1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: January 14, 1994
EVEREST & JENNINGS INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 0-3585 95-2536185
(State of Organization) (Commission Number) (IRS Employer I.D. #)
1100 Corporate Square Drive, St. Louis, Missouri 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 995-7000
NOT APPLICABLE
(Former name or former address, if changed since last report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Everest & Jennings International Ltd. (the "Company") and BIL (Far East
Holdings) Limited ("BIL") entered into an Exchange Agreement and Plan of
Merger, dated as of October 23, 1993 (the "Merger Agreement"), with Medical
Composite Technology, Inc. ("MCT") and certain stockholders of MCT. The Merger
Agreement set forth the terms and conditions under which MCT would be merged
(the "Merger") with and into a wholly-owned subsidiary of the Company. The
Merger occurred on January 14, 1994, pursuant to a plan of merger (the "Plan of
Merger") between MCT and MCT Acquisition Corp. A copy of each of the Merger
Agreement and the Plan of Merger is attached as an exhibit hereto and is
incorporated herein by this reference. The outstanding shares of common stock
and preferred stock of MCT were converted into 8,000,000 Common shares of the
Company. Purchase accounting will be used to record the Merger, which is
structured to constitute a reorganization within Section 368(a) of the Internal
Revenue Code of 1986, as amended. The Company intends to value the Merger at
$1 per share or $8,000,000. The closing market price of the Company's Common
shares on October 23, 1993, the date of the Merger Agreement, was $1.56.
However, the Company's Common stock is thinly traded and is not the best
indicator of its value. As of September 30, 1993, the Company and BIL had
entered into a debt conversion agreement ("Debt Conversion Agreement") which
provided for the conversion ("Debt Conversion Transaction") of $75,000,000 debt
owing to BIL into equity. The conversion price negotiated by the Company with
BIL is $1.00 per share. In management's opinion, $1 is more appropriate to
record the Merger than the market price on October 23, 1993, as the valuation
of the Debt Conversion Transaction more closely reflects the value of the
Company's Common stock.
Pursuant to the terms of the Merger Agreement, the Company had advanced
$2,700,000 to MCT, $500,000 of which was a nonrefundable cash payment to be
used by MCT in the ordinary course of its business, $500,000 was a term loan
maturing on September 30, 1994 and bearing interest at the rate of 10% per
annum and the balance was repayable only if the Merger Agreement is terminated
by E&J under certain defined circumstances. The Company obtained this
$2,700,000 from BIL through advances under a loan agreement between BIL and the
Company.
Two representatives from MCT, Bevil J. Hogg and Charles D. Yie, were
elected to the Company's Board of Directors on January 21, 1994. Mr. Hogg was
also appointed as the Company's President and Chief Executive Officer.
MCT develops, designs, manufactures and markets state-of-the-art durable
medical equipment, including wheelchairs and other medical mobility products
and assistive devices. MCT has developed proprietary products with significant
competitive advantages in the areas of performance, aesthetics, durability and
cost. MCT's products
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utilize advanced composite materials to achieve differentiated, aesthetically
pleasing shapes while providing mechanical properties that are superior to
those of most current mobility and assistive products, almost all of which are
constructed of metal. The Company intends to utilize the MCT assets in
substantially the same business as conducted by MCT prior to the Merger. The
Company believes that the acquisition of MCT will enable it to expand its
product line into the ultra-lightweight wheelchair and related products
markets.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Medical Composite Technology, Inc.
Financial Statements: Page(s)
-------
Report of Certified Public Accountants 6
Audited Balance Sheets for Fiscal Years
ended December 31, 1991 and December 31, 1992 7
Audited Statements of Operations for the Fiscal
Years ended December 31, 1991 and December 31,
1992 and the Cumulative Period from April 7,
1989 (date of inception) to December 31, 1992 8
Audited Statements of Shareholders' Equity for
the Cumulative Period from April 7, 1989
(date of inception) to December 31, 1992 9
Audited Statements of Cash Flows for the Fiscal
Years ended December 31, 1991 and December 31,
1992 and the Cumulative Period from April 7,
1989 (date of inception) to December 31, 1992 10
Notes to Financial Statements 11
Unaudited Statement of Operations for the Nine-
Month Period ended September 30, 1993 21
Unaudited Balance Sheet as of September 30, 1993 22
Unaudited Statement of Cash Flows for the Nine-
Month Period ended September 30, 1993 23
Notes to Financial Statements 24
(b) Everest & Jennings International Ltd./Medical Composite Technology, Inc.
Pro Forma Financial Information:
Notes to Condensed Pro Forma Financial Statements 28
Pro Forma Unaudited Consolidated Statement of
Operations for the Fiscal Year Ended December 31,
1992 29
Pro Forma Unaudited Consolidated Statement of
Operations for the Nine Month Period Ended
September 30, 1993 30
Pro Forma Unaudited Consolidated Balance Sheet
as of September 30, 1993 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations at December 31,
1992 33
Management's Discussion and Analysis of Financial
Condition and Results of Operations at September 30,
1993 41
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(c) Exhibits: Page(s)
-------
2 (a) Exchange Agreement and Plan of Merger,
dated as of October 23, 1993, by and
among Medical Composite Technology, Inc.
("MCT"), certain stockholders of MCT,
Everest & Jennings International Ltd.,
BIL (Far East Holdings) Limited, and
MCT Acquisition Corp. 47
(b) Plan of Merger, dated as of January 14,
1994, by and between MCT Acquisition Corp.
and Medical Composite Technology, Inc. 91
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
EVEREST & JENNINGS INTERNATIONAL LTD.,
a Delaware corporation
Date: January 28, 1994 By: /s/ Ralph E. Wolf
Name: Ralph E. Wolf
Title: Executive Vice President,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial
Officer of the Registrant)
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[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Medical Composite Technology, Inc.:
We have audited the accompanying balance sheets of Medical Composite
Technology, Inc. (a company in the development stage) as of December 31, 1992
and 1991, and the related statements of operations, shareholders' equity and
cash flows for the years then ended, and the cumulative period from April 7,
1989 (date of inception) to December 31, 1992. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Composite Technology,
Inc. (a company in the development stage) as of December 31, 1992 and 1991, and
the results of its operations and its cash flows for the years then ended, and
the cumulative period from April 7, 1989 (date of inception) to December 31,
1992, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has a material accumulated deficit as of December 31, 1992, and has incurred
significant losses during the development stage. The Company must obtain
additional financing to fund expected operating losses. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 2. The
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
/s/ Coopers & Lybrand
San Jose, California
February 18, 1993, except for Note 10,
as to which the date is March 31, 1993
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS, DECEMBER 31, 1992 AND 1991
---------
ASSETS 1992 1991
---- ----
Current assets:
Cash and cash equivalents $ 44,353 $ 561,811
Accounts receivable 17,157 6,120
Accounts receivable from related party 56,756 58,229
Inventories, net of reserve of $100,000 in 1992 610,671 324,232
Prepaid and other current assets 41,944 20,133
---------- ----------
Total current assets 770,881 970,525
Property and equipment, net 877,151 634,813
Patents 234,766 124,225
Other assets 18,909 20,417
---------- ----------
Total assets $1,901,707 $1,749,980
---------- ----------
---------- ----------
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 41,742 $ 45,294
Current portion of note payable 16,668
Accounts payable and accrued expenses 337,915 198,846
---------- ----------
Total current liabilities 396,325 244,140
Deferred revenue 206,250 262,500
Capital lease obligations, less current portion 75,915 77,690
Note payable, less current portion 21,403
---------- ----------
Total liabilities 699,893 584,330
---------- ----------
Commitments (Note 6).
SHAREHOLDERS' EQUITY
Convertible preferred stock, no par value:
Authorized: 5,000,000 shares:
Series A:
Issued and outstanding: 340,000 shares
(Liquidation value of $272,000) 270,491 270,491
Series B:
Issued and outstanding: 1,520,674 shares 3,074,525 3,074,525
(Liquidation value of $3,550,290)
Series C:
Issued and outstanding: 769,229 shares 2,477,756
(Liquidation value of $2,598,958)
Common stock, no par value:
Authorized: 10,000,000 shares:
Issued and outstanding: 474,723 shares in 1992
and 473,910 shares in 1991 21,798 21,642
Less note receivable from shareholder (10,000) (10,000)
Deficit accumulated during the development stage (4,632,756) (2,191,008)
---------- ----------
Total shareholders' equity 1,201,814 1,165,650
---------- ----------
Total liabilities and shareholders' equity $1,901,707 $1,749,980
---------- ----------
---------- ----------
The accompanying notes are an integral
part of these financial statements.
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
--------
Cumulative
Period from
April 7, 1989
(date of
Years Ended inception)
December 31, to
------------------- December 31,
1992 1991 1992
---- ---- ------------
Sales $ 504,366 $ 85,288 $ 589,654
Cost of sales (876,764) (115,693) (992,457)
----------- ----------- -----------
(372,398) (30,405) (402,803)
----------- ----------- -----------
Operating expenses:
Engineering, research and development (1,177,312) (1,014,577) (2,762,889)
Marketing, general and administrative (871,719) (566,151) (1,529,975)
----------- ----------- -----------
(2,049,031) (1,580,728) (4,292,864)
----------- ----------- -----------
Loss from operations (2,421,429) (1,611,133) (4,695,667)
Interest and other income (expense) (20,319) 64,388 62,911
----------- ----------- -----------
Net loss $(2,441,748) $(1,546,745) $(4,632,756)
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements.
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
STATEMENTS OF SHAREHOLDERS' EQUITY
for the cumulative period from April 7, 1989
(date of inception) to December 31, 1992
Preferred Stock
---------------------------------------------------------------
Series A Series B Series C Common Stock
---------------- ------------------ ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------------- ------------------ ---------------- ----------------
Issuance of Series A preferred
stock at $0.80 per share in
July 1989, net of issuance
costs of $1,509 340,000 $270,491
Issuance of common stock at
$.05 per share in July 1989,
net of issuance costs of $1,509 260,000 $11,491
Net loss
------- -------- ------- -------
Balance, December 31, 1989 340,000 $270,491 260,000 $11,491
Payment of shareholder notes
receivable
Issuance of common stock at
$.05 per share in June 1990 12,660 633
Issuance of Series B preferred
stock at $1.50 per share in
September 1990, net of
issuance costs of $25,561 920,674 $1,355,450
Issuance of Series B preferred
stock at $2.25 per share in
November 1990 100,000 225,000
Net loss
------- -------- --------- ---------- ------- -------
Balance, December 31, 1990 340,000 270,491 1,020,674 1,580,450 272,660 12,124
Issuance of Series B preferred
stock at $3.00 per share in
June 1991, net of issuance
costs of $4,225 300,000 895,775
Exercise of options at $0.05
per share in August 1991, net
of issuance costs of $607 200,000 9,393
Exercise of options at $0.10
per share in October 1991 1,250 125
Issuance of Series B preferred
stock at $3.00 per share in
November 1991, net of issuance
costs of $1,700 200,000 598,300
Net loss
------- -------- --------- ---------- ------- -------
Balance, December 31, 1991 340,000 270,491 1,520,674 3,074,525 473,910 21,642
Issuance of Series C preferred
stock at $3.25 per share in
March 1992, net of issuance
costs of $22,244 769,229 $2,477,756
Exercise of options at $0.25
per share in May 1992 500 125
Exercise of options at $0.10
per share in May 1992 313 31
Net loss
------- -------- --------- ---------- ------- ---------- ------- -------
Balance, December 31, 1992 340,000 $270,491 1,520,674 $3,074,525 769,229 $2,477,756 474,723 $21,798
------- -------- --------- ---------- ------- ---------- ------- -------
------- -------- --------- ---------- ------- ---------- ------- -------
Deficit
Notes Accumulated
Receivable During the
From Development
Shareholders Stage Total
------------ ------------ ------
Issuance of Series A preferred
stock at $0.80 per share in
July 1989, net of issuance
costs of $1,509 $(100,000) $ 170,491
Issuance of common stock at
$.05 per share in July 1989,
net of issuance costs of $1,509 (10,000) 1,491
Net loss $ (89,302) (89,302)
--------- ---------- ----------
Balance, December 31, 1989 $(110,000) $ (89,302) $ 82,680
Payment of shareholder notes
receivable 100,000 100,000
Issuance of common stock at
$.05 per share in June 1990 633
Issuance of Series B preferred
stock at $1.50 per share in
September 1990, net of
issuance costs of $25,561 1,355,450
Issuance of Series B preferred
stock at $2.25 per share in
November 1990 225,000
Net loss (554,961) (554,961)
---------- ----------- ----------
Balance, December 31, 1990 (10,000) (644,263) 1,208,802
Issuance of Series B preferred
stock at $3.00 per share in
June 1991, net of issuance
costs of $4,225 895,775
Exercise of options at $0.05
per share in August 1991, net
of issuance costs of $607 9,393
Exercise of options at $0.10
per share in October 1991 125
Issuance of Series B preferred
stock at $3.00 per share in
November 1991, net of issuance
costs of $1,700 598,300
Net loss (1,546,745) (1,546,745)
---------- ----------- ----------
Balance, December 31, 1991 (10,000) (2,191,008) 1,165,650
Issuance of Series C preferred
stock at $3,25 per share in
March 1992, net of issuance
costs of $22,244 2,477,756
Exercise of options at $0.25
per share in May 1992 125
Exercise of options at $0.10
per share in May 1992 31
Net loss (2,441,748) (2,441,748)
---------- ----------- ----------
Balance, December 31, 1992 $ (10,000) $(4,632,756) $1,201,814
---------- ----------- ----------
---------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
STATEMENTS OF CASH FLOWS
---------
Cumulative
Period from
April 7, 1989
(date of
Years Ended inception)
December 31, to
------------------ December 31,
1992 1991 1992
---- ---- ---------------
Cash flows from operating activities:
Net Loss $(2,441,748) $(1,546,745) $(4,632,756)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 187,062 77,314 274,577
Provision for inventories 100,000 100,000
Change in work capital:
Accounts receivable (9,564) (47,229) (73,913)
Inventories (386,439) (324,232) (710,671)
Prepaid and other current assets (21,811) (6,625) (41,944)
Accounts payable and accrued expenses 139,069 67,439 337,915
----------- ----------- -----------
Net cash used in operating activities (2,433,431) (1,780,078) (4,746,792)
----------- ----------- -----------
Cash flows from investing activities:
Net short-term investment activity 186,817
Acquisition of property and equipment (381,626) (429,588) (941,232)
Acquisition of patents (110,541) (69,973) (237,625)
Acquisition of other assets (196) (15,750) (25,065)
----------- ----------- -----------
Net Cash used in investing activities (492,363) (328,494) (1,203,922)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net of issuance costs and shareholder
note receivable 2,477,756 1,494,075 5,722,772
Proceeds from issuance of common stock,
net of issuance costs and shareholder
note receivable 156 9,518 11,798
Proceeds from issuance of long-term note 50,000 50,000
Repayments on long-term note (11,929) (11,929)
Repayment of shareholder note 100,000
Repayment of lease obligations (51,397) (30,393) (83,824)
Increase (decrease) in deferred revenue (56,250) 162,500 206,250
----------- ----------- -----------
Net cash provided by financing activities 2,408,336 1,635,700 5,995,067
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents (517,458) (472,872) 44,353
Cash and cash equivalents at beginning of period 561,811 1,034,683
----------- ----------- -----------
Cash and cash equivalents at end of period $ 44,353 $ 561,811 $ 44,353
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of noncash investing
and financing activities:
Additions to capital lease obligations $46,070 $127,506 $205,066
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $4,630 $13,766 $21,682
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral
part of these financial statements.
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
--------
1. BUSINESS OF THE COMPANY:
Medical Composite Technology, Inc. (the Company) was incorporated on
April 7, 1989 to engage in the development, manufacturing and marketing of
advanced composite medical equipment. Since inception, the Company has
devoted sustantally all its efforts to raising capital, recruiting personnel
and developing products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has a material
accumulated deficit as of December 31, 1992, and has incurred significant
losses during the development stage. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
Company's operating losses to date have been funded from equity-financing
transactions. The Company has continued to incur high levels of research
and development spending, primarily in the development of its advanced
composite wheelchair products. While sales of these new products are
projected to increase substantially, there can be no assurance that
projected sales levels can be achieved. The Company projects it will
incur an operating loss in 1993 and will require additional financing to
fund this deficit. The Company's management has arranged for certain
bridge loan financing (see Note 10), and intends to seek additional debt
or equity-financing needed to fund the Company's operating losses. The
Company has not received firm commitments for the balance of the
financing projected to be required, and there can be no assurance that
such commitments will be obtained. The financial statements do not
include any adjustments that might result if the Company is unable to
obtain the requisite financing.
CASH AND CASH EQUIVALENTS:
Investments purchased with initial maturities of three months or less
are included in cash and cash equivalents. The Company's cash and cash
equivalents, which consist of demand deposits or money market accounts
are on deposit primarily with two U.S. Banks.
Continued
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
PATENTS:
Patents are valued at cost and amortized on a stright-line basis over
the lesser of their statutory life (17 years) or their estimated useful
life (generally 7 years).
ORGANIZATION COSTS:
Included in other assets are organization costs which are valued at
cost and amortized on a straight-line basis over five years.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1991 fiscal financial
statements to conform to the fiscal 1992 presentation. These
reclassifications have no impact on the previously reported net income
or total assets of the Company.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally five to
seven years. When assets are sold or retired, the cost and related
accumulated depreciation is removed from the accounts and the
resulting gains or losses are included in other income. Tooling costs
are included in machinery and equipment and are depreciated over an
estimated useful life of five years.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
Continued
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. INVENTORY:
Components of inventory are as follows:
December 31,
----------------
1992 1991
---- ----
Raw materials $279,642 $227,981
Work in process 199,001 96,251
Finished goods 132,028
-------- --------
$610,671 $324,232
-------- --------
-------- --------
4. PROPERTY AND EQUIPMENT:
Detail of property and equipment is as follows:
December 31,
----------------
1992 1991
---- ----
Machinery and equipment $ 876,327 $524,706
Computer equipment 176,226 126,011
Furniture and fixtures 80,798 64,300
---------- --------
1,133,351 715,017
Less accumulated depreciation
and amortization (256,200) (80,204)
---------- --------
$ 877,151 $634,813
---------- --------
---------- --------
Included in property and equipment are items acquired under capital
leases totaling $108,440 and $122,867, respectively, at Decebmer 31, 1992
and 1991, net of accumulated amortization of $87,792 and $32,544.
Continued
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. Line of Credit and Note Payable:
The Company has a line of credit with a bank under which it
may borrow up to the lesser of $200,000 or 60% of eligible accounts
receivable, as defined, increasing to 70% following two quarters of
profitable operations. Borrowings bear interest at the bank's prime rate
plus 2% and will be collateralized by substantially all of the assets of
the Company. As of December 31, 1992, there have been no borrowings under
this agreement.
The Company also has a note payable to this bank. The note bears
interest at 11% per annum and is due in monthly installments of $1,389
through April 1995. During fiscal year 1992, the Company incurred
approximately $4,630 of interest expense related to this note.
Both the line of credit and note payable are subject to various
financial covenants including a minimum tangible net worth of $1,250,000
and a minimum quick ratio of 1.5 to 1. At December 31, 1992, the Company
was not in compliance with covenants regarding minimum tangible net worth
and certain ratios; however, the Company has obtained waivers on these
covenants through December 31, 1993.
6. Commitments:
The Company has certain noncancelable operating leases for its office and
manufacturing facilities, which expire in March and October 1994.
Under the terms of the lease agreements, the Company is responsible for
common area maintenance expenses which include insurance, taxes, repairs
and other operating costs.
At December 31, 1992 future minimum rental commitments under these
operating lease agreements were as follows:
Year Ending
-----------
1993 $ 80,304
1994 26,397
--------
$106,701
--------
--------
Continued
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
6. Commitments, continued:
Rent expense for the years ended December 31, 1992 and 1991 was
approximately $136,210 and $81,300, respectively. Rent expense from April
7, 1989 (date of inception) to December 31, 1992 was approximately
$230,150.
Future minimum lease payments remaining under capitalized lease
obligations incurred in connection with property and equipment
acquisitions are as follows:
Year Ending
-----------
1993 $ 56,406
1994 48,123
1995 29,823
1996 9,390
--------
143,742
Less amounts representing interest (26,085)
--------
Present value of minimum lease payments 117,657
Less current portion (41,742)
--------
$ 75,915
--------
--------
7. Capital Stock:
Convertible Preferred Stock:
Each share of Series A, B and C preferred stock is convertible into
common stock on a one-for-one basis. The conversion rate is subject to
adjustment to reflect certain dilutive issuances. Conversion of preferred
stock into common stock is at the option of the holder at any time or
automatic upon the closing of an underwritten public offering of the
Company's common stock at a price of not less than $7.50 per share and an
aggregate offering of not less than $7,500,000. The Company has reserved
340,000, 1,520,674 and 769,229 shares of common stock for conversion of
Series A, B and C preferred stock, respectively. The remaining authorized
shares of preferred stock may be issued from time to time in one or more
series, as designated by a majority vote of the Board of Directors.
Continued
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MEDICAL COMPOSITE TECHNOLOGY, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
________
7. Capital Stock, continued:
Convertible Preferred Stock, continued:
The Series C preferred stock has preference over Series A and B
preferred stock and common stock to the extent of its original
issuance price of $3.25 per share. The Series B preferred stock has
preference over Series A preferred stock and common stock in
liquidation to the extent of its original issuance prices, ranging from
$1.50 to $3.00 per share. The Series A preferred stock has preference
over common stock in liquidation to the extent of $.80 per share.
All declared and unpaid dividends are to be paid upon liquidation.
The holders of preferred stock may receive dividends of $.07, $.15 and
$.1625 per share per annum for Series A, B and C, respectively, when
and if declared by the Board of Directors. Dividends on the Series C
preferred stock accrue annually and are to be paid prior to and in
preference to any other dividend. As a result, $98,958 has been added
to Series C liquidation value as of December 31, 1992. Dividends on
the Series B preferred stock accrue annually, are cumulative whether
or not earned or declared, and are payable upon liquidation or upon
declaration of the Board of Directors. As a result, $444,279 has been
added to Series B liquidation value as of December 31, 1992. Series A
preferred stock dividends are noncumulative.
Preferred shareholders vote with common shareholders on an "as if
converted" basis.
Continued
-16-
17
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, continued
_______
7. Capital Stock, continued:
COMMON STOCK:
In July 1989, the Company sold 200,000 shares of common stock
to a founder under a restricted stock purchase agreement at $.05 per
share. The Company has the option to repurchase unvested shares at the
original purchase price in the event of termination of the shareholder's
employment. The shares are released from this restriction ratably
through July 1993. At December 31, 1992, 25,000 shares were subject to
repurchase.
In September 1989, the Board granted options to certain founders of the
Company to acquire up to 400,000 shares of common stock of the Company
at an exercise price of $.05 per share. The options vest ratably over a
four-year period. During 1991, vested options for 200,000 shares were
exercised. The Company has reserved 200,000 shares of common stock for
issuance in connection with the remaining unexercised options. At
December 31, 1991, options for an additional 133,334 shares had vested.
These founders are also consultants of the Company pursuant to
consulting agreements whereby the Company incurred $94,833 and $58,000 in
consulting fees for the years ended December 31, 1992 and 1991,
respectively.
STOCK OPTION PLAN:
The Company has reserved 398,437 shares of common stock for issuance to
employees of the Company, including officers, directors, employees and
consultants, pursuant to its amended 1989 Stock Option Plan. Under the
plan, options are granted by the Board of Directors at prices not less
than the fair market value at the date of grant for qualified incentive
stock options, or not less than 85% of the fair market value for all
other nonqualified options. Options vest ratably over periods determined
by the Board, generally four to five years.
Continued
-17-
18
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, continued
_____
7. Capital Stock, continued:
STOCK OPTION PLAN, continued:
Information with respect to activity under the Plan from inception is
set forth below:
Outstanding Options
----------------------------------------
Available Number Price
for Options of Per Aggregate
Grant Exercised Shares Share Price
--------- ---------- ------ ----- ---------
Shares reserved 234,224
Options granted (12,000) 12,000 $.05 $ 600
------- ------ -------
Balance, December 31,1989 222,224 12,000 $.05 600
Options granted (151,999) 151,999 $.05-$.11 14,683
--------- -------- -------
Balance, December 31, 1990 70,225 163,999 $.05-$.11 15,283
Options granted (63,000) 63,000 $.25 15,750
Options exercised 1,250 (1,250) $.10 (125)
Options terminated 7,000 (7,000) $.25 (1,750)
------- ------ ------- ------
Balance, December 31, 1991 14,225 1,250 218,749 $.05-$.25 29,158
Additional authorization 165,776
Options granted (86,400) 86,400 $.25 21,600
Options exercised 313 (313) $.10 (31)
Options terminated 46,437 (46,437) $.05-$.25 (7,050)
------ ------ -------- -------
Balance, December 31, 1992 140,038 1,563 258,399 $.05-$.25 $43,677
-------- ------ ------- -------
-------- ------ ------- -------
At December 31, 1992, options to purchase 108,698 shares had
vested and were exercisable.
8. DISTRIBUTIONS AGREEMENT:
In October 1990, the Company executed a distribution agreement
with a certain shareholder of the Company whereby the shareholder has
the exclusive right to market and distribute the Company's Model 1A
rigid frame wheelchair product, and related accessories, to all
countries of North America and Europe. The agreement expires in April
1994 and contains automatic renewals for additional three-year periods,
unless either party elects not to renew the agreement.
Continued
-18-
19
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, continued
________
8. DISTRIBUTION AGREEMENT:
The agreement also provided for the distributor to fund certain costs
incurred for tooling, molds and dies related to the development of
manufacturing equipment. The $300,000 of aggregate funding received is
being recognized in results of operations on a straight-line basis
beginning September 1991. By the end of 1991, the Company completed all of
the milestones and received a total of $300,000 for such costs. During
1991 and 1990, the Company granted stock options to purchase up to 300,000
and 100,000 shares, respectively, of Series B preferred stock at $3.00 per
share to the distributor. During 1991, the distributor exercised all
options and purchased 400,000 shares.
The majority of sales during 1992 and the majority of outstanding
accounts receivable at December 31, 1992 and 1991 were with the
distributor.
9. INCOME TAXES:
As of December 31, 1992 the Company has federal net operating loss
carryforwards of approximately $4,500,000 for financial reporting purposes
which expire in years 2004 through 2007. A net operating loss carryforward
for regular federal income tax purposes of approximately $2,200,000 expires
in 2007. For federal and state purposes, the Company's net operating
losses may be subject to certain limitations due to changes in ownership.
For tax purposes, the Company has elected to capitalize certain
start-up costs and research and development expenses to be amortized over a
five-year period.
During 1991, the State of California, in which the Company resides,
suspended the usage of net operating loss carryforwards to reduce taxable
income for the fiscal years 1991 and 1992. These suspended loss
carryforwards receive an extension of the carryover period of two
additional years. Net operating loss carryforwards for state income tax
purposes of approximately $900,000 expire in 2009.
Continued
-19-
20
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS, continued
________
9. Income Taxes, continued:
In February 1992, the Financial Accounting Standards Board
issued Statement No. 109, "Accounting for Income Taxes." The Company is
required to adopt the new standard for its fiscal year ending December
31, 1993. The effect of complying with this standard is not expected to be
significant.
10. Subsequent Events:
During January 1993, the Company executed another distribution
agreement with its shareholder whereby the shareholder has exclusive right
to market and distribute the Company's Model FX rigid frame wheelchair
product, and related accessories, to all countries of North America and
Europe (except Russia). The agreement expires in January 1996 and contains
automatic renewals for additional three-year periods, unless either party
elects not to renew the agreement. Under this agreement, the Company
received another $200,000 for reimbursement of tooling costs related to the
Model FX product.
During February 1993, the Company received a $500,000 loan from
certain of its preferred shareholders to finance operations during the
first quarter 1993. This loan, plus any additional loans which may be
received, are expected to be converted to preferred stock during 1993.
On March 31, 1993, the Company received a commitment from certain of
its preferred shareholders for an additional $1,500,000 bridge loan to
finance operations in 1993. As with the prior bridge loan, this loan is
expected to be converted to preferred stock during 1993.
-20-
21
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
STATEMENT OF OPERATIONS
Nine Months Ended September 30,
-------------------------------
1993 1992
---- ----
(Unaudited)
Sales $ 754,552 $ 422,260
Cost of sales 945,341 832,123
----------- -----------
(190,789) (409,863)
Engineering Research & Development 831,823 694,492
Marketing, General & Administrative 1,013,832 587,269
----------- ------------
1,845,655 1,281,761
Loss from Operations (2,036,444) (1,691,624)
Interest and Other Income (Expense) (2,013) (24,728)
------------ --------------
Net Loss $(2,038,457) $(1,716,352)
------------- -------------
------------- -------------
SEE ACCOMPANYING NOTES TO FINACIAL STATEMENTS
-21-
22
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
BALANCE SHEET
September 30,
-------------
1993 1992
---- ----
(Unaudited)
Cash and Cash Equivalents $ (12,266) $ 758,544
Accounts Receivable from Related Party 103,625 91,935
Accounts Receivable, Other 7,901 9,408
Inventory 491,630 519,033
Prepaid Expenses and Other Current Assets 268,204 67,305
----------- ------------
Total Current Assets 859,094 1,446,225
Patents, Net 289,441 172,786
Property & Equipment, Net 936,247 852,538
Other Non-Current Assets 17,053 23,279
----------- ------------
Total Assets $ 2,101,835 $ 2,494,828
----------- ------------
----------- ------------
Accounts Payable Trade $ 280,902 $ 104,777
Accrued Liabilities 112,741 65,000
Bank Credit Line (Note 4) 87,750 --
Convertible Debt (Note 5) 1,450,000 --
Other Current Liabilities 26,387 49,100
----------- ------------
Total Current Liabilities 1,957,780 218,877
Advances from Everest & Jennings (Note 7) 500,000 --
Capital Lease Obligation 217,127 128,429
Deferred Revenue 249,062 220,312
----------- ------------
Total Long-Term Liabilities 966,189 348,741
Capital Stock 5,865,746 5,844,570
Shareholder Note Receivable (16,667) (10,000)
Retained Earnings - Prior Years (4,632,756) (2,191,008)
Retained Earnings - Current Year Loss (2,038,457) (1,716,352)
----------- ------------
Total Stockholder's Equity (822,134) 1,927,210
----------- ------------
Total Liabilities and Stockholder's Equity $ 2,101,835 $ 2,494,828
----------- ------------
----------- ------------
See Accompanying Notes to Financial Statements
-22-
23
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
1993 1992
---- ----
(Unaudited)
Cash Flows From Operating Activities:
Net Loss $(2,038,457) $(1,716,352)
Adjustment to Reconcile Operating Cash:
Depreciation 169,008 129,165
Amortization 7,089 1,278
Increase (Decrease) in Deferred Revenue 42,812 (42,187)
Change in Working Capital:
Accounts Receivable, Related Party (47,375) (33,706)
Accounts Receivable, Other 9,762 (3,283)
Inventories 119,040 (194,806)
Prepaid & Other Current Assets (226,259) (47,171)
Accounts Payable 13,981 (2,599)
Accrued Expenses 41,746 (20,003)
----------- -----------
Net Cash Used in Operating Activities (1,908,653) (1,929,664)
Cash Flows From Investing Activities:
Acquisition of Property & Equipment (228,105) (346,888)
Acquisition of Patents (60,486) (48,561)
Acquisition of Other Assets 578 (4,141)
----------- -----------
Net Cash Used in Investing Activities (288,013) (399,590)
Cash Flows From Financing:
Issuance of Common Stock, Net of Notes Receivable 14,511 156
Issuance of Preferred Stock -- 2,477,756
Convertible Debt Issuance 1,450,000 --
Advances From Everest & Jennings 500,000 --
Bank Credit Line Debt 87,750 --
Issuance of Long-Term Note -- 50,000
Repayment of Long-Term Note (11,685) (7,367)
Increase in Lease Obligation 144,842 46,786
Repayment of Lease Obligation (45,371) (41,342)
----------- -----------
Net Cash Provided by Financing Activities 2,140,047 2,525,989
----------- -----------
Increase (Decrease) in Cash & Cash Equivalents (56,619) 196,735
Cash and Cash Equivalents at Beginning of Period 44,353 561,810
----------- -----------
Cash and Cash Equivalents at End of Period $ (12,266) $ 758,545
----------- -----------
----------- -----------
See Accompanying Notes to Financial Statements
-23-
24
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS OF THE COMPANY
Medical Composite Technology, Inc. ("MCT") was incorporated on April 7,
1989 to engage in the development, manufacturing and marketing of advanced
composite medical equipment. Since inception, MCT has devoted substantially
all its efforts to raising capital, recruiting personnel and developing
products.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared assuming MCT will
continue as a going concern. MCT has a material accumulated deficit as of
September 30, 1993, and has incurred significant losses during the development
stage. These matters raise substantial doubt about MCT's ability to continue as
a going concern. MCT's operating losses to date have been funded from
equity-financing transactions. MCT has continued to incur high levels of
research and development spending, primarily in the development of its advanced
composite wheelchair products. While sales of these new products are projected
to increase substantially, there can be no assurance that projected sales
levels can be achieved. MCT projects it will incur additional operating
losses throughout the remainder of 1993 and will require additional financing
to fund this deficit.
Accounts Receivable
The majority of accounts receivable are with the distributor; the
relationship with MCT is described in Note 3. A reserve for doubtful accounts
is not considered necessary for the Company.
Inventories
Inventories are stated at the lower of cost (first in, first out method)
or market. Components of inventory at September 30, 1993 were as follows:
Raw materials $443,309
Work in process 93,878
Finished goods 33,905
Obsolescence reserve (79,461)
--------
$491,631
Other Current Assets
Other Current Assets includes deposits for tooling not yet completed or
placed in service. Tooling deposits total $191,180 at September 30, 1993.
-24-
25
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
Patents
Patents are valued at cost and amortized on a straight-line basis over the
lesser of their statutory life (17 years) or their estimated useful life
(generally 10 years). Original cost of patents at September 30, 1993 is as
follows:
Acquisition cost $295,252
Accumulated amortization 5,811
--------
$289,441
Deferred Revenue
A total of $400,000 to partially defray the cost of tooling development
was received from the distributor, who is also a significant shareholder in
MCT. This income was classified as deferred revenue and is being amortized
over the expected life of the products, generally three years. The balance at
September 30, 1993 was $249,062.
Research and Development
Research and development costs are expenses as incurred.
Organization Costs
Included in other assets are organization costs which are valued at cost
and amortized on a straight-line basis over five years.
Property and Equipment
Propety and Equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally ranging from five to seven years.
Components of fixed assets at September 30, 1993 are as follows:
Machinery & Equipment $ 961,651
Computer Equipment 299,767
Furniture & Fixtures 100,037
----------
$1,361,455
Accumulated Depreciation 425,208
----------
$ 936,247
Accrued Liabilities
Accrued liabilities includes various accruals for vacation, workers
compensation, payroll taxes and anticipated legal expenses. The highest single
item at September 30, 1993 is a $30,000 reserve regarding a dispute with a
computer software supplier.
-25-
26
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
NOTE 3 -- RELATED PARTY TRANSACTIONS
Invacare Corporation, a manufacturer and distributor of durable medical
equipment, is a significant shareholder in MCT.
MCT entered into distribution agreements with Invacare Corporation on
October 9, 1990 (to distribute MCTs model AC wheelchair) and on January 1, 1993
(to distribute MCT's model FX wheelchair). MCT, in accordance with the terms
of those agreements, terminated them on April 6, 1993 and September 21, 1993,
respectively.
MCT entered into a new distribution agreement for the AC and FX
wheelchairs with Invacare on October 14, 1993. This agreement grants Invacare
exclusive North American distribution rights to these model wheelchairs for a
term of two years or, if MCT is acquired by an existing wheelchair provider,
until 30 days following the closing of the acquisition.
It is expected, therefore, that MCTs exclusive distribution agreement with
Invacare will terminate 30 days after the closing of MCTs acquisition by
Everest & Jennings. MCT will have no further contractual relationship with
Invacare beyond that date.
NOTE 4 -- BANK CREDIT LINE
MCT has a line of credit which expires January 5, 1999, under which it may
borrow the lesser of $100,000 or 60% of eligible accounts receivable. No
additional funds were available to MCT as of September 30, 1993 pursuant to
this line. The line is collateralized by substantially all the assets of MCT.
MCT also has a promissory note payable with the same bank. The balance as
of September 30, 1993 was $26,387; it is payable in monthly installments of
$1,389 through April 1995.
Both the line of credit and note payable are subject to various financial
convenants including a minimum tangible net worth of $1,250,000 and a minimum
quick ratio of 1.5 to 1. At December 31, 1992, MCT was not in compliance with
covenants regarding minimum tangible net worth and certain ratios; however, MCT
has obtained waivers on these covenants through December 31, 1993.
NOTE 5 -- CONVERTIBLE DEBT
Through September 1993, MCT has received loans totalling $1,450,000 from
certain of its prefered shareholders. This debt is expected to be converted to
equity concurrently with the Company's acquisition by Everest & Jennings.
NOTE 6 -- COMMITMENTS
The Company has certain non-cancelable operating leases for its office and
manufacturing facilities, which expire in March and October, 1994. Under the
terms of the lease agreements, the Company is responsible for common area
maintenance expenses which include insurance, taxes, repairs and other
operating costs.
-26-
27
MEDICAL COMPOSITE TECHNOLOGY, INC.
(a company in the development stage)
Future minimum rental commitments under these operating lease agreements are as
follows:
Year ending 1993 (Oct - Dec) 26,557
Year ending 1994 26,397
------
52,954
The balance of capital lease obligations incurred in connection with
property and equipment acquisitions was $217,127 as of September 30, 1993.
NOTE 7 -- SUBSEQUENT EVENTS
MCT signed a merger agreement with Everest & Jennings on October 22, 1993,
under which MCT would be acquired in a stock for stock transaction. It is
anticipated this merger will close in late December 1993 or early January 1994.
Since October 1, 1993, MCT has been funding operations through advances
from Everest & Jennings. These advances total $1,500,000 as of the end of
November 1993.
-27-
28
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
Notes to Condensed Pro Forma Financial Statements
(Unaudited)
NOTE A -- BASIS OF PRESENTATION
On October 23, 1993, Everest & Jennings International Ltd. (the 'Company') and
Brierley Investments Limited ('BIL') entered into an Exchange Agreement and
Plan of Merger (the 'Merger Agreement') with Medical Composite Technology,
Inc. ('MCT') The Merger Agreement sets forth the terms and conditions under
which MCT will merge with and into a wholly-owned subsidiary of the Company.
The Merger Agreement provides for a tax-free stock for stock exchange between
the stockholders of MCT and the Company, which will be accounted for using the
purchase method. The outstanding shares of common stock and preferred stock of
MCT will be converted into 8 million Common shares of the Company, provided
certain anti-dilution provisions are maintained. The Merger Agreement is
subject to numerous conditions, including but not limited to, the approval by
the Company's stockholders of the Debt Conversion Transaction described below.
As of September 30, 1993, the Company and BIL entered into a Debt Conversion
Agreement to provide for the conversion (the 'Debt Conversion Transaction') of
approximately $75 million in principal and accrued, unpaid interest (the
'Converted BIL Debt') into a $55 million convertible Common Stock Note and a
$20 million convertible Preferred Stock Note. The Common Stock Note is
convertible into a number of shares of Common Stock equal to the principal
balance of that Note divided by a stated conversion price ($1.00 per
share). Similarly, the Preferred Stock Note is convertible into a number of
shares of Series C Preferred Stock equal to the principal balance of that Note
divided by a stated conversion price ($1.00 per share). The Preferred Stock
and Common Stock Note will convert in full upon satisfaction of a number of
conditions, including but not limited to, ratification of the Debt Conversion
Transaction by the stockholders of the Company. On December 31, 1993, the
Debt Conversion Transaction was ratified by the stockholders of the Company.
The unaudited pro forma financial statements present a combination of the
historical financial statements for the Company and MCT as adjusted to reflect
the purchase transactions in accordance with the purchase method of accounting
and the Debt Conversion Transaction. Pro forma income statements are presented
for the fiscal year ended December 31, 1992, and the three quarters ended
September 30, 1993. A pro forma balance sheet is presented as of September 30,
1993.
The unaudited pro forma results are not necessarily indicative of the combined
results that would have occured had the acquisition and debt conversion
actually taken place on October 1, 1993, nor are they necessarily indicative of
the results that may occur in the future. The pro forma financial statements
should be read in conjunction with the related historical financial statements.
-28-
29
EVEREST & JENNINGS INTERNATIONAL LTD AND SUBSIDIARIES
Pro Forma Consolidated Statement of Operations
(Dollars in thousands except per share data and number of shares outstanding)
Year Ended December 31, 1992
---------------------------------------------------------------------------
(Unaudited)
Pro Forma
Consolidated MCT Acquis Debt Conv Combined
E & J Int'l MCT Dr/(Cr) Adj Dr/(Cr) Adj E&J/MCT
----------- --- ----------- ----------- ---------
Revenues $107,115 $504 $ - $ - $107,619
Cost of Sales 80,923 877 81,800
-------- ------ -------- ----------- --------
Gross Profit 26,192 (373) 0 0 25,819
Selling Expenses 27,195 1,177 28,372
General & Administrative Expenses 9,275 872 a) 480 10,627
Restructuring Expenses 5,150 0 5,150
-------- ------ -------- ----------- --------
Total Operating Expenses 41,620 2,049 480 0 44,149
-------- ------ -------- ----------- --------
Operating Loss from Continuing Operations (15,428) (2,422) (480) 0 (18,330)
Interest Expense, BIL 2,272 0 b) (2,272) 0
Interest Expense, Other 2,709 20 2,729
Other Expense 240 0 240
-------- ------ -------- ----------- --------
Other (Income)/Expense 5,221 20 0 (2,272) 2,969
-------- ------ -------- ----------- --------
Loss from Continuing Operations before Taxes (20,649) (2,442) (480) 2,272 (21,299)
Income Tax Provision (1,737) 0 (1,737)
-------- ------ -------- ----------- --------
Net Loss ($18,912) ($2,442) ($480) $2,272 ($ 19,562)
-------- ------ -------- ----------- --------
-------- ------- -------- ----------- --------
Proforma Loss Per Share ($0.31) ($0.27)
------- --------
------- --------
Proforma Weighted Average Number of Shares Outstanding 8,000,000 72,146,000
--------- ----------
--------- ----------
a) To reflect goodwill amortization pursuant to E & J's acquisition of MCT as
of 1/01/92. A 10-year useful life has been assigned to the MCT goodwill.
b) To reflect reduced interest expense pursuant to the BIL/E & J debt
conversion as of 1/01/92.
c) The above amounts do not include the anticipated charge to earnings of the
Company which will result from expensing research & development items in
process at the acquisition date.
d) Management of the Company is in the process of reviewing the recoverability
and useful life of the goodwill recorded pursuant to the Smith & Davis
acquisition. Such goodwill is valued at approximately $6.5 million at
September 30, 1993. This review may result in a partial or full impairment
of this asset.
-29-
30
EVEREST & JENNINGS INTERNATIONAL LTD AND SUBSIDIARIES
Pro Forma Consolidated Statement of Operations
(Dollars in thousands except per share data and number of shares outstanding)
Nine Months Ended Spetember 30, 1993
------------------------------------------------------------------
(Unaudited)
Pro Forma
Consolidated MCT Acquis Debt Conv Combined
E & J Int'l MCT Dr/(Cr) Adj Dr/(Cr) Adj E&J/MCT
----------- --- ----------- ----------- --------
Revenues $71,734 $755 $ - $ - $72,489
Cost of Sales 53,826 944 54,770
------ --- --- --- ---------
Gross Profit 17,908 (189) 0 0 17,719
Selling Expenses 19,317 1,214 20,531
General & Administrative Expenses 9,917 632 a) 360 10,909
------ ----- --- --- ---------
Total Operating Expenses 29,234 1,846 360 0 31,440
------ ----- --- --- ---------
Operating Loss from Continuing Operations (11,326) (2,035) (360) 0 (13,721)
Interest Expense, BIL 2,175 0 b) (2,175) 0
Interest Expense, Other 2,341 3 2,344
Other Expense 0 0 0
----- ----- --- ----- --------
Other (Income)/Expense 4,516 3 0 (2,175) 2,344
----- ----- --- ----- --------
Loss from Continuing Operations before Taxes (15,842) (2,038) (360) 2,175 (16,065)
Income Tax Provision 208 0 208
------ ----- --- ------ ---------
Net Loss ($16,050) ($2,038) ($360) $2,175 ($16,273)
------ ----- --- ----- ---------
------ ----- --- ----- ---------
Proforma Loss Per Share ($0.25) ($0.23)
----- ----------
----- ----------
Proforma Weighted Average Number of Shares Outstanding 8,000,000 72,162,000
--------- ----------
--------- ----------
a) To reflect goodwill amortization pursuant to E & J's acquisition of MCT as
of 1/01/93. A 10-year useful life has been assigned to the MCT goodwill.
b) To reflect reduced interest expense pursuant to the BIL/E & J debt
conversion as of 1/01/93.
c) The above amounts do not include the anticipated charge to earnings of the
Company which will result from expensing research & development items in
process at the acquisition date.
d) Management of the Company is in the process of reviewing the recoverability
and useful life of the goodwill recorded pursuant to the Smith & Davis
acquisition. Such goodwill is valued at approximately $6.5 million at
September 30, 1993. This review may result in a partial or full impairment
of this asset.
-30-
31
EVEREST & JENNINGS INTERNATIONAL LTD AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
(Dollars in Thousands)
ASSETS
September 30, 1993
---------------------------------------------------------------------------
(Unaudited)
Pro Forma
Consolidated MCT Acquis Debt Conv Combined
E & J Int'l MCT Dr/(Cr) Adj Dr/(Cr) Adj E & J/MCT
------------ ----- ------------- ------------- -----------
Current Assets:
- ---------------
Cash $ 180 $ (13) $ - $ - $ 167
Accounts Receivable 21,471 112 21,583
Inventories 26,948 492 c) (300) 27,140
Other Current Assets 5,436 268 5,704
------- ------- ------- -------- ------
Total Current Assets 54,035 859 (300) 0 54,594
Property, Plant & Equipment
- ---------------------------
Land 470 0 470
Buildings and Improvements 6,765 0 6,765
Machine & Equipment 19,014 1,361 b) (902) 19,473
------- ------- ------- -------- ------
26,249 1,361 (902) 0 26,708
Less Accumulated Depreciation (13,007) (425) b) 425 (13,007)
------- ------- ------- -------- ------
Property, Plant & Equipment, Net 13,242 936 (477) 0 13,701
Intangible Assets, Net 6,522 289 a) 4,800 11,611
Other Assets 1,638 17 1,655
------- ------- ------- -------- ------
Total Assets $ 75,437 $ 2,101 $4,023 $0 $81,561
------- ------- ------- -------- ------
------- ------- ------- -------- ------
a) To reflect goodwill pursuant to E & J's acquisition of MCT as of 9/30/93.
Such amount was computed as follows:
Value of 8 Million shares of E & J Common Stock $8,000
E & J advances to MCT at 9/30/93 500
MCT negative net worth at 9/30/93 324
Valuation adjustment to inventory & machinery 777
------
9,601
Amount allocated to R & D (4,801)
------
Goodwill $4,800
------
------
The trading price for the Company's common stock to be issued pursuant to the
MCT transaction would indicate the value of the MCT acquisition would
approximate $12 million. However, the stock is thinly traded and is not the
best indicator of value. Therefore, in the opinion of management of the
Company, a valuation consistent with the debt conversion price of the Company's
stock would be more appropriate for recording this transaction. A final
determination of valuation will be made upon the closing of the transaction.
b) To eliminate accumulated depreciation and to adjust valuation of machinery &
equipment in comformity with E & J's accounting policy on asset
capitalization pursuant to E & J's acquisition of MCT as of 9/30/93.
c) To adjust inventory to reflect a discontinued product line pursuant to
E & J's acquisition of MCT as of 9/30/93.
d) Management of the Company is in the process of reviewing the recoverability
and useful life of the goodwill recorded pursuant to the Smith & Davis
acquisition. Such goodwill is valued at approximately $6.5 million at
September 30, 1993. This review may result in a partial or full
impairment of this asset.
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EVEREST & JENNINGS INTERNATIONAL LTD AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
(Dollars in thousands except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 1993
----------------------------------------------------------------------------------------
(Unaudited)
Pro Forma
Consolidated MCT Acquis Debt Conv Combined
E & J Int'l MCT Dr/(Cr) Adj Dr/(Cr) Adj E & J / MCT
--------------- ------------- ------------- ------------- ---------------
Liabilities
- -----------
Short Term Borrowings From BIL $ 67,300 $ 0 $ - b) ($60,547) $ 6,753
Short Term Borrowings and current 18,381 1,538 b) (10,000) 9,919
installments of long term debt
Accounts Payable 7,260 282 7,542
Accrued Payroll Costs 8,143 0 8,143
Accrued Interest, BIL 4,453 0 b) (4,453) 0
Accrued Expenses and Income Taxes 7,568 139 7,707
Accrued Restructuring Expenses 1,656 0 1,656
-------- ------ ------- ------------ ---------
Total Current Liabilities 114,761 1,959 0 (75,000) 41,720
Advances from E & J to MCT 0 500 a) (500)
Long-Term Debt, Net of Current Portion 7,808 0 7,808
Other Long-Term Liabilities 552 466 1,018
-------- ------ ------- ------------ ---------
Total Liabilities 123,121 2,925 (500) (75,000) 50,546
Stockholders' Equity:
- ---------------------
Preferred Stock 11,725 5,823 a)(5,823) b) 20,000 31,725
Common Stock 92 35 a) 45 b) 550 722
Additional Paid-In Capital 43,708 (10) a) 8,430 b) 54,450 106,578
Accumulated Deficit (102,550) (6,672) a) 1,871 (107,351)
Cummulative translation adjustments (659) 0 (659)
-------- ------ ------- ------------ ---------
Total Stockholders' Equity (47,684) (824) 4,523 75,000 31,015
-------- ------ ------- ------------ ---------
Total Liabilities & Stockholders' Equity $ 75,437 $2,101 $4,023 $ 0 $81,561
-------- ------ ------- ------------ ---------
-------- ------ ------- ------------ ---------
Proforma Book Value ($0.10) $0.43
------ ---------
------ ---------
a) To reflect reclassification of MCT's advance from E & J and adjustment in
combined equity accounts pursuant to E & J's acquisition of MCT as of
9/30/93.
b) To reflect adjustments in E & J's equity, short term debt and accrued
interest accounts pursuant to the BIL/E & J debt conversion as of 9/30/93.
c) Management of the Company is in the process of reviewing the recoverability
and useful life of the goodwill recorded pursuant to the Smith & Davis
acquisition. Such goodwill is valued at approximately $6.5 million at
September 30, 1993. This review may result in a partial or full
impairment of this asset.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Commencing in 1989, the Company has undergone an extensive restructuring
of its operations with the objective of becoming a stronger long-term competitor
in the durable medical equipment industry. The restructuring was designed to
improve overall financial performance through cost reduction and the
elimination of excess manufacturing capacity. Extensive asset sales were also
undertaken to generate the cash necessary to partially finance restructuring
activites and reduce debt levels. Credit facilities were modified or expanded
as needed to partially fund the overall restructuring, in addition to
contributing to the funding of the Company's operations.
A major element of the restructuring was the sale in October, 1991 of
the Company's former European subsidiary, Ortopedia GmbH. At the time, the
Company retained a 15% interest in Ortopedia Holding GmbH, the new parent of
Ortopedia GmbH. During the period from December 31, 1990 to December 31, 1992,
total assets were reduced approximately $84 million due primarily to $63
million from the sale of Ortopedia as well as sales and writedown of certain
fixed assets and reductions in other current assets including planned
reductions of inventory in the United States. In December 1992, the Company
sold its remaining 15% interest in Ortopedia Holding GmgH.
On February 28, 1992, the Company announced its intention to
consolidate its domestic wheelchair manufacturing operations and corporate
headquarters by relocating its California-based manufacturing and corporate
offices to Missouri by the end of the year. This decision was made in light of
the higher cost of manufacturing in Southern California and based on the
opportunity to further reduce costs through the consolidation of administrative
and support functions with existing operations in Missouri. The relocation from
California was begun in the second quarter of 1992, and was largely completed
by the end of 1992.
As a result of the relocation, the Company experienced major start-up
problems in wheelchair production due primarily to computer system failures and
related parts shortages, and to manufacturing delays and inefficiencies
attributable generally to the commencement of relocated manufacturing operations
and specifically to the need to train a large number of new employees. These
start-up problems have most severely impacted the Company's high margin power
and rehab wheelcair products, and the resulting reduction in sales and cash
flow has hindered the Company's ability to keep vendors current and otherwise
to implement corrective measures quickly and effectively.
Shipment delays have caused a substantial build-up in back-ordered power
and rehab wheelchair products, which the Company is working to reduce.
However, customer confidence and frustration resulting from such delays have
combined to increase the order cancellation rate and to decrease the incoming
order rate, particularly for the affected wheelchairs. As a result, orders and
market share generally have decreased, and manufacturing activity generally has
shifted disproportionately to lower margin manual and commodity wheelchairs.
The foregoing problems adversely affected third and fourth quarter 1992
shipments and financial results, and will continue to do so at least through
the second quarter of 1993. Management has developed and implemented a plan it
believes will correct the Company's problems with manufacturing and shipment
delays. However, order rates, margins and market share must increase and
customer confidence must be restored in the very near term, if the Company is to
generate the cash flow necessary to fund its operations on a continuing basis
and to achieve profitability. Assuming the Company can achieve these
objectives, management expects the relocation to improve the Company's overall
cost structure and, therefore, its competitive position.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
Production and delivery of all of the Company's non-wheelchair products
were unaffected by the production problems that occurred in the relocation of
the wheelchair manufacturing facility to St. Louis. The Company has continued
to deliver non-wheelchair products in a timely manner and management believes
that additional market share can be obtained in these product lines.
On October 9, 1992 the Company completed the sale of its California
property. The Company is in arbitration with the environmental engineering
firm which was retained by the Company to manage certain aspects of the work
required to sell the California property. See Part I, Item 3, Legal
Proceedings.
In the domestic market, the Company's durable medical equipment products
are sold primarily through homecare and medical equipment dealers, as well as
national accounts. Consumers and dealers are reimbursed through federal, state
and private insurer reimbursement programs. The Company estimates that
Medicare reimbursement presently represents approximately 33% of the Company's
total domestic revenues. The Company anticipates being able to counteract the
impact of cutbacks in Medicare, state budget and private insurer programs on
its results of operations and cash flow through the benefits of a reduced cost
structure.
In the institutional bed market, while the Company has a small market
share of hospital beds, it has been in the position of being the only
competitor of Hill-Rom with respect to retractable hospital beds. Early in
1993, Stryker introduced a retractable hospital bed into the market which
management believes could put pressure on sales volume and current margins on
its retractable hospital bed products.
RESULTS OF OPERATIONS
REVENUES
The following table sets forth the amounts and percentages of revenues
geographically by area where products were manufactured (dollars in millions):
1992 1991 1990
------------ ----------- ------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
North America $107 100 $119 100 $133 63
Europe - - - - 77 37
---- --- ---- --- ---- ---
$107 100 $119 100 $210 100
---- --- ---- --- ---- ---
---- --- ---- --- ---- ---
North American revenues in 1992 decreased $12 million, or 10%, from the
prior year, primarily due to shipment delays and the loss of market share in
the U.S. wheelchair business as a result of disruptions to production
capabilities related to the relocation of the primary manufacturing facility
from California to Missouri. Revenues in the bed product line increased 8% in
1992, largely due to improved market penetration for institutional products.
North American revenues in 1991 decreased $14 million, or 11%, versus
1990, primarily due to increased price competition, reduced sales of lower
margin manual wheelchairs, and lower homecare bed and scooter revenues. The
reduced sales of lower margin manual wheelchairs resulted from the elimination
of certain unfavorable sales contracts in late 1990 while lower scooter
revenues reflected a deemphasis of the product line in 1991. Lower homecare
bed revenues reflected the impact of increased price competition.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
European revenues were $77 million in 1990 but were reflected on the
equity method in 1991, reflecting the deconsolidation of Ortopedia GmbH in 1991
due to the decision in 1990 to sell the subsidiary.
For the periods indicated, the following table summarizes operating results of
the Company (dollars in millions):
Year Ended December 31
-----------------------------------------------
1992 1991 1990
----------- ----------- -----------
Amount % Amount % Amount %
------ -- ------ -- ------ --
Revenue $107.1 100 $118.9 100 $209.7 100
Cost of sales 80.9 75 80.3 68 154.4 74
------ --- ------ --- ------ ---
Gross profit 26.2 25 38.6 32 55.3 26
Operating expenses 36.4 34 40.7 34 64.5 31
------ --- ------ --- ------ ---
Operating loss before
restructuring expense (10.2) (9) (2.1) (2) (9.2) (5)
Restructuring expense 5.2 5 18.5 15 34.0 16
------ --- ------ --- ------ ---
Operating loss $(15.4) (14) $(20.6) (17) $(43.2) (21)
Interest expense (5.0) (5) (3.9) (3) (8.9) (4)
Earnings from European
operations -- -- 1.2 -- -- --
Gain (loss) on sale of
European operations (0.2) -- 6.6 6 -- --
Loss on sale of discontinued
operations -- -- -- -- (1.4) --
------ --- ------ --- ------ ---
Loss before income taxes $(20.6) (19) $(16.7) (14) $(53.5) (25)
Income tax provisions (benefits) (1.7) (1) 0.4 -- (0.4) --
------ --- ------ --- ------ ---
Net loss $(18.9) (18) $(17.1) (14) $(53.1) (25)
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
1992 VERSUS 1991
1992 revenues of $107.1 million decreased $11.8 million or 10% from 1991,
largely as a result of wheelchair operations, which were negatively impacted by
the relocation of the Company's primary domestic manufacturing facility from
Camarillo, California to St. Louis, Missouri. The impact was focused almost
exclusively on the third and fourth quarter revenues after the commencement of
the physical relocation. The process of moving complex manufacturing operations
across the country and restarting with a largely new workforce resulted in
disruptions to normal manufacturing throughput with corresponding delays in
customer shipments and revenue recognition. Relocation-related inventory
imbalances caused by computer system failures and inadequate training of new
employees have also contributed to manufacturing shortfalls. At the same time,
1992 incoming orders for wheelchair products were largely equivalent to 1991,
resulting in increasing order backlogs. As a result of the shipment delays,
however, the Company experienced an increasing rate of order cancellations in
the third and fourth quarters of 1992 and the first quarter of 1993, and more
cancellations may occur in the second quarter of 1993. Such cancellations have
had and, if the cancellations continue, will have a material adverse impact on
the Company's financial performance. Also, the incoming power and rehab
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
wheelchair order rate has declined in 1993 to date, and if such order rate is
not improved, the Company's financial performance will be adversely affected
for as long as the order rate remains depressed. In the first quarter of 1993,
wheelchair shipments increased over the fourth quarter, 1992 levels as the
startup and relocation problems are gradually being resolved; however, the
products shipped were skewed in favor of the low margin manual wheelchairs, as
production of the high margin power and rehab wheelchairs is still lagging.
Backlogs of past due orders are beginning to decline due to increases in
production and cancellation of orders.
Sales of Smith & Davis bed products in 1992 improved 8% over the prior
year due to improved penetration in the institutional market. Homecare product
sales were largely flat year to year due to intense price competition. 1992
revenues in the Everest & Jennings' Canadian and Mexican subsidiaries were down
6% from 1991 due to a 5% unfavorable Canadian exchange rate change and the
non-recurrence of $.9 million of export orders in Canadian operations.
Total Company gross profit decreased $12.4 million from $38.6 million in
1991 to $26.2 million in 1992. As a percentage of sales, gross profit decreased
from 32% last year to 25% in 1992. The decrease in gross profit reflects the
decrease in sales plus continued price competition in the markets for the
Company's wheelchair, homecare bed and oxygen concentrator products. Wheelchair
profitability has also been impacted by what management believes to be a
temporary shift of the Company's product mix to lower margin wheelchair
products as a result of the relocation; however, the Company must recover
market share for the higher margin wheelchairs, otherwise the shift of product
mix to lower margin products may be permanent. Shipment delays have occurred
largely in custom and rehabilitation wheelchair products due to their greater
complexity, larger number of components which have been subject to inventory
imbalances, and longer training time for new employees before normal production
levels are reestablished. Gross profit in Smith & Davis was also adversely
affected by a $0.7 million charge to writeoff surplus and obsolete inventory.
Operating expenses decreased $4.3 million or 11% from $40.7 million in
1991 to $36.4 million in 1992 due to lower depreciation, staffing expenses,
taxes, insurance, professional fees and contracted services in general and
administrative expenses resulting from the Company's consolidation of
corporate, Everest & Jennings Inc. and Smith & Davis functions in St. Louis.
1991 operating expenses also included a $1.5 million charge to write down the
Camarillo facility to its estimated net realizable value.
In the third and fourth quarters of 1992, the Company recorded
restructuring changes of $2.5 million and $2.7 million, respectively, to
reflect increased costs for startup inefficiencies, facilities and staff
duplication and additional provision for physical inventory losses associated
with the relocation of the wheelchair manufacturing facility and corporate
headquarters to Missouri. $1.5 million of the restructuring charge recorded in
1992 relates to expenses expected to be incurred during the first four months
of 1993. An initial restructuring charge of $18.5 million was recorded in 1991
in connection with the relocation to Missouri.
Interest expense of $5.0 million in 1992 increased 28% from 1991 as a
result of the accrual of $1.3 million of interest recorded in anticipation of
not being able to reduce the balance of a certain bank loan below $13 million
by March 31, 1993, as subsequently extended to June 30, 1993 (see Note 6 to the
Consolidated Financial Statements in Item 8).
Net other income and expenses declined from $7.8 million income in 1991
which included a $6.6 million gain from the sale of 85% of Ortopedia and $1.2
income from European operations sold in October, 1991 to a $0.2 million expense
in 1992 which reflected a loss on the disposition of the remaining 15%
shareholding in Ortopedia.
The 1992 income tax benefit of $1.8 million reflects the settlement of
certain disputed items for the years 1975 - 1983 with the California Franchise
Tax Board.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
1991 versus 1990
Revenues in 1991 declined $90.8 million, or 43%, to $118.9 million versus
$209.7 million in 1990. The decline in revenues reflects the deconsolidation
of Ortopedia in 1991 ($76.9 million of the reduction) and reduced sales of
lower margin wheelchairs, lower scooter revenues and lower homecare bed
revenues. The Company also believes that uncertainties surrounding the
viability of the Company due to successive years of large losses resulting from
excess costs and restructuring charges may have adversely impacted operations
in 1991.
Gross profit decreased $16.7 million or 30% to $38.6 million in 1991, from
$55.3 million in 1990. The decreased gross profit reflects the deconsolidation
of Ortopedia which contributed $22.3 million to the reduction partially offset
by increased gross profit resulting from concerted efforts since January 1990
to reduce costs through significant reduction in personnel, increased
operational efficiency, control over raw material costs and an improved product
mix. As a percent of revenues, gross profit increased to 32% in 1991 from 26%
in 1990.
Operating expenses, before restructuring expenses in 1991, decreased $23.8
million or 37% to $40.7 million in 1991, from $64.5 million in 1990. The
decrease in operating expenses reflects the deconsolidation of Ortopedia which
reduced operating expenses $18.1 million, and lower salary and fringe costs
resulting from the significant reduction in headcount between periods,
partially offset by a $1.5 million charge in 1991 to write-down its Camarillo
facility to estimated net realizable value. Operating loss before restructuring
expenses narrowed to $2.1 million in 1991 versus $9.2 million in 1990 due to
success in reducing operating expenses between periods and in improving gross
profit.
As a result of its anticipated relocation from California to Missouri, the
Company recorded a fourth quarter, 1991 charge of $18.5 million to provide for
costs associated with the relocation including personnel related costs such as
severance and relocation expenses and costs associated with the sale and
relocation of certain machinery and equipment.
Inclusive of the restructuring expense associated with the consolidation
in St. Louis, the operating loss totaled $20.6 million in 1991 versus $43.2
million in 1990. Prior to its sale, Ortopedia was recorded on the equity
method. Accordingly, income before income taxes in 1991 includes $1.2 million
in equity income.
Interest expense of $3.9 million in 1991 declined $5.0 million from $8.9
million in 1990. The reduction in interest expense reflects no accrual in 1991
on borrowing from the Company's primary domestic lender and lower debt levels
due to the deconsolidation of Ortopedia in 1991 reducing interest expense $2.7
million. In accordance with the Company's bank restructuring agreement upon the
sale of Ortopedia GmbH and the repayment to the Bank of $8.3 million in October
1991, the Company's primary domestic lender waived any interest accrual in 1991
on amounts borrowed.
Other income in 1991 of $7.8 million is comprised of the $6.6 million gain
on the sale of Ortopedia in October 1991 and $1.2 million in equity income from
Ortopedia.
Loss on sale of discontinued operations of $1.4 million in 1990 is mainly
comprised of additional contingency reserves related to the sale of one of the
divisions of the Metal Products Group in 1987.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided from
operations and cash on hand. At December 31, 1992, the Company had $0.1
million in cash or $1.0 million less than the $1.1 million in cash at December
31, 1991. At December 31, 1992, total debt of $58.6 million was $4.4 million
higher than the $54.2 million in debt at December 31, 1991. The increase was
primarily due to advances from BIL (Far East Holdings) Limited ("BIL") and
borrowings from The Hongkong and Shanghai Banking Corporation ("HSBC") of $14
million and $15.1 million, respectively, during the year to finance the
restructuring and relocation, offset by the conversion of the Amended 9% Note
plus accrued interest totalling $9.8 million to 9% Series A Voting Convertible
Preferred Stock effective with the approval of the restructuring plan by the
stockholders at the annual meeting held on March 17, 1992, and the retirement
of $11.1 million in debt from the proceeds from the sale of the Camarillo,
California facility (see Note 6 to the Consolidated Financial Statements in
Item 8). Positive cash flow from operations of $3.2 million at Smith & Davis
and Everest & Jennings Canada also mitigated the overall increase in debt.
On October 2, 1992 the Company finalized a new one year $20 million
revolving credit facility with HSBC. Proceeds from this credit line were used
to repay $11 million of existing BIL advances, to fund restructuring expenses,
to replace existing letters of credit and for working capital purposes. The
repayment of this facility was guaranteed by Brierley Investments Limited, an
affiliate of BIL. The facility would not have been made available to the
Company without such guaranty. As of December 31, 1992, the Company had
borrowed close to the maximum available under the HSBC credit facility.
According to its original terms, the total amount available under the facility
was to reduce from $20 million to $15 million on March 31, 1993. Pursuant to
an amendment dated as of March 30, 1993, HSBC agreed to maintain the total
amount available under the facility at $20 million through the expiration date
of the facility.
Under the debt agreements with BIL and HSBC, at December 31, 1991 and 1992
the Company was obligated to repay approximately $29.3 million and $15.1
million, respectively, at various dates as described below.
12/31/91 12/31/92
Balance Balance
Debt Agreement $ millions $ millions Repayment Date
- -------------- ---------- ---------- --------------
Bank Loan (1) $22.7 $14.6 June 30, 1993
FASB 15 Adjustment (1.0) (0.2)
------ -----
Subtotal 21.7 14.4
Amended 10.5% Note 3.9 0.9 June 30, 1993
Amended 9% Note 9.7 -0-
BIL Promissory Notes (1992 Advances
through 9/11/92) - 4.0 June 30, 1993
BIL Promissory Notes (1992 Advances - 10.0 Various dates in the fourth quarter, 1993;
9/12/92 through 12/31/92) generally one year maturities
------ -----
Subtotal Due BIL 35.3 29.3
HSBC Credit Facility (2) - 15.1 September 30, 1993
------ -----
TOTAL $35.3 $44.4
------ -----
------ -----
(1) Pursuant to a First Amended and Restated Credit Agreement, dated
August 30, 1991 (the "Agreement"), between the Company and Security Pacific
National Bank (the "Bank"). On February 21, 1992 BIL acquired all of the
Bank's interest in the Agreement.
(2) Excludes approximately $4.9 million committed with respect to outstanding
letters of credit at December 31, 1992.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
On October 9, 1992, the Company repaid $11.1 million of the Bank Loan
indebtedness with the proceeds from the sale of the Camarillo property.
Additionally, on October 14, 1992, the Company repaid $11 million of the 1992
BIL Promissory Notes with a portion of the proceeds from the $20 million HSBC
credit facility. However, the Company was unable to repay $4.0 million of the
BIL 1992 Promissory Notes. Such Promissory Notes were due and payable on the
date that the company closed the HSBC credit facility. Also, the Company was
unable to repay the remaining $14.6 million balance on the Bank Loan as
required by March 31, 1993 or reduce the balance below $13 million to obtain
interest forgiveness. Accordingly, during 1992, the Company accrued interest
in the aggregate amount of approximately $13 million on the Bank Loan.
As of March 29, 1993, BIL agreed to extend the due dates of the Bank
Loan, the $4.0 million of the 1992 BIL Promissory Notes and the Amended 10.5%
Note to June 30, 1993. The Company has made a proposal to BIL to restructure
the indebtedness described in the preceeding sentence. In general, the
restructuring proposal under consideration, which would be subject to applicable
corporate approvals, contemplates converting the $14.6 million Bank Loan
balance, the remaining $0.9 million of the Amended 10.5% Note and the $4 million
of 1992 BIL Promissory Notes plus accrued interest into Class A Common Stock (or
Single Class Common Stock) at a price yet to be determined. Negotiations
between the Company and BIL also contemplate providing the Company additional
borrowing capacity to complete the restructuring. In order to properly evaluate
this proposal as well as explore other financing alternatives, the Company and
BIL have jointly retained a major investment banking firm. Upon review of such
firm's recommendations by the Board of Directors, the Company and BIL may enter
into negotiations to finalize a restructuring of the BIL indebtedness. While
management believes that mutually satisfactory arrangements can be negotiated
with BIL, no assurances can be made that the Company will be successful in such
negotiations.
Through the end of the first quarter of 1993, the Company has required
additional financing to fund the restructuring and fund operating needs. These
borrowings have been provided by BIL in their entirety and total an additional
$14 million. The Company expects to need additional financing through the end
of the second quarter 1993 before a cash neutral situation from operations is
anticipated to be attained.
On March 17, 1992 the stockholders of the Company approved the conversion
of the Amended 9% Note plus accrued interest into 5.9 million shares of 9%
Series A Voting Convertible Preferred Stock. Assuming the conversion of such
Preferred Stock to Common Stock and inclusive of the Series B Voting
Convertible Preferred Stock representing nearly 5% of total shares outstanding
(previously due to be received by the Bank and issued to BIL as a result of
BIL's purchase of the Company's debt with the Bank - see Note 6 to the
Consolidated Financial Statements in Item 8), BIL's ownership in the Company
now approximates 60% of total shares outstanding.
In July, 1991 the Company obtained a new three-year $13 million credit
line for its Smith & Davis subsidiary. At December 31, 1992, Smith & Davis
had borrowed $5.4 million under this line. In February, 1993 this credit line
was amended to increase the availability of funding to the Company and reduce
the borrowing cost. The Company's Canadian operation has existing credit
facilities in the aggregate of $5.1 million, on which $3.3 million was
borrowed as of December 31, 1992.
Accordingly, at December 31, 1992 the Company owed $27.7 million to banks
and other commercial lenders, $1.6 million under capitalized lease obligations,
and $29.3 million to BIL (net of $0.2 million FASB 15 adjustment).
The Company's 1992 revenues and operating results have been adversely
impacted by increased price competition, liquidity constraints and the
relocation of the Company's primary domestic wheelchair manufacturing facility
from California to Missouri. The third and fourth quarters were particularly
impacted by delayed shipments of customer orders for higher margin
rehabilitation wheelchair products and spare parts. These delays have resulted
in additional cash needs beyond those originally anticipated to finance the
relocation. From time to time, the Company has not been able to make timely
payments to some of the suppliers of materials for its wheelchair products. In
such circumstances, past due payment terms have been negotiated with most of
such suppliers. However, certain suppliers have temporarily suspended parts
deliveries to the Company until payment
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
has been received. As a result, the Company has not been able to make all
wheelchair production commitments on time, resulting in some order
cancellations and a reluctance by some customers to place future orders.
Startup inefficiencies and inventory imbalances in St. Louis manufacturing
operations will continue to adversely impact revenues, operating income and
cash flow. As a result, a first quarter 1993 loss from operations is expected
and additional financing must be secured. Assuming a successful restructuring
of the BIL debt as described earlier, the Company will attempt to fulfill its
cash needs through seeking additional financing from BIL or other external
sources. Although no assurances can be given that the Company can restructure
or reschedule the debt, if such debt is restructured or rescheduled,
management believes that the Company will be able to meet its cash operating
requirements at its existing Missouri, Canadian and Mexican operations.
To retain dealer loyalty during the period when wheelchair production
problems were occurring, the Company allowed certain dealers to delay payments
for purchases beyond the normal credit terms. The Company plans to begin
stricter enforcement of credit terms once production problems are rectified and
deliveries are made on an on-time basis.
Management believes that the Company's domestic and international
manufacturing capacity is sufficient to meet anticipated demand for the
foreseeable future. Capital expenditures of approximately $3.5 million are
projected for 1993 versus actual expenditures of $3.4 million in 1992.
NET OPERATING LOSS CARRY-FORWARDS
At December 31, 1992, for U.S. tax reporting purposes, the Company had
net operating loss ("NOL") carry-forwards of approximately $101 million
expiring between 1997 and 2008, which should be available to offset U.S.
taxable income generated in future years. For financial reporting purposes,
the Company had NOL carry-forwards of approximately $113 million expiring
between 1997 and 2008. The difference between tax and financial reporting of
NOL carry-forwards relates primarily to amounts written off for financial
reporting purposes not yet deductible for tax purposes. The Company does not
believe that any restructuring proposals under consideration with BIL will
limit the Company's ability to utilize its NOL carry-forwards. However such
restructuring could serve to increase the likelihood that limitations could
apply as a result of future changes in equity ownership in the Company.
FUTURE ACCOUNTING REQUIREMENTS
In Feberuary, 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" (SFAS 109). The Company is required to and
intends to adopt SFAS 109 in 1993. The Company has not yet determined the
impact of the adoption of SFAS 109, although it is not anticipated to be
material to the Company's consolidated financial statements.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1993
The following table summarizes operating results of the Company for the
three months ended Septmeber 30, 1993 and 1992 (dollars in millions):
Three Months Ended September 30
-----------------------------------------
1993 1992
---------------- --------------------
Amount % Amount %
------ ---- ------ ----
Revenues $23.4 100 $22.7 100
Cost of sales 17.7 76 17.4 77
----- --- ----- ---
Gross profit 5.7 24 5.3 23
Operating expenses 9.3 40 11.3 50
----- --- ----- ---
Operating loss (3.6) (16) (6.0) (27)
Interest expense 1.6 6 0.7 3
----- --- ----- ---
Loss before income taxes (5.2) (22) (6.7) (30)
Income tax provisions (benefits) - - (1.2) (5)
----- --- ----- ---
Net loss $(5.2) (22) $(5.5) (25)
----- --- ----- ---
----- --- ----- ---
Third quarter, 1993 revenues of $23.4 million increased $0.7 million or 3%
from 1992. Wheelchair sales of $16.8 million in the thrid quarter, 1993
increased $2.0 million or 14% from the third quarter, 1992. Domestic delivery
problems related to the relocation of the Company's primary domestic
manufacturing facility from Camarillo, California to St. Louis, Missouri had a
negative impact on third quarter, 1992 sales.
Sales of Smith & Davis homecare beds in the thrid quarter of 1993 decreased
$0.6 million of 17% from the third quarter of 1992; sales of institutional beds
in the third quarter of 1993 decreased $0.4 million or 10% from the third
quarter of 1992, for an aggregate decrease in bed sales for the third quarter of
1993 of 15% from the comparable period in the prior year. This decrease is a
result of competitive pressures and uncertainty in the durable medical equipment
market related to the potential impact of health care reform programs to be
enacted by the Clinton administration. In management's opinion, the decrease
in Smith & Davis' institutional bed sales in the third quarater of 1993 was
representative of conditions in the institutional durable medical equipment
market as a whole. Sales of Smith & Davis oxygen concentrator products in the
third quarter of 1993 decreased $0.3 million or 34% from the comparable period
of the prior year due to a reduction in purchases by the largest oxygen
concentrator customer.
Total Company gross profit increased $0.4 million from $5.3 million in the
thrid quarter of 1992 to $5.7 million in the third quarter of 1993. As a
percentage of sales, gross profit increased from 23% in the third quarter of
1992 to 24% in the third quarter of 1993. The increase in gross profit and in
gross profit as a percentage of sales reflects improvement in the Company's
manufacturing efficiency, offset by continued price competition in the markets
for the Company's wheelchair, bed and oxygen concentrator products.
Operating expenses decreased $2.0 million or 18% from $11.3 million in the
third quarter of 1992 to $9.3 million in the third quarter of 1993. The
decrease is due primarily to $2.5 million of restructuring expense which was
recorded in the third quarter of 1992. Third quarter, 1993 operating expenses
also reflect a one time $0.3 million charge for writing off the Company's
investment in a foreign joint venture.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
Interest expense of $1.6 million in the third quarter of 1993 increased
from the comparable period in the prior year due to increased debt levels and
as a result of the accrual of interest recorded in anticipation of not being
able to reduce the balance of the Bank Loan below $13 million by September 30,
1993, as extended (see Note 5 to the Unaudited Consolidated Financial
Statements in Item 1).
In January 1993, the Company adopted the provisions of SFAS No. 109,
'Accounting for Income Taxes' ('SFAS 109'). The adoption of SFAS 109 did not
have an impact on the consolidated financial statements (see Note 7 to the
Unaudited Consolidated Financial Statements in Item 1).
The income tax benefits of $1.2 million in the third quarter of 1992
reflect the settlement of certain disputed items with the California Franchise
Tax Board.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
The following table summarizes operating results of the Company for the
nine months ended September 30, 1993 and 1992 (dollars in millions):
Nine Months Ended September 30
----------------------------------------
1993 1992
--------------- --------------------
Amount % Amount %
------ --- ------ ---
Revenues $ 71.7 100 $ 82.9 100
Cost of sales 53.8 75 60.0 72
----- --- ---- --
Gross profit 17.9 25 22.9 28
Operating expenses 29.2 41 30.4 37
---- -- ---- --
Operating loss (11.3) (16) (7.5) (9)
Interest expense 4.5 6 2.5 3
--- -- ---- --
Loss before income taxes (15.8) (22) (10.0) (12)
Income tax provisions (benefits) 0.2 -- (1.8) (2)
--- ---- ---- ---
Net loss $(16.0) (22) $ (8.2) (10)
------ ---- ------ -----
------ ---- ------ -----
Revenues for the nine months ended September 30, 1993 decreased $11.2
million or 14% to $71.7 million from the comparable period in the prior year.
Wheelchair sales of $50.6 million in the first nine months of 1993 decreased
$5.2 million or 9% from the comparable period in the prior year. The relocation
of the Company's primary domestic manufacturing facility from Camarillo,
California to St. Louis, Missouri and the related production and delivery
problems and declining orders negatively impacted sales in the first and second
quarters of 1993. However, the domestic wheelchair order rate has gradually
increased throughout the first three quarters of 1993, and on-time deliveries
have improved throughout 1993 to the point where the Company had fewer than a
dozen past due wheelchair orders at the end of October, 1993.
Sales of Smith & Davis homecare beds in the first nine months of 1993
decreased $1.5 million or 14% from the first nine months of 1992; sales of
institutional beds in the first nine months of 1993 decreased $2.6 million or
21% from the first nine months of 1992, for an aggregate decrease in bed
sales for the first nine months of 1993 of 18% from the comparable period in
the prior year. This decrease is primarily a result of ongoing price
competition and uncertainty in the durable medical equipment market related to
the potential impact of health care reform programs to be enacted by the
Clinton administration. In management's opinion, the decrease in Smith &
Davis' institutional bed sales through the third quarter of 1993 was
representative of conditions in the institutional durable medical equipment
market as a whole. Sales of Smith & Davis oxygen concentrator products
through the third quarter of 1993 decreased $1.9 million or 51% through the
comparable period of the prior year due to a reduction in purchases by the
largest oxygen concentrator customer.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
Total Company gross profit decreased $5.0 million or 22% from $22.9
million in the first nine months of 1992 to $17.9 million in the first nine
months of 1993. The decrease in gross profit reflects the decrease in sales,
manufacturing inefficiency experienced in the wheelchair operations, and
continued price competition in the markets for the Company's wheelchairs, bed
and oxygen concentrator products. Gross profit was also adversely affected by
a $1.0 million charge to reserve for excess and obsolete inventory, which arose
due to the Company discontinuing certain wheelchair models.
As a percentage of sales, gross profit decreased from 28% for the first
nine months of 1992 to 25% in the first nine months of 1993. This decrease
reflects increased price competition and production problems experienced during
1992.
Operating expenses decreased $1.2 million from $30.4 million in the first
nine months of 1992 to $29.2 million in the first nine months of 1993. This
decrease is primarily due to $2.5 million of restructuring expense which was
recorded in the third quarter of 1992, offset by a $0.3 million charge for
writing off a foreign joint venture during the third quarter of 1993 and an
additional $0.7 million charge for the closure of the Camarillo facility
recorded in the second quarter of 1993. The closure of this facility was
delayed by the slower-than-anticipated implementation of the computer system in
St. Louis.
Interest expense of $4.5 million in the first nine months of 1993
increased from the comparable period in the prior year due to increased debt
levels and as a result of the accrual of interest recorded in anticipation of
not being able to reduce the balance of the Bank Loan below $13 million by
September 30, 1993, as extended (see Note 5 to the Unaudited Consolidated
Financial Statements in Item 1).
In January 1993, the Company adopted the provisions of SFAS No. 109,
'Accounting for Income Taxes' ('SFAS 109'). The adoption of SFAS 109 did not
have an impact on the consolidated financial statements (see Note 7 to the
Unaudited Consolidated Financial Statements in Item 1).
The income tax benefits of $1.8 million in the first nine months of 1992
reflect the settlement of certain disputed items with the California Franchise
Tax Board.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided from
operations, borrowings and cash on hand. At September 30, 1993 and December
31, 1992, the Company had $0.2 million and $0.1 million in cash,
respectively. At September 30, 1993, total debt of $93.5 million was
$34.9 million higher than the $58.6 million in debt at December 31, 1992.
The increase was primarily due to Interim Loans from BIL during the
first nine months of 1993 to fund the restructuring and relocation expenses
accrued in prior periods and for operating needs.
On September 30, 1992 the Company entered into the $20 million Revolving
Credit Agreement with HSBC. Proceeds from this credit facility were used to
repay $11 million of existing Interim Loans, to fund restructuring expenses, to
replace existing letters of credit and for working capital purposes. The
repayment of this facility was guaranteed by Brierley Investments Limited, an
affiliate of BIL. The facility would not have been made available to the
Company without such guaranty. Prior to September 30, 1993, the Company had
borrowed close to the maximum available under the HSBC credit facility.
According to its original terms, the total amount available under the facility
was to reduce from $20 million to $15 million on March 31, 1993. Pursuant to
an amendment dated as of March 30, 1993, HSBC agreed to maintain the total
amount available under the facility at $20 million through the expiration date
of the facility, September 30, 1993. In September, 1993, the outstanding HSBC
loan balance of $5.7 million was paid off utilizing a cash advance provided
by BIL under the Revolving Promissory Note. Furthermore, as of September 30,
1993, HSBC and E&J Inc. agreed to amend the Revolving Credit Agreement and
extend its term for approximately one year. The HSBC facility, as amended,
provides to E&J Inc. up to $6 million letter of credit availability and up to
$10 million of cash advances. On
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
October 8, 1993, E&J Inc. repaid the $10 million loan from Mercantile Bank by
utilizing $10 million of cash advances from the SBC facility.
On October 9, 1992, the Company repaid $8.1 million of the Bank Loan and
$3.0 million of the Amended 10.5% Note indebtedness with the proceeds from the
sale of the Camarillo property. Additionally, on October 14, 1992, the Company
repaid $11 million of the 1992 Interim Loans with a portion of the proceeds
from the $20 million HSBC credit facility. However, the Company was unable to
repay $4.0 million of the 1992 Interim Loans. Such Promissory Notes were due
and payable on the date that the Company closed the HSBC credit facility.
Also, the Company was unable to repay the remaining $14.6 million balance on
the Bank Loan as required by March 31, 1993 or reduce the balance below $13
million to obtain interest forgiveness. Accordingly, during 1992 and the first
nine months of 1993, the Company accrued interest in the aggregate amount of
approximately $1.3 million and $0.8 million, respectively, on the Bank Loan.
As of September 30, 1993, under the debt agreements with BIL and HSBC, the
Company was obligated to repay approximately $67.3 million and $10.0 million,
respectively, at various dates as described below.
As of 9/30/93 As of 12/31/92
Balance Balance
Debt Agreement $ millions $ millions Repayment Date
- -------------- ----------- ---------- --------------
Bank Loan $14.6 $14.6 September 30, 1993
FASB 15 Adjustment - (0.2)
------- ------
Subtotal 14.6 14.4
Amended 10.5% Note 0.9 0.9 September 30, 1993
Interim Loans (1992 Advances 4.0 4.0 September 30, 1993
through 9/11/92)
Interim Loans (1992 Advances 10.0 10.0 Various dates in the fourth quarter, 1993;
9/12/92 through 12/31/92) generally one year maturities
Interim Loans (1993 Advances 37.8 - Various dates in the first, second and third
through 9/30/93) quarters, 1994; generally one year maturities
------- ------
Subtotal Due BIL 67.3 (1) 29.3
HSBC Revolving Credit Agreement (2) - 5.1 September 30, 1994
Mercantile Bank 10.0 10.0 October 8, 1993
Accrued, unpaid interest due BIL 4.5(1) 2.3 Same date as the corresponding debt
agreement
------- ------
TOTAL $81.8 $46.7
------- ------
------- ------
(1) Effective September 30, 1993, the date of the Debt Conversion Transaction,
the debt to BIL was restructured by the Company issuing the following:
9/30/93 Balance
$ millions
---------------
Common Stock Note 45.0
Preferred Stock Note 20.0
Revolving Promissory Note 6.8
----
TOTAL $ 71.8
--------
--------
(2) Excludes approximately $3.7 million and $4.9 million committed with
respect to outstanding letters of credit at September 30, 1993 and
December 31, 1992, respectively.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
As of September 30, 1993, the Company entered into the Debt Conversion
Agreement with BIL whereby $65 million of the indebtedness represented by the
Converted BIL Debt (i.e., the Bank Loan, the Amended 10.5% Note and the Interim
Loans) was restructured by the issuance of the Common Stock Note and the
Preferred Stock Note. The balance of the BIL indebtedness ($6.8 million) which
was not converted into the Common Stock Note and the Preferred Stock Note was
treated as advances under the Revolving Promissory Note. See Note 4 to the
Unaudited Consolidated Financial Statements in Item 1 for a detailed discussion
of the Debt Conversion Transaction.
As part of the Debt Conversion Transaction, BIL agreed to provide to the
Company and E&J Inc. a revolving credit facility of up to $12.5 million, as
evidenced by the Revolving Promissory Note. As of September 30, 1993, $6.8
million had been advanced to the Company and E&J Inc. by BIL under such Note.
BIL has agreed, upon stockholder approval of the Debt Conversion
Transaction and the Recapitalization Proposals, to advance to E&J Inc. $10
million to pay HSBC the cash advances made by it to E&J Inc. under the
Revolving Credit Agreement. Such advance by BIL to E&J Inc. would result in an
increase in the principal amount of the Common Stock Note from $45 million to
$55 million.
In July, 1991, the Company obtained a three-year $13 million secured credit
line for its Smith & Davis subsidiary which is secured by substantially all of
the subsidiary's assets. In February, 1993 this credit line was amended to
increase the availability of funding to the Company and reduce the borrowing
costs thereunder. At September 30, 1993 Smith & Davis had borrowed $4.4
million under this line. The Company's Canadian operation has existing credit
facilities in the aggregate of $4.9 million, on which $4.1 million was borrowed
as of September 30, 1993.
Accordingly, at September 30, 1993 the Company owed $22.4 million to banks
and other commercial lenders, $3.8 million under capitalized lease obligations,
and $67.3 million to BIL.
During November, 1993, the Company required $2.0 million of additional
financing to fund its operating requirements, advances to MCT, and previously
accrued restructuring expenses. This additional funding has been provided to
the Company by BIL, bringing the total advances under the Revolving Promissory
Note to $8.8 million as of November 8, 1993, out of an available line of credit
of $12.5 million. The Company expects to need additional financing at least
through the end of the fourth quarter 1993.
The proposed acquisition of MCT (see Note 3 to the Unaudited Consolidated
Financial Statements in Item 1) is reflective of the Company's commitment to
new product development. MCT develops, designs, manufactures and markets
state-of-the-art durable medical equipment, including wheelchairs and other
medical mobility products and assistive devices. MCT has developed proprietary
products with significant competitive advantages in the areas of performance,
aesthetics, durability and cost. MCT's products utilize advanced composite
materials to achieve differentiated, aesthetically pleasing shapes while
providing mechanical properties that are superior to those of most current
mobility and assistive products, almost all of which are constructed of metal.
The Company believes that the acquisition of MCT will enable it to expand its
product line into the ultra-lightweight wheelchair and related products
markets.
As of September 30, 1993, the Company has advanced $1.0 million to MCT
for use in the ordinary course of its business in two installments of $500,000
each, the first of which is nonrefundable and the second of which is evidenced
by a term loan maturing on September 30, 1994. The Company has also committed
in the Merger Agreement to advance additional funds for working capital needs as
necessary to MCT, which amounts shall not exceed $2.5 million for the period
commencing October 22, 1993 and ending March 31, 1994. $500,000 was advanced
in November, 1993, pursuant to the foregoing sentence. If the Merger does not
occur, the Merger Agreement sets out the circumstances and the terms under
which the advances described in the preceding two sentences are to be repaid.
To meet its obligations to MCT as described herein, the Company will be relying
on cash provided from operations, borrowings and cash on hand.
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EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
The Company's 1993 year to date revenues and operating results have been
adversely impacted by ongoing price competition, liquidity constraints and the
relocation in 1992 of the Company's primary domestic wheelchair manufacturing
facility from California to Missouri. The loss of customer confidence stemming
from long lead times and shipping delays due to start-up inefficiencies and
inventory imbalances in St. Louis manufacturing operations is expected to
adversely impact revenues, operating income and cash flow at least through the
end of 1993. Management has developed and implemented a plan it believes will
correct the Company's problems with manufacturing and shipment delays.
However, order rates, margins and market share must increase, production and
operating costs must be reduced and customer confidence must be restored in the
very near term if the Company is to generate the cash flow necessary to fund
its operations on a continuing basis and to achieve profitability. With
respect to its bed products, the Company anticipates, for the remainder of the
year, severe price and product competition; however, the market demand for
these products may improve once a national health care reform plan is enacted.
The Company will attempt to fulfill its cash requirements through
additional financing from BIL or other external sources. Although no
assurances can be given that the Company will be able to obtain additional
financing, if additional funding is obtained, management believes that the
Company will be able to meet its cash operating requirements at its existing
Missouri, Canadian and Mexican operations.
Management believes that the Company's domestic and international
manufacturing capacity is sufficient to meet anticipated demand for the
forseeable future.
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