ITEM 1. BUSINESS:
THE COMPANY
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, a significant portion of which is derived from the United States. 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, 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.
The Company's strategic objective is to be the leading provider of medical products to the rapidly growing home healthcare, medical/surgical, rehabilitation and long-term care markets by offering a comprehensive product line, single-source purchasing and technologically advanced, cost-effective delivery systems. The cornerstone of the Company's sales and marketing strategy is the Company's Consolidation Advantage Program ("C.A.P."). Through C.A.P. the Company strives to become the most efficient and reliable low-cost provider of medical products by offering the Company's customers the ability to reduce their operating costs significantly by consolidating the purchase of multiple product lines through a single source. The Company's sales and marketing representatives consult with the Company's customers to identify the cost efficiencies and savings that can be derived from purchasing all of their product needs through the Company. By consolidating the purchase of multiple products through a single source, the Company's customers can significantly reduce their operating costs associated with the purchasing process, including the reduction of delivery expenses, administrative costs and other expenses. The Company believes that its C.A.P. program significantly improves the level of service to its customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, and providing inventory on demand.
In December 1997, the Company acquired Fuqua Enterprises, Inc. (currently, Lumex/Basic American Holdings, Inc.) ("Fuqua"). The acquisition of Fuqua has positioned Graham-Field as one of the leading manufacturers of durable medical products in North America. The Company believes that the strategic combination of Graham-Field and Fuqua will significantly enhance Graham-Field's manufacturing capabilities, expand Graham-Field's presence in the home healthcare, medical/surgical and rehabilitation markets, and broaden Graham-Field's product line. The Company intends to utilize Fuqua's existing relations in the long-term and acute care markets to cross-sell its products into these markets. The Company believes that Graham-Field's distribution network and advanced technology systems will also provide significant growth opportunities for Fuqua's proven manufacturing capabilities and leading product lines.
INDUSTRY OVERVIEW
Graham-Field distributes its medical, surgical and other healthcare products primarily into the home healthcare, medical/surgical, rehabilitation and long-term care markets.
Home Healthcare. Graham-Field believes that the home healthcare market is growing rapidly due to the shift in the provision of healthcare away from more expensive acute care settings into lower cost home care settings. The rising cost of healthcare has caused many payors of healthcare expenses to look for ways to contain costs. Healthcare payors have, in many cases, altered their reimbursement patterns to encourage home healthcare whenever appropriate.
The over 65 age group represents the vast majority of home healthcare patients and continues to grow. In 1993, the United States Census Bureau estimated that by the year 2000 approximately 35 million people, or 13% of the population in the United States, will be over 65. Graham-Field believes that growth of the home healthcare market will exceed that of institutional care, as many medical professionals and patients prefer home healthcare because it allows greater patient independence, increased patient responsibility and improved responsiveness to treatment due to the enhanced psychological benefits of receiving treatment in comfortable and familiar surroundings. Home healthcare is more cost effective than facility-based care and, in many cases, more desirable to the patient.
Medical/Surgical. Graham-Field believes that rapid growth in the medical/surgical distribution industry has resulted primarily from medical/surgical supply and equipment manufacturers increasing the number and volume of products sold through distributors and an overall increase in the volume of medical/surgical supplies being consumed. This overall increase in consumption is due primarily to the aging of the U.S. population and the development of new medical procedures.
Historically, the medical/surgical supply distribution industry has been highly fragmented. During the past ten years, the overall healthcare market has been characterized by the consolidation of healthcare providers into larger and more sophisticated entities which are seeking to lower total product costs and incremental services from their medical/surgical supply distributors. These trends have led to a significant and ongoing consolidation of the distribution industry and the formation of a small number of industry participants with national capabilities.
Rehabilitation Market. The rehabilitation market includes a broad range of medical products provided to individuals in order to minimize physical and cognitive impairments, maximize functional ability and restore lost functional capacity. The focus of rehabilitation medical products is to improve the physical and cognitive impairments resulting from illness or injury, and to restore or improve functional ability so that individuals can return to work and lead independent and fulfilling lives. Typically, rehabilitation medical products are provided by a variety of healthcare professionals including rehabilitation nurses, physical therapists, occupational therapists, speech language pathologists, respiratory therapists, recreation therapists, social workers, psychologists, rehabilitation counselors and others.
Graham-Field believes that the demand for rehabilitation medical products will continue to be driven by advances in medical technologies, an aging population and the recognition on the part of the payor community (insurers, self-insured companies, managed care organizations and federal, state and local governments) that appropriately administered rehabilitation medical products can lower overall healthcare costs as well as improve quality of life. Studies conducted by insurance companies demonstrate the ability of rehabilitation medical products to significantly reduce the cost of future care. Further, reimbursement changes have encouraged the rapid discharge of patients from acute-care hospitals while they remain in need of rehabilitation medical products.
Long-Term Care Market. The long-term care market encompasses a broad range of healthcare products provided to the elderly and to other patients with medically complex needs who can be cared for outside of the acute care hospital environment and generally cannot be efficiently and effectively cared for at home. Long-term care facilities offer skilled nursing care, routine rehabilitation therapy and other support services, primarily to elderly patients. Long-term care facilities require ongoing medical and nursing supervision and access to a broad range of medical products. The Company believes that the demand for medical products
provided to the long-term care market will increase substantially during the next decade due primarily to demographic trends, advances in medical technology and the impact of cost containment measures by government and private pay sources. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities.
Graham-Field believes that the major healthcare industry trends impacting the markets it serves are as follows:
Consolidation Within the Industry. Continued growth in managed care and capitated plans have pressured independent home medical equipment suppliers to find ways of becoming more cost competitive with national providers. This has also led to consolidations among manufacturers and distributors as smaller companies with limited product lines seek out partners with potential for significant synergies. In addition, certain healthcare product suppliers are consolidating in order to promote better utilization of resources and improve service to customers, thereby maintaining margin and market share. Graham-Field believes healthcare supply companies will be required to use size and economies of scale to their competitive advantage to be successful.
In recent years, concern over the rising cost of healthcare has sparked a marked shift toward lower priced products and services in the industry. This shift has resulted in the substitution of simpler and more generic products, as well as price concessions to payors from healthcare providers. As healthcare moves from largely fee-for-service reimbursement to prepaid and capitated payment systems, this trend is expected to intensify. Graham-Field believes that high-volume, full-line providers will have a competitive advantage over those servicing only niche markets. These trends are causing significant consolidation of healthcare providers.
Increasing Emphasis on Value-Added Services Oriented Towards Total Cost Reduction. Graham-Field believes that the administrative costs associated with purchasing, tracking and carrying inventory and distributing medical products are often greater than the cost of the supplies. As a result, customers are increasingly evaluating distributors not only on the basis of product cost and timely and accurate delivery, but also on their ability to provide value-added services that lower the administrative and other overhead costs associated with medical and surgical supplies. For example, customers increasingly seek distributors that can deliver inventory on a "just-in-time" basis. In addition, certain customers are seeking distributors that can provide programs to assist in inventory management.
Shift of Healthcare Delivery to Home Healthcare Markets. Graham-Field believes that the delivery of healthcare is shifting from acute care settings to alternate sites, such as physician offices and extended care facilities, due to cost containment pressures from government and private reimbursement sources. The growth of managed care has resulted in (i) more procedures being performed in outpatient settings, (ii) the length of stay for inpatient procedures continuing to fall and (iii) hospitals sharing financial risk as they take on capitated contracts from managed care entities. These trends have led to a general increase in the level of care required by alternate-site patients as well as the emergence of specialized long-term care facilities, leading to increased demand for home healthcare products. The Company believes that demand for home healthcare and medical and surgical supplies in the alternate-site markets will increase at a faster rate than the overall industry.
BUSINESS STRATEGY
The Company's strategic objective is to become the leading provider of low-cost, high-quality medical products to the rapidly growing home healthcare, medical/surgical, rehabilitation and long-term care markets by offering a comprehensive product line, single source purchasing and technologically advanced, cost-effective delivery systems. To achieve this objective and to continue to improve its profitability, the Company is pursuing the following strategies:
Offer Comprehensive Product Line. The Company markets and distributes approximately 45,000 products under its own brand names and under suppliers' names throughout the world, and believes that it provides one of the most extensive product offerings in each of the markets it serves. Through the breadth of its product offerings and its competitive pricing, the Company strives to be a single source supplier to the
home healthcare, medical/surgical, rehabilitation and long-term care markets. As a result of recent acquisitions, the Company has expanded its product line through enhanced manufacturing and out-sourcing capabilities, which furthers the Company's objective to become the most efficient and reliable low-cost provider of medical products. The Company believes its ability to increase its revenue base without commensurate increases in its cost structure enables it to offer a wide array of products at prices below those of many of its competitors. The Company continuously seeks to expand its product lines by increasing the number of distributorship agreements it has with suppliers, forming strategic alliances and acquiring other companies and product lines.
Focus on Value-Added Services. In order to differentiate itself from its competitors and gain a competitive advantage in the industry, the Company focuses on providing its customers with value-added services. Currently, the Company has the following three programs in place which it believes furthers this objective:
Consolidation Advantage Program. The C.A.P. program offers customers the ability to significantly reduce their operating costs by consolidating the purchase of multiple product lines through a single source. C.A.P. significantly improves the level of service to the Company's customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, lowering administrative costs, and providing inventory on demand. See "Value Added Services -- Consolidation Advantage Program".
Graham-Field Express. The Graham-Field Express program enables the Company to provide "same-day" and "next-day" service to home healthcare dealers of strategic home healthcare products, including Temco patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements, and other freight intensive and time sensitive products through its satellite Graham-Field Express facilities. See "Value-Added Services -- Graham-Field Express".
Seamless Distribution Program. The Seamless Distribution Program enables orders to be shipped from the Company's distribution facilities to home healthcare end-users on behalf of the Company's customers. This program enables these customers to realize significant reductions in their operating costs by eliminating the receiving and shipping process and inventory carrying costs, while reducing the product delivery time to end users. See "Value-Added Services -- Seamless Distribution Program".
Utilize Low-Cost Manufacturing and Distribution Model. The Company believes that its ability to offer its customers value-added services is supported through its low-cost manufacturing and distribution model. The Company's ability to increase revenues without commensurate increases in its cost structure enables it to offer a wide array of products at prices below those of many of its competitors. As the Company has integrated its acquisitions of manufacturing companies, it has shifted certain of its production to overseas manufacturers which has reduced certain of Graham-Field's manufacturing costs. On the distribution side, Graham-Field has invested in emerging technology to increase the efficiency of its distribution process. In 1993, the Company opened an automated "paperless" warehouse and distribution center in St. Louis, Missouri (the "St. Louis Facility"). The St. Louis Facility was designed with IBM to include "state-of-the-art" technology in order to improve delivery-cycles, inventory turnover and distribution efficiency. In addition, the Company's technologically advanced EDI system enables customers to place orders electronically which also serves to enhance Graham-Field's distribution efficiency.
Pursue Strategic Alliances. The Company intends to continue to pursue strategic alliances that are complementary to the Company's existing manufacturing and distribution network and that enhance the Company's existing product lines and market presence. The Company has completed six acquisitions since January 1997, including the Fuqua acquisition, which substantially enhance the Company's national scope and presence in the home healthcare and long-term care markets. Strategic alliances such as exclusive distribution arrangements will enable the Company to penetrate new markets and increase its presence in existing markets. See "-- Recent Acquisitions" and "Management's Discussions and Analysis of Financial Condition and Results of Operations."
RECENT ACQUISITIONS
Graham-Field has recently completed the following acquisitions:
V.C. Medical. In September 1996, Graham-Field acquired V.C. Medical Distributors, Inc. ("V.C. Medical"), a wholesale distributor of medical products in Puerto Rico. V.C. Medical currently operates under the name "GF Express (Puerto Rico)," and provides "same-day" and "next-day" service to home healthcare dealers of certain strategic home healthcare products, including patient aids, Everest & Jennings wheelchairs and homecare beds, adult incontinence products and nutritional supplements. Through GF Express (Puerto Rico), Graham-Field has increased its presence in Puerto Rico.
Everest & Jennings. In November 1996, Graham-Field acquired Everest & Jennings International Ltd. ("Everest & Jennings"). Through its subsidiaries, Everest & Jennings manufactures a broad line of wheelchairs and distributes homecare beds. Everest & Jennings' principal manufacturing and distribution facilities are located in Earth City, Missouri; Toronto, Canada and Guadalajara, Mexico.
Motion 2000 and Motion Quebec. In February 1997, Graham-Field acquired Motion 2000 and its wholly-owned subsidiary, Motion Quebec. Motion 2000 and Motion Quebec currently operate under the name Graham-Field (Canada), as a division of Everest & Jennings Canadian Limited, a wholly-owned subsidiary of the Company ("Everest & Jennings Canada"). Graham Field (Canada) distributes a line of rehabilitation products, including walkers, rollators, cushion products and pediatric wheelchair products, and manufactures seating products, and has become the primary distribution company for the Company and Everest & Jennings in Canada. The strategic combination of Graham-Field (Canada) with Everest & Jennings' operations, along with Graham-Field's broad product lines, has positioned Graham-Field as one of the leading suppliers of the broadest range of products available from a single source in Canada, and as a leading supplier of rehabilitation products, including high performance adult and pediatric wheelchairs, home care wheelchairs, patient aids and other wheelchair products. The business combination has enabled Graham-Field to expand its C.A.P. program in the Canadian marketplace, and increase its revenue base in the Canadian marketplace.
Kuschall. In March 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. The acquisition of Kuschall has provided Graham-Field with additional manufacturing capabilities and expanded Graham-Field's presence in the rehabilitation and pediatric wheelchair market. The pediatric wheelchair product line of Kuschall has broadened Everest & Jennings' rehabilitation product lines, and provided Graham-Field with the ability to market and distribute its products into Japan, New Zealand and Australia through Kuschall's established distributor relationships.
LaBac. In June 1997, Graham-Field acquired LaBac Systems, Inc. ("LaBac"), a manufacturer and distributor of custom power wheelchair seating systems and manual wheelchairs. The acquisition of LaBac has provided Graham-Field with one of the premier custom power wheelchair seating product lines in the healthcare industry, expanded the Everest & Jennings power wheelchair product lines and enhanced the manufacturing and research and development capabilities of Graham-Field. The LaBac products, which have a reputation for excellence and quality, have broadened the Everest & Jennings and Kuschall product lines and provided additional support and expertise to Graham-Field in the rehabilitation market.
Medi-Source. In August 1997, Graham-Field acquired Medi-Source, Inc. ("Medi-Source"), a wholesale distributor of medical sundry products to the medical/surgical market. The acquisition of Medi-Source has expanded Graham-Field's presence in the medical/surgical market.
Medapex. In August 1997, Graham-Field acquired Medical Supplies of America, Inc. ("Medapex"), a wholesale distributor of home healthcare products. The acquisition of Medapex has provided Graham-Field with additional distribution capabilities in the Southeast region of the United States, and enabled Graham-Field to utilize Medapex's telemarketing operations to provide increased customer service to the combined customer base.
Fuqua. In December 1997, Graham-Field acquired Fuqua. The medical products business of Fuqua, through its subsidiaries, Lumex Medical Products, Inc. ("Lumex"), Basic American Medical Products, Inc. ("Basic American") and Prism Enterprises, Inc. ("Prism"), manufactures and distributes a variety of products, including medical beds, patient room furnishings, bathroom safety products, mobility products, specialty seating products, vacuum pumps, heat and cold packs, and therapeutic support systems.
The acquisition of Fuqua has positioned Graham-Field as one of the leading manufacturers of durable medical products in North America. The acquisition has provided Graham-Field with the well-established product brand names of Lumex, Basic American and Prism, and expanded Graham-Field's presence in the acute and long-term healthcare markets.
In connection with the acquisition of the medical products business of Fuqua, the Company also acquired the leather tanning operations of Fuqua (the "Leather Operations"), which supplies finished leather to leather product manufacturers both domestically and internationally. In order to concentrate in its area of expertise and focus in the medical products industry, Graham-Field sold the Leather Operations on January 27, 1998. The cash proceeds from the sale of the Leather Operations were used to retire the debt acquired in connection with the Fuqua acquisition.
PRODUCTS
Graham-Field markets and distributes approximately 45,000 healthcare products under its own brand names and under suppliers' names. Graham-Field's products are marketed to dealers and other customers, principally 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.
Product lines marketed by Graham-Field 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.
The acquisition of Fuqua has enhanced Graham-Field's product offering and expanded Graham-Field's presence into the long-term, acute care and consumer markets. The Company believes that the expanded product offering and new markets serviced by Basic American and Prism will provide cross-selling opportunities and present growth opportunities for Graham-Field.
Basic American operates through its divisions, Simmons Health Care, Omni Manufacturing and SSC Medical, which manufacture and distribute medical beds, patient room furnishings, patient aids and mobility products primarily for the long-term and acute care markets. Basic American serves as one-stop shopping for a customer looking to refurbish or newly construct a long-term care patient room. Consistent with the one-stop shopping approach, Basic American maintains several in-house interior designers who provide design services to customers looking to refurbish or construct long-term care facilities.
Prism manufactures and distributes therapeutic heat and cold pack products, and obstetrical vacuum pump systems for the acute care, long-term care and consumer markets. Prism also sells heat and cold packs through a "show dealer" network, which includes cart/kiosk retailing programs located in consumer outlets.
Graham-Field's principal manufactured and proprietary products include the following:
During the years ended December 31, 1997, 1996, and 1995, sales of Graham-Field's line of sphygmomanometers accounted for 3%, 14% and 11%, respectively, of Graham-Field's revenues. Graham-Field's lines of wheelchairs, ambulatory and patient aids and incontinence products accounted for approximately 33%, 8% and 7%, respectively, of Graham-Field's revenues in 1997. No other product line or product accounted for more than 5% of annual revenues in 1997. The number of products marketed by Graham-Field has increased from approximately 20,000 in 1992 to approximately 45,000 in 1997.
During the year ended December 31, 1997, approximately 49% of Graham-Field's revenues were derived from products manufactured by Graham-Field, approximately 20% were derived from imported products, and approximately 31% were derived from products purchased from domestic sources.
VALUE-ADDED SERVICES
Consolidation Advantage Program. The C.A.P. program is the cornerstone of Graham-Field's sales and marketing strategy. Through C.A.P., 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 Graham-Field's 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 C.A.P. significantly improves the level of service to Graham-Field
customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, and providing inventory on demand.
Graham-Field Express. As part of Graham-Field's commitment to providing superior customer service, in 1996 Graham-Field introduced its Graham-Field Express Program in the Bronx, New York. This program enables Graham-Field to provide "same-day" and "next-day" service to home healthcare dealers of strategic home healthcare products, including Temco and Lumex patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements, and other freight intensive and time sensitive products through its Graham-Field Express satellite facilities. The Graham-Field Express Program differs from Graham-Field's standard distribution model in that the Graham-Field Express Program focuses on "same-day" and "next-day" service to home healthcare dealers of a limited number of strategic home healthcare 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.
Seamless Distribution Program. Graham-Field has recently developed a seamless distribution program which enables Graham-Field to ship orders directly from its distribution facilities to home healthcare end-users on behalf of Graham-Field's customers. The Seamless Distribution Program enables customers to realize significant reductions in their operating costs by eliminating costs associated with receiving, shipping and inventory management, while reducing the product delivery time to end-users. This program currently operates from the St. Louis Facility. Graham-Field intends to continue to expand the Seamless Distribution Program.
SALES AND MARKETING
Graham-Field's sales and marketing strategies are developed on a market-by-market basis through each of its business units -- Home Healthcare, Medical/Surgical, Rehabilitation, Graham-Field Express, Basic American, Prism and International. While Graham-Field's sales and marketing strategies are developed and conducted on a business unit basis, the sale of Graham-Field's products generally overlap all business units. Each of the business units has a dedicated sales force consisting of direct, full-time sales employees and independent sales representatives. The full-time sales employees receive both salary and commission, while the independent sales representatives work solely on commission. The sales force of the Rehabilitation business unit conducts training activities for the benefit of dealers and their personnel, physical and occupational therapists, and other healthcare professionals. The training primarily focuses on the features and benefits of Graham-Field's rehabilitation products, including the products of Everest & Jennings, Kuschall, LaBac, Lumex and other rehabilitation product lines of Graham-Field, and also covers the proper fitting and use of such rehabilitation products. As a result of recent acquisitions, Graham-Field has expanded its telemarketing program to enhance the sales and marketing efforts of its sales forces. Graham-Field employs an extensive telemarketing program, consisting of telemarketing sales personnel located in Atlanta, Georgia and Hauppauge, New York, which targets approximately 8,000 customers nationwide.
The international sales group consists of in-house sales employees, as well as representatives located overseas. In order to expand its presence in the European market, Graham-Field entered into a five-year European distribution agreement in September 1997 for a wide range of its products with Thuasne, a manufacturer and supplier of medical products throughout Europe.
Graham-Field markets its products using a variety of programs and materials including print advertising, product brochures, an extensive library of product line video tapes, cooperative advertising programs and sales promotions to reinforce Graham-Field's ongoing commitment to satisfy the needs of its customers. A CD-ROM version of Graham-Field's catalog and an Internet interactive website are currently being developed. In 1997, Graham-Field continued the implementation of its new marketing programs, which included several high-visibility marketing programs, including a new strategic advertising campaign, packaging designs, and new logos and catalogs.
CUSTOMERS
Graham-Field'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 and pharmacies and home shopping related businesses. No single customer or buying group accounted for more than 10% of Graham-Field's revenues in 1997. Since January 1, 1997, Graham-Field has entered into new supply arrangements with a number of customers, including Baxter Healthcare Corporation, Allegiance Healthcare Corporation, General Medical (a subsidiary of McKesson), Owens & Minor, Healthcare Partners, Inc. and Homecare & Hospital Management, The Med Group, Homecare Providers Co-Op, Physician Sales and Services, Medquik, Sysco Corporation, Option Care, U.S. Rehab., Henry Schein, Inc, Equipnet, Inc., VGM Associates, Inc., and Binson's Home Healthcare Center.
The Home Healthcare business unit markets and sells its products to durable medical equipment suppliers, home healthcare equipment suppliers, respiratory supply dealers, specialty retailers and independent pharmacies. Graham-Field believes that it transacts business with substantially all significant home healthcare dealers in the United States. The Home Healthcare business unit also markets and sells its products to the consumer market consisting of drug store chains, mass merchandisers, department stores and home shopping related businesses. Consumers who purchase from such customers of Graham-Field usually do so upon the advice of physicians, hospital discharge planners, nurses or other professionals. The Medical/Surgical business unit markets and sells its products to medical and surgical supply dealers. Graham-Field believes that it sells to substantially all significant medical and surgical supply dealers in the United States. The Rehabilitation business unit markets and sells its products primarily to rehabilitation dealers. These various dealers in turn sell Graham-Field's products principally to physicians, hospitals, nursing homes and other healthcare facilities. In general, the dealers, wholesalers and retailers to whom Graham-Field markets its products also sell other medical products, some of which compete with Graham-Field's products.
Basic American and Prism market and sell their products primarily to the long-term, acute care, and consumer markets. Graham-Field believes that the existing relationships of Basic American and Prism in the long-term, acute care and consumer markets will present significant growth opportunities for Graham-Field to market and distribute its products into such markets.
DISTRIBUTION NETWORK
Graham-Field provides same-day and next-day services to its customers through its distribution network. Graham-Field believes that its ability to continue to grow its revenue base depends in part upon its ability to provide its customers with efficient and reliable service. As a means of providing such service, Graham-Field distributes its products through nine (9) primary points of distribution located in Hauppauge, New York; Bayshore, New York; St. Louis, Missouri; Jacksonville, Florida; Santa Fe Springs, California; Downey, California; Memphis, Tennessee; Toronto, Canada; and Guadalajara, Mexico. Secondary points of distribution include seven (7) facilities located in Atlanta, Georgia and Bowling Green, Kentucky, as well as Graham-Field Express satellite facilities located in the Bronx, New York; Dallas, Texas; San Juan, Puerto Rico; Baltimore, Maryland; and Cleveland, Ohio. Graham-Field also distributes its products from thirteen (13) manufacturing facilities located in Passaic, New Jersey; Earth City, Missouri; Central Falls, Rhode Island; Guadalajara, Mexico; Camarillo, California; Denver, Colorado; Toronto, Canada; Bayshore, New York; Fond du Lac, Wisconsin; Johnstown, New York; Lawrenceville, Georgia; San Antonio, Texas; and Tupelo, Mississippi.
MANUFACTURING AND PRODUCT SOURCING
Principal manufactured and proprietary products (designed and/or manufactured by Graham-Field or manufactured to its specifications by third parties) include EVEREST & JENNINGS(R) wheelchairs, LUMEX(R) bathroom safety products, mobility products and specialty seating systems, AKROS(R) therapeutic support systems, ORTHOBIOTIC(R) specialty seating systems, POSTURE GLIDE(R) specialty seating systems, MITYVAC(R) vacuum pumps, ZAPPAC(R) heating packs, EZ HEAT(R) heating packs, AQUA COOL(R) cooling scarves, SMITH & DAVIS(R) homecare beds, LABTRON(R) stethoscopes and blood pressure instru-
ments, JOHN BUNN(R) respiratory aid products, MEDICOPASTE(R) medicated bandages, rubber elastic bandages, SURVALENT(R) electronic thermometry systems, silver nitrate applicators, examination lamps and sterile packages under the MSP(R) label, GRAFCO(R) medical supplies, including silver nitrate applicators and examination lamps, the TEMCO(R) product line of patient aids, bathroom safety equipment and patient room equipment, Simmons beds, and Aquatherm specialty cushions and mattresses for the treatment and prevention of pressure sores.
Graham-Field purchases products from approximately 1,200 domestic and foreign suppliers. Graham-Field has entered into exclusive and non-exclusive distribution agreements with a number of its domestic and foreign suppliers. Under such agreements, suppliers may designate the markets into which Graham-Field can sell the products and may stipulate minimum annual sales volumes which are to be achieved by Graham-Field. Most of the distribution agreements are cancelable by either party upon one to six months' notice. Except as is described in the following paragraph, Graham-Field does not believe that cancellation of any such agreements would have a material adverse effect on Graham-Field, because comparable products are obtainable from alternative sources upon acceptable terms.
Graham-Field is dependent on the maintenance of its Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T. Dharma"). If the Wheelchair Supply Agreement is terminated, there can be no assurance that Graham-Field will be able to enter into a suitable supply agreement with another manufacturer. The termination of this agreement in combination with the failure to secure an alternative source of supply on acceptable terms 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 percent. The advance is collateralized by shares of the capital stock of P.T. Dharma, and is 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 transaction, the advance will be returned to the Company.
Graham-Field currently purchases a substantial portion of its sphygmomanometers and stethoscopes from a limited number of suppliers in the Far East. In addition, Graham-Field sources component parts for sphygmomanometers and stethoscopes and assembles such products in its facility located in Hauppauge, New York.
PATENTS AND TRADEMARKS
Graham-Field believes that its business is dependent in part on its ability to establish and maintain patent protection for its proprietary technologies, products and processes, and the preservation of its trade secrets. Graham-Field currently holds a number of United States patents relating to the EVEREST & JENNINGS(R), LUMEX(R), TEMCO(R), and PRISM(R) product lines. Other companies may provide similar products which may not be covered by Graham-Field's issued patents. There can be no assurance that any United States or international patents issued or licensed to Graham-Field will provide any significant competitive advantages to Graham-Field or will not be successfully challenged, invalidated or circumvented or that patents will be issued in respect of patent applications to which Graham-Field currently holds rights. In addition, Graham-Field distributes certain patented products pursuant to licensing arrangements. In the event a licensing arrangement is terminated, Graham-Field may not be able to continue to distribute the patented product.
Graham-Field is involved in the ordinary course of business in patent-related lawsuits or other actions, none of which Graham-Field believes is material. However, defense and prosecution of patent claims is costly and time consuming, regardless of an outcome favorable to Graham-Field, and can result in the diversion of substantial financial and managerial resources from Graham-Field's primary business activities. Additionally, adverse outcomes of such claims could have a material adverse effect on Graham-Field's business and financial condition.
Graham-Field has registered a significant number of trademarks in the United States, including "GRAHAM-FIELD," "EVEREST & JENNINGS," "LUMEX," "AKROS," "ORTHOBIOTICS," "POSTURE GLIDE," "MITYVAC," "ZAPPAC," "EZ HEAT," "AQUA COOL," "SMITH & DAVIS,"
"JOHN BUNN," "BRISTOLINE," "SURVALENT," "MEDICOPASTE," "HEALTHTEAM," "LABTRON," "GRAFCO," "TEMCO" and "TENDERCLOUD". The registered trademarks are significant to Graham-Field because they provide Graham-Field with name and market recognition for its products and distinguish Graham-Field's proprietary products from its competitors' products.
PRODUCT LIABILITY
The sale, manufacture and distribution of healthcare products involve an inherent risk of product liability claims and related adverse publicity. Although Graham-Field maintains product liability insurance, there can be no assurance that such coverage will be adequate to protect Graham-Field from liabilities it may incur. Product liability insurance is expensive, and there can be no assurance that Graham-Field will be able to continue to obtain and maintain insurance at acceptable premium rates. Potential losses from liability claims and the effect which product liability litigation may have on the reputation and marketability of Graham-Field's products could have a material adverse effect on Graham-Field's business and financial condition.
GOVERNMENTAL REGULATION
The healthcare industry is affected by extensive government regulation at the Federal and state levels. In addition, through the Medicare, Medicaid and other programs the Federal and state governments are responsible for the payment of a substantial portion of United States healthcare expenditures. Changes in regulations and healthcare policy occur frequently and may impact the current results of the growth potential for and the profitability of products sold by Graham-Field in each market. Although Graham-Field is not a direct provider under Medicare and Medicaid, many of Graham-Field's customers are providers under these programs and depend upon Medicare and/or Medicaid reimbursement for a portion of their revenue. Changes in Medicare and Medicaid regulations may adversely impact Graham-Field's revenues and collections indirectly by reducing the reimbursement rate received by Graham-Field's customers and consequently placing downward pressure on prices charged for Graham-Field's products. Graham-Field's C.A.P. program is designed in part to enable customers to respond to the reduction in reimbursement rates by consolidating the purchase of multiple product lines through Graham-Field. There can be no assurance, however, that this program will offset any such reduction in reimbursement rates.
In certain cases, the ability of the Company's customers to pay for the products supplied by the Company depends upon governmental and private insurer reimbursement policies. Consequently, those policies have an impact on the level of the Company's sales and its ability to collect receivables on a timely basis. Continuing governmental and private third-party payor cost-cutting efforts have led and may continue to lead to significant reductions in the reimbursement levels. Furthermore, governmental reimbursement programs, such as the Medicare and Medicaid programs, are subject to substantial regulation by Federal and state governments, which are continually reviewing and revising the programs and their regulations. For example, the Balanced Budget Act of 1997, if enacted, would provide for a five-year freeze through 2002 on updates to the Medicare fee reimbursement schedules for durable medical equipment. Although the Company does not believe that this freeze would have a material adverse effect on the Company, there can be no assurance that this or any other change to reimbursement levels will not have a material adverse effect on the Company. In the fourth quarter of 1997, the Company recorded a provision for uncollectible accounts and notes receivable of $5 million 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 Federal Food, Drug and Cosmetic Act ("FDA"), the Safe Medical Devices Act and regulations issued or proposed thereunder provide for regulation by the FDA of the marketing, manufacturing, labeling, packaging and distribution of medical devices and drugs, including Graham-Field's products. Among these regulations are requirements that medical device manufacturers register with the FDA, list devices manufactured by them and file various kinds of reports. Graham-Field is also required to comply with the FDA's "Good Manufacturing Practices for Medical Devices" regulations, which set forth requirements for, among other things, Graham-Field's manufacturing process and associated record creation and maintenance, including tests and sterility.
Graham-Field engages the services of an outside consulting firm to monitor the quality control program to ensure that all manufactured products and supplier products comply with FDA requirements. Graham-Field is in the process of implementing ISO 9001 certification on a company-wide basis, which will enhance Graham-Field's overall standard quality systems and enable Graham-Field to comply with European regulatory requirements.
Certain requirements must be met prior to the initial marketing of medical devices. These range from a minimum obligation of waiting to receive a determination of substantial equivalence from the FDA before the introduction of a medical device which Graham-Field has determined is substantially similar to devices already on the market, to a maximum obligation of complying with the potentially expensive and time-consuming testing process necessary to obtain FDA approval prior to the commercial marketing of new medical devices. In addition, the FDA has the authority to issue performance standards for devices manufactured by Graham-Field. Should such standards be issued, Graham-Field's products would be required to conform to them. Unscheduled FDA inspections of Graham-Field's facilities may occur from time to time to determine compliance with FDA regulations.
The impact of FDA regulation on Graham-Field has increased in recent years as Graham-Field has increased its manufacturing operations. To date, Graham-Field has not experienced any significant difficulty in complying with the requirements imposed by the FDA or other government agencies. Graham-Field believes that the manufacturing and quality control procedures it employs conform to requirements of the FDA and does not anticipate having to make any material expenditures as a result of these requirements.
COMPETITION
Graham-Field competes with many other manufacturers and distributors who offer one or more products competitive with Graham-Field's products; however, Graham-Field believes that no single competitor serving Graham-Field's markets offers as broad a product range as Graham-Field. Graham-Field's principal means of competition are the breadth of its product range, quality, price and speed of delivery, and value-added services, including attractive financing programs and delivery and service alternatives. The C.A.P. program enables Graham-Field to compete by offering customers reduced operating costs associated with purchasing by consolidating purchases of multiple products. With respect to Graham-Field's manufactured and proprietary products, Graham-Field's primary competitors include Invacare Corporation and Sunrise Medical Corporation. Competition for the sale of such products is intense and is based on a number of factors, including quality, reliability, price, financing programs, delivery and service. Graham-Field believes that the quality, reputation and technological advances relating to its manufactured and proprietary products are favorable factors in competing with other manufacturers. Graham-Field purchases certain products from its competitors and supplies certain of its products to its competitors. Many of Graham-Field's competitors have substantially greater financial and other resources than Graham-Field. There can be no assurance that Graham-Field will be able to compete effectively in its industry or that competitive pressures will not adversely affect Graham-Field's financial position or results of operations.
EMPLOYEES
As of March 31, 1998, Graham-Field had 2,236 employees, of which eight were executive officers, 499 were administrative and clerical personnel (of which 18 were part-time employees), 357 were sales, marketing and customer service personnel (of which 9 were part-time employees) and 1,372 were manufacturing and warehousing personnel (of which 17 were part-time employees).
Graham-Field is a party to six collective bargaining agreements covering Graham-Field's facilities located in Hauppauge, New York; Bayshore, New York; Passaic, New Jersey; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective bargaining agreements cover approximately 822 employees. The collective bargaining agreements for Hauppauge, New York; Bayshore, New York; Passaic, New Jersey; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to expire on October 18, 2000, October 19, 1998, July 27, 1999, September 13, 1999, July 24, 1998 and December 31, 1998, respectively.
Graham-Field has never experienced an interruption or curtailment of operations due to labor controversy that had a material adverse effect on Graham-Field's operations. Graham-Field considers its employee relations to be satisfactory.
ITEM 2.
ITEM 2. PROPERTIES:
The Company's principal executive offices are located in Hauppauge, New York.
Graham-Field distributes its products through nine (9) primary points of distribution located in Hauppauge, New York; Bayshore, New York; St. Louis, Missouri; Jacksonville, Florida; Santa Fe Springs, California; Downey, California; Memphis, Tennessee; and Toronto, Canada. Secondary points of distribution include seven (7) facilities located in Atlanta, Georgia and Bowling Green, Kentucky, as well as Graham-Field Express satellite facilities located in the Bronx, New York; Dallas, Texas; Puerto Rico; Baltimore, Maryland; and Cleveland, Ohio. Graham-Field also distributes its products from thirteen (13) manufacturing facilities located in Passaic, New Jersey; Earth City, Missouri; Central Falls, Rhode Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bayshore, New York; Fond du Lac, Wisconsin; Johnstown, New York; Lawrenceville, Georgia, San Antonio, Texas; and Tupelo, Mississippi. The manufacturing facilities located in Toronto, Canada; Guadalajara, Mexico; Bayshore, New York; Fond du Lac, Wisconsin; and Lawrenceville, Georgia are owned by the Company. The distribution facilities located in Tucker, Georgia; Atlanta, Georgia; and Bayshore, New York are owned by the Company.
Graham-Field believes that its facilities are in good repair and provide adequate capacity for the near term growth of the Company's business.
Owned and leased properties for Graham-Field's principal facilities are summarized in the following table.
A. MANUFACTURING FACILITIES:
B. DISTRIBUTION FACILITIES:
ITEM 3.
ITEM 3. 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 common stock of the Company 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 common stock of the Company 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 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, 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 or cash flows of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
A special meeting (the "Special Meeting") of the Company's stockholders was held on December 30, 1997 to approve the following matters:
1. The issuance of shares of common stock of Graham-Field pursuant to an Agreement and Plan of Merger dated as of September 5, 1997, as amended as of September 29, 1997, by and among Graham-Field, GFHP Acquisition Corp., a wholly-owned subsidiary of Graham-Field, and Fuqua.
2. To approve an amendment to the Graham-Field Incentive Program to increase the maximum number of shares of common stock available under the Incentive Program by 1,500,000 shares.
3. Approval of the postponement or adjournment of the Special Meeting of Stockholders for the solicitation of additional votes, if necessary.
As of the record date of November 13, 1997, 21,138,255 shares of the common stock of the Company were issued and outstanding. Tabulations for the proposals voted at the Special Meeting are set forth below:
All of such proposals were approved at the Special Meeting.
PART II
ITEM 5.
ITEM 5. 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.
(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% 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.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA:
SELECTED FINANCIAL DATA
- --------------- (1) On August 28, 1997, Graham-Field acquired all of the issued and outstanding shares of the capital stock of Medapex in a transaction accounted for as a pooling of interests. The selected financial data has been restated to reflect this transaction.
(2) 1997 includes indirect merger charges relating to the acquisition of Fuqua of $4,583,000, restructuring charges of $26,619,000 (of which $7,732,000 is included in cost of goods sold), $3,300,000 associated with the write-off of purchased in-process research and development costs, and other charges of $5,000,000 for allowances for receivables.
On December 30, 1997, Graham-Field acquired Fuqua in a transaction pursuant to which Graham-Field issued 9,413,689 shares of common stock (excluding shares of common stock of Graham-Field to be issued in connection with Fuqua stock options assumed by Graham-Field) in exchange for the common stock of Fuqua. 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 $134,900,000.
In connection with the acquisition of Fuqua, Graham-Field acquired the Leather Operations. It was Graham-Field'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 have been reflected as "Assets held for sale" in the amount of $61,706,000 on the balance sheet as of December 31, 1997. The net asset value of the Leather Operations includes the value of the proceeds expected to be realized from the sale of the Leather Operations. On January 27, 1998, Graham-Field 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.
On August 17, 1997, Graham-Field acquired substantially all of the assets and certain liabilities of Medi-Source, a privately-owned distributor of medical supplies, for $4,500,000 in cash. Graham-Field 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, Graham-Field acquired all of the capital stock of LaBac, in a merger transaction. LaBac manufactures and distributes custom power wheelchair seating systems and manual wheelchairs throughout North America. In connection with the acquisition, LaBac became a wholly-owned subsidiary of Graham-Field, and the selling stockholders of LaBac received in the aggregate 772,557 shares of common stock of Graham-Field valued at $11.77 per share in exchange for all of the issued and outstanding shares of the capital stock of LaBac. Graham-Field also entered into a three year consulting agreement with the selling stockholders and an entity controlled by the selling stockholders, and non-competition agreements with each of the 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 acquired Kuschall, a manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and other rehabilitation products, for a purchase price of $1,510,000, representing the net book value of Kuschall. The purchase price was paid by the issuance of 116,154 shares of common stock of Graham-Field valued at $13.00 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.
On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary of Graham-Field 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. $2,900,000 (Canadian Dollars) (approximately U.S. $2,150,000). The purchase price was paid by the issuance of 187,733 shares of common stock of Graham-Field valued at U.S.$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 U.S.$2.5 million.
(3) In March 1996, Graham-Field sold its Gentle Expressions breast pump product line, and recorded a gain of $360,000.
(4) 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, by and among Graham-Field, Everest & Jennings, Everest & Jennings Acquisition Corp., and BIL. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of Everest & Jennings have been included in Graham-Field's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the estimated fair market value of the net deficiency acquired was approximately $65.5 million.
On September 4, 1996, Graham-Field acquired substantially all of the assets of V.C. Medical, a wholesale distributor of medical products in Puerto Rico, for a purchase price consisting of $1,703,829 in cash, and the issuance of 32,787 shares of common stock of Graham-Field, valued at $7.625 per share. In addition, Graham-Field assumed certain liabilities of V.C. Medical in the amount of $296,721. The
acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $988,000.
(5) During 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-related expenses.
(6) The extraordinary item is related to the early retirement of the indebtedness underlying the John Hancock Mutual Life Insurance Note and Warrant Agreement dated as of March 12, 1992, as amended (the "John Hancock Indebtedness"), and represents a "make-whole" payment and the write-off of unamortized deferred financing costs associated with this indebtedness.
(7) Effective July 1, 1995, Graham-Field acquired substantially all of the assets and liabilities of National Medical Excess Corp. The acquisition was accounted for under the purchase method of accounting and accordingly, the results of operations are included in the consolidated financial statements of Graham-Field subsequent to that date.
(8) 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.
(9) In February 1992, the Financial Accounting Standard Board issued Statement No. 109, "Accounting for Income Taxes." Graham-Field adopted the provisions of the new standard in its financial statements effective January 1, 1993. The adoption of Statement No. 109 did not affect Graham-Field's pre-tax loss from operations for the year ended December 31, 1993. The cumulative effect as of January 1, 1993 of adopting Statement No. 109 was a tax benefit of $530,000, or $.04 per share, which was net of allowances of $55,000. This tax benefit was principally attributable to available net operating loss carryforwards and investment, research and development, jobs tax and alternative minimum tax credits which can be used to reduce future tax liabilities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 relate to (i) the expansion of the Company's market share, (ii) the Company's growth into new markets, (iii) the development of new products and product lines to appeal to the needs of the Company's customers, (iv) the opening of new distribution and warehouse facilities, including the expansion of the Graham-Field Express program, (v) obtaining regulatory and governmental approvals, (vi) the upgrading of the Company's technological resources and systems and (vii) 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 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, the termination of the Company's Exclusive Wheelchair Supply Agreement with P.T. Dharma, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company's business, 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 the section entitled "Risk Factors" in 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, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that 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.
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 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 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 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 Subordi-
nated 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.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
GRAHAM-FIELD HEALTH PRODUCTS, INC.
HAUPPAUGE, NEW YORK
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Graham-Field Health Products, Inc. and subsidiaries are included in Item 8:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The response to this Item is submitted as a separate section of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES:
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are elected by, and serve at the discretion of the Board of Directors. The following table sets forth certain information concerning the present executive officers of the Company:
Mr. Selinger, a founder and principal stockholder of the Company, has been the Chairman of the Board and Chief Executive Officer of the Company since April 1981. Mr. Selinger was a founder and the Chief Executive Officer of Surgicot, Inc., a manufacturer of sterilization indicators, and its predecessor from 1968 to April 1980. In 1979, Surgicot, Inc. was acquired by E.R. Squibb & Sons, Inc., a subsidiary of Squibb Corporation. From April 1980 to June 1984, Mr. Selinger was a consultant to E.R. Squibb & Sons, Inc.
Mr. Giordano has been the President and Chief Operating Officer of the Company since February 2, 1998, and a director of the Company since 1994. Prior to such time, Mr. Giordano was a Principal of The Giordano Group, Limited, a diversified consulting firm, since its founding in February 1993. From May 1987 to February 1993, Mr. Giordano was Executive Vice President of Lamonts Apparel, Inc. Mr. Giordano also currently serves as a director of Cherry & Webb, Inc., a ladies specialty apparel company, Joseph A. Bank Clothiers, Inc., a manufacturer and retailer of men's clothing, and Nomos Corporation, a conformal radiation therapy provider. In 1984, Mr. Giordano retired from his position as CEO, Naval Supply Systems Command and Chief of the Supply Corps., with the rank of Rear Admiral.
Mr. Bellamy has been the Vice President, Finance and Chief Financial Officer of the Company since March 2, 1998. From September 1995 to February 1998, Mr. Bellamy was the Chief Financial Officer of Davis Vision, a national managed eye care company based in Long Island. From October 1992 to May 1995, Mr. Bellamy was the Chief Financial Officer, as well as Chief Executive Officer and President and a member of the Board of Directors, of Nichols Institute, a California based international diagnostic services and products company. In addition, from January 1994 to September 1995, Mr. Bellamy was a member of the Board of Directors of Ancra International Inc., a manufacturer of transportation equipment and parts.
Mr. Kolodny has been Vice President, General Counsel and Secretary of the Company since August 1993. From 1990 to 1993, Mr. Kolodny was associated with the law firm of Carro, Spanbock, Kaster & Cuiffo. Prior to such time, Mr. Kolodny was associated with the law firm of Shea & Gould.
Mr. Winocur has held various positions with the Company since May 1992, and has been the Executive Vice President of Sales and Marketing of the Company since January 1996. Prior to 1992, Mr. Winocur was the founder and President of National Health Care Equipment, Inc., which was acquired by the Company in May 1992.
Mr. Schwartz has been Vice President of Graham-Field Express since March 1996. Effective June 18, 1997, Mr. Schwartz became the Corporate Vice President -- Graham-Field Express. From 1994 to 1996, Mr. Schwartz was the President of a home healthcare distribution company based in the metropolitan New York area. From 1992 to 1994, Mr. Schwartz held various sales positions with the Company.
Mr. Liguori has been the Executive Vice President of Operations of the Company since July 1995. From 1990 to 1995, Mr. Liguori was the Group Vice President of Operations of Del Laboratories, Inc. Prior to such time, Mr. Liguori was the Senior Vice President of U.S. Operations of Coleco Industries, Inc.
Ms. Scherer has been Vice President-Administration of the Company since 1985. From 1981 to 1985, Ms. Scherer was Vice-President-Finance for the Company.
Mr. Cantwell has been the Vice President of Information Systems of the Company since May 1996, and became an executive officer of the Company as of January 1, 1997. From 1995 to 1996, Mr. Cantwell was the Chief Information Officer of Dial-A-Mattress, Inc. Prior to such time, Mr. Cantwell held various management positions with Grumman Corporation for over ten years.
The information to be furnished with respect to the directors of the Company is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
14(a). Documents filed as part of this Form 10-K:
1. Financial Statements. The following financial statements are included in Part II, Item 8:
- --------------- * Incorporated by reference.
EXHIBIT INDEX
- --------------- * Incorporated by reference herein from the document described therein.
21. Subsidiaries of the Company:
Labtron Scientific Corporation (a New York corporation) Patient Technology, Inc. (a New York corporation) Graham-Field Express, Inc. (a Delaware corporation) Bristoline, Inc. (a New York corporation) Ventilator Corp. (a New York corporation) Graham-Field, Inc. (a New York corporation) Medisco, Inc. (a Delaware corporation) ExNewt, Inc. (a New York corporation) M.E. Team, Inc. (a New Jersey corporation) Graham-Field Temco, Inc. (a New Jersey corporation) AquaTherm Corp. (a New Jersey corporation) Health and Medical Techniques, Inc. (a Connecticut corporation) Graham-Field Distribution, Inc. (a Missouri corporation) Graham-Field Bandage, Inc. (a Rhode Island corporation) G.F.E. Healthcare Products Corp. (a Delaware corporation) Graham-Field European Distribution Corporation Limited (an Ireland corporation) HealthTeam, Inc. (a Delaware corporation) Graham-Field Express (Puerto Rico), Inc. (a Delaware corporation) Graham-Field Express (Dallas), Inc. (a Delaware corporation) Everest & Jennings International Ltd. (a Delaware corporation) Everest & Jennings, Inc. (a California corporation) Smith & Davis Manufacturing Company (a Missouri corporation)
Everest & Jennings de Mexico S.A. de C.V. (a Mexico corporation) The Jennings Investment Company (a California corporation) Everest & Jennings Canadian Ltd. (a Canadian corporation) MCT Acquisition Corp. (a Missouri corporation) Thompson Blair, Inc. (a Missouri corporation) Freeway Investment Corp. (a California corporation) Metal Products Corp. (a California corporation) Professional Securities Corp. (a Missouri corporation) International Medical Equipment Corp. (a California corporation) Everest & Jennings Lifestyles (a California corporation) Rabson Medical Sales, Ltd. (a New York corporation) Kuschall of America, Inc. (a California corporation) LaBac Systems, Inc. (a Colorado corporation) Medical Supplies of America, Inc. (a Georgia corporation) Health Care Wholesalers, Inc. (a Georgia corporation) H C Wholesalers, Inc. (a Georgia corporation) Critical Care Associates, Inc. (a Georgia corporation) Fuqua Enterprises, Inc. (a Delaware corporation) Basic American Medical Products, Inc. (a Georgia corporation) Basic American Sales and Distribution Co., Inc. (a Delaware corporation) Lumex Medical Products, Inc. (a Delaware corporation) Lumex Sales and Distribution Co., Inc. (a Delaware corporation) MUL Acquisition Corp. II (a Delaware corporation) Prism Enterprises, Inc. (a Delaware corporation) PrisTech, Inc. (a Delaware corporation)
23. Consent of Independent Auditors.
14(b). Reports on Form 8-K.
The Company's Report on Form 8-K dated as of December 31, 1997 (Date of Event: December 31, 1997)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ IRWIN SELINGER
------------------------------------ Irwin Selinger, Chairman of the Board and Chief Executive Officer Date: April 14, 1998
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: