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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A Amendment 1
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1992
or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________________ to __________________
Commission File Number: 0-3585
EVEREST & JENNINGS INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)
Delaware 95-2536185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Corporate Square Drive, St. Louis, Missouri 63132
(Address of principal executive offices)
Registrant's telephone number, including area code: (314) 995-7000
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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 activities 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 GmbH.
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 wheelchair 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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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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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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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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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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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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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 $1.3 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 preceding 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 has been received.
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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 February, 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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
of Everest & Jennings International Ltd.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Everest & Jennings International Ltd. and its
subsidiaries at December 31, 1992 and 1991, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles. 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 audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts of disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 14 to the consolidated financial statements, the
Company is a defendant in a class action lawsuit alleging federal securities
laws violations. The suit was dismissed on March 26, 1991 and the amended
complaint was dismissed on September 20, 1991; however, the plaintiff filed a
Notice of Appeal on December 23, 1991. The ultimate outcome of the lawsuit
cannot presently be determined.
PRICE WATERHOUSE
St. Louis, Missouri
March 19, 1993
(except as to Note 6, which is as of March 31, 1993)
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
of Everest & Jennings International Ltd.
Camarillo, California
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and cash flows of Everest & Jennings
International Ltd. and subsidiaries (the "Company") for the year ended December
31, 1990. Our audit also included the financial statement schedules listed in
the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
As discussed in Note 9, on December 12, 1991, the Company made a
decision to change its method of accounting for inventories at its principal
California subsidiary and, accordingly, restated its 1990 financial statements.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of Everest &
Jennings International Ltd. and subsidiaries for the year ended December 31,
1990 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As disclosed in the accompanying
financial statements and in prior years, the U.S. operations have experienced
substantial operating losses resulting in a deficit equity position. The
Company's financial position and operating results raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 1. The continuing viability of the
Company is dependent upon completion of new financing arrangements, sufficient
proceeds from asset sales to meet 1991 and 1992 debt payments, improvement of
margins and meeting restructuring expenditures. The financial statements do
not include adjustments, if any, that might result from the outcome of these
uncertainties.
11
12
As discussed in Note 14 to the consolidated financial statements, a
class action suit claiming damages in connection with product warranties
relating to a certain wheelchair model was filed. On August 30, 1991, and as
subsequently amended, the Company reached an agreement in principle to settle
the litigation on terms considered not material to the Company's consolidated
financial position. Additionally, a class action suit alleging federal
securities laws violations has been granted permission to file an amended
complaint. The ultimate outcome or liability resulting from these suits, if
any, is not presently determinable.
DELOITTE & TOUCHE
Los Angeles, California
April 4, 1991 (except as to the first, sixth, eighth
and ninth sentences of Note 9, as to which the date is
December 12, 1991, and the fourth sentence of paragraph 1
of Note 14, as to which the date is August 30, 1991.)
12
13
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per-share data)
Year Ended December 31
---------------------------------------------
1992 1991 1990
---- ---- ----
Revenues $107,115 $118,924 $209,711
Cost of sales 80,923 80,276 154,431
------- ------- -------
Gross profit 26,192 38,648 55,280
------- ------- -------
Selling expenses 27,195 26,075 41,876
General and administrative expenses 9,275 14,638 22,653
Restructuring expenses (Note 2) 5,150 18,524 33,953
------- ------- -------
Total operating expenses 41,620 59,237 98,482
------- ------- -------
Operating loss from continuing operations (15,428) (20,589) (43,202)
------- ------- -------
Other income (expense):
Interest expense, BIL (Note 6) (2,272) (1,096) (1,462)
Interest expense, other (2,709) (2,791) (7,408)
Earnings in European operations (Note 5) -- 1,189 --
Gain (loss) on sale of European operations (Note 5) (240) 6,600 --
------- ------- -------
Other income (expense), net (5,221) 3,902 (8,870)
------- ------- -------
Loss from continuing operations before income taxes (20,649) (16,687) (52,072)
Income tax provisions (benefits) (Note 8) (1,737) 377 (356)
------- ------- -------
Net loss from continuing operations (18,912) (17,064) (51,716)
------- ------- -------
Discontinued operations:
Loss on disposal of discontinued operations -- -- (1,410)
------- ------- -------
Net loss $(18,912) $(17,064) $(53,126)
-------- -------- --------
-------- -------- --------
Loss per share:
From continuing operations $(2.07) $(1.87) $(5.65)
From discontinued operations -- -- (.16)
----- ----- -----
$(2.07) $(1.87) $(5.81)
------- ------ ------
------- ------ ------
Weighted average number of Common Shares outstanding 9,146,000 9,146,000 9,146,000
--------- --------- ---------
--------- --------- ---------
The accompanying Notes are an integral part of these
Consolidated Financial Statements
13
14
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31 December 31
1992 1991
----------- -----------
CURRENT ASSETS:
Cash $ 145 $ 1,132
Accounts receivable, less allowance for doubtful
accounts of $3,505 in 1992 and $6,658 in 1991 20,000 21,245
Inventories (Note 9) 24,631 24,124
Assets held for sale (Notes 1 and 4) 67 12,358
Other current assets 4,129 4,430
------ ------
Total current assets 48,972 63,289
------ ------
PROPERTY, PLANT AND EQUIPMENT:
Land 442 454
Buildings and improvements 6,677 4,081
Machinery and equipment 16,112 36,938
------ ------
23,231 41,473
Less accumulated depreciation and amortization 11,848 32,094
------ ------
Property, plant and equipment, net 11,383 9,379
INTANGIBLE ASSETS, NET 6,696 6,957
OTHER ASSETS 2,408 3,296
------ ------
TOTAL ASSETS $69,459 $82,921
------- -------
------- -------
The accompanying Notes are an integral part of these
Consolidated Financial Statements
14
15
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per-share data)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31 December 31
1992 1991
---------- ---------
CURRENT LIABILITIES:
Short-term borrowings from BIL (Note 6) $29,292 $13,178
Short-term borrowings and current installments of long-term
debt of $1,637 in 1992 and $13,425 in 1991 (Note 6) 25,912 12,462
Accounts payable 16,782 17,491
Accrued payroll costs 7,624 6,759
Accrued interest, BIL (Note 6) 2,278 458
Accrued expenses and income taxes (Note 8) 8,361 10,727
Accrued restructuring expenses (Notes 1 and 2) 6,047 14,095
------ ------
Total current liabilities 96,296 75,170
------ ------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 6) 3,351 28,528
OTHER LONG-TERM LIABILITIES 610 676
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock (Notes 6 and 10) 10,174 --
Series B Convertible Preferred Stock (Notes 6 and 10) 1,317 --
Class A Common Stock, par value: $.01;
authorized 10,000,000 shares (Note 10) 68 68
Class B Common Stock, convertible, par value: $.01;
authorized 10,000,000 shares (Note 10) 24 24
Additional paid-in capital 43,708 44,980
Accumulated deficit (85,585) (66,296)
Cumulative translation adjustments (504) (229)
------ ------
Total stockholders' deficit (30,798) (21,453)
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $69,459 $82,921
------- -------
------- -------
The accompanying Notes are an integral part of these
Consolidated Financial Statements
15
16
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1992
(Dollars in thousands)
Series A Series B
Convertible Convertible Class A Class B
Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- ------------ ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1989 -- -- -- -- 5,807,102 $58 2,355,177 $24
Common Stock issued for
acquisition of Smith & Davis -- -- -- -- 984,000 10 -- --
Net loss -- -- -- -- -- -- -- --
Adjustment for pension liability -- -- -- -- -- -- -- --
Translation adjustments -- -- -- -- -- -- -- --
-------- ------ ------ ----- -------- --- -------- ---
Balance at December 31, 1990 -- -- -- -- 6,791,102 $68 2,355,177 $24
Conversion of Common Stock -- -- -- -- 1,750 -- (1,750) --
Net loss -- -- -- -- -- -- -- --
Additional cash contribution
to the capital of a subsidiary -- -- -- -- -- -- -- --
Book value of the proposed
Convertible Preferred Stock
to be issued -- -- -- -- -- -- -- --
Sale of European subsidiaries -- -- -- -- -- -- -- --
Translation adjustments of
consolidated subsidiaries -- -- -- -- -- -- -- --
-------- ------ ------ ----- -------- --- -------- ---
Balance at December 31, 1991 -- -- -- -- 6,792,852 $68 2,353,427 $24
Adjustment
Additional Accumu- Cumulative for
Paid-in lated Translation Pension
Capital Deficit Adjustments Liability Total
------- ------- ----------- --------- -----
Balance at December 31, 1989 $37,812 $ 3,894 $2,076 $(784) $43,080
Common Stock issued for
acquisition of Smith & Davis 5,894 -- -- -- 5,904
Net loss -- (53,126) -- -- (53,126)
Adjustment for pension liability -- -- -- 784 784
Translation adjustments -- -- 1,449 -- 1,449
---------- ------- ----- ---- ------
Balance at December 31, 1990 $43,706 $(49,232) $3,525 -- $(1,909)
Conversion of Common Stock -- -- -- -- --
Net loss -- (17,064) -- -- (17,064)
Additional cash contribution
to the capital of a subsidiary 2 -- -- -- 2
Book value of the proposed
Convertible Preferred Stock
to be issued 1,272 -- -- -- 1,272
Sale of European subsidiaries -- -- (2,644) -- (2,644)
Translation adjustments of
consolidated susidiaries -- -- (1,110) -- (1,110)
------ ------- ----- ---- ------
Balance at December 31, 1991 $44,980 $(66,296) $ (229) -- $(21,453)
The accompanying Notes are an integral part of these
Consolidated Financial Statements
16
17
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1992
(continued)
(Dollars in thousands)
Series A Series B
Convertible Convertible Class A Class B
Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- ------------ ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1991 -- $ -- -- $ -- 6,792,852 $68 2,353,427 $24
Series A Convertible Preferred
Stock issued upon conversion
of a convertible note payable 5,850,380 9,797 -- -- -- -- -- --
Pay-in-kind dividends on Series A
Convertible Preferred Stock 225,039 377 -- -- -- -- -- --
Reclassification of value of
Series B Convertible Preferred
Stock as of December 31, 1991 -- -- 759,542 1,272 -- -- -- --
Adjustment to actual number of
shares of Series B Convertible
Preferred Stock issued -- -- 26,815 45 -- -- -- --
Net loss -- -- -- -- -- -- -- --
Translation adjustments -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- --- --------- ---
Balance at December 31, 1992 6,075,419 $10,174 786,357 $1,317 6,792,852 $68 2,353,427 $24
--------- ------- ------- ------ --------- --- --------- ---
--------- ------- ------- ------ --------- --- --------- ---
Adjustment
Additional Accumu- Cumulative for
Paid-in lated Translation Pension
Capital Deficit Adjustments Liability Total
------- ------- ----------- --------- -----
Balance at December 31, 1991 $44,980 $(66,296) $(229) -- $(21,453)
Series A Convertible Preferred
Stock issued upon conversion
of a convertible note payable -- -- -- -- 9,797
Pay-in-kind dividends on Series A
Convertible Preferred Stock -- (377) -- -- --
Reclassification of value of
Series B Convertible Preferred
Stock as of December 31, 1991 (1,272) -- -- -- --
Adjustment to actual number of
shares of Series B Convertible
Preferred Stock issued -- -- -- -- 45
Net loss -- (18,912) -- -- (18,912)
Translation adjustments -- -- (275) -- (275)
------- -------- ----- ---- --------
Balance at December 31, 1992 $43,708 $(85,585) $(504) -- $(30,798)
------- -------- ----- ---- --------
------- -------- ----- ---- --------
The accompanying Notes are an integral part of these
Consolidated Financial Statements
17
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
------------------------------
1992 1991 1990
---- ---- ----
Cash flows from operating activities:
Net loss $(18,912) $(17,064) $(53,126)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 2,736 4,235 7,326
Restructuring expenses (Note 2):
Write-down in value of certain accounts receivable,
inventories and other assets -- 750 7,052
Write-down in value of certain properties and equipment -- 5,552 13,896
Net increase (decrease) in certain accrued expenses (8,048) 12,222 1,864
Write-down of certain properties -- 1,500 --
Loss (gain) on sales of certain fixed assets 356 (206) (898)
Loss (gain) on sale of European operations (Note 5) 240 (6,600) --
Loss on sales of assets held for sale (Note 4) 127 -- --
Changes in operating assets and liabilities net of
effects of the 1990 purchase of Smith & Davis (Note 7):
Trade accounts receivable 1,245 3,128 6,385
Inventories (507) 6 2,610
Accounts payable (709) (2,647) 2,212
Accrued interest, BIL 1,820 (1,004) 1,462
Accrued expenses and income taxes (2,623) (7,530) (2,652)
Other, net (759) 269 4,671
------ ------ ------
Cash used in operating activities (25,034) (7,389) (9,198)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (3,364) (1,390) (4,455)
Acquisition of Smith & Davis, net of cash acquired (Note 7) -- -- (4,374)
Proceeds from sale of European operations, net of expenses
and settlement of intercompany accounts (Note 5) 1,544 16,713 --
Proceeds from sales of assets held for sale (Note 4) 12,633 -- --
Proceeds from sales of certain fixed assets 38 2,643 2,305
------ ------ ------
Cash provided by (used in) investing activities 10,851 17,966 (6,524)
------ ------ ------
Cash flows from financing activities:
Advances from BIL (Note 5) 24,000 -- 14,100
Repayments to BIL (Note 5) (22,082) (3,000) --
Repayment of Bank Loan (Note 1) -- (8,344) --
Other borrowings of short-term and long-term debt, net 11,479 3,812 2,778
Changes in other long-term liabilities (66) (2,328) 266
------ ------ ------
Cash provided by (used in) financing activities 13,331 (9,860) 17,144
------ ------ ------
Effect of exchange rate changes on cash flows (135) (27) (1,724)
------ ------ ------
Increase (decrease) in cash balance (987) 690 (302)
Cash balance at beginning of year 1,132 442 1,433
Less: Cash balance at subsidiaries held for sale at the end of 1990 -- -- (689)
------ ------ ------
Cash balance at end of year $ 145 $ 1,132 $ 442
------- -------- -------
------- -------- -------
The accompanying Notes are an integral part of these
Consolidated Financial Statements
18
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(Dollars in thousands)
Year Ended December 31
------------------------------
1992 1991 1990
---- ---- ----
Supplemental cash flow information:
Cash paid for interest $2,128 $1,951 $8,601
Cash paid for income taxes 55 36 39
Supplemental information for noncash financing and investing activities:
On March 17, 1992, $9,797 of debt and accrued interest was converted by
BIL into 5,850,380 shares of Series A Convertible Preferred Stock.
In March 1990, the Company purchased all of the capital stock of Smith &
Davis. The purchase price consisted of $4,500 paid in cash and the issuance of
984,000 shares of Class A Common Stock. The adjusted fair value of assets
acquired and liabilities assumed at January 1, 1990 was $38,373 and $36,374,
respectively.
The accompanying Notes are an integral part of these
Consolidated Financial Statements
19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per-share data)
NOTE 1 -- CORPORATE RESTRUCTURING PLAN
Since 1989 the Company has incurred substantial financial losses in a
continuing effort to restructure its operations with the objective of becoming
a stronger long-term competitor in the durable medical equipment industry.
Restructuring activities to date have included asset sales, significant
reductions in headcount, salaries and fringe benefits, plant closures and
consolidations, product line rationalization, debt to equity conversion and
outsourcing of manufacturing operations. Additionally, in 1992 the Company
relocated its corporate headquarters and principal wheelchair manufacturing
operations from Camarillo, California to St. Louis, Missouri. The relocation
facilitated the consolidation of corporate offices and other key
administrative, sales/marketing, and technical functions with existing Company
operations in the St. Louis area.
As of December 31, 1992, the physical relocation of the wheelchair
manufacturing operations, which began in May, 1992, was largely complete. The
relocation of administrative and support staff from California, hiring of new
employees where necessary, and the integration with existing St. Louis
operations is now also largely complete. Only the Corporate Data Center, which
will be replaced by a new St. Louis based computer system in 1993, remains in
California.
At December 31, 1991, the Company owed Security Pacific National Bank
(the "Bank") approximately $22.7 million ("Bank Loan") under a First Amended
and Restated Credit Agreement (the "Agreement") dated August 30, 1991. In
order to facilitate the relocation process to Missouri, on February 21, 1992
BIL (Far East Holdings) Limited ("BIL"), currently the Company's majority
stockholder, acquired all of the Bank's rights ("Bank Interest") in the
Agreement. In connection with the acquisition by BIL of the Bank Interest, BIL
agreed (a) to permit the Company to consolidate its U.S. manufacturing
facilities, corporate headquarters and administrative functions in St. Louis,
Missouri, (b) to permit the Company to borrow additional funds and to obtain
letters of credit from a lender other than BIL as necessary for consolidation
and for working capital, and (c) to release or subordinate its security
interests under the Agreement to allow the Company to obtain financing from a
third party lender for working capital and to effect and facilitate the
consolidation of operations and corporate headquarters in St. Louis, Missouri.
In anticipation of the Company receiving additional financing from a
third party lender, BIL advanced the Company $18 million through October 1,
1992. These funds were used by the Company to finance, in part, the relocation
and the restructuring as well as for working capital purposes.
On October 2, 1992, the Company finalized a $20 million revolving credit
facility with The Hongkong and Shanghai Banking Corporation ("HSBC"). The
repayment of the HSBC facility has been guaranteed by Brierley Investments
Limited, an affiliate of BIL. From the proceeds of the HSBC facility, $11
million was utilized to repay advances (described in the preceding paragraph)
made by BIL during the second and third quarters of 1992. The remaining
proceeds were used to fund restructuring expenses, to replace existing letters
of credit and for working capital purposes. BIL has provided the Company with
additional funding beyond the amounts available under the HSBC credit line. In
November and December, 1992, BIL advanced an additional $7 million for
operating needs for the restructuring, bringing the total BIL advances
outstanding on December 31, 1992 to $14 million.
20
21
The accompanying financial statements have been prepared under the going
concern concept. The going concern concept anticipates an entity will continue
in its present form and, accordingly, uses the historical cost basis to prepare
financial statements. The Company has incurred substantial recurring losses
and has a net capital deficiency at December 31, 1992. As described more fully
in Note 6 to the Consolidated Financial Statements, the Company also has a
current obligation to repay $19.5 million to BIL and has entered into
negotiations to restructure such indebtedness. No assurance can be made that
the Company will successfully emerge from or complete its restructuring and
refinancing activities.
NOTE 2 -- RESTRUCTURING EXPENSES
Fiscal 1992
During the third and fourth quarters of 1992 the Company recorded
additional charges of $2.5 million and $2.7 million, respectively, in
connection with the restructuring and relocation process. $1.5 million of the
restructuring charge recorded in 1992 relates to expenses expected to be
incurred during the first four months of 1993. This charge is related and
incremental to the $18.5 million recorded in 1991 and described below. It
reflects higher than originally anticipated costs primarily in the areas of 1)
duplication of employees and facilities in both California and Missouri during
the relocation process; 2) production inefficiencies in California operations
due to the loss of skilled employees after the relocation announcement and the
subsequent hiring of temporary employees as replacements; 3) production and
startup inefficiencies in the St. Louis facility due to the large number of new
and temporary employees hired and trained; 4) interest expense of $0.5 million
on incremental borrowings required to finance the relocation and related
inventory buildup; and 5) provision for potential scrap and physical inventory
losses related to the relocation. A portion of the original restructuring
reserve not utilized for other purposes was also allocated to provide for the
termination of the contracts between the Company and certain independent
manufacturer's representative organizations pursuant to which those
organizations solicited orders for the Company's products in the United States.
Fiscal 1991
The Company announced that it would be consolidating its U.S.
manufacturing operations and Corporate headquarters in St. Louis, Missouri.
This decision was made in response to the higher cost of manufacturing in
Southern California and to take advantage of synergies with its existing
Missouri based operations.
The charge of approximately $18.5 million relating to this decision
provided for severance or relocation expenses for nearly 450 employees, costs
to relocate certain inventory and equipment, costs associated with the
writedown to estimated net realizable value of machinery and equipment that was
not expected to be moved to St. Louis, and for other miscellaneous costs
associated with restructuring.
In 1991, the Company also provided $1.5 million for additional loss
relating to the sale of its Camarillo, California property. This amount was
recorded in general and administrative expenses.
Fiscal 1990
In 1990, the Company recorded a charge of $34.0 million to provide for
costs associated with a restructuring of its operations. This charge consisted
of $14.6 million provided for anticipated losses and associated costs relating
to the sale of its Camarillo, California manufacturing facility and related
excess
21
22
machinery and equipment. Additionally, $14.8 million was provided for costs
associated with the consolidation of its California manufacturing facility,
professional fees associated with the restructuring, costs to reduce to net
realizable value certain receivables and inventory adversely impacted by a
significant streamlining of the Company's product line included in this
restructuring and to provide for costs associated with the curtailment of one
of its domestic pension plans. Finally, $4.6 million was provided for expected
operating losses until shutdown of certain international operations and for
other restructuring costs associated with the acquisition of Smith & Davis.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
VALUATION OF INVENTORIES: Inventories are stated at the lower of cost or
market, determined by the first-in, first-out (FIFO) method. Inventory costs
consist of material cost, labor cost and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost except for certain assets which have been written down in value in
anticipation of lower utilization in future periods (see Note 2, "Restructuring
Expenses"). Assets held for sale are stated at anticipated proceeds, net of
expenses associated with the sales (see Note 2, "Restructuring Expenses," and
Note 4, "Assets Held for Sale"). Provisions for depreciation and amortization
are determined using the straight-line method based upon the estimated useful
life of the asset. Leasehold improvements are amortized over the life of the
related lease.
EXCESS OF INVESTMENT OVER NET ASSETS ACQUIRED: Included in Intangible assets,
net is the excess of investments over net assets of businesses acquired
(goodwill), which is being amortized using the straight-line method over a
period of 30 years. Balances outstanding at the end of fiscal 1992 and 1991
were $6,696 and $6,957, net of amortization of $750 and $489, respectively.
TAXES ON INCOME: The Company uses the liability method for computing deferred
income taxes. Under this method, the tax expense is the amount of income taxes
expected to be payable for the current year plus the change from the beginning
of the year in the deferred tax liability. The deferred tax liability is
determined based on the expected future tax consequences resulting from
differences between the financial reporting and tax bases of assets and
liabilities.
LOSS PER SHARE: Loss per share for each of the years in the three-year period
ended December 31, 1992 is calculated based on the weighted average number of
the combined shares of both Class A and Class B Common Stock during the
periods.
CONCENTRATION OF CREDIT RISK: The Company sells its products to customers in
the healthcare industry, primarily in North America. Concentration of credit
risk with respect to trade receivables is limited due to the size of the
customer base and its dispersion. The Company performs on-going credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have
been within management's expectations.
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars in accordance with the
provisions of SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at year-end exchange rates. Revenues and expenses
are translated at the average exchange rate for each year. The resulting
translation adjustments for each year are recorded as a
22
23
separate component of stockholders' equity. All foreign currency transaction
gains and losses are included in the determination of income and are not
significant.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: In December, 1992 the Company
adopted the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." This new standard requires that
the expected cost of retiree health benefits be charged to expense during the
years that the employees render service rather than the Company's past practice
of recognizing these costs on a cash basis. The Company has elected to
recognize this change in accounting on the immediate recognition basis. The
cumulative effect of $49, as of December 31, 1992, was charged to 1992
operating results.
CHANGE IN FISCAL YEAR END: The Company elected in December 1992 to change its
fiscal year end from the period ending Sunday nearest December 31 to a calendar
year end.
RECLASSIFICATION: Certain reclassifications have been made to prior period
financial statements to conform with current period presentation. The
reclassifications have no effect on net income as previously reported.
NOTE 4 -- ASSETS HELD FOR SALE
The Company's Camarillo, California property, the principal item
included in assets held for sale at December 31, 1991, was sold on October 9,
1992. After consideration of the costs for postclosing environmental
compliance activity, the Company recognized a $127 loss on the disposition of
this property.
NOTE 5 -- SALE OF EUROPEAN OPERATIONS
On October 4, 1991, the Company sold 85% of its wholly owned German
subsidiary, Ortopedia GmbH, for approximately $19.6 million, while retaining a
15% interest in Ortopedia Holding GmbH, the new parent of Ortopedia GmbH.
Under the sale agreement, the Company received an option to purchase an
additional 5% of Ortopedia under certain circumstances. As a result of the
transaction, the Company recorded a $6.6 million gain in 1991. Cash proceeds
from the sale were used to reduce $8.3 million of the Company's indebtedness
to the Bank, and to reduce $3 million of indebtedness to BIL with the balance
used to pay closing costs and to fund working capital requirements. The
Company's remaining interest in Ortopedia GmbH was accounted for using the cost
method. During December, 1992 the Company sold its remaining 15% interest in
Ortopedia Holding GmbH for $1.5 million, at a loss of $240. These proceeds
were used for general working capital purposes.
23
24
NOTE 6 -- DEBT
The Company's debt as of December 31, 1992 and 1991 is as follows:
1992 1991
---- ----
Bank Loan (net of FASB 15 adjustment) $ -- $21,652
Notes payable to BIL (1992 amount net of FASB 15 adjustment) 29,292 13,178
Loans from HSBC 15,093 --
Other domestic debt 10,258 14,408
Foreign debt 3,912 4,930
------ ------
Total debt 58,555 54,168
Less short-term debt and current installments of long-term debt 55,204 25,640
------ ------
Long-term debt, net of current installments $ 3,351 $28,528
-------- -------
-------- -------
Aggregate long-term debt maturities during each of the next five fiscal years
follows:
1994 $1,975
1995 770
1996 304
1997 302
1998 -0-
------
$3,351
The Company's primary domestic financing agreement with the Bank expired
as of December 31, 1989. On August 30, 1991, the Company executed the
Agreement concerning the restructuring of its debt with the Bank. Under the
provisions of the Agreement the payment of cash dividends to common
stockholders is prohibited. The Bank Loan is secured by essentially all
tangible and intangible assets of the Company, its principal subsidiary,
Everest & Jennings, Inc., and the stock of the Company's other subsidiaries.
On October 4, 1991, the Company sold Ortopedia GmbH and repaid the Bank $8.3
million of its indebtedness. In November 1991, certain provisions of the
Agreement with the Bank were amended. The amended Agreement obligated the
Company to repay its indebtedness to the Bank by March 31, 1993. Additionally,
if this indebtedness was reduced to $13 million or less by March 31, 1993, the
payment of interest at the rate of 2.25% over prime would be waived from April
1, 1992 through March 31, 1993. In consideration for an extension of the
payment due date, the Company agreed to issue a new class of voting convertible
preferred stock to the Bank representing approximately 5% of the voting stock
of the Company. As discussed in Note 1 to the Consolidated Financial
Statements, on February 21, 1992, BIL purchased the Bank's Interest. The
acquisition of the Bank Loan by BIL resulted in BIL acquiring the new class of
voting Series B Convertible Preferred Stock (786,000 shares). As a condition
of the HSBC $20 million revolving credit agreement, BIL has subordinated the
repayment of the Bank Loan and the Amended 10.5% Note as defined below to the
repayment of the HSBC debt. As of March 29, 1993, BIL agreed to extend the due
date of the Bank Loan to June 30, 1993.
In 1990 the Company borrowed $14.1 million from BIL for working capital
purposes and to complete the acquisition of five wholly-owned subsidiaries
(collectively, "Smith & Davis") of HUNTCO Manufacturing, Inc. On August 30,
1991, the Company entered into an agreement with BIL (the "Debt Restructure
Agreement") to restructure this indebtedness. The restructuring combined the
principal, accrued unpaid interest and certain
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expenses into two new notes, the first (which was unsecured) in the principal
amount of $9.2 million at 9% interest (the "Amended 9% Note"), and the second
(which was secured) in the principal amount of $6.9 million at 10.5% interest
(the "Amended 10.5% Note"). In accordance with the Debt Restructure Agreement,
on October 4, 1991 the Company sold Ortopedia GmbH and repaid BIL $3.0 million
of the Amended 10.5% Note, reducing the balance to $3.9 million. On March 17,
1992, the Company's stockholders approved the conversion of the Amended 9%
Note, including accrued interest, into approximately 5.9 million shares of 9%
Series A Voting Convertible Preferred Stock, thereby repaying the Amended 9%
Note in its entirety. The remaining $3.9 million balance of the Amended 10.5%
Note, plus accrued interest, was required by the terms of the Debt Restructure
Agreement to be repaid by the earlier of April 1, 1993 or the date on which the
Camarillo property was sold.
On October 9, 1992 the Company sold its facility in Camarillo,
California. Under the terms of the Debt Restructure Agreement, the Company was
obligated to utilize the proceeds from this sale to repay $3 million of the
Amended 10.5% Note with the balance to be applied against the Bank Loan.
Accordingly, $3.0 million and $8.1 million, respectively, were repaid, leaving
a balance of $14.6 million on the Bank Loan and a balance of $0.9 million on
the Amended 10.5% Note. The due date of the Amended 10.5% Note has been
extended by BIL to June 30, 1993.
During 1992 BIL advanced the Company $25 million, of which $11 million
was repaid from the proceeds of the HSBC loan, leaving a net balance of $14
million as of December 31, 1992. An additional $14 million was advanced on
various dates through March 31, 1993, with a maturity date of one year after
the date of each respective advance. The indebtedness to BIL carries an
interest rate of 6.5% and is evidenced by various Promissory Notes. The first
$15 million of these Promissory Notes provided for repayment upon the Company
obtaining new financing. However, as noted earlier, only $11 million of this
amount was actually repaid and BIL has amended, as of March 29, 1993, the terms
of the $4 million balance to provide for a June 30, 1993 repayment date. The
remaining $10 million of Promissory Notes outstanding at December 31, 1992
generally have a one year term and mature on various dates through December 30,
1993.
During the fourth quarter of 1992, the Company accrued interest in the
amount of approximately $1.3 million on the Bank Loan in anticipation of not
being able to reduce the balance of the Bank Loan below $13 million by March
31, 1993, as subsequently extended to June 30, 1993. Current projections
indicate that internal cash flow generation will not be sufficient to repay by
June 30, 1993 the amount of the Bank Loan required to achieve the interest
waiver.
The Company has made a proposal to BIL to restructure certain
indebtedness. 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 balance of 1992 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.
In total, as of December 31, 1992, the Company owed BIL $29.3 million
(net of $0.2 million in FASB 15 adjustments) at interest rates ranging from
6.5% to 10.5%. Interest expense related to BIL borrowings was $2,272, $1,096
and $1,462 during 1992, 1991 and 1990, respectively.
On October 2, 1992, the Company finalized a new $20 million revolving
credit agreement with HSBC. The unsecured agreement carries an interest rate
at prime. Repayment of existing debt with BIL is subordinated to the HSBC
debt, and Brierley Investments Limited, an affiliate of BIL, has guaranteed its
repayment. Ten
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million dollars of the agreement is designated as a letter of credit to secure
a 3.5% loan from Mercantile Bank under the State of Missouri MoBucks program,
due in October, 1993. The proceeds from the MoBucks program were used to
reduce debt to BIL. Additionally, the HSBC credit agreement was used to
replace existing letters of credit ($4.3 million outstanding at December 31,
1992). As of December 31, 1992, $15.1 million was outstanding under this
credit line, which, when added to the outstanding letters of credit above, are
near the maximum amount of borrowings available under the HSBC credit
agreement. According to its original terms, the total amount available under
the HSBC agreement reduces from $20 million to $15 million on March 31, 1993
and borrowings allowed from BIL are limited to $23 million. Pursuant to an
amendment dated March 30, 1993, HSBC has agreed to extend the $20 million of
credit availability through the maturity date of the agreement (September 30,
1993) and has also increased the amount of borrowings allowed from BIL by $10
million.
In July, 1991, the Company obtained a new three-year $13 million secured
credit line at the interest rate of prime plus 3% for its Smith & Davis
subsidiary. At December 31, 1992, the Company 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 to prime
plus 2%. Additionally, Smith & Davis had other borrowings primarily consisting
of amounts owed under certain industrial revenue bonds totaling $1.7 million at
December 31, 1992, with interest rates ranging from 8% to prime plus 3%. These
amounts are due at various semi-annual intervals through 1996.
On May 12, 1992, the Company's Canadian operations renewed existing
credit facilities in the aggregate of $5.1 million, on which $3.3 million was
borrowed as of December 31, 1992 at interest rates ranging from prime plus 1/2%
to prime plus 3/4%. The loans are secured by the net assets of the Canadian
subsidiary.
At December 31, 1992, the Company was contingently liable under existing
letters of credit in the aggregate amount of approximately $4.3 million.
NOTE 7 -- ACQUISITION
In March 1990, the Company completed the acquisition (the "Acquisition")
of certain subsidiaries of HUNTCO Manufacturing, Inc., which comprise the
operations of Smith & Davis. The purchase price consisted of $4.5 million paid
in cash and the issuance of 984,000 shares of Class A Common Stock valued at
$4.9 million.
Smith & Davis, headquartered in St. Louis, Missouri, is engaged in the
design, manufacturing, marketing and distribution of durable medical equipment,
primarily homecare, nursing home and hospital beds, and oxygen therapy
products.
The Acquisition was accounted for as a purchase. The excess of the
purchase price over the fair value of assets acquired and liabilities assumed
has been allocated to goodwill. The amount allocated to goodwill was
approximately $7.4 million which is being amortized over a period of 30 years.
For purposes of financial statement presentation, the Acquisition has
been accounted for as if it was completed on January 1, 1990 in accordance with
the terms of the purchase agreement. Accordingly, the Company's consolidated
financial statements for fiscal year 1990 include the results of operations of
Smith & Davis for the entire year.
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NOTE 8 -- TAXES ON INCOME
The components of income tax expense (benefit) from continuing operations for
each of the years in the three year period ended December 31, 1992 are as
follows:
1992 1991 1990
---- ---- ----
Current:
Federal $ -- $ -- $ --
Foreign 107 303 (687)
State (1,786) 100 --
Deferred:
Federal -- -- --
Foreign (58) (26) 31
State -- -- 300
-------- -------- ---------
$ (1,737) $ 377 $ (356)
-------- -------- ---------
-------- -------- ---------
A reconciliation of the provision (benefit) for taxes on income from continuing
operations and the amount computed using the statutory federal income tax rate
of 34% for each of the years in the three year period ended December 31, 1992
is as follows:
1992 1991 1990
---- ---- ----
Computed "expected" tax (benefit) $ (7,021) $ (5,674) $ (18,184)
Increases (reductions) due to:
State taxes, net of federal benefit (1,786) 66 300
Foreign subsidiaries with different tax rates (60) (122) (1,092)
Domestic losses with no tax benefit 7,130 6,107 18,620
-------- -------- ---------
$ (1,737) $ 377 $ (356)
-------- -------- ---------
-------- -------- ---------
During 1992 the Company resolved certain disputed issues raised by the
California Franchise Tax Board for the years 1975 through 1983. As a result of
the agreement reached, assessments, including related accrued interest in the
aggregate amount of approximately $1.8 million, were withdrawn by the Franchise
Tax Board. Accordingly, this amount has been reflected as a credit to the 1992
income tax provision.
The Company and certain subsidiaries file consolidated federal income
and combined state franchise tax returns. For book purposes, as of December
31, 1992 the Company has a net operating loss ("NOL") carry-forward of
approximately $113 million that expires in 1997 through 2008. For federal
income tax purposes, as of December 31, 1992 the Company has a net operating
loss carry-forward of approximately $101 million and tax credit carry-forwards
of approximately $1 million that expire in 1997 through 2008. There is also a
significant preacquisition net operating loss generated by Smith & Davis
Manufacturing Co. in the amount of approximately $8 million. Such a loss would
be available to reduce that company's future contribution to consolidated
taxable income and would expire through 2004. However, the available loss will
be limited in its application to approximately $600 per year.
The Company's foreign source income is not material.
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The Company does not believe that the provisions of its debt
restructuring with the Bank and BIL, as described in Note 6 to the Consolidated
Financial Statements, will limit the Company's ability to utilize its tax 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.
In February 1992, the FASB issued SFAS No. 109 "Accounting for Income
Taxes" ("SFAS 109"). The new statement requires recognition of a deferred tax
liability for taxable temporary differences and a deferred tax asset for
deductible temporary differences, operating loss carry-forwards and tax credit
carry-forwards. SFAS 109 requires the establishment of a valuation allowance
reducing the deferred tax asset if it is more likely than not that all, or some
portion, will not be realized. Adoption of SFAS 109 is required no later than
the first quarter of 1993. The Company intends to adopt SFAS 109 in 1993.
However, as the Company has not yet considered all the limitations on the
expected future events which are considered in assessing the need for a
valuation allowance, the effect on the Company's financial statements is not
known or reasonably estimable at this time, although adoption of SFAS 109 is
not believed to have a material impact on the consolidated financial
statements.
NOTE 9 -- INVENTORIES
Inventories at December 31, 1992 and 1991 consist of the following:
December 31 December 31
1992 1991
----------- -----------
Raw materials $12,691 $10,020
Work-in-process 6,682 5,653
Finished goods 5,258 8,451
------ -------
$24,631 $24,124
------- -------
------- -------
In 1991, the Company changed from the Last-in, First-out (LIFO) method
of valuing inventory to the First-in, First-out (FIFO) method at its wheelchair
subsidiary. The Company believes that the FIFO method of accounting for such
inventories will result in a more appropriate presentation of financial
position and results of operations. Due to the Company's weakened financial
position resulting from substantial recurring losses in the past years, the
Company has undertaken both financial and operational restructurings. In
connection with these restructuring plans, the Company's current financial
condition is of significant interest to shareholders, creditors, vendors, and
other users of the Company's financial statements. Under the circumstances, the
FIFO method of valuation is the preferable method because inventory is
presented in the Company's balance sheet at values that more closely reflect
its current worth. As a result of this change in accounting principle,
inventories and retained earnings were increased by $4,002 at December 31,
1990. If the change had not been made, inventories would be lower and
cumulative deficit would be higher by $2,802 at December 31, 1991 and the
reported net loss for 1991 would have decreased by $1,200 or 13 cents a share.
Financial statements of 1990 have been restated. The effects of the change on
1990 is an $848 increase in the Net Loss and $.09 increase in the Net Loss Per
Share.
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NOTE 10 -- COMMON AND PREFERRED STOCK
The Company has two employee stock option plans that provide for the
grant to eligible employees of stock options to purchase shares of common
stock. The Everest & Jennings International Ltd. 1981 Employees Stock Option
Plan expired in 1991. Options are exercisable over a ten-year period. Stock
options were granted at prices which represent the fair market value of common
stock on the date of grant. The combined changes in these stock option plans
in each of the years in the three year period ended December 31, 1992 are
summarized as follows:
Year Ended December 31
-------------------------------------------
1992 1991 1990
---- ---- ----
Outstanding, beginning of year 393,910 468,151 385,248
Granted -- -- 147,000
Exercised -- -- --
Cancelled (164,539) (74,241) (64,097)
------- ------- -------
Outstanding, end of year 229,371 393,910 468,151
------- ------- -------
------- ------- -------
Exercisable, end of year 221,045 293,077 216,054
------- ------- -------
------- ------- -------
Options outstanding as of December 31, 1992 were granted at prices
ranging from $1.88 to $12.75 per share. As of December 31, 1992, 221,045
shares were exercisable in the price range of $1.88 to $12.75 per share.
The above discussion and table does not include options to acquire
approximately 800,000 shares of the Company's Class A Common Stock issuable to
certain key employees pursuant to the Omnibus Incentive Plan, adopted by the
Board of Directors during 1990 and approved by the stockholders on March 17,
1992. At December 31, 1992, 800,000 shares have been reserved for issuance
pursuant to this plan, and 715,000 options were outstanding which were granted
from 1990 through 1992 at prices ranging from $1.25 to $2.38.
The Company's Class A Common Stock and Class B Common Stock have
identical dividend rights with the exception that the Class A Common Stock is
entitled to a $.025 per share additional dividend (the "Additional Dividend")
for each quarter in respect of which a cash dividend is declared on the Class B
Common Stock. After the Additional Dividend, the Class A Common Stock shares
equally with the Class B Common Stock in all dividends and distributions. The
Additional Dividend is non-cumulative and is subject to adjustment if the
Company's Board of Directors declares a dividend on other than a quarterly
basis. Provisions of existing loan agreements prohibit the Company from
declaring dividends at the present time.
Holders of Class A Common Stock are entitled to elect 25% of the Board
of Directors (rounded up to the nearest whole number) so long as the number of
outstanding shares of Class A Common Stock is at least 10% of the number of
outstanding shares of both classes of Common Stock. Except as otherwise
described for election of directors and except for class votes as required by
law or the Company's Certificate of Incorporation, holders of common stock vote
or consent as a single class on all matters, with each share of Class A Common
Stock having one-tenth vote per share and each share of Class B Common Stock
having one vote per share. Holders of the two classes of common stock vote as
separate classes on any matter on which such a vote is required by applicable
law or the Company's Certificate of Incorporation. Additionally, at the option
of the holder of record, each share of Class B Common Stock is convertible at
any time into one share of Class A Common Stock.
On March 17, 1992, the stockholders of the Company approved a Plan of
Reclassification. Under the Plan of Reclassification, the Certificate of
Incorporation of the Company will be amended to replace the Company's
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authorized Class A Common Stock and Class B Common Stock with a new single
class of Common Stock (the "Single Class Common Stock") having 25,000,000
authorized shares, and would reclassify each outstanding Class A Common share
and each outstanding Class B Common share into one share of such new single
class of Common Stock. The Plan of Reclassification provides that the Board of
Directors may elect to abandon the Plan at any time prior to the time an
amendment to the Company's Certificate of Incorporation to effect the Plan of
Reclassification becomes effective. The Company currently plans to effect the
Plan of Reclassification upon the first to occur of (a) effectiveness of a
Registration Statement under the Securities Act of 1933 (the "1933 Act")
registering the distribution of shares of the new Single Class Common Stock
into which the outstanding Class A Common shares and the outstanding Class B
Common shares of the Company are to be reclassified pursuant to the Plan of
Reclassification or (b) a determination by the Company that such distribution
is exempt from the registration requirements of the 1933 Act. The Company has
requested that the Securities and Exchange Commission (the "SEC") issue a
No-Action Letter confirming that the Company may effect the Plan of
Reclassification without having to comply with the registration statement and
prospectus delivery requirements of Section 5 of the 1933 Act based on the
exemption available under Section 3(a)(9) of the 1933 Act with respect to
securities exchanged by issuers exclusively with their existing stockholders.
The SEC has requested that the Company provide certain additional information
in support of its position that such exemption should apply, and the Company is
in the process of doing so. A decision by the SEC is expected in the second
quarter of 1993, and, assuming a favorable No-Action Letter is issued, the Plan
of Reclassification is expected to become effective as soon thereafter as
reasonably practicable. If the Plan of Reclassification becomes effective, the
Company will have an unclassified Board of Directors. If such Plan becomes
effective prior to the end of the terms of the Class A directors and Class B
directors elected at the Annual Meeting, each such Director shall become an
unclassified member of the Board of Directors for the balance of his or her
term.
At the March 17, 1992 meeting, the stockholders also approved a
resolution to authorize a new class of preferred stock. Thereafter,
approximately 5.9 million shares of 9% Series A Convertible Preferred Stock was
issued for conversion of BIL debt and accrued interest as discussed in Note 6
to the Consolidated Financial Statements. Such preferred shares are redeemable
into common stock on a one-for-one basis at the Company's option until the
second anniversary of conversion of the debt, and thereafter the seventh
anniversary of conversion into Common Stock on a one-for-one basis except for
any in-kind dividends which would be redeemable at 150% of the market price at
the time of conversion. The preferred shares are also redeemable for cash at
the Company's option at a price of $1.67458437 per share until the second
anniversary of conversion of the debt and thereafter the seventh anniversary of
conversion to cash at a price of $1.67458437 per share except for in-kind
dividends which would be redeemable at an amount equal to 150% of market price
of the common stock as of the redemption date. Upon notice of redemption, the
holder(s) of the preferred shares can convert such shares into shares of common
stock on a one-for-one basis. Also as discussed in Note 6 to the Consolidated
Financial Statements, a second series of preferred stock (Series B, consisting
of 786,000 shares) was issued to BIL, which is redeemable at the Company's
option into Common Stock on a one-for-one basis (except for any unpaid interest
owed) at any time prior to the seventh anniversary of the issuance date of said
preferred shares.
Resolutions approved by the stockholders on March 17, 1992, resulted in
an increase in the total shares outstanding, on a fully diluted basis, to 15.7
million and increased the percentage ownership of the Company by BIL and its
affiliates from approximately 31% at December 31, 1991 to approximately 60% at
December 31, 1992.
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NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all employees of its primary domestic subsidiary, Everest &
Jennings, Inc. and two non-contributory defined benefit pension plans for the
non-bargaining unit salaried employees ("Salaried Plan") and employees subject
to collective bargaining agreements ("Hourly Plan") at its Smith & Davis
subsidiary. The total pension expenses under these plans are $233, $297 and
$2,662 for 1992, 1991 and 1990, respectively.
The following table sets forth the status of these plans and the amounts
recognized in the Company's Consolidated Financial Statements:
1992 1991
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation $ 15,813 $ 15,332
-------- --------
-------- --------
Accumulated benefit obligation $ 15,978 $ 15,884
-------- --------
-------- --------
Projected benefit obligation for services
rendered to date $ 16,285 $ 16,073
Plan assets at fair value, primarily listed
stocks, bonds and investment funds 12,926 13,386
-------- --------
Projected benefit obligation
in excess of plan assets (3,359) (2,687)
Unrecognized transition amount (134) (147)
Unrecognized net gain/(loss) from past
experience different from that assumed 410 (621)
-------- --------
Pension liability included in Accrued
payroll costs $ (3,083) $ (3,455)
-------- --------
-------- --------
The pension cost relating to these plans
is comprised of the following:
Pension expense:
1992 1991 1990
---- ---- ----
Service cost -- benefits earned during period $ 135 $ 116 $ 552
Interest cost on projected benefit obligation 1,330 1,321 1,411
Actual return on plan assets (771) (2,190) (200)
Net amortization and deferral (461) 1,050 (732)
-------- --------
Net periodic pension cost $ 233 $ 297 $ 1,031
-------- -------- --------
-------- -------- --------
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Effective May 1, 1991, the Company froze the accruing of benefits under
the Everest & Jennings, Inc. Pension Plan. The effect of this decision on the
Company's December 31, 1990 consolidated financial statements was an increase
in the Company's pension expense by $1,631, offset by a reduction in intangible
assets of $830 and a reduction in the direct charge to equity of $801.
Additionally, during 1991 the Company froze the Smith & Davis Hourly
Plan and purchased participating annuity contracts to cover accumulated and
projected benefit obligations. The Company has also frozen the Salaried Plan
effective January 1, 1993. Participants in the plan are eligible to
participate in the Company's 401(k) Savings and Investment Plan, as discussed
below. There was no material impact on the consolidated financial statements
as a result of these changes.
The following assumptions were used to determine the projected benefit
obligations and plan assets:
Smith & Davis
Everest & Jennings, Inc. -----------------------------------
Plan Salaried Plan Hourly Plan
--------------------- ------------- -------------
1992 1991 1992 1991 1992 1991
---- ---- ---- ---- ---- ----
Weighted-average discount rate 8.5% 9.0% 8.5% 9.0% 8.5% 9.0%
Expected long-term rate of return on assets 9.0% 9.0% 10.0% 10.0% 10.0% 10.0%
Long-term rate for compensation increases 5.0% 5.0% 6.0% 6.0% --- ---
No long term rate for compensation increases was assumed for the Smith &
Davis Hourly Plan, as all participants are inactive and the plan is frozen.
The Company also sponsored a 401(k) Savings and Investment Plan (the
"401(k) plan") covering all full-time non-union employees of Everest &
Jennings, Inc. The 401(k) plan was extended as of January 1, 1993 to include
participants in the Smith & Davis Salaried Plan. Contributions made by the
Company to the 401(k) plan are based on a specified percentage of employee
contributions up to 6% of base salary. Employees may contribute between 1% and
15% of base salary. Expense recorded for the 401(k) plan totaled $99 in 1992
and $40 in 1991.
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NOTE 12 -- LEASE COMMITMENTS
The Company is a party to a number of noncancelable lease agreements
involving buildings and equipment. The leases extend for varying periods up to
10 years and generally provide for the payment of taxes, insurance and
maintenance by the lessee. Certain of these leases have options to purchase at
varying rates.
The Company's property held under capital leases, included in Property,
plant and equipment, at December 31, 1992 and 1991 consists of the following:
December 31 December 31
1992 1991
---- ----
Machinery and equipment $2,658 $2,780
Less accumulated amortization (2,270) (2,432)
----- -----
$ 388 $ 348
------ ------
------ ------
Minimum future lease obligations on long-term noncancelable leases in
effect at December 31, 1992 are as follows:
Capital Operating
------- ---------
1993 $1,060 $ 2,667
1994 858 2,500
1995 592 2,270
1996 8 1,454
1997 0 1,522
Thereafter 0 3,408
------ ------
Net minimum lease payments 2,518 $13,821
-------
-------
Less amount representing interest (878)
------
Present value of minimum
lease payments 1,640
Less current portion (623)
------
$1,017
------
------
Rental expense for operating leases amounted to approximately $2,416,
$2,149 and $2,379 in 1992, 1991 and 1990, respectively.
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NOTE 13 -- INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
The Company operates in one industry segment, which is the durable
medical equipment business. The Company's North American operations include
operations in the United States, Canada and Mexico. The European operations
were primarily in Germany. The following table sets forth certain financial
information by geographic area for each of the years in the three year period
ended December 31, 1992:
Year Ended December 31,
--------------------------------
1992 1991 1990
---- ---- ----
Net sales, durable medical products:
North America
Wheelchairs $ 65,420 $ 81,569 $ 88,750
Beds and Accessories 36,125 31,953 36,394
Other 5,570 5,402 7,638
------- ------- -------
107,115 118,924 132,782
Europe -- -- 76,929
-------- -------- --------
$107,115 $118,924 $209,711
-------- -------- --------
-------- -------- --------
Loss from continuing operations:
North America $(20,409) $(24,476) $(53,555)
Europe (240) 7,789 1,483
-------- -------- --------
$(20,649) $(16,687) $(52,072)
-------- -------- --------
--------- --------- --------
Identifiable assets:
North America $69,459 $ 81,136 $ 98,064
Europe -- 1,785 14,598
------- ------- -------
$ 69,459 $ 82,921 $112,662
-------- -------- --------
-------- -------- --------
As described in Note 5 to the Consolidated Financial Statements, in
October, 1991 the Company sold a majority interest in its Ortopedia GmbH
subsidiary. This subsidiary's results of operations were consolidated and
presented in the Consolidated Statement of Operations for the year ended
December 31, 1990 (the date of the decision to dispose of Ortopedia). The
remaining interest in Ortopedia Holding GmbH was sold in December, 1992.
Export sales to unaffiliated customers by domestic operations in the
United States are not significant. No single customer accounts for 10% or more
of the consolidated revenues.
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NOTE 14 -- CONTINGENT LIABILITIES
In July 1989, a class action suit was filed against a subsidiary of the
Company by six plaintiffs in the Superior Court for Alameda County, California.
The plaintiffs assert claims based on strict liability, negligence,
misrepresentations, fraud, breach of warranty and violation of various consumer
statutes in connection with the subsidiary's manufacture of a certain
wheelchair model. On June 27, 1991, the Superior Court certified the class
action. On August 30, 1991 and as subsequently amended, the Company reached an
agreement in principle to settle the litigation on terms considered not
material to the Company's consolidated financial statements. The Company has
recorded the expected costs of approximately $0.5 million relating to the
settlement. Final settlement documentation in the form of a Judgment and Order
of Dismissal was entered by the Superior Court on November 2, 1992, approving
the agreed settlement. The Company is in the process of taking actions
necessary to execute the agreed settlement.
In July 1990, a class action suit was filed by a stockholder of the
Company in the United States District Court for the Central District of
California. The suit is against the Company and certain of its present and
former directors and officers and seeks unspecified damages for alleged
non-disclosure and misrepresentation concerning the Company in violation of
federal securities laws. The Company twice moved to dismiss the complaint on
various grounds. After the first such motion was granted, plaintiff filed a
first amended complaint, which subsequently was dismissed by order filed on
September 20, 1991. Plaintiff then notified the court that it did not intend
to further amend the complaint, and an order dismissing the complaint was
entered in November 1991. Plaintiff filed a notice of appeal to the Court of
Appeals for the Ninth Circuit on December 23, 1991. The case has been fully
briefed and it is expected that oral argument will be scheduled within the
second quarter of 1993. The Company continues to believe the case is without
merit and intends to contest the asserted complaints vigorously. The ultimate
liability, if any, cannot be determined at this time.
In December, 1992 ICF Kaiser Engineers, Inc. ("ICF Kaiser") filed a
Demand for Arbitration (the "Demand") against the Company before the American
Arbitration Association in Los Angeles, California. ICF Kaiser in its demand
claims breach of contract between the parties for consulting and clean up work
by ICF Kaiser at E&J's former facilities located at 3233 East Mission Oaks
Boulevard, Camarillo, California. The Arbitration Demand is in the sum of $1.1
million. In January, 1993 an answer and counter-claim were filed on behalf of
the Company. The answer denies breach of the contract and disputes the
monetary claim asserted in the Demand. In the counterclaim, the Company
asserts that ICF Kaiser breached the contract, above referenced, by inter alia
failing to perform the services required under the Agreement in a reasonably
cost effective manner and in accordance with the terms and conditions of the
Agreement. The matter is currently scheduled for hearing by the appointed
arbitrators commencing July 12, 1993. In February, 1993 E&J made a payment
without prejudice to ICF Kaiser in the sum of approximately $0.6 million. This
payment, together with prior payments, brings the total paid to date by the
Company to ICF Kaiser to approximately $0.7 million. The entirety of the
charges by ICF Kaiser are disputed as unreasonable under the circumstances and
the Company intends to vigorously defend its position. The Company has
recorded an appropriate reserve to reflect this matter and does not consider
the amount to be material to the Company's consolidated financial statements.
Die Cast Products, Inc. ("Die Cast Products"), a former subsidiary of
the Company, has been named as a defendant in a lawsuit filed by the State of
California pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act 42 U.S.C. Section Section 9601 et sec ("CERCLA"). The
Company was originally notified of this action on December 10, 1992. The
lawsuit seeks to recover response and remediation costs in connection with the
release or threatened release of hazardous substances at 5619-21 Randolph
Street, in the City of Commerce, California ("Randolph Street Site"). It is
alleged that the Randolph Street Site was used for the treatment, storage and
disposal of hazardous substances. The Company anticipates being named as a
defendant as a result of its former ownership of Die Cast Products, which
allegedly disposed of hazardous waste materials at the Randolph Street Site.
Investigation with respect to potential liability of the Company is in the
early stages. Issues to be addressed include whether the Company will be
responsible for the disposals made by Die Cast Products; whether Die Cast
Products actually sent hazardous waste materials to the Randolph Street Site;
the
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nature, extent and costs of the ultimate cleanup required by the State of
California; the share of that cleanup which may ultimately be allocated to Die
Cast and/or the Company; and the extent to which insurance coverage may be
available for any costs which may eventually be assigned to the Company.
Remedial investigations performed on behalf of the State of California at the
Randolph Street Site have disclosed soil and groundwater contamination.
Through October, 1992, the State had incurred response and oversight costs of
approximately $2.2 million. Until the Company has seen and reviewed the
Remedial Investigation and Feasibility Study, which is being prepared, and
until additional investigation and factual and legal analysis is completed, the
Company cannot quantify either the potential cleanup costs for the Randolph
Street Site or the share of that cleanup which may ultimately be borne by the
Company.
In March, 1993, Everest & Jennings, Inc. ("EJI") received a notice from
the United States Environmental Protection Agency ("EPA") regarding an
organizational meeting of generators with respect to the Casmalia Resources
Hazardous Waste Management Facility ("Casmalia Site") in Santa Barbara County,
California. The EPA alleges that the Casmalia Site is an inactive hazardous
waste treatment, storage and disposal facility which accepted large volumes of
commercial and industrial wastes from 1973 until 1989. In late 1991, the
Casmalia Site owner/operator abandoned efforts to actively pursue site
permitting and closure and is currently conducting only minimal maintenance
activities. The EPA estimates that the Casmalia Site's closure trust fund,
approximately $10 million, is substantially insufficient to cover cleanup and
closure of the site. Since August, 1992, the EPA has undertaken certain
interim stabilization actions to control actual or threatened releases of
hazardous substances at the Casmalia Site. The EPA is seeking cooperation from
generators to assist in the cleaning up, and closing of, the Casmalia Site.
EJI and 64 other entities were invited to the organizational meeting. The EPA
has identified EJI as one of the larger generators of hazardous wastes
transported to the Casmalia Site. Investigation with respect to potential
liability of EJI is in the early stages. Issues to be addressed include
whether EJI actually sent the volume of hazardous wastes to the Casmalia Site
as alleged by the EPA; the nature, extent and costs of the ultimate cleanup and
closure required by the EPA; the share of such costs which may ultimately be
allocated to EJI; and the extent to which insurance coverage may be available
for any costs allocated or assigned to EJI. Until additional investigation and
factual and legal analysis are completed, EJI cannot quantify either the
potential cleanup and closure costs for the Casmalia Site or the share of the
cleanup and closure costs which may ultimately be borne by EJI.
The Company and its subsidiaries are parties to other lawsuits and other
proceedings arising out of the conduct of its ordinary course of business,
including those relating to product liability and the sale and distribution of
its products. While the results of such lawsuits and other proceedings cannot
be predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
NOTE 15 -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following items of expense have been charged to cost of sales and
operating expenses of continuing operations in each of the years in the three
year period ended December 31, 1992:
1992 1991 1990
---- ---- ----
Maintenance and repair costs $ 763 $935 $2,646
Advertising costs 1,822 971 3,165
Other expenses not disclosed elsewhere are less than one percent of the
consolidated revenues and, therefore, are not separately reported in the table
above.
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NOTE 16 -- QUARTERLY FINANCIAL INFORMATION
The following chart sets forth the highlights of the quarterly
consolidated results of operations in fiscal years 1992 and 1991:
Three Months Ended (Unaudited)
--------------------------------------------------------
March 31 June 30 September 30 December 31 Year
-------- ------- ------------ ----------- ----
Fiscal year 1992
----------------
Revenues $29,713 $30,492 $22,742 $24,168 $107,115
Gross profit 8,345 9,289 5,293 3,265 26,192
Net loss (2,077) (639) (5,461)(a) (10,735)(b) (18,912)(a,b)
Loss per share (.23) (.07) (.60) (1.17) (2.07)
Fiscal year 1991 (c)
----------------
Revenues $29,377 $30,588 $28,561 $30,398 $118,924
Gross profit 9,660 10,014 8,040 10,934 38,648
Net loss (1,306) (114) (1,488) (14,156)(d) (17,064)(d)
Loss per share (.14) (.01) (.16) (1.56) (1.87)
(a) Includes a $2.5 million restructuring charge for incremental costs
associated with item (d) above.
(b) Includes an additional $2.7 million restructuring charge for incremental
costs associated with (d) above and approximately $1.3 million of
accrued interest recorded in anticipation of not being able to reduce
the balance of the Bank Loan below $13 million by March 31, 1993, as
subsequently extended to June 30, 1993 (see Note 6, "Debt").
(c) In the fourth quarter of 1991 the Company changed its method of
determining the cost of inventories at its Camarillo, California
manufacturing facility to the FIFO method from the LIFO method used in
prior years. The new method of accounting has been applied
retroactively and financial statements of prior years and quarters have
been restated.
(d) Includes a $18.5 million restructuring charge to provide for costs
associated with the planned closure and relocation of the Company's
principal domestic wheelchair manufacturing operation and consolidation
of its international headquarters from Camarillo, California to St.
Louis, Missouri.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
(Registrant)
Date: February 14, 1994 By /s/ Joseph A. Newcomb
Joseph A. Newcomb
Executive Vice President
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