor of the Company. The Company also entered into a three
(3)-year consulting agreement with the LaBac Selling Stockholders and an entity
controlled by the LaBac Selling Stockholders, and non-competition agreements
with each of the LaBac Selling Stockholders. 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 net assets acquired amounted to
approximately $7.3 million.
On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1.51 million representing the
net book value of Kuschall. The purchase price was
Twenty
<PAGE> 22
paid by the issuance of 116,154 shares of Company Common Stock 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. 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.
On February 28, 1997, Everest & Jennings Canadian Limited ("Everest &
Jennings Canada"), a wholly-owned subsidiary of the Company, 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 Company Common
Stock valued at $11.437 per share. 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 $2.5 million.
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
"Everest & Jennings Merger Agreement"), by and among the Company, Everest &
Jennings, Everest & Jennings Acquisition Corp., a wholly-owned subsidiary of the
Company ("E&J Sub"), and BIL (Far East Holdings) Limited, a Hong Kong
corporation and the majority stockholder of Everest & Jennings ("BIL"). Under
the terms of the Everest & Jennings Merger Agreement, E&J Sub was merged with
and into Everest & Jennings with Everest & Jennings continuing as the surviving
corporation wholly-owned by the Company (the "Everest & Jennings Merger").
In the Everest & Jennings 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 Everest
& Jennings Merger Agreement, was converted into the right to receive .35 shares
of the Company Common Stock. The Company Common Stock was valued at $7.64 per
share, which represents the average closing market price of the Company Common
Stock for the period three business days immediately prior to and three business
days immediately after the announcement of the execution of the Everest &
Jennings Merger Agreement. There were 7,207,689 shares of Everest & Jennings
Common Stock outstanding on November 27, 1996, which converted into 2,522,691
shares of the Company Common Stock.
In addition, in connection with, and at the effective time of the Everest
& Jennings Merger:
(i) BIL was issued 1,922,242 shares of the Company Common Stock in
consideration of the repayment of indebtedness owing by Everest & Jennings
in the amount of $24,989,151 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 Everest & Jennings Merger
and used to discharge the HSBC Indebtedness. The Company Common Stock was
valued at $7.64 per share, which represents the average closing market
price of the Company Common Stock for the period three business days
immediately prior to and three business days immediately after the
announcement of the execution of the Everest & Jennings 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 21 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 Common Stock and the Series C Preferred Stock, is not
subject to redemption and is convertible into shares of the Company Common
Stock (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. Based on an independent
valuation, the fair value ascribed to the Series B Preferred Stock was
$28,200,000.
(iii) BIL was issued $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 Company Common Stock 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 Company Common Stock
automatically on the fifth anniversary of the date of issuance at a
conversion price of $20 per share, subject to customary antidilution
adjustments. 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 (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
from the date of acquisition. The Company allocated $12,800,000 of the purchase
price 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 deficiency acquired was approximately
$65.5 million, which is being amortized on a straight-line basis over 30 years.
From the date of 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 the Company Common Stock valued at
$7.625 per share representing the closing market price of the Company Common
Stock 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.
The shares of the Company Common Stock were delivered into escrow and will
remain in escrow, subject to the resolution of a claim for indemnification
asserted by the Company. The acquisition was accounted
Twenty-One
<PAGE> 23
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 pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996 as if the acquisitions
described above occurred at the beginning of each of 1997 and 1996. 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 1997 and 1996 pro forma
information includes the write-off of certain purchased in-process research and
development costs of $3,300,000 in 1997 and $16,100,000 in 1996 and merger and
restructuring related charges of $36,202,000 in 1997 and $39,202,000 in 1996
associated with the strategic restructuring initiatives. 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, 1997 and
1996. Conversion of the preferred stock was not assumed since the result would
have been antidilutive.
<TABLE>
<CAPTION>
Pro forma
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Net revenues $374,189,000 $330,759,000
- ------------------------------------------------------------------------
Loss before extraordinary item $(32,630,000) $(58,769,000)
Net loss $(32,630,000) $(59,505,000)
Common per share data -- basic and diluted:
Loss before extraordinary item $ (1.10) $ (1.99)
- ------------------------------------------------------------------------
Net loss per common share --
basic and diluted $ (1.10) $ (2.01)
- ------------------------------------------------------------------------
Weighted average number of
common shares outstanding 30,525,000 30,105,000
- ------------------------------------------------------------------------
</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
paid by the delivery of 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.
3. MERGER AND RESTRUCTURING RELATED CHARGES
In connection with the acquisition of Fuqua on December 30, 1997, the
Company adopted a plan to implement certain strategic restructuring initiatives
(the "Restructuring Plan") and recorded $26,619,000 of restructuring charges
(the "Restructuring Charges"). The Restructuring Plan was initiated to create
manufacturing, distribution and operating efficiencies and enhance the Company's
position as a low-cost supplier in the healthcare industry. These steps will
include a broad range of efforts, including the consolidation of the Company's
Temco manufacturing operations in New Jersey into Fuqua's Lumex manufacturing
facility in New York and relocation of the Company's corporate headquarters to
the Lumex facility. In addition, the Company will be closing several other
distribution facilities and consolidating operations in an effort to achieve
additional cost savings.
The Restructuring Charges include exit costs of $16,037,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees, asset write-downs of
$2,200,000 relating to assets to be sold or abandoned, 22 Twenty-Two 23
inventory write-downs of $7,732,000 associated with the elimination of certain
non-strategic inventory and product lines (which costs are included in costs of
revenue). The Company anticipates recording additional restructuring charges in
1998 as the Company continues the implementation of its Restructuring Plan.
The Company incurred $4,583,000 of indirect merger charges (the "Merger
Charges") related to the Fuqua acquisition and Medapex combination with respect
to the write-off of certain unamortized catalog costs with no future value,
certain insurance policies, payment of bonuses related to the acquisitions, and
various transaction costs. The Company also incurred $3,300,000 of expenses
related to the write-off of purchased in-process research and development costs
of Fuqua.
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).
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Raw materials $16,553,000 $ 8,423,000
Work-in-process 6,735,000 4,430,000
Finished goods 50,244,000 35,392,000
- -------------------------------------------------------------
$73,532,000 $48,245,000
- -------------------------------------------------------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 17,323,000 $ 1,462,000
Equipment 26,845,000 17,490,000
Furniture and fixtures 2,619,000 1,629,000
Leasehold improvements 2,668,000 2,222,000
Construction in progress 1,566,000 --
- ------------------------------------------------------------
51,021,000 22,803,000
Accumulated depreciation
and amortization (15,066,000) (11,539,000)
- ------------------------------------------------------------
$ 35,955,000 $ 11,264,000
- ------------------------------------------------------------
</TABLE>
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $2,395,000 (excluding amounts
recorded in the restructuring charge), $1,778,000 and $1,704,000, for the years
ended December 31, 1997, 1996 and 1995, respectively.
6. INVESTMENT IN LEVERAGED LEASE
The Company was the lessor in a leveraged lease agreement entered into in
December 1983, pursuant to which helicopters having an estimated economic life
of approximately 22 years were leased for a term of 16 years. The Company's
equity investment represented 9% of the purchase price, and 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. In May
1996, the Company liquidated its investment in the leveraged lease agreement and
received cash proceeds of $487,000 which approximated the recorded net
investment in the lease at December 31, 1995.
Twenty-Two
<PAGE> 24
7. NOTES AND ACCEPTANCES PAYABLE
The Company was a party to a syndicated three-year senior secured
revolving credit facility, as amended (the "Credit Facility"), for up to $100
million of borrowings, including letters of credit and bankers' acceptances,
arranged by IBJ Schroder Business Credit Corp. ("IBJ Schroder"), as agent. The
Credit Facility terminates on December 10, 1999. Under the terms of the Credit
Facility, borrowings bear interest, at the option of the Company, at IBJ
Schroder's prime rate (8.50% at December 31, 1997), or 1.625% above LIBOR in
1997 (2.25% above LIBOR effective as of January 1, 1998), or 1.5% above IBJ
Schroder's bankers' acceptance rate. The Credit Facility is secured by all of
the Company's assets.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the prepayment of principal on
subordinated debt, including the Company's 9.75% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes"), the incurrence of additional debt,
liens, transactions with affiliates, and certain consolidations, mergers and
acquisitions, and 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, including a cash flow coverage and leverage ratio, and
requires specified levels of earnings before interest and taxes, as well as the
requirement that the Company reduce outstanding borrowings with the net cash
proceeds of certain asset sales.
The Company was not in compliance with certain financial covenants
contained in the Credit Facility as of December 31, 1997. On April 13, 1998,
these covenants were waived effective as of December 31, 1997 by IBJ Schroder
and amended for the balance of the term of the Credit Facility.
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, 1997, the Company had aggregate direct borrowings under
the Credit Facility of $65,883,000. On January 27, 1998, the Company used the
proceeds from the sale of the Leather Operations of $60,167,000 to repay
outstanding borrowings under the Credit Facility. The weighted average interest
rate on the amounts outstanding as of December 31, 1997 was 8.5%. Open letters
of credit at December 31, 1997 were $2,261,000 relating to trade credit and
$1,759,000 for other requirements.
At December 31, 1996, the Company had aggregate direct borrowings 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 $6,000,000 for other requirements.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
BIL Note(a) $ 4,000,000 $4,000,000
Notes payable to International
Business Machines Corp. ("IBM")(b) 490,000 1,019,000
Capital lease obligations(c) 1,715,000 1,344,000
Term loan(d) 1,535,000 --
Other(e) 2,612,000 2,188,000
- --------------------------------------------------------------
10,352,000 8,551,000
Less current maturities 2,619,000 2,016,000
- --------------------------------------------------------------
$ 7,733,000 $6,535,000
- --------------------------------------------------------------
</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 principal amount matures on April 1,
2001 and bears interest at the effective rate of 7.7% per annum and 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 7.68%
to 11.53%.
(c) At December 31, 1997, the Company is obligated under certain lease
agreements for equipment which have been accounted for as capital leases.
Future minimum payments in the aggregate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
- -------------------------------------------------------------
<S> <C>
1998 $ 698,000
1999 328,000
2000 291,000
2001 245,000
2002 141,000
Thereafter 136,000
- -------------------------------------------------------------
Total 1,839,000
Less amounts representing interest 124,000
- -------------------------------------------------------------
Present value of future minimum lease payments $1,715,000
- -------------------------------------------------------------
</TABLE>
The net book value of assets held under capital lease obligations amounted
to $1,364,000 at December 31, 1997.
(d) In connection with the Fuqua Merger, the Company assumed a term loan,
which is payable in monthly installments of $9,900, bearing interest at
LIBOR + .55% through January 2001.
(e) Other long-term debt consists primarily of a mortgage payable for the
Company's Canadian subsidiary in the amount of $788,000 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 1/2%. In addition, the Company has a credit facility for its
Mexican subsidiary, of which $300,000 was outstanding as of December 31,
1997. Borrowings under the credit facility bear interest at approximately
13%. The Mexican borrowings are secured by the assets of the Mexican
subsidiary, and are payable in semi-annual installments of $100,000
through 1999. In connection with the acquisition of Medapex's principal
corporate headquarters, the Company assumed debt in the amount of $508,000
with a remaining term of approximately seven (7) years, which is
collateralized by the principal headquarters and requires the payment of
interest at 72% of the current prime rate (8.5% as of the date which the
Company assumed the indebtedness). In connection with the acquisitions of
LaBac and Medi-Source, the Company entered into non-competition agreements
with certain former shareholders of such companies. The non-competition
agreements have a remaining balance due of $679,000 as of December 31,
1997. In addition, the Company assumed certain debt obligations of other
acquired companies. Such debt obligations, aggregating $337,000 as of
December 31, 1997, bear interest at various rates.
Twenty-Three
<PAGE> 25
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>
1998 $2,002,000
1999 477,000
2000 324,000
2001 4,306,000
2002 284,000
Thereafter 1,244,000
- -------------------------------------------------------------
$8,637,000
=============================================================
</TABLE>
9. SENIOR SUBORDINATED NOTES
On August 4, 1997, the Company issued the Senior Subordinated Notes due
2007 under Rule 144A of the Securities Act of 1933, as amended (the "Securities
Act"). On February 9, 1998, the Company completed its exchange offer to exchange
the outstanding Senior Subordinated Notes for an equal amount of new Senior
Subordinated Notes which have been registered under the Securities Act. The new
Senior Subordinated Notes are identical in all material respects to the
previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes
bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The
Senior Subordinated Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior debt of the
Company, including indebtedness under the Credit Facility arranged by IBJ
Schroder, as agent. The Senior Subordinated Notes are guaranteed (the
"Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis
by all existing and future restricted subsidiaries of the Company (the
"Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in
right of payment to all existing and future senior debt of the Guaranteeing
Subsidiaries including any guarantees by the Guaranteeing Subsidiaries of the
Company's obligations under the Credit Facility.
The Company is a holding company with no assets or operations other than
its investments in its subsidiaries. The subsidiary guarantors are wholly-owned
subsidiaries of the Company and comprise all of the direct and indirect
subsidiaries of the Company. Accordingly, the Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because management has determined that such information is not material to
investors.
The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions and the
opening of an additional Graham-Field Express facility.
Beginning on August 15, 2002, the Senior Subordinated Notes are
redeemable, in whole or in part, at the option of the Company, at certain
redemption prices plus accrued and unpaid interest to the date of redemption. In
addition, prior to August 15, 2000, the Company may, at its option, redeem up to
25% of the aggregate principal amount of Senior Subordinated Notes originally
issued with the net proceeds from one or more public offerings of Company Common
Stock at a redemption price of 109.75% of the principal amount, plus accrued and
unpaid interest to the date of redemption; provided that at least 75% of the
aggregate principal amount of Notes originally issued remain outstanding after
giving effect to any such redemption.
The indenture ("Indenture") governing the Senior Subordinated Notes
contains customary covenants including, but not limited to, covenants relating
to limitations on the incurrence of additional indebtedness, the creation of
liens, restricted payments, the sales of assets, mergers and consolidations,
payment restrictions affecting subsidiaries, and transactions with affiliates.
In addition, in the event of a change of control of the Company as defined in
the Indenture, each holder of the Senior Subordinated Notes will have the right
to require the Company to repurchase such holder's Senior Subordinated Notes, in
whole or in part, at a purchase price of 101% of the principal amount thereof
plus accrued and unpaid interest to the date of repurchase. In addition, the
Company will be required in certain circumstances to make an offer to purchase
Senior Subordinated Notes at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest to the date of purchase, with
the net cash proceeds of certain assets sales. The Credit Facility prohibits the
Company from purchasing the Senior Subordinated Notes without the consent of the
lenders.
In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.
10. EXTRAORDINARY ITEM
During December 1996, the Company repaid $20,000,000 of indebted-ness
under the John Hancock Note and Warrant Agreement with proceeds from the Credit
Facility. 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.
11. STOCKHOLDERS' EQUITY
Rights Agreement
On August 12, 1996, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of the Company Common Stock. The dividend was paid on September 17, 1996
(the "Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder 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 "Series A Preferred Stock") at a price of $35.00 per
one one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of September 3, 1996 (the "Rights Agreement")
between the Company and American Stock Transfer & Trust Company, as Rights Agent
(the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have
Twenty-Four
<PAGE> 26
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 election of directors ("Voting Shares") or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors of the
Company 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 Company Common Stock certificates outstanding as of
the Record Date, by such certificate with a copy of the Summary of Rights which
is attached to the Rights Agreement (the "Summary of Rights"). Notwithstanding
the foregoing, BIL will not be an Acquiring Person by virtue of its ownership of
any Voting Shares acquired in connection with the Company's acquisition of
Everest & Jennings or in accordance with the Amended and Restated Stockholder
Agreement dated as of September 3, 1996, as amended (the "BIL Stockholder
Agreement"), by and among Irwin Selinger, the Company and BIL (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. "BIL Voting
Shares" is defined in the Rights Agreement as (i) any Voting Shares owned by BIL
which were acquired by BIL in connection with the Company's acquisition of
Everest & Jennings or in accordance with the BIL Stockholder Agreement, and (ii)
any shares of the Company Common Stock issued by the Company to BIL upon
conversion of or as a dividend on the shares referred to in clause (i) above.
The 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 Company Common Stock. Until the Distribution Date (or
earlier redemption or expiration of the Rights), new Company Common Stock
certificates issued after the Record Date upon transfer or new issuance of the
Company Common Stock will contain a notation incorporating the Rights Agreement
by reference. Until the Distribution Date (or earlier redemption or expiration
of the Rights), the surrender for transfer of any certificates for the Company
Common Stock outstanding as of the Record Date, even without such notation or a
copy of the Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the Company Common Stock represented by
such certificate. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Company Common Stock as of the close of
business on the Distribution Date and such separate Right Certificates alone
will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on September 3, 2006 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock, (ii) upon the grant to holders of Series A Preferred Stock of
certain rights or warrants to subscribe for or purchase Series A Preferred Stock
at a price, or a securities convertible into Series A Preferred Stock with a
conversion price, less than the then-current market price of Series A Preferred
Stock, or (iii) upon the distribution to holders of Series A Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of
Series A Preferred Stock) or of subscription rights or warrants (other than
those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the Company Common Stock
or a stock dividend on the Company Common Stock payable in shares of the Company
Common Stock, subdivisions, consolidations or combinations of the Company Common
Stock occurring, in any such case, prior to the Distribution Date.
Shares of Series A Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Series A Preferred Stock 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 the Company Common Stock. In the event of liquidation of the Company, the
holders of the Series A Preferred Stock 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 the Company Common
Stock. Each share of Series A Preferred Stock will have 100 votes, voting
together with the Company Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of the Company Common Stock
are exchanged, each share of Series A Preferred Stock will be entitled to
receive 100 times the amount received per share of the Company Common Stock.
These rights are protected by customary antidilution provisions.
Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of the Company Common Stock.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
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 Purchase Price,
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 Purchase Price.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, the 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 the Company Common Stock having a market value of two times the
Purchase Price. 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 shares of the Company Common Stock 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 the Company Common Stock, or one one-hundredth of a share of
Series A Preferred Stock (or of a share of a class or series of Company
Preferred Stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
The Rights Agreement provides that none of the directors or officers of
Company shall be deemed to beneficially own any Voting Shares owned by any other
director or officer solely by virtue of such persons acting in their capacities
as such, including in connection with the formulation and publication of the
recommendation of the position of the Board of Directors of the Company, and
actions taken in furtherance thereof, with respect to an acquisition proposal
relating to Company or a tender or exchange offer for the Company Common Stock.
Twenty-Five
<PAGE> 27
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock, which may, at the election of the
Company, be evidenced by depositary receipts) and in lieu thereof, any
adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to a person or group 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 of the Company 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, (c) reduce the Redemption Price or (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).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
As long as the Rights are attached to the Company Common Stock, the
Company will issue one Right with each new share of the Company Common Stock so
that all such shares will have Rights attached. The Board of Directors of the
Company has reserved for issuance upon exercise of the Rights 300,000 shares of
Series A Preferred Stock.
Stock Transactions
On December 30, 1997, the Company acquired Fuqua (see Note 2), in
consideration of the issuance of 9,413,689 shares of the Company Common Stock
(excluding shares of Company Common Stock to be issued in connection with Fuqua
stock options assumed by the Company).
On June 25, 1997, the Company acquired the capital stock of LaBac (see
Note 2), in consideration of the issuance of 772,557 shares of the Company
Common Stock.
On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall (see Note 2), in consideration of the issuance of
116,154 shares of the Company Common Stock. On February 28, 1997, Everest &
Jennings Canada, a wholly-owned subsidiary of the Company, acquired Motion 2000,
Inc. and Motion 2000 Quebec, Inc. (see Note 2), in consideration of the issuance
of the 187,733 shares of the Company Common Stock.
On November 27, 1996, in connection with the acquisition of Everest &
Jennings (see Note 2), the Company issued an aggregate of 4,444,933 shares of
the Company Common Stock, and $61 million stated value of Series B Preferred
Stock and $10 million stated value of Series C Preferred Stock to 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
Common Stock of the Company and the Series C Preferred Stock, is not subject to
redemption and is convertible into shares of the Company Common Stock (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
Company Common Stock 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 Company Common Stock automatically on the fifth anniversary of the
date of issuance at a conversion price of $20 per share, subject to customary
antidilution adjustments.
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 $1,703,829 in cash and the issuance of
32,787 shares of the Company Common Stock.
In September 1995, the Company completed an offshore private placement of
1,071,655 shares of the Company Common Stock with various European institutional
investors. The net proceeds of $3,471,000 realized from the offering were used
for general corporate purposes.
In connection with the John Hancock Note and Warrant Agreement, the
Company issued warrants to John Hancock to purchase 345,336 shares of the
Company Common Stock at exercise prices ranging from $5.17 to $5.42. The
warrants expire in February 2000.
Stock Options
Under the Company's stock option program (the "Incentive 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% of the
fair market value of the Company Common Stock at the date of grant. Stock
options outstanding under the Incentive 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 stock options expire five years from the
date of grant.
In 1996, the plan was amended to increase the maximum number of shares
available from 2,100,000 to 3,000,000. On December 30, 1997, the plan was
further amended to increase the maximum number of shares available from
3,000,000 to 4,500,000.
During 1997, 1996 and 1995, officers of the Company surrendered 134,870,
45,517 and 14,518 shares, respectively, of the Company Common Stock with a fair
market value of $1,617,000, $165,000 and $50,000, respectively, in satisfaction
of the exercise price of stock options to purchase 306,669, 50,000 and 25,000
shares, respectively, of the Company Common Stock. 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 the Company Common Stock.
Twenty-Six
<PAGE> 28
The Company has elected to comply with APB Opinion No. 25, and related
interpretations in accounting for its employee stock options because the
alternate fair value accounting provided for under SFAS 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 Opinion No.
25, no compensation expense is recognized in connection with the grant of stock
options under the Incentive Program.
In accordance with SFAS No. 123, pro forma information regarding net
(loss) income and (loss) income 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 stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.375% for 1997 and 6.5% for 1996 and 1995; no dividend yields
on the Common Stock, volatility factors of the expected market price of the
Company's Common Stock of .46, .41 and .42; and a weighted average expected life
of the option is approximately 3 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>
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net (loss) income $(24,448,000) $(13,098,000) $953,000
- -------------------------------------------------------------------
Pro forma net (loss) income
per share --
basic and diluted $ (1.24) $ (.85) $ .07
===================================================================
</TABLE>
Information with respect to options during the years ended December 31,
1997, 1996 and 1995 under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding --
beginning of year 1,643,175 $ 5.77 912,645 $ 5.49 818,379 $ 6.10
Options granted:
Incentive options 240,483 12.25 699,121 6.45 257,432 3.47
Directors' options 90,000 9.33 90,000 3.25 91,852 3.65
Non-qualified options 185,453 11.96 91,764 6.02 -- --
Fuqua stock options 885,150 9.69 -- -- -- --
Options exercised (527,975) (5.36) (103,255) (3.83) (86,500) (2.58)
Options cancelled
and expired (42,204) (8.38) (47,100) (4.87) (168,518) (5.79)
- --------------------------------------------------------------------------------------
Options outstanding --
end of year 2,474,082 $ 8.44 1,643,175 $ 5.77 912,645 $ 5.49
- --------------------------------------------------------------------------------------
Options exercisable at
end of year 1,594,142 $ 7.91 582,244 $ 5.45 483,929 $ 4.95
- --------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
year $ 4.22 $ 2.10 $ 1.20
======================================================================================
</TABLE>
In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options, has been adjusted for the exchange
ratio of 2.1, in accordance with the terms of the Fuqua Merger Agreement.
Exercise prices for stock options outstanding and for options exercisable
as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Number of Range of
Number of Options Exercise
Options Exercisable Prices
- -------------------------------------------------------------
<S> <C> <C>
15,000 15,000 $ 2.00 -- $ 2.99
296,718 245,604 3.00 -- 3.99
82,550 64,050 4.00 -- 4.99
74,044 74,044 5.00 -- 5.99
12,750 6,375 6.00 -- 6.99
502,715 257,322 7.00 -- 7.99
188,194 46,597 8.00 -- 8.99
885,150 885,150 9.00 -- 9.99
99,512 -- 10.00 -- 10.99
56,000 -- 11.00 -- 11.99
195,250 -- 12.00 -- 12.99
23,500 -- 14.00 -- 14.99
22,699 -- 15.00 -- 15.99
- -----------------------------------
2,474,082 1,594,142
- -----------------------------------
</TABLE>
The weighted average remaining contractual life of the above-described
stock options is three years.
Shares of common stock reserved for future issuance as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Number of Shares
- -------------------------------------------------------------
<S> <C>
Stock options 3,212,188
Warrants issued to John Hancock 345,336
Series B Preferred Stock 3,935,483
Series C Preferred Stock 500,000
- -------------------------------------------------------------
7,993,007
=============================================================
</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 1997, 1996 and 1995, approximately $520,000, $38,000 and $38,000,
respectively, was credited to additional paid in capital.
12. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,953,000 $ 328,000 $129,000
State and local 591,000 86,000 71,000
Foreign 1,073,000 9,000 --
- ---------------------------------------------------------------
3,617,000 423,000 200,000
Deferred Federal and state (10,952,000) 2,495,000 494,000
- ---------------------------------------------------------------
$ (7,335,000) $2,918,000 $694,000
===============================================================
</TABLE>
Twenty-Seven
<PAGE> 29
Pre-tax (loss) income consists of the amounts earned in the United States
versus Foreign locations as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
United States $(33,029,000) $(8,965,000) $1,741,000
Foreign 2,801,000 10,000 --
- -------------------------------------------------------------
Total $(30,228,000) $(8,955,000) $1,741,000
- -------------------------------------------------------------
</TABLE>
The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)
computed at
statutory rate $(10,278,000) (34)% $(3,045,000) (34)% $ 592,000 34%
Expenses not
deductible for
income tax
purposes:
Amortization of excess
of cost over net
assets acquired 1,015,000 3% 276,000 3% 286,000 16%
In-process R&D costs 1,122,000 4% 4,352,000 49% -- --
Other 459,000 2% 32,000 -- 7,000 1%
Write-off of merger
and restructuring
charges 1,835,000 6% -- -- -- --
State tax expense
(benefit), net of
Federal benefit (1,488,000) (5)% 303,000 3% 121,000 7%
Previously unrecognized
state tax benefits -- -- -- -- (312,000) (18)%
Valuation allowance
on deferred tax
assets -- -- 1,000,000 11% -- --
- -------------------------------------------------------------------------------------------
$ (7,335,000) (24)% $ 2,918,000 32% $ 694,000 40%
- -------------------------------------------------------------------------------------------
</TABLE>
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, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 7,769,000 $ 7,893,000
Tax credits 890,000 890,000
Accounts receivable allowances 4,412,000 2,600,000
Inventory related 5,387,000 2,575,000
Deferred rent 349,000 382,000
Merger and restructuring
related charges 8,061,000 --
Other reserves and accrued items 5,286,000 4,765,000
- -----------------------------------------------------------------------
32,154,000 19,105,000
Valuation allowance for deferred assets (14,505,000) (15,549,000)
- -----------------------------------------------------------------------
Total deferred tax assets 17,649,000 3,556,000
Deferred Tax Liabilities:
Tax in excess of book depreciation 2,148,000 1,696,000
Prepaid expenses 940,000 254,000
Amortization of intangibles 822,000 668,000
- -----------------------------------------------------------------------
Total deferred tax liabilities 3,910,000 2,618,000
- -----------------------------------------------------------------------
Net deferred tax assets $ 13,739,000 $ 938,000
- -----------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had aggregate net operating loss
carryforwards of approximately $25,726,000 for income tax purposes which expire
in 2011, which were acquired primarily in connection with the Everest & Jennings
acquisition and are limited as to use in any particular year. In addition, at
December 31, 1997, the Company had approximately $890,000 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.
For financial reporting purposes, due to prior years losses of Everest &
Jennings, and SRLY limitations, a full valuation allowance of approximately
$13,338,000 has been recorded against the Everest & Jennings net operating
losses and other deferred tax assets. When realized, the tax benefit for those
items will be recorded as a reduction of the excess of cost over net assets
acquired. In addition, at December 31, 1997, the Company has a valuation
allowance of approximately $1,167,000 against a portion of its remaining net
deferred tax asset as a result of recent acquisitions. 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.
13. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
employees of Everest & Jennings 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 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. In addition, Everest &
Jennings froze the Salaried Plan effective as of January 1, 1993.
The following table sets forth the status of these plans and the amounts
recognized in the Company's consolidated financial statements as of December 31,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 18,404,000 $ 17,567,000
- ------------------------------------------------------------------------------
Accumulated benefit obligation $ 18,404,000 $ 17,567,000
Projected benefit obligation for
services rendered to date $ 18,404,000 $ 17,567,000
Plan assets at fair value, primarily
listed stocks, bonds, investment
funds and annuity contracts 16,817,000 14,746,000
- ------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets 1,587,000 2,821,000
Unrecognized loss (63,000) --
- ------------------------------------------------------------------------------
Pension liability (current portion
of $1,264,000 and $1,069,000) $ 1,524,000 $ 2,821,000
- ------------------------------------------------------------------------------
</TABLE>
The following assumptions were used to determine the projected benefit
obligations and plan assets:
<TABLE>
<CAPTION>
Everest & Jennings Smith & Davis
Salaried Plan Hourly Plan
--------------------------
1997 &
1997 1996 1997 1996 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average discount rate 7.0% 7.5% 7.0% 7.5% 7.5%
Expected long-term rate
of return on assets 9.0% 9.0% 9.0% 9.0% 9.0%
</TABLE>
Twenty-Eight
<PAGE> 30
As all participants are inactive and the plans are frozen, no compensation
increases were assumed.
The Company also sponsors five 401(k) Savings and Investment Plans. A
separate and distinct individual plan covers all full-time employees of Everest
& Jennings, Medapex, LaBac, and Fuqua and an additional plan covers the
remaining employees of the Company. The Company does not contribute to its plan
and the Everest & Jennings plan. The Medapex plan matches 25% of an employee's
contribution up to a maximum contribution of 6% of the employee's salary, the
LaBac plan matches 25% of the employees' contribution up to a maximum
contribution of 15% of the employee's salary, and the Fuqua plan matches 50% of
the employee's contribution up to a maximum contribution of 4% of the employee's
salary. Amounts expensed for the Medapex, LaBac and Fuqua plans for the fiscal
years 1997, 1996 and 1995 were immaterial.
14. 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, 1997 and 1996, 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.
Credit facility and acceptances payable: The carrying amounts of the
Company's borrowings under its credit facility approximate their fair value.
Long-term debt and Senior Subordinated Notes: The fair values of the
Company's long-term debt and Senior Subordinated Notes are estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. At December 31, 1997 and
1996, the carrying amount reported approximates fair value.
15. 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, 1997, 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, 1997 and 1996, $132,000
and $933,000, respectively, of rent expense was accrued in excess of rental
payments made by the Company.
As of December 31, 1997, minimal annual rental payments under all
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended December 31:
- -------------------------------------------------------------
<S> <C>
1998 $ 6,699,000
1999 6,287,000
2000 5,142,000
2001 4,492,000
2002 3,338,000
Thereafter 11,349,000
- -------------------------------------------------------------
$37,307,000
- -------------------------------------------------------------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995
approximated $3,896,000, $2,805,000 and $2,400,000, respectively.
Legal Proceedings
Following the Company's public announcement on March 23, 1998 of its
financial results for the fourth quarter and year ended December 31, 1997, the
Company and certain of its directors and officers were named as defendants in at
least six putative class action lawsuits filed in the United States District
Court for the Eastern District of New York on behalf of all purchasers of common
stock of the Company (including former Fuqua shareholders who received shares of
the Company Common Stock when the Company acquired Fuqua in December 1997)
during various periods within the time period May 1997 to March 1998. The
complaints assert claims against the Company and the other defendants for
violations of Sections 11, 12(2) and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder with respect to alleged material
misrepresentations and omissions in public filings made with the Securities and
Exchange Commission and certain press releases and other public statements made
by the Company and certain of its officers relating to the Company's business,
results of operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of the Company Common Stock was
artificially inflated during the putative class periods. Several of the
complaints focus on statements made concerning the Company's integration of its
various recent acquisitions. The plaintiffs seek unspecified compensatory
damages costs (including attorneys and expert fees), expenses and other
unspecified relief on behalf of the putative classes. The Company believes that
it has complied with all of its obligations under the Federal securities laws,
considers the plaintiffs' allegations to be without merit and intends to defend
these suits vigorously.
On March 27, 1998, agents of the U.S. Customs Service and the Food and
Drug Administration arrived at the Company's principal headquarters and one
other Company location and retrieved several documents pursuant to search
warrants. The Company has subsequently been advised by an Assistant United
States Attorney for the Southern District of Florida that the Company is a
target of an ongoing grand jury investigation involving alleged fraud by one or
more of the Company's suppliers relating to the unauthorized diversion of
medical products intended for sale outside of the United States into United
States markets. The Company has also been advised that similar search warrants
were obtained with respect to approximately 14 other participants in the
distribution of medical products. The Company is presently investigating these
matters. The Company does not know when the grand jury investigation will
conclude or what action, if any, may be taken by the government against the
Company or any of its employees, so it cannot yet assess the impact of this
investigation on the Company. The Company intends to cooperate fully with the
government in its investigation.
Environmental Contingency: In March 1994, the Suffolk County Authorities
initiated an investigation to determine whether regulated substances had been
discharged in excess of permitted levels from Fuqua's Lumex division (the "Lumex
Division") located in Bayshore, New York. An environmental consulting firm was
engaged by the Lumex Division to conduct a more comprehensive site
investigation, develop a remediation work plan and provide a remediation cost
estimate. These activities were performed to determine the nature and extent of
contaminants present on the site and to evaluate their potential off-site
extent.
In connection with Fuqua's April 1996 acquisition of the Lumex Division,
Fuqua assumed the obligations associated with this environmental matter. In late
1996, Fuqua conducted surficial soil remediation at the Bayshore facilities and
reported the results to the Suffolk County Authorities in March 1997. A ground
water work plan was submitted
Twenty-Nine
<PAGE> 31
concurrently with the soil remediation report and Fuqua is waiting for the
necessary approvals from the Suffolk County Authorities before proceeding with
execution of the ground water work plan. Management is not currently able to
determine when any required remediation and monitoring efforts with respect to
the ground water contamination will be completed. In May 1997, the Suffolk
County Authorities approved the soil remediation conducted by Fuqua and provided
comments on the ground water work plan.
In November 1997, the Lumex Division received the results of additional
ground water testing that had been performed in August and September 1997. The
results revealed significantly lower concentrations of contaminants than were
known at the time the "Ground Water Work Plan" was prepared in March 1997. In
January 1998, additional confirmatory samples were taken, including two
additional wells, but the results of this sampling have not yet been received
from the laboratory. Management is not currently able to determine whether or
when additional remediation or monitoring efforts will be required.
At December 30, 1997, the Lumex Division had reserves for remediation
costs and additional investigation costs which will be required. Reserves are
established when it is probable that a liability has been incurred and such
costs can be reasonably estimated. The Lumex Division's estimates of these costs
were based upon currently enacted laws and regulations and the professional
judgment of independent consultants and counsel. Where available information was
sufficient to estimate the amount of liability, that estimate has been used.
Where information was only sufficient to establish a range of probable liability
and no point within the range is more likely than another, the lower end of the
range has been used. The Lumex Division has not assumed that any such costs
would be recoverable from third parties nor has the Lumex Division discounted
any of its estimated costs, although a portion of the remediation work plan will
be performed over a period of years.
The amounts of environmental liabilities are difficult to estimate due to
such factors as the extent to which remedial actions may be required, laws and
regulations change or the actual costs of remediation differ when the final work
plan is performed.
Dispute with Cybex: On April 3, 1996, Fuqua acquired the Lumex Division
from Cybex International, Inc. (formerly, Lumex, Inc.). The purchase price for
the Lumex Division was $40.7 million, subject to a final purchase price
adjustment in the asset sale agreement. The final purchase price adjustment was
disputed and, pursuant to the asset sale agreement, was to be resolved through
arbitration. On April 18, 1997, the seller obtained an interim stay of the
arbitration proceedings pending a hearing on May 9, 1997. On May 9, 1997, the
New York County Supreme Court vacated its stay of the arbitration proceedings
and directed Fuqua and the seller to proceed to arbitration. On June 10, 1997,
the seller filed a motion for a stay of arbitration pending the hearing and
determination of the seller's appeal with the Appellate Division of the New York
County Supreme Court. On June 24, 1997, the Appellate Division denied the
seller's motion to stay the arbitration proceedings pending appeal. Accordingly,
Fuqua and the seller continued the arbitration proceedings. The Appellate
Division subsequently affirmed the Supreme Court's denial of the stay, and
seller's motion for reconsideration has been denied. On February 13, 1998, the
arbitrator accepted $3,179,685 in claims by Fuqua, with interest of $350,690,
yielding a net award to Fuqua of $2,384,606.
In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights provided in the asset sale agreement.
In February 1998, Fuqua filed in the State Court of Fulton County a
lawsuit against the seller and certain former officers and it states claims for
fraud, breach of warranty, negligent misrepresentation, Georgia RICO, and
attorney's fees. Defendants filed an answer and counterclaim on April 7, 1998,
denying liability and asserting fifteen defenses. Defendant Cybex has asserted
four counterclaims, seeking $1,284,288 in damages, plus attorneys' fees and
costs. Fuqua believes that the counterclaims lack merit for several reasons,
including, among others, that the punitive claim for $1,284,288, was decided
adversely to Cybex in the arbitration.
General: The Company and its subsidiaries are parties to 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 six (6) collective bargaining agreements
covering approximately 822 employees. The collective bargaining agreements are
scheduled to expire at various dates from October 19, 1998 through October 18,
2000.
16. OTHER MATTERS
During 1997, the Company loaned an officer $2.5 million bearing interest
at the Company's borrowing rate, as adjusted from time to time. The loan is due
on December 3, 2004 and is collateralized by shares of the Company Common Stock
and is included in other assets on the balance sheet.
Thirty
<PAGE> 32
17. QUARTERLY DATA (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the quarter ended March 31,(c) June 30,(c) Sept. 30, Dec. 31,(d)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Net revenues:
Medical equipment and supplies $ 56,191 $ 62,579 $ 70,745 $ 72,466
Interest and other income 144 252 363 403
- ------------------------------------------------------------------------------------------
56,335 62,831 71,108 72,869
Costs and expenses:
Cost of revenues 38,438 42,503 47,159 60,595
Selling, general and administrative 13,193 14,765 16,018 26,670
Interest expense 994 1,169 2,394 2,703
Purchased in-process research &
development costs -- -- -- 3,300
Merger and restructuring
related charges -- -- -- 23,470
- ------------------------------------------------------------------------------------------
52,625 58,437 65,571 116,738
- ------------------------------------------------------------------------------------------
Income (loss) before income
taxes (benefit) 3,710 4,394 5,537 (43,869)
Income taxes (benefit) 1,527 1,681 2,187 (12,730)
- ------------------------------------------------------------------------------------------
Net income (loss) $ 2,183 $ 2,713 $ 3,350 $ (31,139)
- ------------------------------------------------------------------------------------------
Net income (loss) per common share:
Net income (loss) $ 2,183 $ 2,713 $ 3,350 $ (31,139)
Preferred stock dividends --(a) --(a) --(a) 266
- ------------------------------------------------------------------------------------------
Net income (loss) available to
common shareholders $ 2,183 $ 2,713 $ 3,350 $ (31,405)
- ------------------------------------------------------------------------------------------
Common shares outstanding -- basic 19,763 20,204 21,078 21,296
- ------------------------------------------------------------------------------------------
Convertible preferred stock 4,435 4,435 4,435 --(b)
Incremental shares using
treasury stock method 966 849 1,227 --(b)
- ------------------------------------------------------------------------------------------
Common shares outstanding -- diluted 25,164 25,488 26,740 21,296
- ------------------------------------------------------------------------------------------
Basic earnings per share $ .11 $ .13 $ .16 $ (1.47)
Diluted earnings per share $ .09 $ .11 $ .13 $ (1.47)(b)
</TABLE>
(a) Assumes conversion of the preferred stock and elimination of any dividends
in relation to such preferred stock.
(b) No incremental shares related to conversion of the preferred stock and
options are included due to the loss in the fourth quarter.
(c) The March 31 and June 30 quarters have been restated to reflect the
Medapex transaction recorded as a pooling of interests.
(d) The fourth quarter 1997 loss before income taxes includes merger related
restructuring and other charges totaling $36,200,000 (see Note 3).
<TABLE>
<CAPTION>
For the quarter ended March 31,(c) June 30,(c) Sept. 30, Dec. 31,(d)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Net revenues:
Medical equipment and supplies $ 30,806 $ 33,432 $ 36,436 $ 42,409
Interest and other income 432 74 31 22
- ---------------------------------------------------------------------------------------
31,238 33,506 36,467 42,431
Costs and expenses:
Cost of revenues 21,429 22,832 24,942 30,438
Selling, general and administrative 8,189 8,468 9,021 8,900
Interest expense 610 680 672 616
Purchased in-process research &
development costs -- -- -- 12,800
Merger and restructuring
related charges -- -- -- 3,000
- ---------------------------------------------------------------------------------------
30,228 31,980 34,635 55,754
- ---------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 1,010 1,526 1,832 (13,323)
Income taxes 449 683 811 975
- ---------------------------------------------------------------------------------------
Income (loss) before
extraordinary item 561 843 1,021 (14,298)
Extraordinary loss on early retirement
of debt (net of tax benefit of $383) -- -- -- (736)
- ---------------------------------------------------------------------------------------
Net income (loss) $ 561 $ 843 $ 1,021 $(15,034)
- ---------------------------------------------------------------------------------------
Net income (loss) per common share:
Common shares outstanding -- basic 15,090 15,090 15,171 16,840
Incremental shares using
treasury stock method 75 440 503 --(a)
- ---------------------------------------------------------------------------------------
Common shares outstanding --
diluted 15,165 15,530 15,674 16,840
- ---------------------------------------------------------------------------------------
Basic earnings per share:
Before extraordinary item $ .04 $ .06 $ .07 $ (.85)
Extraordinary item -- -- -- (.04)
- ---------------------------------------------------------------------------------------
$ .04 $ .06 $ .07 $ (.89)
- ---------------------------------------------------------------------------------------
Diluted earnings per share:
Before extraordinary item $ .04 $ .05 $ .07 $ (.85)
Extraordinary item -- -- -- (.04)
- ---------------------------------------------------------------------------------------
$ .04 $ .05 $ .07 $ (.89)
- ---------------------------------------------------------------------------------------
</TABLE>
(a) No incremental shares related to conversion of the preferred stock and
options are included due to the loss in the fourth quarter.
(b) The March 31 and June 30 quarters have been restated to reflect the
Medapex transaction recorded as a pooling of interests.
(c) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with SFAS No. 128, "Earnings per Share."
(d) During the fourth quarter of 1996, the Company recorded charges of $15.8
million related to the acquisition of Everest & Jennings (see Note 3). The
extraordinary item of $736,000 (net of tax benefit of $383,000) relates to
the early retirement of the indebtedness underlying the John Hancock Note
and Warrant Agreement.
Thirty-One
<PAGE> 33
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 (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
March 23, 1998, except for Note 7,
as to which the date is April 13, 1998
Market for Registrant's Common Stock and Related Stockholder 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, 1996 through March 31, 1998 as reported on the New
York Stock Exchange.
<TABLE>
<CAPTION>
High Sales Low Sales
Price Price
- -------------------------------------------------------------
<S> <C> <C>
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 $13 3/4 $ 8 1/2
Second Quarter 13 3/4 8 3/8
Third Quarter 17 7/8 12 9/16
Fourth Quarter 18 3/4 14
1998
First Quarter $19 11/16 $ 7 5/16
</TABLE>
B. As of the close of business on March 31, 1998, the number of holders of
record of common stock of the Company was 1,273.
Under the terms of the Company's Senior Secured Revolving Credit Facility,
as amended (the "Credit Facility"), which provides for up to $100 million of
borrowings, including letters of credit and bankers' acceptances, arranged by
IBJ Schroder Business Credit Corporation ("IBJ Schroder"), as agent, 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 to BIL (Far East Holdings)
Limited and BIL Securities Offshore Ltd. (collectively, "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 was not in compliance with certain financial covenants
contained in the Credit Facility as of December 31, 1997. On April 13, 1998,
these covenants were waived effective as of December 31, 1997 by IBJ Schroder
and amended for the balance of the term of the Credit Facility.
In addition, the Company's Indenture (the "Indenture") governing the
issuance of its $100 million Senior Subordinated Notes (the "Senior Subordinated
Notes") prohibits the Company from declaring or paying any dividend or making
any distribution or restricted payment as defined in the Indenture
(collectively, the "Restricted Payments") (other than dividends or distributions
payable in capital stock of the Company), unless, at the time of such payment
(i) no default or event of default shall have occurred and be continuing or
would occur as a consequence thereof; (ii) the Company would be able to incur at
least $1.00 of additional indebtedness under the fixed charge coverage ratio
contained in the Indenture; and (iii) such Restricted Payment, together with the
aggregate of all Restricted Payments made by the Company after the date of the
Indenture is less than the sum of (a) 50% of the consolidated net income of the
Company for the period (taken as one accounting period) beginning on April 1,
1997 to the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such consolidated net income for such period is a deficit, minus
100% of such deficit), plus (b) 100% o f the aggregate net cash proceeds
received by the Company from contributions of capital or the issue or sale since
the date of the Indenture of capital stock of the Company or of debt securities
of the Company that have been converted into capital stock of the Company.
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.
Thirty-Two
<PAGE> 34
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
Corporate Information
Board of Directors
Irwin Selinger(1)
Chairman of the Board and
Chief Executive Officer
David P. Delaney, Jr.(2)(3)(4)
Chairman and Chief Executive Officer
Lancer Financial Group
Andrew A. Giordano(1)(4)
President and Chief Operating Officer
Steven D. Levkoff(2)(3)
Chairman and Chief Executive Officer
Standard Folding Cartons, Inc.
Louis A. Lubrano
Investment Banker
Herzog, Heine, Geduld, Inc.
Rodney F. Price1,(1)(2)
Director
Brierley Investments Limited
(1) Executive Committee
(2) Compensation Committee
(3) Audit Committee
(4) Nominating Committee
Corporate Officers
Irwin Selinger
Chairman of the Board and
Chief Executive Officer
Andrew A. Giordano
President and Chief Operating Officer
Richard S. Kolodny
Vice President, General Counsel and Secretary
Peter Winocur
Executive Vice President, Sales & Marketing
Paul Bellamy
Vice President and Chief Financial Officer
Ralph Liguori
Executive Vice President, Operations
Jeffrey Schwartz
President, GF Express
Donald D. Cantwell
Vice President, Information Systems
Beatrice Scherer
Vice President, Administration
Auditors
Ernst & Young, LLP
Melville, New York
Counsel
Milbank, Tweed, Hadley & McCloy
New York, New York
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 1997 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
<PAGE> 35
[LOGO] Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
