<PAGE> 1
FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended March 31, 1999, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 1-8801
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2578230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
81 Spence Street, Bay Shore, NY 11706
(Address of principal executive offices)
(Zip Code)
(516) 273-2200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
--- ---
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.025 Par Value --- 31,501,680 shares as of May 28, 1999
<PAGE> 2
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Part I. Financial Information: Page
<S> <C> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 (Audited)
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Part II. Other Information:
Item 1. Legal Proceedings
Item 5. Other Matters
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,776,000 $ 3,290,000
Accounts receivable - less allowances
of $19,660,000 and $20,107,000, respectively 93,364,000 90,969,000
Inventories 58,565,000 63,121,000
Other current assets 6,987,000 9,252,000
Recoverable and prepaid income taxes 788,000 1,441,000
------------- -------------
TOTAL CURRENT ASSETS 162,480,000 168,073,000
PROPERTY, PLANT AND EQUIPMENT - net 40,824,000 40,188,000
EXCESS OF COST OVER NET ASSETS ACQUIRED
net of accumulated amortization of $22,547,000 and
$20,664,000, respectively 205,639,000 207,554,000
OTHER ASSETS 12,480,000 13,044,000
------------- -------------
TOTAL ASSETS $ 421,423,000 $ 428,859,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Credit facility $ 32,421,000 $ 27,606,000
Current maturities of long-term debt 1,134,000 1,235,000
Accounts payable 25,764,000 28,915,000
Accrued expenses 32,332,000 33,941,000
------------- -------------
TOTAL CURRENT LIABILITIES 91,651,000 91,697,000
Long-term debt and Senior Subordinated Notes 106,609,000 106,715,000
Other long-term liabilities 10,702,000 10,580,000
------------- -------------
TOTAL LIABILITIES 208,962,000 208,992,000
------------- -------------
STOCKHOLDERS' EQUITY:
Series A preferred stock -- --
Series B preferred stock 28,200,000 28,200,000
Series C preferred stock 3,400,000 3,400,000
Common stock 785,000 783,000
Additional paid-in capital 286,734,000 286,503,000
Accumulated deficit (105,257,000) (97,587,000)
Accumulated other comprehensive loss (1,401,000) (1,432,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 212,461,000 219,867,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 421,423,000 $ 428,859,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1999 1998
------------ ------------
(As Restated,
see Note 5)
<S> <C> <C>
NET REVENUES:
Medical equipment and supplies $ 85,266,000 $ 97,893,000
Interest and other income 190,000 415,000
------------ ------------
85,456,000 98,308,000
COSTS AND EXPENSES:
Cost of revenues 59,506,000 67,378,000
Selling, general and administrative 30,114,000 29,046,000
Interest expense 3,240,000 2,768,000
------------ ------------
92,860,000 99,192,000
------------ ------------
LOSS BEFORE INCOME TAXES (7,404,000) (884,000)
INCOME TAX PROVISION -- 800,000
------------ ------------
NET LOSS (7,404,000) (1,684,000)
PREFERRED STOCK DIVIDENDS 266,000 266,000
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (7,670,000) $ (1,950,000)
============ ============
Net loss per common share-basic and diluted $ (0.24) $ (0.06)
Weighted average number of common shares
outstanding 31,351,000 30,839,000
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
(As Restated,
see Note 5)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(7,404,000) $ (1,684,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,780,000 3,872,000
Deferred income taxes -- 790,000
Provisions for losses on accounts receivable 716,000 443,000
Non cash compensation component of employee stock options -- 954,000
Changes in operating assets and liabilities:
Accounts receivable (3,111,000) (8,905,000)
Inventories 4,556,000 (184,000)
Other current assets and recoverable
and prepaid income taxes 2,918,000 (3,803,000)
Accounts payable, accrued expenses and other liabilities (4,680,000) (8,057,000)
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (3,225,000) (16,574,000)
----------- ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,027,000) (2,551,000)
Proceeds from sale of asset held for sale -- 60,167,000
Increase in excess of cost over net assets acquired -- (488,000)
Net decrease in other assets 139,000 194,000
----------- ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES $(1,888,000) $ 57,322,000
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
------------------
1999 1998
---- ----
(Restated)
<S> <C> <C>
FINANCING ACTIVITIES:
Net borrowings (repayments) under Credit Facility $ 4,815,000 $(46,103,000)
Principal payments on long-term debt (216,000) (578,000)
Proceeds on exercise of stock options -- 4,639,000
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,599,000 (42,042,000)
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS $ (514,000) $ (1,294,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,290,000 4,430,000
----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,776,000 $ 3,136,000
=========== ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 5,696,000 $ 5,426,000
=========== ============
Income taxes paid (net of refunds) $ (653,000) $ 0
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment in preferred stock received as
partial proceeds from sale of assets $ 1,539,000
============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
1. GENERAL AND BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The going concern
basis of presentation assumes the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business.
The Company has incurred significant losses in each of the three years
in the period ended December 31, 1998 and in the first quarter of 1999. These
losses have arisen as a result of significant amounts of merger, restructuring
and other expenses related to acquisitions completed in 1996 and 1997, the
failure to integrate effectively these acquisitions and realize the benefits and
synergies to be derived therefrom, and the impact of intense competition within
the healthcare industry. The losses included significant charges relating to
provisions for accounts receivable, inventory and other asset write-offs in 1997
and 1998, a provision to increase the valuation allowance on deferred tax assets
in 1998, and certain professional and other advisory fees in the first quarter
of 1999, all of which management believes to be substantially non-recurring.
Further, the Company and certain of its directors and officers have been named
as defendants in at least fifteen putative class action lawsuits which have been
consolidated into an amended complaint (see Note 9).
The Company was not in compliance with certain financial covenants, and
other terms and provisions contained in its Senior Secured Revolving Credit
Facility (the "Credit Facility") as of March 31, 1999. On April 22, 1999 (and
subsequently as amended as of May 21, and June 3, 1999), the Company entered
into an amendment to the Credit Facility, which provided for, among other
things, a waiver of these defaults, an amendment to certain financial covenants,
a new undrawn availability covenant relating to scheduled interest payments on
the Senior Subordinated Notes (as hereinafter defined), and other terms and
provisions consistent with the Company's business plan for the remainder of
1999, and extension of the term of the Credit Facility from December 10, 1999 to
May 31, 2000.
In response to the losses incurred in 1997, 1998 and the first quarter
of 1999, management has commenced a program to reduce operating expenses,
improve gross margins, reduce the investment in working capital during the
remainder of 1999 and take other actions to improve its cash flow. These actions
include, but are not limited to, (i) the completion of the activities
contemplated by the Company's restructuring plan as further described in Note 8;
(ii) the initiation of inventory reduction and product rationalization programs;
(iii) the tightening of credit policies and payment terms; (iv) the reduction in
previously budgeted capital expenditures; (v) the implementation of streamlined
product pricing and product return guidelines; (vi) the initiation of an
aggressive program to collect past due accounts receivable; and (vii) the
realignment and consolidation of sales forces and territories.
Notwithstanding the actions described above, the Company currently
expects that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements, which
would require the consent of the lenders under the Credit Facility.
Management believes that such objectives are attainable, however, there
can be no assurance that the Company will be successful in its efforts to
improve its cash flow from operations or that it will be able to obtain such
additional borrowing availability on satisfactory terms in a timely manner to
provide
7
<PAGE> 8
sufficient cash from operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
as of March 31, 1999 (unaudited), the results of operations for the three months
ended March 31, 1999 and 1998 (unaudited) and the statements of cash flows for
the three months ended March 31, 1999 and 1998 (unaudited).
It should be noted that the accompanying financial statements and notes
thereto do not purport to be complete disclosures in conformity with generally
accepted accounting principles. While the Company believes that the disclosures
presented are adequate to make the information contained herein not misleading,
it is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
As further described in Note 5 to the Condensed Consolidated Financial
Statements, the 1998 quarterly results have been restated to correct for certain
improperly recorded transactions.
Inventories at March 31, 1999 have been valued at standard cost for
manufactured goods and at average cost for other inventories based primarily on
perpetual records, each of which approximates actual cost on the first-in,
first-out method.
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 established new rules for the reporting and display of comprehensive
income and its components, however, the adoption of this Statement had no impact
on the Company's net loss or shareholders' equity. During the first quarter of
1999 and 1998, total comprehensive loss amounted to ($7,373,000) and ($891,000),
respectively.
In March 1998, Statement of Position 98-01 ("SOP 98-01"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" was
issued. SOP 98-01 requires certain costs associated with developing or obtaining
software for internal use to be expensed as incurred until certain
capitalization criteria are met. The Company has adopted SOP 98-01 as of January
1, 1999. Based on the Company's current information systems plans, which include
completing its Year 2000 remediation program and the upgrade of its order entry
and manufacturing system, adoption of this statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued effective for fiscal years beginning after June
15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company currently does not use derivative instruments and therefore,
adoption of this statement is not expected to impact the Company.
The results of operations for the three months ended March 31, 1999 and
1998 are not necessarily indicative of results for the full year.
8
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2. EARNINGS PER SHARE
Basic and diluted net loss per common share 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"), for the quarter ended March 31, 1999 and
1998. Conversion of the preferred stock and common equivalent shares was not
assumed since the result would have been antidilutive.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
<S> <C> <C>
Raw materials $ 12,866,000 $ 10,739,000
Work-in-process 5,680,000 5,412,000
Finished goods 40,019,000 46,970,000
-------------- --------------
$ 58,565,000 $ 63,121,000
============= =============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Land and buildings $ 18,463,000 $ 18,366,000
Equipment 35,028,000 33,909,000
Furniture and fixtures 3,388,000 3,219,000
Leasehold improvements 3,926,000 3,865,000
Construction in progress 2,556,000 1,923,000
------------ ------------
63,361,000 61,282,000
Accumulated depreciation and amortization (22,537,000) (21,094,000)
------------ ------------
$ 40,824,000 $ 40,188,000
============ ============
</TABLE>
5. RESTATEMENT
The Company has restated its financial results for the first, second
and third quarters of 1998 to correct for certain improperly recorded
transactions. Such adjustments increased the net loss reported in the first and
second quarters of 1998 by $971,000 and $249,000, respectively, and decreased
the net loss reported in the third quarter of 1998 by $739,000. The adjustments
were primarily related to previously unrecognized stock compensation charges of
$954,000 in the first quarter of 1998 and an $800,000 reduction in the
previously recorded estimated separation charges in the third quarter of 1998.
9
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The following Consolidated Statements of Operations compare the
previously reported and restated financial information for the first quarter of
1998.
<TABLE>
<CAPTION>
First Quarter 1998
--------------------------
As Previously As
Reported Restated
------------- ------------
<S> <C> <C>
Net revenues $ 98,142,000 $ 98,308,000
Cost of revenues 67,102,000 67,378,000
Selling, general and administrative 28,210,000 29,046,000
Interest expense 2,743,000 2,768,000
------------ ------------
Income before income taxes 87,000 (884,000)
Income taxes 800,000 800,000
------------ ------------
Net loss (713,000) (1,684,000)
Preferred stock dividends 266,000 266,000
------------ ------------
Net loss attributable to common shareholders $ (979,000) $ (1,950,000)
============ ============
Net loss per common share-basic and diluted $ (0.03) $ (0.06)
</TABLE>
6. INCOME TAXES
The Company did not record an income tax benefit for the three months
ended March 31, 1999 due to the uncertain future realization of such benefits.
At March 31, 1999, the Company has a full valuation allowance recorded
against its net deferred tax assets. The Company will realize these tax benefits
when the Company generates taxable income. $12.1 million of the $37.0 million
valuation allowance is attributable to the acquired net operating loss
carryforward and other deferred tax assets of Everest & Jennings International
Ltd. When realized, the tax benefit will be recorded as a reduction of the
excess of cost over net assets acquired.
Realization of the future tax benefits related to the deferred tax
assets is dependent upon many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.
7. DISPOSAL OF ASSETS
In connection with the Company's acquisition of Fuqua Enterprises, Inc.
(currently known as Lumex/Basic American Holdings, Inc.) ("Fuqua") on December
30, 1997, the Company acquired the leather operations of Fuqua (the "Leather
Operations"). It was the Company's intention to dispose of the Leather
Operations as soon as reasonably practicable following the consummation of the
acquisition of Fuqua. Accordingly, the net assets of the Leather Operations were
reflected as "assets held for sale" in the amount of $61,706,000 on the balance
sheet as of December 31, 1997. On January 27, 1998, the Company sold the Leather
Operations 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 (valued at $1,539,000) and
the assumption of debt of $2,341,250. The cash proceeds from the sale of the
Leather Operations were used to repay the indebtedness incurred under the terms
of the Credit Facility,
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which was used to retire the Fuqua indebtedness.
8. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN
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 $18,151,000 of restructuring charges and
$4,393,000 of indirect merger charges. The plan consists of 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,
relocation of the Company's corporate headquarters to the Lumex facility, and
the closure and/or consolidation of certain other distribution facilities and
operations.
As of March 31, 1999 the Company had completed the majority of the
initiatives contemplated in the Restructuring Plan, including the consolidation
of the Temco operations into the Lumex facility and the closure of certain
distribution centers. The Company expects to complete the closure of the
remaining distribution center contemplated in the Restructuring Plan by June 30,
1999.
The following summarizes the activity in the restructuring and merger related
accrual for the quarter ended March 31, 1999:
<TABLE>
<CAPTION>
Accrual Balance Cash Payments Accrual Balance
December 31, In March 31,
1998 1999 1999
--------------- ------------- ---------------
<S> <C> <C> <C>
Facility exit costs $ 11,898,000 $ (402,000) $11,496,000
Severance 144,000 (46,000) 98,000
Merger related 120,000 -- 120,000
------------ ------------ -----------
$ 12,162,000 $ (448,000) $11,714,000
============ ============ ===========
</TABLE>
9. 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 fifteen putative class action lawsuits filed primarily 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 class actions were consolidated into an amended consolidated
class action complaint as of January 29, 1999, and lead counsel was selected.
The amended consolidated class action complaint asserts 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. The amended consolidated class action complaint
focuses on statements made
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concerning the Company's integration of its various recent acquisitions, as well
as statements about the Company's inventories, accounts receivable, expected
earnings and sales levels. The plaintiffs seek unspecified compensatory damages
and costs (including attorneys and expert fees), expenses and other unspecified
relief on behalf of the putative classes.
In March 1999, the Company reported that an investigation conducted by
the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had
found certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997.
While the accounting errors and irregularities are not presently the basis for
the pending class actions, counsel to the class plaintiffs have informed the
Company's counsel that plaintiffs may seek to amend the consolidated complaint
to allege claims based on such items.
The Company intends to defend the lawsuit vigorously, but the Company
is not currently able to evaluate the likelihood of success in this case or the
range of potential loss. However, if the foregoing proceeding were determined
adversely to the Company, management believes that such a judgment could have a
material adverse effect on the Company's financial condition, results of
operations and/or cash flows. In addition, the staff of the SEC has advised the
Company that the SEC may conduct an investigation with respect to the
aforementioned accounting irregularities.
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. Accordingly, the impact of this investigation
on the Company cannot yet be assessed. The Company intends to cooperate fully
with the government in its investigation.
In March 1994, Suffolk County Authorities initiated an investigation to
determine whether regulated substances had been discharged in excess of
permitted levels from the Lumex division (the "Lumex Division") located in Bay
Shore, New York, which was acquired by Fuqua in April 1996. 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 the acquisition of the Lumex
Division, Fuqua assumed by contract the obligations associated with this
environmental matter. In late 1996, Fuqua conducted surficial soil remediation
at the Bay Shore facilities and reported the results to the Suffolk County
Authorities in March 1997. A ground water work plan was submitted concurrently
with the soil remediation report. In May 1997, the Suffolk County Authorities
stated that they were satisfied with the soil remediation that had been
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.
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<PAGE> 13
Due to the relatively low levels of contaminants detected, the Lumex Division
proposed sampling the groundwater on a quarterly basis for two years to ensure
that the groundwater was not significantly affected and deferred implementing
the ground water work plan. In January, April, July and October 1998, and in
January 1999, additional confirmatory samples were taken and analyzed. These
analytic results provide further support that the groundwater is not
significantly contaminated. The Company will continue to monitor the quality of
the groundwater to confirm that it remains acceptable. If the quality of the
groundwater remains acceptable after the two year period expires, the Company
will seek to withdraw its groundwater work plan.
At December 31, 1998, the Company 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 Company'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 Company has not assumed that any such costs would be
recoverable from third parties nor has the Company discounted any of its
estimated costs, although a portion of the remediation work plan will be
performed over a period of years. The amount of environmental liabilities is
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.
In April 1996, Fuqua acquired the Lumex Division from Cybex
International, Inc. (formerly Lumex, Inc.) for the purchase price of $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 resolved through arbitration. On July 30, 1998, Fuqua
received a payment of $2,468,358 (inclusive of interest) from Cybex, of which
$2,384,606 was recorded as a reduction of the excess of cost over net assets
acquired at September 30, 1998.
In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights provided under the terms of 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 stating 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. On February 18, 1999, Cybex paid Fuqua $2.6
million in settlement of all of Fuqua's claims. As part of the settlement, Cybex
released Fuqua from all liability in connection with Cybex's counterclaim.
On August 3, 1998, the Company and another defendant, one of the
Company's employees, were served with a lawsuit initiated by JOFRA Enterprises,
Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The
complaint, seeking damages of $25,000,000, alleges that the Company's hiring of
a certain officer and employees of JOFRA constituted, among other things, unfair
competition and wrongful appropriation of business opportunities. Pursuant to
the defendant-employee's employment agreement, the defendant-employee is seeking
indemnification with respect to such claims. Discovery is proceeding in the
action. The Company considers the plaintiff's allegations to be without merit
and intends to defend this lawsuit vigorously.
On November 3, 1998, the Company and certain of its directors were
named as defendants in a derivative suit commenced in the Court of Chancery of
the State of Delaware, New Castle County. The lawsuit seeks to rescind a
separation agreement dated as of July 29, 1998 (the "Separation Agreement"),
pursuant to which Irwin Selinger, the former Chairman of the Board and Chief
Executive Officer, resigned
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as Chairman of the Board, Chief Executive Officer and President of the Company.
The lawsuit also seeks unspecified damages as well as the recovery of all sums
paid to Mr. Selinger pursuant to the Separation Agreement. The plaintiff alleges
that by approving the terms of the Separation Agreement, the defendants breached
their fiduciary duties of loyalty and care to the Company by obligating the
Company to pay Mr. Selinger substantially more than his former employment
agreement had required. The Company considers the plaintiff's allegations to be
without merit, and filed a motion to dismiss the complaint on various grounds in
February 1999. The parties are presently in the process of briefing the motion
to dismiss.
In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"),
a company acquired by Graham-Field in June 1997, asserted certain claims
against Graham-Field relating to alleged material misrepresentations and
omissions contained in the purchase agreement, certain press releases and other
public filings made by the Company with the Securities and Exchange Commission
relating to the Company's business, results of operations and financial
condition. Under the terms of the purchase agreement pursuant to which
Graham-Field acquired LaBac for approximately $9.1 million in common stock of
Graham-Field, all claims that are not resolved between the parties are to be
submitted to arbitration. The Company intends to defend the claims vigorously,
but the Company is not currently able to evaluate the likelihood of success in
this case or the range of potential loss.
The Company and its subsidiaries are parties to lawsuits and other
proceedings, including those relating to product liability and the sale and
distribution of its products. Except as discussed above, 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 or cash flows of the Company.
10. MANAGEMENT CHANGE
On March 24, 1999, the Board of Directors appointed a new President and
Chief Executive Officer and a new Chief Financial Officer who are employed with
Jay Alix & Associates ("JA&A"), a corporate turnaround and financial
restructuring consulting firm. In connection with such appointments, the Company
entered into a Consulting Agreement which provides for billings on an hourly
basis for services rendered. In addition, JA&A was granted a stock option with a
four year term to purchase 200,000 shares of the Company Common Stock which
vests and becomes exercisable seven months following the termination of the
consulting engagement (or upon the consummation of a sale of the business, if
earlier). The stock option contains an exercise price equal to the lowest five
day average closing price of the Company Common Stock for the period beginning
on March 24, 1999 and ending on the earlier to occur of (i) consummation of a
sale of the business, or (ii) June 22, 1999. The Consulting Agreement also
provides for a contingent success fee in the event of a sale of all or a portion
of the Company's business. The minimum amount payable to JA&A under the
Consulting Agreement, inclusive of any contingent success fee, is $1,000,000.
11. SUBSEQUENT EVENTS
Effective as of May 12, 1999, BIL Securities (Offshore) Ltd. ("BIL")
waived certain events of default under a $4 million note owing by the Company to
BIL (the "BIL Note") and exchanged all of its right, title and interest under
the BIL Note, in consideration of the issuance of 2,036 fully paid, validly
issued, non-assessable shares of the Company's Series D Preferred Stock (the
"Series D Preferred Stock"). The shares of Series D Preferred Stock are
non-voting, but have substantially the same economic rights as 2,036,000 shares
of Common Stock. Based on the closing price of the Common Stock on May 12, 1999,
that number of shares would have a market value of $4,072,000, which equals the
aggregate of the unpaid principal amount and accrued interest on the BIL Note.
Simultaneously with the closing of such transaction, Graham-Field and BIL
entered into an agreement dated as of May 12, 1999, which provided Graham-Field
with the sole and exclusive option for a period of one year following May 12,
1999, to convene a meeting of its stockholders or take such other corporate
action, in accordance with applicable laws and regulatory requirements, as may
be required to obtain applicable corporate approval to exchange each share of
Series D Preferred Stock for 1,000 shares of Common Stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements as defined
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives relating to the future economic performance and
financial results of the Company. The forward-looking statements include, but
are not limited to, statements relating to (i) the Company's ability to continue
as a going concern (ii) the Company's ability to reduce operating expenses and
working capital investment and obtain additional financing to operate the
business, (iii) the expansion of the Company's market share, (iv) the Company's
growth into new markets, (v) the development of new products and product lines
to appeal to the needs of the Company's customers, (vi) the consolidation of
the Graham-Field Express distribution network, (vii) obtaining regulatory and
governmental approvals, (viii) the upgrading of the Company's technological
resources and systems, (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risk related to Year 2000 compliance, and
(x) the retention of the Company's earnings for use in the operation and
expansion of the Company's business.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the Company's ability to continue as a going concern, the
effect of economic and market conditions, the impact of the consolidation of
healthcare practitioners, the impact of healthcare reform, the Company's ability
to effectively integrate acquired companies, and realize certain manufacturing,
operational and distribution efficiencies and cost savings, the termination of
the Company's Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T.
Dharma"), an Indonesian company, the ability of the Company to maintain its
gross profit margins, the ability to obtain financing to operate the Company's
business, the ability of the Company to implement its Year 2000 remediation plan
and address the risks related to Year 2000 compliance, the ability of the
Company to successfully defend the class actions arising out of the Company's
public announcement on March 23, 1998 of its financial results for the fourth
quarter and year ended December 31, 1997, the failure of the Company to
successfully compete with the Company's competitors that have greater financial
resources, the loss of key management personnel or the inability of the Company
to attract and retain qualified personnel, adverse litigation results, the
acceptance and quality of new software and hardware products which will enable
the Company to expand its business, the acceptance and ability to manage the
Company's operations in foreign markets, possible disruptions in the Company's
computer systems or distribution technology systems, possible increases in
shipping rates or interruptions in shipping service, the level and volatility of
interest rates and currency values, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q, the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and the Company's Registration Statement on Form S-4
dated as of December 19, 1997.
The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, expressed or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
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Operating Revenues
Operating revenues for the three month period ended March 31, 1999 were
$85,266,000, representing a decrease of approximately 12.9% from the same period
in the prior year. The decrease is primarily due to intense competition in the
healthcare industry, the implementation of more stringent credit policies, the
effect of the Company's product rationalization programs to eliminate
unprofitable product lines, and the negative impact of certain customers
experiencing financial difficulty.
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 March 31, 1999,
Graham-Field Express facilities were operating from five (5) distribution
facilities located in the Bronx, New York; Puerto Rico; Baltimore, Maryland;
Cleveland, Ohio; and Boston, Massachusetts (which opened in the second quarter
of 1998), as compared to six (6) Graham-Field Express facilities which were
operating as of March 31, 1998. During the three month period ended March 31,
1999, the Company had eliminated Graham-Field Express facilities located in
Louisville, Kentucky and Dallas, Texas. Revenues attributable to Graham-Field
Express were approximately $20 million and $18.3 million for the three month
periods ended March 31, 1999 and 1998, respectively. The Company intends to
moderate the growth of the Graham-Field Express program and may further
consolidate the Graham-Field Express distribution network.
Interest and Other Income
Interest and other income for the three month period ended March 31,
1999 was $190,000 as compared to $415,000 for the same period in the prior year.
The decrease is primarily due to lower net sublease income and lower interest
income recognized under a loan arrangement with P.T. Dharma.
Cost of Revenues
Cost of revenues as a percentage of operating revenues was 69.8% for
the three month period ended March 31, 1999, as compared to 68.8% recorded in
the same period in the prior year. Gross margin decreased primarily due to
intense competition and pricing pressures within the healthcare industry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
operating revenues for the three month period ended March 31, 1999 was 35.3% as
compared to 29.7% in the same period in the prior year. The increase in selling,
general and administrative expenses as a percentage of operating revenue is
primarily the result of non-recurring accounting, audit and other professional
expenses (the "Non-Recurring Expenses") associated with the accounting
investigation conducted by the Company's Audit Committee relating to the
Company's restatement of its financial results for 1996 and 1997, consulting
fees incurred in connection with the initial implementation of the Company's
strategic and operating business plan, and a decrease in operating revenues.
Excluding these items, selling, general and administrative expenses for the
three month period ended March 31, 1999 were $26,701,000, as compared to
$29,046,000 in the same period in the prior year.
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Interest Expense
Interest expense for the three month period ended March 31,1999
increased to $3,240,000, as compared to $2,768,000 for the same period in the
prior year. The increase is primarily due to an increased level of borrowings
under the Credit Facility and a higher cost of borrowings.
Net Loss
Loss before income taxes for the three month period ended March 31,
1999 was $7,404,000, as compared to a loss before income taxes of $884,000 for
the same period in the prior year.
The increase in the loss before income taxes was primarily due to a
decrease in operating revenues, an increase in cost of revenues, an increase in
selling, general and administrative expenses, primarily as a result of the
Non-Recurring Expenses and consulting expenses, and an increase in interest
expense.
The Company had a net loss for the three month period ended March 31,
1999 of $7,404,000 as compared to a loss of $1,684,000 for the same period in
the prior year. For the three month period ended March 31, 1999, the Company did
not record an income tax benefit because the Company recorded a full valuation
allowance against its net deferred tax assets. The Company recorded income tax
expense of $800,000 for the same period in the prior year.
The Company's business has not been materially affected by inflation.
Liquidity and Capital Resources
The Company had net working capital of $70,829,000 at March 31,1999, as
compared to $76,376,000 at December 31, 1998. The decrease is primarily
attributable to cash used in operations of $3,225,000, payments of $2,027,000
for the purchase of property, plant and equipment and offset by an increase in
borrowings under the revolving Credit Facility.
Cash used in operations for the three month period ended March 31, 1999
was $3,225,000, as compared to $16,574,000 in the same period in the prior year.
The decrease is primarily due to a lower investment in accounts receivable by
approximately $5.8 million relative to the investment in the 1998 period, a
decrease in inventories of $4.7 million, a decrease in other current assets of
$6.5 million, offset by an increase in the net loss adjusted for non-cash items
and a reduction in accounts payable and accrued expenses of $3.6 million. The
lower investment in accounts receivable and decrease in inventories are the
result of the implementation of strategic initiatives to collect past due
receivables and reduce inventory levels as well as a lower level of sales.
The Credit Facility. The Credit Facility provides for borrowings of up
to $50 million (after giving effect to the 1999 Amendment, as defined below),
including letters of credit and bankers acceptances arranged by IBJ Whitehall
Business Credit Corporation, as agent. Under the terms of the Credit Facility,
borrowings bear interest at IBJ's prime rate (7.75% at March 31, 1998) plus one
percent.
As of March 31, 1999, the Company was not in compliance with certain
financial covenants and other terms and provisions contained in the Credit
Facility. On April 22, 1999, the Company entered into an amendment, which was
subsequently amended on May 21 and June 3, 1999 (the "1999 Amendment"). The 1999
Amendment provides for, among other things, the waiver of these defaults, an
amendment to certain financial covenants, a new undrawn availibility covenant
relating to scheduled interest payments on the Senior Subordinated Notes, and
other terms and provisions contained in the Credit Facility, and an extension of
the
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term of the Credit Facility from December 10, 1999 to May 31, 2000. The 1999
Amendment reduced the maximum revolving advance amount under the Credit Facility
from $80 million to $50 million, and reduced and/or eliminated certain
availability and borrowing base reserves. After giving effect to the 1999
Amendment, which includes the reduction and/or elimination of certain
availability and borrowing base reserves, the Company's availability to borrow
funds under the Credit Facility remains relatively unchanged. As part of the
1999 Amendment, the Company is required to pay a waiver fee (the "Waiver Fee")
in the amount of $400,000 on or before June 30, 1999, unless the Company either
presents an acceptable business plan to the banks on or before June 30, 1999, or
repays in full all outstanding obligations under the Credit Facility on or
before June 30, 1999. Notwithstanding the foregoing, in the event the Company is
in receipt on or before June 30, 1999, of a commitment letter, letter of intent
or agreement to (i) sell substantially all or a part of the assets or equity
securities of the Company in a sale, merger, consolidation or other similar
transaction, which results in the repayment of all of the outstanding
obligations under the Credit Facility, or (ii) refinance the indebtedness under
the Credit Facility (the transactions referred to in clauses (i) and (ii) are
individually referred to as a "Significant Transaction"), the payment date for
the Waiver Fee will be extended until the earlier to occur of the consummation
of a Significant Transaction, which results in the repayment of all outstanding
obligations under the Credit Facility, or ninety (90) days from June 30, 1999.
The Credit Facility is secured by substantially all of the assets of the Company
and the pledge of the capital stock of certain of the Company's subsidiaries.
As of June 1, 1999, after giving effect to the 1999 Amendment, the
Company has unused availability of approximately $7.2 million. The Company has
incurred significant losses in each of the three years in the period ended
December 31, 1998 and in the first quarter of 1999. These losses have arisen as
a result of a significant amount of merger, restructuring and other expenses
related to acquisitions completed in 1996 and 1997, the failure to integrate
effectively these acquisitions and realize the benefits and synergies to be
derived therefrom, and the impact of intense competition within the healthcare
industry. The losses included significant charges relating to provisions for
accounts receivable, inventory and other asset write-offs in 1997 and 1998, a
provision to increase the valuation allowance on deferred tax assets in 1998,
and certain professional and other advisory fees in the first quarter of 1999,
all of which management believes to be substantially non-recurring. Further, the
Company and certain of its directors and officers have been named as defendants
in at least fifteen putative class action lawsuits which have been consolidated
into an amended complaint (see Note 9 to the Consolidated Financial Statements).
In response to the losses incurred in 1997, 1998, and the first quarter
of 1999, management has commenced a program to reduce operating expenses,
improve gross margins and reduce the investment in working capital during the
remainder of 1999 and take other actions to improve its cash flow. These actions
include, but are not limited to, (i) the completion of the activities
contemplated by the Company's restructuring plan as further described in Note 8
to the Consolidated Financial Statements; (ii) the initiation of inventory
reduction and product rationalization programs; (iii) the tightening of credit
policies and payment terms; (iv) the reduction in previously budgeted capital
expenditures; (v) the implementation of streamlined product pricing and product
return guidelines; (vi) the initiation of an aggressive program to collect past
due accounts receivable; and (vi) the realignment and consolidation of sale
forces and territories.
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Notwithstanding the actions described above, the Company currently
expects that it will be necessary to obtain approximately $5 to $10 million of
additional or borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements, which
would require the consent of the lenders under the Credit Facility.
Management believes that such objectives are attainable, however, there
can be no assurance that the Company will be successful in its efforts to
improve its cash flow from operations or that it will be able to obtain such
additional borrowing availability on satisfactory terms in a timely manner to
provide sufficient cash for operations, capital expenditures and regularly
scheduled debt service. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Consolidated Financial
Statements do not include any adjustment to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
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 Senior Subordinated 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 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 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, taxes,
depreciation and amortization covenant, as well as the requirement that
Graham-Field reduce outstanding borrowings with the net cash proceeds of certain
asset sales.
The Senior Subordinated Notes. On August 4, 1997, Graham-Field issued its $100
million Senior Subordinated Notes (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
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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 was 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.
BIL Note
Effective as of May 12, 1999, BIL waived certain events of default
under the BIL Note and exchanged all of its right, title and interest under the
BIL Note, in consideration of the issuance of 2,036
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fully paid, validly issued, non-assessable shares of the Company's Series D
Preferred Stock. The shares of Series D Preferred Stock are non-voting, but have
substantially the same economic rights as 2,036,000 shares of Common Stock.
Based on the closing price of the Common Stock on May 12, 1999, that number of
shares would have a market value of $4,072,000, which equals the aggregate of
the unpaid principal amount and accrued interest on the BIL Note. Simultaneously
with the closing of such transaction, Graham-Field and BIL entered into an
agreement dated as of May 12, 1999, which provided Graham-Field with the sole
and exclusive option for a period of one year following May 12, 1999, to convene
a meeting of its stockholders or take such other corporate action, in accordance
with applicable laws and regulatory requirements, as may be required to obtain
applicable corporate approval to exchange each share of Series D Preferred Stock
for 1,000 shares of Common Stock.
Year 2000
The following disclosure is intended to be a "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. Graham-Field has developed, and is in the process of
implementing, a Year 2000 ("Y2K") remediation plan, in an attempt to address the
risks related to the Y2K compliance of information technology ("IT") systems,
non-IT systems and products, and relationships with third parties. The Company
has three major IT application environments: distribution, manufacturing and
warehouse automation. Management has selected application packages for
distribution and manufacturing functions which the Company believes are Y2K
compliant based upon representations from the supplier of such application
packages. Management believes, subject to completion of its review of the Y2K
compliance of its critical business partners (as discussed below) and completion
of product testing, that the current warehouse automation systems should be Y2K
compliant. With respect to each of these application environments, the Company
is relying on the Y2K compliance representations of suppliers and other third
parties whose activities may impact the Company's business operations. The
Company will be conducting Y2K compliance testing of these application packages.
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 and inventory control functions have
been upgraded, and order entry is anticipated to be upgraded during the first
half of 1999. The manufacturing system upgrade is in process, and one of the
five manufacturing sites has been completed. The remaining manufacturing sites
are currently in the remediation phase with all remediation and testing
scheduled to be completed by the end of the third quarter of 1999.
In the event that the Company's IT and non-IT systems are not Y2K
compliant in time, the most reasonably likely worst case scenario is that such
non-compliance would result in a material adverse effect on the Company's
business, financial position, and results of operations in future periods. The
Company intends to create a contingency plan during 1999 to address potential
Y2K failures of its critical IT and non-IT systems. This contingency plan will
include, but not be limited to, identification and mitigation of potentially
serious business interruptions, adjustment of inventory levels to meet customer
needs and establishment of crisis response processes to address unexpected
problems. In developing the contingency plan, the Company will be prioritizing
its applications and developing emergency measures to address potential failures
of applications that are deemed significant to the Company's business
operations. Moreover, the Company's contingency plans will attempt to address
Y2K risks in connection with potential Y2K failures experienced by third parties
such as suppliers.
The Company is in the process of reviewing its relationships with
high-priority business partners, including such areas as payroll, electronic
banking, EDI links and freight systems, to determine their Y2K
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compliance status. Although the Company anticipates completing its assessment of
the Y2K compliance of its business partners by the middle of 1999, the Company
will be relying primarily on the representations of these external parties
regarding their readiness for Y2K compliance. The inability of the Company's
high-priority business partners to be Y2K compliant could have a material
adverse effect on the business, financial position and results of operations of
the Company.
With respect to non-IT system issues, the Company is in the process of
assessing the Y2K compliance of its products to determine if there are any
material issues associated with the Y2K problem, including any issues related to
embedded technology in these products. Towards that end, the Company is
attempting to identify its at-risk products (which include date data
processing), prioritize these products, and identify and address pertinent Y2K
concerns. The Company is assessing the Y2K compliance representations made by
suppliers, and anticipates completing its assessment by the third quarter of
1999. Since the Company's Y2K plan is dependent in part upon these suppliers and
other key third parties being Y2K compliant, there can be no assurance that the
Company's efforts in this area will be able to prevent a material adverse effect
on the Company's business, financial position, and results of operations in
future periods should a significant number of suppliers and customers experience
business disruptions as a result of their lack of Y2K compliance.
A Y2K program manager has been assigned to coordinate the computer
system upgrades and the Company's Y2K compliance plan. In 1998, the Company
expended approximately $150,000 on its Y2K plan, primarily related to the costs
of outside consulting and review services. In 1999, the Company expects to
expend approximately $250,000 for outside consulting assistance, and $250,000 in
the form of capital equipment leases to replace equipment that is determined not
to be Y2K compliant. In addition, in 1999, the Company expects to expend
$150,000 for an independent Y2K audit, and approximately $350,000 to undertake
and complete system testing. The Company's upgrades of IT systems were not
accelerated due to Y2K issues, and accordingly, such costs are not included in
the costs of the Y2K plan. With respect to non-IT system issues, the Company is
unable to estimate its remediation costs since it does not have information
available upon which to measure the cost of Y2K compliance in this area. While
the total costs to become Y2K compliant in the non-IT system area are not known
at this time, management does not believe that such costs will have a material
effect on the business, financial position, and results of operations of the
Company.
The Company's statements regarding its Y2K readiness are
forward-looking and, therefore, subject to change as a result of known and
unknown factors. The estimates and expected completion dates described above are
based on information available at this time and may change as additional
information and assessment phase results become available.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of March 31, 1999, the Company did not hold any derivative financial
or commodity instruments. The Company is subject to interest rate risk and
certain foreign currency risk relating to its operations in Mexico and Canada;
however, the Company does not consider its exposure in such areas to be
material. The Company's interest rate risk is related to its Senior Subordinated
Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its
Credit Facility, which bear interest at IBJ's prime rate, as adjusted from time
to time, plus one percent.
23
<PAGE> 24
Part II. Other Information
Item 1. Legal Proceedings
See Note 9 to the Condensed Consolidated Financial Statements.
Item 5. Other Matters
On March 24, 1999, the Board of Directors appointed a new President and
Chief Executive Officer and a new Chief Financial Officer, who are employed with
Jay Alix & Associates ("JA&A"), a corporate turnaround and financial
restructuring consulting firm. In connection with such appointments, the Company
entered into a Consulting Agreement which provides for billings on an hourly
basis for services rendered. In addition, JA&A was granted a stock option with a
four year term to purchase 200,000 shares of the Company Common Stock which
vests and becomes exercisable seven months following the termination of the
consulting engagement (or upon the consummation of a sale of the business, if
earlier). The stock option contains an exercise price equal to the lowest, five
day average closing price of the Company Common Stock for the period beginning
on March 24, 1999 and ending on the earlier to occur of (i) consummation of a
sale of the business, or (ii) June 22, 1999. The Consulting Agreement also
provides for a contingent success fee in the event of a sale of all or a portion
of the Company's business. The minimum amount payable to JA&A under the
Consulting Agreement, inclusive of any contingent success fee, is $1,000,000.
Effective as of May 12, 1999, BIL waived certain events of default
under the BIL Note and exchanged all of its right, title and interest under the
BIL Note, in consideration of the issuance of 2,036 fully-paid, validly issued,
non-assessable shares of the Series D Preferred Stock. The shares of Series D
Preferred Stock are non-voting, but have substantially the same economic rights
as 2,036,000 shares of Common Stock. Based on the closing price of the Common
Stock on May 12, 1999, that number of shares would have a market value of
$4,072,000, which equals the aggregate of the unpaid principal amount and
accrued interest on the BIL Note. Simultaneously with the closing of such
transaction, Graham-Field and BIL entered into an agreement dated as of May 12,
1999, which provided Graham-Field with the sole and exclusive option for a
period of one year following May 12, 1999, to convene a meeting of its
stockholders or take such other corporate action, in accordance with applicable
laws and regulatory requirements, as may be required to obtain applicable
corporate approval to exchange each share of Series D Preferred Stock for 1,000
shares of Common Stock.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
4.1 Certificate of Designation of Graham-Field Health Products,
Inc.'s ("Graham-Field") Series D Preferred Stock, incorporated
by reference to Exhibit 4.5 to the 1998 Form 10-K.
10.1 Supply Agreement, by and between Everest & Jennings, Inc. and
P.T. Dharma Polimetal, dated as of March 5, 1999, incorporated
by reference to Exhibit 10.21 to the 1998 Form 10-K.
10.2 Letter Agreement to International Distributorship Agreement
dated as of January 26, 1999,
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
by and between Graham-Field and Thuasne, incorporated by
reference to Exhibit 10.24 to the 1998 Form 10-K.
10.3 Pledge Agreement, dated September 15, 1998, made by and among
IBJ Whitehall Business Credit Corporation ("IBJ"),
Graham-Field, Graham-Field, Inc., Everest & Jennings, Inc.,
Medical Supplies of America, Inc., Lumex/Basic American
Holdings, Inc., Basic American Medical Products, Inc., Lumex
Medical Products, Inc., Prism Enterprises, Inc. and Everest &
Jennings International Ltd., incorporated by reference to
Exhibit 10.41 to the 1998 Form 10-K.
10.4 Amendment No. 7 dated as of April 22, 1999, to the Revolving
Credit and Security Agreement dated as of December 10, 1996
(the "Revolving Credit Agreement"), by and among IBJ and
Graham-Field, Graham-Field, Inc., Graham-Field Temco, Inc.,
Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
Graham-Field Express (Puerto Rico), Inc., Everest & Jennings,
Inc., LaBac Systems, Inc., Medical Supplies of America, Inc.,
Health Care Wholesalers, Inc., HC Wholesalers, Inc., Critical
Care Associates, Inc., Lumex/Basic American Holdings, Inc.,
Basic American Medical Products, Inc., Lumex Medical Products,
Inc., Prism Enterprise, Inc., Basic American Sales and
Distribution Co.Inc., PrisTech, Inc., Lumex Sales and Distribution
Co., Inc., and MUL Acquisition Corp. II, incorporated by
reference to Exhibit 10.42 to the 1998 Form 10-K.
10.5 Letter Amendments dated as of May 21, 1999 and June 3, 1999,
to the Revolving Credit Agreement, by and among IBJ and
Graham-Field, Graham-Field, Inc., Graham-Field Temco, Inc.,
Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
Graham-Field Express (Puerto Rico), Inc., Everest & Jennings,
Inc., LaBac Systems, Inc., Medical Supplies of America, Inc.,
Health Care Wholesalers, Inc., HC Wholesalers, Inc., Critical
Care Associates, Inc., Lumex/Basic American Holdings, Inc.,
Basic American Medical Products, Inc., Lumex Medical Products,
Inc., Prism Enterprises, Inc., Basic American Sales and
Distribution Co.Inc., PrisTech, Inc., Lumex Sales and
Distribution Co., Inc., and MUL Acquisition Corp. II,
incorporated by reference to Exhibit 10.43 to the 1998 Form
10-K.
10.6 Agreement dated as of March 24, 1999, by and between Jay Alix
& Associates and Graham-Field, incorporated by reference to
Exhibit 10.74 to the 1998 Form 10-K.
10.7 Letter Agreement dated as of May 12, 1999, by and between BIL
Securities (Offshore) Limited and Graham-Field, incorporated
by reference to Exhibit 10.75 to the 1998 Form 10-K.
10.8 Letter Agreement dated as of May 12, 1999, by and among BIL
Securities (Offshore) Limited, BIL (Far East Holdings)
Limited, and Graham-Field, incorporated by reference to
Exhibit 10.76 to the 1998 Form 10-K.
</TABLE>
Reports on Form 8-K:
Not applicable.
25
<PAGE> 26
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Registrant)
Date: June 3, 1999 /s/ John G. McGregor
----------------------------------
John G. McGregor
President and
Chief Executive Officer
Date: June 3, 1999 /s/ J. Soren Reynertson
----------------------------------
J. Soren Reynertson
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AS INCLUDED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,776
<SECURITIES> 0
<RECEIVABLES> 93,364
<ALLOWANCES> 0
<INVENTORY> 58,565
<CURRENT-ASSETS> 162,480
<PP&E> 40,824
<DEPRECIATION> 0
<TOTAL-ASSETS> 421,423
<CURRENT-LIABILITIES> 91,651
<BONDS> 106,609
0
31,600
<COMMON> 785
<OTHER-SE> 180,076
<TOTAL-LIABILITY-AND-EQUITY> 421,423
<SALES> 85,266
<TOTAL-REVENUES> 85,456
<CGS> 59,506
<TOTAL-COSTS> 59,506
<OTHER-EXPENSES> 30,114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,240
<INCOME-PRETAX> (7,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,404)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
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